Understanding Estimates of National

Health Expenditures Under Health Reform

May 1994

OTA-H-593

NTIS order #PB94-193229

GPO stock #052-003-01374-6
Recommended Citation: U.S. Congress, Office of Technology Assessment, Understanding

Estimates of National Health Expenditures Under Health Reform, OTA–H–594

(Washington, DC: U.S. Government Printing Office, May 1994).
Foreword

H

ealth care reform is at the top of the nation’s domestic policy

agenda, and numerous reform bills have been introduced in

Congress. Each reform proposal takes a somewhat different approach to containing costs and providing insurance coverage to

more people.

A key concern in the debate on health reform is how individual reform

proposals might affect future national health spending. Congress and

others have looked to a variety of individuals and organizations (for example, the Congressional Budget Office, the Administration, and private consulting firms) for estimates of how different reforms could affect

future national health expenditures. The key assumptions and methods

that underlie the estimates published by these groups are not always obvious to people who may wish to understand or question them, including

the analysts’ clients,

This OTA report looks behind the published estimates to examine

analysts’ approaches to estimating future national health expenditures.

In particular, the report appraises the analysts’ estimates of the potential

effects of four provisions that may be key to modeling alternative reforms (government cost controls, managed competition and increased

HMO enrollment, coverage for uninsured people, and administrative

streamlining). The report compares assumptions in these areas to evidence from available research. The report also draws policy implications

for congressional consideration.

The request for this report came from the members of the Technology

Assessment Board (see inside front cover) and Senator Ted Stevens.

Numerous individuals, including an advisory panel chaired by Joseph

Newhouse, assisted OTA in the development of this report. OTA gratefully acknowledges the contribution of each of these individuals. As

with all OTA reports, the final responsibility

rests with OTA.

d%=- .

ROGER C. HERDMAN

for the content of the report

Director

. . .

Ill
Advisory Panel

Joseph Newhouse, Chair

Director of the Division of Health

Policy Research and Education

Harvard University

Boston, MA

Stuart H. Altman

Professor of Health Policy

Graduate School of Social Policy

Brandeis University

Waltham, MA

Harold Cohen

President

Harold Cohen, Inc.

Baltimore, MD

Karen Davis

Executive Vice President

Commonwealth Fund

New York, NY

Tom J. Elkin

Assistant Executive Officer

Health Benefit Services

California Public Employees’

Retirement System

Sacramento, CA

Deborah A. Freund

Vice Chancellor of Academic

Affairs

Dean of the Faculties

Director of the Bowen Research

Center

Indiana University

Indianapolis, IN

Fernando A. Guerra

Director of Health

San Antonio Metropolitan Health

District

San Antonio, TX

William Hsiao

Professor

Harvard School of Public Health

Harvard University

Cambridge, MA

Lawrence J. Klein

Professor of Economics, Emeritus

Department of Economics

University of Pennsylvania

Philadelphia, PA

Woodrow Myers

Jack Rodgers

Senior Manager and Director of

Health Policy Analysis

Price Waterhouse

Washington, DC

Alien J. Sorbo

Principal

Tillinghast, A Towers Perrin

Company

Minneapolis, MN

Gail Wilensky

Senior Fellow

Project HOPE

Bethesda, MD

Michael C. Wolfson

Director General of Institutions

and Social Statistics Branch

Statistics Canada

Ottawa, Canada

Special Consultant

Joseph Anderson

President

Capital Research Associates

Chevy Chase, MD

Vice President for Medical Affairs

The Associated Group

Indianapolis, IN

Note: OTA appreciates and is grateful for the valuable assistance and thoughtful critiques provided by the advisory panel members.

The panel do& not, however, necessarily approve. disapprove, or endorse this report. OTA assumes full responsibility for the report

and the accuracy of its contents.

iv
Clyde J. Behney

Assistant Director

Sean Tunis

Health Program Manager]

Kerry B. Kemp

Managing Editor

ADMINISTRATIVE STAFF

Beckie Erickson

Office Administrator

Carolyn Martin

Word Processing Specialist

Daniel B. Carson

PC Specialist

Carolyn Swarm

PC Specialist

Project Staff

PRINCIPAL STAFF

Tami L. Mark

Denise M. Dougherty

Project Co-Directors

Mary Laschober

Analyst

Justin Latus

Research Analyst

Douglas Berkson

Research Assistant

David Grabowski

Research Assistant

OTHER CONTRIBUTING STAFF

Yen-Pin Chiang

Senior Analyst

Arna M. Lane

Research Analyst

‘ Effective January 1994.
1 Summary and Policy Implications 1

Summary of Key Findings 3

General Findings 3

Findings for Specific Policy Areas 14

■ Effects of Applying Government Cost Controls

(chapter 2) 14

= Effects of Encouraging Maria@ Competition and

HMO Enrollment (chapter 3) 15

■ Effects of Providing Coverage to uninsured

People (chapter 4) 17

● Effects of Administrative Changes Under Reform

(chapter 5) 17

Policy Implications 18

Understanding and Communicating Uncertainty 18

■ Sensitivity Analysis 1 8

= Documentation 1 8

Improving the Estimation Process 19

■ Collaboration Between Analytic Organizations

and the Larger Research Community 19

■ Research and Data Collection 19

Organization of This Report 19

2 Applying Government Cost Controls 21

Key Government Cost-Control Strategies 23

Health Security Act (H.R. 3600/S. 1757) 23

American Health Security Act of 1993

(H.R. 1200 S. 491 ) 29

Health Care Cost Containment and Reform Act of

1993 (H.R. 200) 29

Summary 29

Analysis of Reform Proposals 29

Analyses of the Health Security Act 32

● Clinton Administration’s Analysis of the Health

Security Act 32

■ Lewin-VHI’s Analysis of the Health Security

Act 3 3

■ CBO’S Analysis of the Health Security Act 33

contents

I I

vii
Analyses of the American Health Security Act of

1993 and the Universal Health Care Act of

1991 38

= CBO’S Analysis of the American Health Security

Act of 1993 38

● CBO’S Analysis of the Universal Health Care Act

of 1991 39

CBO’S Analysis of the Health Care Cost

Containment and Reform Act of 1992 41

Summary 41

Review of the Evidence 42

Evidence on Expenditure Limits Applied to Large

Sources of Funding 42

Evidence on Premium Limits 46

Evidence on Provider Payment Controls 47

● Hospital Payment Controls 48

■ Evidence on Physician Payment Controls 60

Findings and Policy Implications 67

- Findings 6 7

= Po] icy Implications 68

3 Effects of Managed Competition and

HMO Enrollment 69

Analyses of Reform Proposals 72

Analyses of Managed Competition Proposals

Without Government Cost Controls 72

■ Congressional Budget Office Analysis of the

Managed Competition Act 75

■ Economic and Social Research Institute

Analysis of the Managed Competition Act 77

■ Lewin-VHI Analysis of the Health Security Act

Without Government Cost Controls 78

Analyses of Managed Competition Proposals With

Government Cost Controls 80

- Congressional Budget Office Analysis of the

Health Security Act 80

● Clinton Administration’s Analysis of the Health

Security Act 80

■ Lewin VHI Analysis of the Health Security

Act 8 1

Summary 81

Review of the Evidence 81

Will People Join HMOS? 81

■ Evidence from Public Employee Insurance

Programs Used as Examples of Managed

Competition 83

■ Summary 8 6

. . . Vlli
Will Increasing HMO Enrollment Save Money? 86

= HMO and Non-HMO Expenditure

Differences 86

● Generalizing to Health Reform 88

■ Summary 9 1

Will Managed Competition Have a Continuing

Impact on the Growth Rate of National Health

Expenditures? 91

. Summary 9 5

Findings and Policy Implications 95

4 Effects of Providing Insurance

to Uninsured People 97

Provisions for Providing Coverage for Uninsured

People in Reform Proposals 99

Proposals for Universal Coverage 99

Proposals That Phase In Coverage 102

Analyses of Reform Proposals 103

Overview of Basic Analytic Approaches 103

Analyses of Proposals for Uninsured Coverage 105

● CBO’S Analyses of Single-Payer Universal

Coverage Proposals 105

● Analyses of Managed Competition Universal

Coverage Proposals 110

● Summary of Analyses of Universal Coverage

Proposals 118

● Analyses of Proposals That Phase In

Coverage 118

Summary of Analyses 119

Review of the Evidence 119

Evidence on Utilization with Expanded

Coverage 119

● Reviews 121

■ Studies 1 2 2

Evidence on Expenditures with Expanded

Coverage 125

= Spillman, 1992 125

■ Long and Marquis 128

- AHCPR Analysis of NMES, 1987 128

Findings and Policy Implications 129

= Findings 129

= Policy Implications 130

L_____!

1 I

ix
5 Effects of Administrative Changes

Under Reform 131

Analyses of Reform Proposals 133

Analyses of Single-Payer Proposals 133

= CBO’S Analysis of the American Health Security

Act 133

● Lewin-VHI’s Analysis of a Single-Payer

System 140

● Economic and Social Research Institute

Analysis of a Single-Payer System 141

● Woolhandler and Himmelstein’s Analysis of a

Single-Payer System 141

● Grumbach et al. Analysis of a Single-Payer

System 142

● GAO’s Analysis of a Single-Payer System 142

Analyses of Proposals That Reform the Private

Insurance Market 142

D Lewin-VHI’s Analysis of the Health Security

Act 142

● Clinton Administration’s Analysis of the Health

Security Act 143

~ CBO’S Analysis of the Health Security Act 144

D CBO’S Analysis of Private Insurance Market

Reform Proposals of the 102d Congress 144

Review of the Evidence 144

The Baseline Numbers 144

Evidence on Administrative Costs Under a

Single-Payer System 145

● Insurer Administrative Costs 145

● Provider Administrative Costs 147

Evidence on Administrative Costs Under Private

Insurance Market Reform 148

Findings and Policy Implications 151

Boxes

1-1 Analysts’ Process of Coming to Estimates and OTA’s

Use of Empirical Research Literature 8

1-2 Selected Critical Assumptions in Estimates of Policy

Changes 10

1-3 Implications of Uncertainty in the Estimates of

National Health Expenditures Under Health

Reform 11

2-1 Key Government Cost-Control Strategies 22

2-2 CBO’S Method and Criteria for Rating the

Effectiveness of Expenditure Limits 34

2-3 Standards of Evidence 43

x
2-4 Measures of the “Effectivcncss” of Governmcnt Cost

Controls 

44

3-l Managed Care and Health Maintenance

Organizations 76

4- I Information Required To Estimate the Effects of

Extending Health Insurance to Uninsured People 104

4-2 CBO’S Generic Approach to Projecting Costs of

Covering Uninsured People in the Context of

Calculating Premium Costs 111

4-3 HCFA and AHCPR Methods for Projecting Costs of

Covering Uninsured People 113

4-4 Why Clinton Administration Estimates of Costs of

Covering Uninsured People Are Different from Other

Estimates 116

4-5 CBO’S Approach to Estimating the Numbers of Newly

Insured People Under Reforms Without Universal

Coverage 120

Figures

1-1 National Health Expenditures, Nominal and Real

Dollars, 1960-2000 2

1-2 National Health Expenditures as a Percent of GDP,

1960-2000 

3

2-1 Average Annual Change in Total Health Care

Expenditures Per Capita and in Medicare Expenditures

Per Enrollee, 1980-92 51

2-2 Intlation-Adjusted Average Annual Change in

Medicare Inpatient and Other Medicare Expenditures

Per Enrollee, 1980-92 51

2-3 Hospital Expenditures Per U.S. Medicare Recipient by

Place of Residence, 1974-82 54

2-4 Index of Hospital Expenditures in the Netherlands,

1976-85 59

2-5 Hospital Expenditures in the Netherlands, 1983-86 59

2-6 Index of Ambulatory Care in the Netherlands,

1976-85 60

2-7 Physician Expenditures Per Capita for Canada and the

United States, 1960-91 64

3- I Projected HMO Market Share of Private Insurance for

the Year 2000 in Various Analyses, 1980-2000 82

3-2 Comparison of U.S. and State of Wisconsin Growth

Rates for Employee Premiums, 1983-93 93

3-3 Comparison of U.S. and State of Minnesota Growth

Rates for Employee Premiums, 1983-94 94

5-1 Estimates of Savings in Administrative Costs Under

Six Analyses of a Single-Payer System, 1991 135

xi
Tables

1-1 Various Analyses’ Projected Changes in National

Health Expenditures Under Health Reform Proposals

Relative to Continuation of the Status Quo 4

1-2 Analyses of the Impact of Health Reform Proposals on

National Health Expenditures Reviewed in This

Report 7

1-3 Lewin-VHI’s Detailed Estimate of NHE in 1998 13

2-1 Analyses of the Impact of Health Reform Proposals on

National Health Expenditures Reviewed in This

Report 24

2-2 Key Assumptions and Criteria for Judging

Effectiveness of Expenditure Limits for Selected

Health Care Reform Proposals 25

2-3 Approaches to Government Cost Controls in the Health

Security Act (H,R. 3600/S. 1757) 28

2-4 Approaches to Government Cost Controls in the

American Health Security Act of 1993 (H.R. 1200/

s. 491) 3 0

2-5 Approaches to Government Cost Controls in the Health

Care Cost Containment and Reform Act of 1993

(H.R. 200) 31

3-1 Features of Managed Competition in the Health

Security Act and the Managed Competition Act of

1992 7 0

3-2 Analyses of the Impact of Health Reform Proposals on

National Health Expenditures Reviewed in This

Report 73

3-3 Key Assumptions in Estimates of Managed

Competition and HMO Enrollment by Privately

Insured Individuals in the Health Security Act and the

Managed Competition Act of 1992 74

3-4 HMO Market Share of Public Employee Insurance

Programs, 1992-93 84

3-5 Public Employee Insurance Programs as Examples of

Managed Competition 85

3-6 Estimates of Savings for Total Enrollment in HMOS

from Selected Studies 89

4-1 Analyses of the Impact of Health Reform Proposals on

National Health Expenditures Reviewed in This

Report 9 8

4-2 Approaches to Expanding Coverage in Selected Health

Care Reform Proposals 100

4-3 Summary of Estimates and Research Evidence of

lncremental, Total, and Premium Costs of Providing

Insurance for Uninsured People 106

4-4 Key Assumptions in Estimates of Costs of Providing

Insurance for Uninsured People and in Research

Studies 108

xii
4-5 Incremental Costs of Covering Uninsured People as a

Percentage of NHE 110

4-6 Additional Methodological Details in Studies on

Differences in Utilization of, and Expenditures for,

Health Services by Insured and Uninsured People 126

5-1 Analyses of the Impact of Health Reform Proposals on

National Health Expenditures Reviewed in This

Report 134

5-2 Key Assumptions in Estimates of Savings in

Administrative Costs Under a Single-Payer

System 136

A

B

c

D

Acknowledgments 153

Method of the Study 158

Implications of Uncertainty in

Selected Estimates of NHE Under

Health Reform 163

Abbreviations and Glossary 168

References 183

Index 195

. . . X111
Summary

and

Policy

Implications

H

ealth care reform is at the top of the nation domestic

policy agenda. With national health expenditures continuing to grow faster than inflation and with an estimated

37 to 38 million Americans without health insurance,

Members of Congress and others have proposed a wide variety of

approaches to reform the delivery and financing of health care. A

key concern in the ensuing debate is how various proposals would

affect national health expenditures. 1,2

As shown in figures 1-1 and 1-2, in the absence of reform, national health expenditures, now estimated at over $900 billion

(approximately 14 percent of gross domestic product (GDP)),

have been projected to continue to climb to $1.7 trillion (approximately 18 percent of GDP) by the year 2000. To estimate what

impact the different proposals would have on national health expenditures, Congress and others have looked to quantitative analyses. Such analyses have been performed by the federal

government (e. g., the Congressional Budget Office, the General

Accounting Office, and the Clinton Administration), by private

consulting firms. and by individual academics. Table 1-1 depicts

changes in national health expenditures projected under health re -

—

1 The Department t)f t {calth and Human Scn Ices defines nati[mal health expenditures

a~ [hc natl~m total prl\ a[c and public spending. fi)r a defined but tmd set of health ser-

~ Ices and \uppl Ic~, ;ind ihe n~cd Ic:il research and cfmstructitm of med}cal facilities

aw)c]atcd w ~th pr(~~ ding th(w health wwws and suppl Ics.

2 Public V)IICI makers arc also cx~nccmwl ah~ut the impact of alternative refom]s (m

the tdcrai bud.gcI and [he hud:cI dcficl(. OTA w III c~anllnc ;inaly stss appr(~aches I(J estimating tcdcral budget Inlpacts In a f{lr[hconl]ng b:ichground paper ( I 92).

II
2 I Understanding Estimates of National Health Expenditures Under Health Reform

* ~Billions of dollars

1,600

1,200

800

400

0

-* Nominal dollars

1

Actual Projected

u Real dollars (1990) [

/

/

I \ I I I I I

1960 65 70 75 80 85 90 95 200 0

The present study was requested by the

Technology Assessment Board and Senator Ted

Stevens as a followup to OTA’s 1993 study. The

report addresses the following questions:

●

●

m

●

8

How do different analysts come to their estimates of national health expenditures under reforms? What assumptions and methods do they

use to produce estimates?

Does the available empirical evidence support

analysts’ assumptions? Is there evidence that

can resolve differences between assumptions

made by different analysts?

How much uncertainty surrounds analysts’ estimates of the effects of particular policy

changes and of future national health expenditures?5

What are the strengths and weaknesses of the

models and estimates of national health expenditures?

How much information about assumptions and

methods should analysts provide to readers

with varying interests and levels of expertise?

This report is intended to provide Congress and

policy makers with guidance on the various predictions of national health expenditures under alternative health reform proposals. It is important

to note that this report has a 1imited focus. The report was not intended to address the full array of

concerns that policy makers may have about specific policies to reform the health care system.

Critical issues such as the potential impacts of various proposed policy changes on individuals’

health status, or on the economic efficiency of the

health system, are not addressed in this report.6

3 !Wme estimates of nati(mal health expenciiturcs became available ttx) late for c{msidcrati(m in this rcp(rt (c.:., KPMG Peat Mat-wick (79);

KPMG Peat MarWick (80); U.S. C{mgress, CBO ( 174)).

4 Ana/y~e~ arc defined in this reP)~ a5 [he processes used to analyze the impact of health refornl prop)sais ~m national heath expenditures

(see box I - 1). Ana/ysfs are those individuals (w entities that Perf(ml] analyses in order to c(wne up with an estimate of nati(mal health expenditures under reform. Aswnpfiom, brt~adly defined, are supp)siti(ms that something IS true. E.rfima/es are approximate calculati(ms, or numerical

values obtained from a statistical sample or ccontm]ic model (in this repwt, the teml esrimafe is used mmt often to refer to the twtc(m~e of sinmlations of nati(mal health expenditures).

5 In this report, as in a recent reproof the Natl(mal Research Council, the term m(erfainfy is used as “an umbrella tern] for the quantificati(m

of the differences between a model estimates and (he truth” (20). N() particular statistical definition of uncertainty sh(mld be inferred.

6 Analysts have not inc{)~)ra[ed a55un1p[lons ah)ut ectmomic efficiency and health status effects in their quantitative estimates. However,

analysts may attempt to bring these impacts to readers’ attcnti(m in a qualitative sense (e.g., Lewin-VHl (89); CBO ( 172)).
Chapter 1 Summary and Policy Implications I 3

*O -Percent of G D P — ‘—” 7

16 I

12 I

8

18.1

Actual Project

7

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these findings for policy mtikers.

SUMMARY OF KEY FINDINGS

The findings of this report can be

both generally and specifically. The

summarized

next section

presents answers to the five questions addressed

by this report in general terms; the section following presents OTA'S specific findings on the estimates of the proposed policy changes selected for

more intensive analysis in this report.

B General Findings

How do different analysts come to their estimates

of national health expenditures under reforms?

What assumtions do they make in order to produce estimates? 

A striking feature of the structure of the U.S.

health care system is its complexity. Since it

would be impossible to describe all features of the

health care system in detail, analysts abstract from

the vast complexities of the real-world and develop rather simple models that attempt to capture the

"essentials” of the processes that determine health

care expenditures (box 1-1).

Health reform proposals typically contain numerous general and specific policies, intended to

change the health system, that analysts might take

into account in estimating the overall effect of a

particular proposal on national health expenditures.

To estlmate what impact different proposals would have on

national health expenditure.s Congress and others have

looked to quantitatve analyses
4 I Understanding Estimates of National Health Expenditures Under Health Reform

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Projected char

Proposalb Analysisc

1991

Singl+payer plan, “ Grumbach et al “ -1 8

Grumbach et al.

version

Single-payer plan, + Lewln-VHl - “ 314

I Lewin-VHl version

~~wyerp,an ‘jjoo,han~,er and -- -

Woolhandler and ‘ H!mmelsteln

~ Himmelstein version

.—

1992 1993 199 4

.— .

I Universal Health Care ~ CBO

——

--1E

~ Act of 1991 (H.R. 1300)f

t

qe in national health expenditures under reform (S billions)d

1995 -

1996 ~ 1997 1998 1999

t .—— . - ——

I .——— 4

— -.——~.-_

I

( 1

KEY E - year the proposal was assumed to be enacted If not speclfled, It IS the same year as the year of the first estimate

2000 -~2001 2002 200 3 2004

+——— . — - . ——

+. . _—- —

I

I

———. ,

-o ‘

,?-

—

1

~ National health expenditures comprise the nations total spending both private and publlc, for a def[ned but broad set of health servtces and supplles, and the research actwltles and construction of

medical facllltles associated wlfh the provlslon of those health sewlces and supplles (83) Changes In national health expendlfures are often referred to as savings or COS[ Increases It IS Important to

understand what these terms mean Savings or cost Increases are measures of changes In national health expenditures relatwe (opfoject/ons ofa continuation of the sta[us quo (/ e , basehne spending)

Prolectlons of continuations of the status quo are themselves dependent on a host of assumptions and nputs aboul the past the presenf and the future absen/ma/orpo//Cy Changes m (hehea//h sec(or

Such projections may be reasonable m the sense that they are based on the Informed judgment observations and data available to analysts As most analysts WIII acknowledge both the basellne

projections and the reform projections Include a host of Inherent uncertainties (89 164 172)

0 T hls column Includes both speclflc Ieglslatlve proposals ar?d more general conceptual proposals

c Full cfatlons for the analyses are hsted m appendix B

fi Current dollars unless otherwise noted

C BIII numbers are for 103d Congress

t BIII numbers are for 102d Congress

Y ESRI conducted two analyses ot this proposal The optimstc analyss was desgned to ger’crate a relal:vely large estimate of savings wh’e the pesslmst, c analysls was desgr?ed to generate a

smaller esllmate of sawngs

SOURCE Office of Technology Assessment 1994
6 I Understanding Estimates of National Health Expenditures Under Health Reform

The first simplification analysts make is to determine which aspects of health reform proposals

may have some effect on national health expenditures. OTA inferred from the available documentation that estimates of the effects of four policies

are among the most important factors considered

in the analyses of national health expenditures under reform:

1. applying government cost controls,

2. encouraging managed competition and increased health maintenance organization

(HMO) enrollment,

3. providing insurance coverage, and

4. administrative changes.

To estimate how each of these four policies will

affect national health expenditures, analyses use

other simplifying assumptions. Typically, estimates of each of the four policies are based on two

or three key assumptions that allow analysts to

make quantitative predictions about how the policies will influence national health expenditures

under reform. in comparison to the status quo.

These assumptions include suppositions about

how individuals will respond to specific incentives provided by the reform proposals. For example, how much individuals” use of health care will

increase when they are insured; how much their

use of health care will decrease when they have to

pay more for services out-of-pocket; and whether

they will join HMOS if HMO prices decrease relative to traditional fee-for-service plans. They also

include assumptions about the effects of using different organizational structures to supply or finance health care services, and assumptions about

how effective selected government cost controls

will be given providers* responses to regulations

of health care prices or expenditures.

Each chapter in this report describes the different assumptions and methods that various analysts used to estimate the impact of these four key

policies on national health expenditures. Some of

the critical assumptions are summarized in box 1-2.

Does the available evidence support analysts’

assumptions? Is there evidence that can help resolve differences between assumptions made by

different analysts?

The ultimate test of whether a given approach

to simulating the impact of health reform is accurate is whether the prediction actually occurred.

For a number of reasons, including the fact that the

health reform proposals being modeled have never been implemented in their entirety, this type of

evaluation is impossible. Another approach to understanding and evaluating particular models is to

examine their assumptions.

OTA compared analysts’ assumptions with evidence from available empirical research (box

1-1). The intent of this comparison was to find

whether the empirical evidence supports the specific assumptions and whether evidence could be

used to settle contradictions between different assumptions made by different analysts.

It is difficult to make a general statement about

whether the research literature supports analysts’

assumptions. 7 Research exists on many of the assumptions examined, although the quality and

quantity of research varies across different assumptions and issues. In some cases, there is direct evidence on behavioral responses to specific

policy changes or on the effect of different organizational structures. In other cases, research evidence indicates how individuals will respond

generally or how organizational structures may influence health care costs, but there is contradictory evidence as to the size of the effect. Finally, for

some areas there has been no research and no indication of how to model the impact of a particular

policy. In general, the research evidence leaves

many questions unanswered.

Even when research evidence does exist, it is

not always clear how it should be interpreted.

There is always the question of whether the results

found will apply to the reforms being considered.

For example, some people have argued that the

7 Each chapter In the rcpt~rt dcscrlbcs the \trcngths and Iinlltatl(ms of the research literature. and h{~w It cxm]parcs to panicular assurnp(i{ms.
Proposal

American Health Security Act of 1993 (H. R 1200/S. 491)b

Comprehensive Health Reform Act of 1992 (H R. 5919)C

Health Care Cost Containment and Reform Act

of 1992 (HR. 5502)C

Health Security Act (H R 3600/S. 1757)b

Health Security Act (HR. 3600/S. 1757)b, Lewin-VHl

scenario without government cost controls

Managed Competition Act of 1992 (H.R. 5936)C

Managed competition plan, Starr version

National health plan, full savings scenario

National health plan, administrative savings scenario

Single-payer plan, CBO version with patient cost-sharing

Single-payer plan, CBO version without patient

cost-sharing

Single-payer plan, GAO version

Single-payer plan, Grumbach et al. version

Single-payer plan, Lewln-VHI version

Single-payer plan, Woolhandler and Hlmmelsteln version

Umversal Health Care Act of 1991 (HR. 1300)C

Applying

government cost

controls

(chapter 2)

CBO

CBO

CBO

Clinton Admmstratlon

Lewln-VHl

CBO

Analysesa

Encouraging Providing universal

managed coverage to

competition uninsured people

(chapter 3) (chapter 4)

CBO

Clinton Admmstration

Lewin-VHl

Lewm-VHl

CBO

ESRI

CBO

CBO

CBO

Clinton Admlnstratlon

Lewm-VHl

CBO

Shells et al.

CBO

CBO

CBO

Reducing

administrative costs

(chapter 5)

CBO

CBO

CBO

CBO

Clinton Admlnlstratlon

Lewin-VHl

CBO

ESRI

ESRI

CBO

GAO

Grumbach et al.

Lewm-VHld

Wool handler and

Hlmmelstem

CBO

KEY CBO = U S Congress, Congressional Budget Off Ice, GAO = U S General Accounting Off Ice, ESRI = Economic and Social Research Inshtute

aFull Cltatlons for the analyses are In appendix B

bBlll numbers are for 103d COngreSS

CBIII numbers are for 102d Congress

dAnaly~ls was ~onducted by Lewln-lCF The company was acquired and expanded In 1992 For purposes of this report all Lewln analyses are Identlfled as Lewln-VHl

SOURCE Off Ice of Technology Assessment, 1994

m

3

Q

—

-1
8 I Understanding Estimates of National Health Expenditures Under Health Reform

—
Chapter 1 Summary and Policy Implications I 9

evidence on other countries’ experience with gov- Despite these difficulties, overall, OTA found

ernment cost controls is not indicative of what

would occur in the United States. Moreover, the

research evidence rarely provides clear-cut answers. Measures of program success, standards of

comparison, the sophistication of the analysis,

and the time period of the study will all influence

the conclusions drawn.

When research does not exist it is not clear

whether analysts should base their estimates on

judgment as to the possible effect of a proposed

policy change, or assume no effect.

that very few of the analyses it reviewed used assumptions that were completely contrary to the results of available empirical research, especially in

terms of the direction of an effect. In addition,

when the analyses OTA reviewed supplied rationales for analytical choices, most of the rationales

met standards of reasonableness, based on the evidence. However, in many cases, the evidence

could also support alternative assumptions about

the size of the effect (e.g.. how many people will

join HMOS).
10 I Understanding Estimates of National Health Expenditures Under Health Reform

How much uncertainty surrounds analysts’ estimates of the effects of particular policy changes

and of estimates of future national health expenditures?

Many analysts have emphasized that their estimates of future national health expenditures are

highly uncertain, and thus are unlikely to represent an accurate prediction of what the United

States can expect to spend on health care under

various reform proposals (e.g., CBO (172),

Lewin-VHI (89)). However, analysts rarely quantify the degree of uncertainty of their estimates.

Moreover, OTA did not have access to the models

or complete analytic frameworks used to estimate

national health expenditures, and was only able to

perform limited sensitivity analyses.

While OTA cannot draw bands of uncertainty

around estimates of national health expenditures

under reform proposals, OTA did find that assumptions used in particular analyses could be
Chapter 1 Summary and Policy Implications I 11

replaced with equally plausible assumptions, thus trols could change how two proposals with govchanging the estimates (box 1-3). In one case, ernment cost controls were ranked in terms of

OTA noted that plausible changes in assumptions their effects on national health expenditures. The

about the effectiveness of government cost con- different assumptions lead to estimates of national
12 I Understanding Estimates of National Health Expenditures Under Health Reform

health expenditures that differed by $57 billion,

equal to approximately 4 percent of baseline national health expenditures. In another case, OTA

found that altering an assumption could produce

opposite conclusions about whether a proposal

would increase or decrease national health expenditures.

These analyses suggest that it maybe important

to examine the assumptions and uncertainty that

underlie analyses, particularly if they are extensively used in the development or evaluation of

policies. Quantifying the levels of uncertainty

may provide more of a basis for understanding the

strengths and limitations of models and empirical

estimates of national health expenditures, and

their potential role in policy analysis (20).

It is also important to note that quantifying the

degree of uncertainty raises other questions. How

much uncertainty is too much? How much uncertainty is substantial and how much is relatively

minor? Is a range of uncertainty of $50 billion

large? Isa range of 4 percent of national health expenditures large? The answers to these questions

will depend on the context in which they are considered and the ways that the estimates are used.

What are the strengths and weaknesses of the

models and estimates of national health expenditures ?

The process of estimating the quantitative impact of health reform proposals can be an important and informative part of policy analysis,

particularly if it is described in a manner accessible to nontechnical audiences. Some research and

data do exist that maybe useful for understanding

the impact of different policies, even if the research provides imprecise answers. Documentation of attempts to use research, data, and

judgment to model reform proposals may highlight for policy makers what analysts believe are

the key determinants of national health expenditures, what effects seem relatively well known,

and where knowledge is weakest. A complete description of analysts’ rationales for particular estimates (e.g., their basis in theory, research, or

experience) may be as informative, or more informative, as the estimates themselves.

A weakness of models and the way in which

their results are sometimes reported may be that

they can shift the focus from important policy

questions to a discussion of the “numbers.”

Whether a model is “good” or “bad” maybe less

important than the underlying issue of what policies can limit the growth in national health expenditures and meet other important policy

objectives.

Another potential drawback of estimates that

are provided in the absence of meaningful qualifications as to their degree of uncertainty is that they

may lead policymakers and others to a false sense

of optimism regarding analysts’ ability to accurately predict the impact of health reform. If policymakers rely extensively on quantitative

estimates without knowing the levels of uncertainty surrounding the estimates or their basis,

they could draw misleading conclusions.

How much information about assumptions and

methods should analysts provide to readers with

varying interests and levels of expertise?

By examining the assumptions and methods

analysts use to estimate effects of selected key policies, and attempting to determine the implications of uncertainty about the effects of the

policies, OTA was able to come to some general

conclusions about the overall process of estimating national health expenditures under reform.

OTA found that analysts’ published reports vary

considerably in the level and types of information

they provide, and that this variation can have implications for potential users of the reports.

For example, OTA found that analysts may not

provide information about the steps of the analyses (i.e., the key algorithms) or about the sources

of their assumptions for analyses of particular proposals (see table 1-3 for a partial exception). Some

analysts provide a general description of their

methods in separate reports. However, readers

may find it difficult to locate and reconcile written

information about analysts’ general beliefs and information sources with analyses of particular proposals. Analysts vary in their willingness to

provide additional information other than what

they publish. To their credit, analysts try to use
Chapter 1 Summary and Policy implications I 13

Changes in

spending

Total health spending (Includes administration)a

$1.3950

Changes in health services utilization

Increase in uttilzation due to expanded coverage

Utilzation Increase for previously uninsuredb

Expanded coverage for those already insuredc

Long-term care utilization

Public health activities (including WIC)

Impact of managed cared

Net change in utilization

Change in administrative cost

Insurer administration (Includes administration for newly

insured) e

Provider administrative savingsf

Federal operations

Program administrationg

Medical educationh

Veterans hospitalsg

State alliance

All lance administration

Guarantee fund reserve accumulation

Net change in administrative costs

$64 0

41 6

5 4

11 6

5 4

(14.9)

49.1

(48)

(1 9)

1 7

1 3

1 7

8 9

5.0

3 9

6.9

Change in provider reimbursement

Net change in provider reimbursement

Uncompensated care savings

Increased reimbursement for Medicaid recipients

Reduction in cost shift

.———

Net change in spending with spending cap

Preempt reimbursement windfall

Impact of spending cap

Medicare spending Iimits

All lance premium caps

Medicaid (net of offsets)J

—

Net change in national health spending

Net change

32.5

2 3 2

4 5 7

(36 4)

(32 5)

(56.6)

(13 1)

(47 3)

3 8

(0.6)

(continued)
14 I Understanding Estimates of National Health Expenditures Under Health Reform

KEY NHE = national health expenditures; WIC = Special Supplemental Food Program for Women, Infants and Children

a Includes spending for acute care, spending for long-term care, public health, research, and construction

b Assumes that utilization of health services by previously uninsured persons wiII rise to levels reported by insured Persons with similar age, sex, income, and health status characteristics

C Assumes that utilizatlon of newly covered health services for insured persons whose coverage is upgraded (prescription drugs, etc ) will rise to the levels reported by persons who have such coverage

d Assumes that competing health plans Will affect utilizahion in ways comparable to HMO plans Estimates are based on

age- and sex-adjusted comparison of hospital utilization for HMO enrollees compared with those enrolled in fee-forservice plans The higher physician utilization iS due largely to coverage for preventive care and substantially lower

levels of patient cost-sharing

e These estimates are largely based upon administrative cost data provided by Hay/Huggins as presented in: U. S. Congress, Congressional Research Service, “Cost and Effects of Extending Health Insurance Coverage, ” Library of Congress, October 1988 Reflects increased cost of covering uninsured persons

t Assumes that provider claims processing expenses and claims adjudication expenses are reduced in proportion to

the reduction in insurer claims processing costs We assume that providers return half of these savings to consumers in

the form of reduced charges.

9 Based on administration estimates.

.

h Includes total funding for academic health centers under the program less reductions in current Medicare funding for

medical education (direct and indirect amounts)

1 Under a universal coverage program, hospitals and physicians wiII receive payments for care formerly provided as

uncompensated care Much of this increase in reimbursement wiII be passed-on to consumers in the form of lower

charges through the negotiation process

I Includes Medicaid savings under budget cap offset by changes in adminlstrative costs, payment Iags, and reserves

SOURCE Reprinted with permission from Lewin-VHl, December 1993 (89) Full citation is in appendix B

new information to guide their assumptions, but

refinements relevant to particular analyses may

not be reflected in previously published background papers. As a result, nonexpert readers may

find it hard to understand analysts’ decisionmaking processes, where the potential sources of uncertainty are, and how the uncertainties might

affect overall estimates of national health expenditures.

Fuller descriptions of the methods used to estimate the impact of reform proposals maybe informative to policy makers. Analysts disagree,

however, about policymakers’ and other clients’

needs and desires for this kind of information, and

there are legitimate questions about how comprehensive and detailed analysts’ reports should be.

Given the complexity of the health system and the

variation in interests, different readers will want

answers to different questions. In addition, analysts often face time pressures that may limit their

ability to provide full written documentation.

These issues are touched upon further under

“Policy Implications” later in this chapter.

I Findings for Specific Policy Areas

Each of the following summaries first reviews the

concept and proposals in question, then summarizes analysts’ assumptions about the effects of the

concept, and finally compares analysts’ assumptions with the available empirical evidence.

Effects of Applying Government Cost

Controls (chapter 2)

Government cost controls are measures by which

federal, state, or local governments impose or negotiate direct limits on: prices of health insurance;

prices of particular health services (e.g., physicians’ fees); overall expenditures related to a particular health care sector (e.g., hospitals); or

overall outlays related to a particular source of

funding (e.g., federal, state, or local government).

The aim of government cost controls is to reduce

the level or rate of growth either in overall national

health expenditures, in expenditures of specific

payers (e.g., government), or in expenditures for
Chapter 1 Summary and Policy Implications I 15

specific sectors of the health care system (e.g.,

hospitals).

In addition to making provisions for specific

government cost control mechanisms, some proposals would specify in statute specific limits on

the growth of expenditures for specific funding

sources.

8

To model proposals with government cost controls, analysts first determine what proportion of

national health expenditures would be subject to

regulation. Next they project that amount at the

growth rate limit specified in the proposed statute

or at some higher rate, depending on analysts’ assumptions about the actual effectiveness of the

controls.

All of the analyses of proposals that include

provisions for government cost controls that OTA

reviewed (see table 1 -2) assumed that the controls

would reduce the growth rate in health care expenditures, though not always to levels specified in

legislation.

Empirical evidence from the United States and

other countries suggests that government cost

controls have decreased the rate of spending for

the particular categories or components of health

services to which they were applied. Often studies

only examine a short time period, and government

controls are constantly changing, making it difficult to pinpoint their effect. Moreover, people

have questioned whether evidence from particular

states or countries is indicative of what could happen under the proposed reforms. Finally, neither

the models nor the empirical evidence directly address the political feasibility of various controls.

The empirical evidence suggests that the effectiveness of government cost controls will depend

on the mechanisms used. However, the empirical

evidence may not provide straightforward answers to the question of whether specific types of

government cost controls can reduce rates of

spending to those specified in some of the current

proposals (a question that is at the heart of "effectiveness ratings” for expenditure limits).9

There may be no way to use empirical evidence to

determine exactly at what rate health care expenditures will grow under any complex set of government cost controls, even if a target rate is

specified in legislation.

Effects of Encouraging Managed

Competition and HMO Enrollment

(chapter 3)

Managed competition has been defined as a “purchasing strategy to obtain maximum value for

consumers and employers, using rules for competition derived from macroeconomic principles”

(31 ). Advocates argue that managed competition

can reduce health expenditures by restructuring

the market for health care. Under managed competition “a sponsor” (either an employer, government entity, or purchasing cooperative), acting on

behalf of a large group of subscribers, structures

and adjusts the market to overcome attempts by

insurers to avoid price competition” (31). Other

elements of managed competition, such as limiting employer contributions to the cost of the lowest priced plan available and standardized

benefits, aim to increase consumers’ sensitivity to

8 For example, by 1999, the Health Care Cost Containment and Reform Act of 1993 (H.R. 200) would limit growth in almost all persona]

health expenditures to no more than gross domestic product growth. Personal health expenditures are expenditures that include all services and

products purchased that are associated with individual health care, such as hospital services, physician services, drugs, and nursing home care.

Personal health expenditures account for about 88 percent of national health expenditures (86). This category of national health expenditures

excludes expenditures for government public health activities, research and construction, and administrative costs, which together acc(mnt for

the remaining 12 percent of national health expenditures. By 1999, the Health Security Act (H.R. M5WS. 1757) would limit growth in regional

health alliance premiums to consumer price index (CPI) growth. No proposal places a limit on all of national health expenditures. For example,

according to Clinton Administration ofllcials, the Health Security Act’s limit on private premiums in the regional alliances would apply to about

one-third of national health expenditures ( 155). GDP growth and CPI growth are indicators of general economic growth and inflation.

9 Effectiveness ratings we analysts’ judgments of tie extent to which a proposal ‘S package of government cost control mechanisms will be

effective in meeting the proposal target rate of growth. Analysts differ in whether and how they apply effectiveness ratings.
16 I Understanding Estimates of National Health Expenditures Under Health Reform

the price of health insurance and to encourage

more active shopping for health plans.l0 In response to the greater price competition, health

plans are expected to reduce costs, typically by

“managing” care (as in HMOS).l1 Although there

is general agreement on the broad outlines of managed competition, various managed competition

proposals would establish different regulations

and entities aimed at restructuring the market for

health insurance and health care.

A key premise of the relevant analyses reviewed in this report is that HMOS have lower premiums than fee-for-service plans and, as a result,

managed competition will increase the pace of enrollment in HMOS and reduce national health expenditures. To calculate savings from managed

competition, analysts multiply the number of

people expected to switch to HMO plans from feefor-service plans by their estimate of the difference in the covered expenditures between HMO

and fee-for-service plans. Analysts make different

assumptions about how much HMOS can reduce

the level of expenditures compared with fee-forservice plans, and analysts’ estimates of average

savings range from 3 to 15 percent.

Analyses have come to differing conclusions

about whether all of the savings will come from

HMO enrollment (a “one-time” effect), or whether competition between plans will result in additional reductions in the growth rate in health care

expenditures. One analysis OTA reviewed assumed no savings beyond a “one-time” effect due

to HMO enrollment, the other assumed an additional 1 to 2 percent decrease in the rate of growth

of health care expenditures.

Empirical evidence indicates that HMOS may

reduce enrollees’ covered health expenditures relative to traditional fee-for-service plans, but there

are a number of obstacles to estimating the magnitude of savings. Similarly, although research suggests that consumers are responsive to the price of

health insurance, HMO enrollment will depend on

the behavior of employers, health plans, and, perhaps, purchasing cooperatives, as well as consumers. Thus, although there is empirical evidence on

the critical components of the models of managed

competition—HMO enrollment and HMO savings—the evidence suggests it is difficult to develop exact savings estimates.

Very few empirical studies have examined the

long-term effect of HMOS or managed competition and whether they can reduce the growth rate

of health expenditures. Early studies found little

difference in the rate of growth of expenditures between HMOS and fee-for-service plans. There are

a few examples of programs that incorporate

many of the features of managed competition proposals but almost no published research on those

experiences. Limited observations from state and

federal employee insurance programs suffer from

methodological problems and are subject to different interpretations of what actually caused or

prevented the programs from having an impact on

health expenditures. How analysts should interpret the existing research and whether they should

score savings in the absence of definitive evidence

is a contentious issue.

10 me tem hea~rh plan has n.stm~ &finition, and different insurer organizations and health reform proposals define it differently. ne

term heahh p/an was coined, in part, because the term hea/rh insurance p/an does not indicate that many plans both provide insurance, that is

they finance care through premiums collected from employers and individuals, and are involved in the delivery of care (e.g., through utilization

management, by hiring providers, andor by providing a setting). Thus, the term heahhplan is more general than the tern] hea/fh insurancep/an

and includes a wide spectrum of private health care financing and delivery arrangements, ranging from traditional fee-for-service plans to traditional health maintenance organizations.

I I ~amged care is a genera] tem app]ied to a range of initiatives from organized health care delivery systems (e.g., staff-model HMOS) to

features of health care plans (e.g., preadmission certification programs, utilization review programs) that attempt to control or coordinate enrollees’ use of (and thus to control the cost of) services. In most analyses, estimates of HMO savings refer to HMOs that are staff-or group-model

HM& or IPAs.
Chapter 1 Summary and Policy Implications I 17

Effects of Providing Coverage

to Uninsured People (chapter 4)

An estimated 37 to 38 million people in the United

States lack access to regular third-party sources of

payment for health services (e.g., private insurance, Medicaid, Medicare), and virtually all

health reform proposals seek to address this problem. This report focused on analyses of proposals

that would provide universal coverage.

In analyses of the effects of extending insurance to uninsured people on national health expenditures, the estimated increase in expenditures

associated with covering uninsured people is typically calculated as the amount projected to be

spent on insured people less the amount projected

to be spent on similar uninsured people (if they

were to remain uninsured). Analyses may differ

substantially in how they estimate both amounts

and analysts’ quantitative estimates of the cost of

covering uninsured people under reform are often

unspecified in analyses. These differences make it

difficult to compare analysts’ estimates with each

other. Differences center around four factors:

where and how in the analysis cost-shifting for

currently uncompensated care is dealt with; the

use of different baseline levels of spending by

uninsured people; 12 whether or not patient costsharing is assumed; and whether or not the reform

benefit package is assumed.

Empirical evidence, though imperfect, suggests that analyses are correct in assuming that expanding coverage to currently uninsured people

would increase national health expenditures. The

range in the magnitudes of the increase and the total cost from available research is relatively narrow, but may be difficult to interpret and may not

be relevant to determining what additional expenditures would be incurred under health reform.

Effects of Administrative Changes

Under Reform (chapter 5)

Analysts usually define administrative costs to include private insurance load (the difference between premiums and claims paid, including

profit), provider (hospital and physician) overhead, and the costs of operating public programs.

Specific definitions within these categories may

differ, however. Provider overhead, for example,

can be viewed narrowl y as just bil1ing expenses or

viewed broadly as all expenses associated with activities not directly related to patient care.

Almost all proposals aim to reduce administrative costs. The two most prominent policies aimed

at reducing administrative costs are single-payer

tax-financed systems, and reforms to the private

insurance market (e.g., pooled purchasing of insurance and limiting of underwriting).

To calculate administrative savings under a

single-payer system, most analysts assume that

current administrative costs (i.e., insurer and provider overhead) would fall to the levels of singlepayer systems (i.e., Canada or Medicare). All the

analyses OTA reviewed estimated that administrative costs would be reduced substantially under

a single-payer insurance system; however, the

range of estimates is broad. Analysts use varying

approaches to estimate administrative costs under

reforms to the private insurance market. Proposals

that retain the current private insurance market but

change the way insurance is provided (e.g., create

insurance purchasing pools) are typically estimated to result in relatively small changes in administrative costs.

The empirical evidence suggests that the analyses are correct in predicting that administrative

costs could be reduced under a single-payer system and that relatively small changes in administrative costs would result from reforms to the

private insurance market. The Medicare program

and the Canadian national health insurance program have much lower insurer overhead than private insurance companies in the United States,

suggesting that a single-payer system might be

less expensive than the current multipayer system

in terms of insurer administrative costs. Health

care providers might reduce their overhead ex12 Ba\cllnej ~re ~rok.c[lons” of ~xp.ndl[urcs assuming m) reform (e.g., assuming the con[lnuatit~” ‘)f Cument ~)]icies ‘“
18 I Understanding Estimates of National Health Expenditures Under Health Reform

penses if they dealt only with a single payer.

Quantifying specific savings is difficult, however,

and researchers’ estimates of administrative costs

have varied. Moreover, it is unclear whether administrative functions under a single-payer system in the United States would differ from those in

Canada or under Medicare.

Studies have documented a difference in the

size of administrative costs between small and

large firms suggesting the opportunity for savings

under proposals that would reform the private insurance market. However, no studies have yet

documented whether buying insurance through

purchasing pools lowers administrative costs to

small firms. Moreover, it may be that potential

savings would be offset, at least in part, by the new

administrative costs associated with running the

purchasing pools. The size of the offset will depend on the functions performed by the purchasing pools.

POLICY IMPLICATIONS

I Understanding and

Communicating Uncertainty

Throughout the course of this assessment, OTA

became increasingly aware of the importance of

communicating information on the level of uncertainty in the analyses. Without information on the

degree of uncertainty, policy makers may make

decisions on the presumption that the estimates

are reasonably accurate when, in fact, they maybe

highly uncertain (20). For example, an analysis

may indicate that one proposal would save $17

billion more than another when the estimates are

really too imprecise to make this determination.

Given the hazards of ignoring uncertainty in the

estimates, it seems crucial for analysts to develop

better methods to express the accuracy of their estimates of the impact of health reform on national

health expenditures. A variety of approaches is

available to describe and explore the uncertainty

in simulation estimates, and new methods continue to be developed (20). This section will briefly

describe two approaches, sensitivity analysis and

detailed documentation.

Sensitivity Analysis

Sensitivity analyses are carried out by estimating

all or part of the analysis using alternative assumptions or specifications. By running various

analyses using equally plausible assumptions,

analysts can roughly quantify the range of uncertainty surrounding their predictions.

In this assessment, OTA identified some of the

key assumptions used in analyses and attempted

to indicate their likely range. Analysts can use this

information as the foundation of sensitivity analyses. For example, analyses of managed competition could be estimated by using alternative

assumptions about savings from HMOS. Similarly, analyses of single-payer systems could be run

using different assumptions about provider overhead expenses. There are undoubtedly other key

assumptions that could be used in sensitivity analyses.

Trying to quantify the degree of uncertainty in

the estimates of the impact of health reform may

not be easy, particularly in the case of relatively

complex proposals and analytical models (20).

Moreover, making several predictions based on

different assumptions, rather than one “best

guess” estimate, would require a substantial investment of time and resources. Finally, many of

the analytic organizations that OTA spoke with

suggested that busy policy makers want a single

number rather than a range, even if the number is

just a “best guess.”

Given the obstacles and the perceived lack of

interest, many analysts have suggested that the

motivation for estimating the degree of uncertainty, or a range of the probable impact, would have

to come from their clients, including Congress.

Documentation

The documentation accompanying many recent

estimates of national health expenditures indicates that the estimates presented are “uncertain.”

Although this serves as a warning to potential users, it does not indicate how uncertain the estimates are.
Chapter 1 Summary and Policy Implications I 19

The foundations of the estimates and their degree of uncertainty might be better appreciated if

users have access to documentation that details

how the estimates were derived and the judgments

and empirical evidence on which they are based.

For example, analysts could be encouraged to indicate how they determined the effectiveness of

government cost controls, whether the determination was based on empirical research or judgment,

and the reasons why the determination of effectiveness might be uncertain. Some analyses present some of this information, but the presentation

is selective, uneven, and may be too abbreviated

to be useful to nonexperts.

Since there are many ways to express methods

and estimates, analysts would require guidance

from their clients on the degree of detail and style

of presentation that would be most useful. For example, Congress could require federal entities to

publish relatively standardized documentation

explaining their analytical approaches and to publish sensitivity analyses.

Congress has more leverage over the federal

entities that produce projections (e.g., the Congressional Budget Office, the General Accounting

Office, and executive branch agencies) than it

does over private consulting firms, private individuals, and state and local governments. Although Congress may encourage federal agencies

to do a better job of describing the uncertainty surrounding their estimates, estimates will still be

produced by nonfederal agencies and used to argue the merits of particular reform proposals. By

requiring certain standards in the public estimates,

however, Congress could have a basis for questioning, challenging, or even dismissing estimates

from private sources that are not well documented

or supported.

I Improving the Estimation Process

Although this document is not meant to discuss in

detail steps that might improve analyses of health

reform proposals, two obvious approaches are

greater collaboration between analytic organizations and the larger research community, and enhanced research and data collection.

Collaboration Between Analytic

Organizations and the Larger

Research Community

Currently there is little opportunity for outside

groups to verify or replicate estimates produced

by other agencies. Creating such an opportunity

may engender more checks and balances of the estimates. Moreover, encouraging greater communication between the relatively few organizations

analyzing health reform costs and the larger research community may help to increase understanding of the strengths and weaknesses of the

estimates. Of course, this approach may put the

analytic organizations under more pressure from

those with political interests. It may also be difficult given the time pressures that accompany most

of the analyses.

Research and Data Collection

Trying to quantify the precise effect of complex

reforms on the health care system—which represents one-seventh of the nation’s economy—is a

daunting task. In this report OTA reviews the empirical evidence available for making such predictions. Not surprisingly, the available empirical

evidence leaves many questions unanswered.

Thus, estimates of the impact of proposed health

reforms on national health expenditures have been

based, to a some extent, on subjective judgment.

Additional research on policies to reduce health

care expenditures and to expand insurance coverage would strengthen the foundation on which

predictions could be based. Although the results

of additional research may not be available in time

for current efforts to reform the health care system, health financing and delivery are likely to remain policy issues for years to come.

ORGANIZATION OF THIS REPORT

This report reviews and critiques assumptions and

inputs underlying various predictions about the

direction and magnitude of the effects on national

health expenditures of four general policies: applying government cost controls (chapter 2); encouraging managed competition (chapter 3);

providing coverage to uninsured people (chapter
20 I Understanding Estimates of National Health Expenditures Under Health Reform

4); and administrative changes (chapter 5). All of analysts appear to use. Third, they review the emthe chapters are organized in parallel fashion. pirical literature on the impact of the particular

First, the chapters outline the policy reviewed. policy, evaluate whether the assumptions about

Second, they describe the various methods used to the policies correspond with empirical evidence,

estimate the effect of the policy. Each chapter and discuss the attendant uncertainty. The final

summarizes in table format the key assumptions section of each chapter summarizes the findings.
Government

cost

Controls 2

R

ecent health reform proposals rely on a number of approaches to constrain health expenditures. One is to apply government cost controls. ] Government cost

controls are measures by which federal, state, or local

governments play a director indirect role in financing and paying

the facilities and providers through which health care services are

delivered. Government cost controls include limits on average

price of health insurance, (i.e., premiums), prices of particular

categories of health services (e.g., physicians’ fees), overall expenditures for a particular health care category or facility (e.g.,

hospitals), or overall outlays for a particular source of funding

(e.g., national, state, or local government budgets).

This chapter begins with a brief description of the key government cost-containment strategies in selected health reform proposals (see box 2-1 ).2 It examines analysts’ assumptions about

the effectiveness of government cost control strategies because

alternative assumptions can result in wide variation in the estimates of “savings” that can be achieved by adopting a particular

reform plan. The analyses of proposals reviewed in this chapter

are summarized in table 2-1. Analysts’ key assumptions are summarized in table 2-2. The chapter also reviews the empirical evidence on the effectiveness of key government cost-control

r 1

N

A

..-, “.”. ..,,

. . .

1 . \ I

1 Other approaches include increasing consumer cost-sharing, promoting managed L-—.....~

competition, and instituting tax incentives, Managed competition is discussed in chapter

. . 3

2 The chapter does not examine all of the health reform proposals introduced in Congress in the current or past legislative sessions, nor does it examine all prf~jections of na- I 21

tional health expenditures (N HE) for those proposals.
22 I Understanding Estimates of National Health Expenditures Under Health Reform

●

●

●

■

■

●

●

●

■

Negotiated prospective spending limits for operating expenses for hospitals, nursing homes, and other

institutional- or facility-based care (H, R. 1200/S, 491)

Negotiated prospective expenditure limits (or risk-adjusted per-enrollee cavitation payments) for new

Comprehensive Health Service Organizations (CHSOS) (H.R, 1200/S. 491)

Prospective Iimlts on overall spending by fee-for-service plans (optional) (H.R. 3600/S, 1757)

Fee schedules for services provided by physicians, hospitals, and other professionals in fee-for-service

plans and potentially for some prescription drugs (HR. 3600/S. 1757)

Maximum payment rates for each class of non-Medicare health services, generally set using Medicare payment methods (staff- and group-model HMOS would be exempt) (H.R, 200)

Maximum payment rates for Medicare health services, reduced as needed to conform to the national Medicare budget (H.R. 200)

State-established payment programs that would exempt providers in the state from the federally set maximum payment rates, if overall expenditures remained within the maximum payment rates (H.R. 200)

Negotiated prospective fee schedules for physician and other professional services, able to be adjusted by

states (H. R. 1200/S. 491)

Negotiated prescnphon drug prices (H.R. 1200/S. 491)

SOURCE. OffIce of Technology Assessment, 1994

strategies. 3 The chapter addresses the following ■ Can any savings be attributed to government

questions about the evidence and analysts’ con- cost-controls and, if so, is it possible to quanticlusions about government cost-control strate- fy the savings resulting from a particular set of

gies: government cost controls?

3 The chapter does not review the evidence on the effectiveness of government attempts to control utilization directly (e.g., by utilization

review programs) or indirectly (e.g., by limiting health care technology or capacity, such as in certificate-of-need programs). These types of

controls play a relatively unimportant role in recent health reform legislation and are not modeled in NHE estimates.
Chapter 2 Applying Government Cost Controls I 23

~ Is there empirical evidence to support assigning

particular effectiveness ratings to a set of government cost-control strategies?

The final section provides conclusions and

policy implications relevant to modeling government cost-control strategies.

KEY GOVERNMENT COST-CONTROL

STRATEGIES

The proposals relevant to this chapter vary in the

extent to which they use explicit limits and supporting mechanisms, in the proportion of national

health expenditures (NHE) to which the mechanisms apply, and in other specifics (e.g., permissible growth rates for budgets or premiums). For

example, premium limits under the Health Security Act (H.R. 3600/S. 1757) would apply to about a

third of NHE according to the Clinton Administration (155). The amount of NHE that is subject

to limits is an important factor in estimating the effect of government cost-controls on national

health expenditures.

As background for understanding the kinds of

assumptions that analysts make, this section provides an overview of selected key government

cost-control mechanisms in the proposals that feature the controls:4

the Health Security Act (H.R. 3600/S. 1757),

the American Health Security Act of 1993

(H.R. 1200/S. 491), and

the Health Care Cost Containment and Reform

Act of 1993 (H.R. 200).

Health Security Act (H.R. 3600/S. 1757)

The Health Security Act proposes to constrain the

growth of health expenditures for the standard

benefit package through numerous mechanisms,5

including premium growth limits (see table 2-3).

Premium limits are considered to be “backstop”

mechanisms for constraining the growth of expenditures.

Under the act, a National Health Board (NHB)

would set the initial-year premium limits for regional health alliances (H.R. 3600/S. 1757, section 6002). The initial-year premium 1imits would

form the basis for health plan premium bids.

Weighted-average regional alliance premiums

would then be allowed to grow no faster than the

rate of the projected increase in the consumer price

index (CPI) plus 1.5 percent for 1996, the CPI plus

1.0 percent for 1997, the CPI plus 0.5 percent for

1998, and the CPI plus O percent for 1999 and

2000. For the year 2001 and beyond, the average

regional alliance premiums would be allowed to

increase no faster than the rate of change in the

CPI, plus the average change in real gross domestic product (GDP) per capita unless Congress approved another rate. These limits on premium

growth would come into effect only when regional

alliance premiums exceed the target rate.

The Health Security Act has several mechanisms to ensure that regional alliance premiums

for the standard benefit package would be no

greater, on average, than the levels determined by

the National Health Board and the growth rates

prescribed in the legislation. These include penalties on health plans that in effect would reduce excessive premiums to the limits on a

dollar-for-dollar basis. In addition, fee schedules

for fee-for-service plans and the fee-for-service

component of other types of health plans, as well

as options for States or regional alliances to impose prospective budgets on fee-for-service plans,

are intended to help keep premiums within the

legislated limits. The Health Security Act would

also limit the rate of increase in corporate alliance

premiums. Corporate alliances would be terminated if they experienced increases in premiums

above the targeted amount.

4 Bills are from 103d Congress.

5 This act also has provisions intended to constrain expenditure growth by increasing competition among plans, as discussed in chapter 3.
Analysesa

Applying Encouraging Providing universal

government cost managed coverage to Reducing

controls competition uninsured people administrative costs

Proposal (chapter 2) (chapter 3) (chapter 4) (chapter 5)

American Health Security Act of 1993 (H R. 1200/S, 491)b

Comprehensive Health Reform Act of 1992 (HR. 5919)C

Health Care Cost Containment and Reform Act of 1992

(HR. 5502)C

Health Security Act (H.R. 3600/S. 1757)b

Health Security Act (H. R. 3600/S. 1757),b Lewin-VHl

scenario without government cost controls

Managed Competition Act of 1992 (H. R. 5936)C

Managed competition plan, Starr version

National health plan, full savings scenario

National health plan, administrative savings scenario

Single-payer plan,

Single-payer plan,

cost-sharing

Single-payer plan,

Single-payer plan,

Single-payer plan,

Single-payer plan,

CBO version with patient cost-sharing

CBO version without patient

GAO version

Grumbach et al. version

Lewin-VHl version

Woolhandler and Himmelstein version

Universal Health Care Act of 1991 (H.R. 1300)C

CBO

CBO

CBO CBO

Clinton Administration Clinton Administration

Lewin-VHI Lewin-VH l

 Lewin-VHl

. . ,

CBO

ESRI

CBO

CBO

CBO

CBO

Clinton Administration

Lewin-VHl

CBO

Sheils et al.

CBO

CBO

CBO

CBO

CBO

CBO

CBO

Clinton Administration

Lewin-VHl

CBO

ESRI

ESRI

CBO

G A O

Grumbach et al.

Lewin-VHl d

Wool handler and

Himmelstein

CBO

KEY CBO = U.S. Congress, Congressional Budget Office, GAO = U S General Accounting Office, ESRI = Economic and Social Research institute

aFull Citations for the analyses are in appendix B

bBill numbers are for 103d Congress

CBiII numbers are for 102d Congress.

dAnalysis was conducted by Lewin-lCF The company was acquired and expanded in 1992 For purposes of this report all Lewin analyses are identified as Lewln-VHl

SOURCE Office of Technology Assessment, 1994

o
Criteria for effectiveness ratings

“Effectiveness

rating” for Criteria for rating Criteria for rating

Design of expenditure limits as effective limits as ineffective

Proposal Analysis a

expenditure limit limit in meeting target in meeting target

American Health CBO National and state

Security Act of budgets

1993 (H.R. 1200/

s. 491)

Health Care Cost CBO

Containment and

Reform Act of

1992 (H.R. 5502)b

National health

budget, divided

into a Medicare

category and a

non-Medicare

category of expenditures

75% A single payment mechanism

A uniform system of reporting by all health

care providers.

Prospective budgets for hospitals and nursing homes

Prohibition of balance billing for covered

services.

Strong incentives for states to keep spending within their share of the national budget

since they would have to fund any excess

spending beyond the federal share of approved state budgets.

Medicare HCFA collects most of the data necessary to

category 7 5% set rates and track spending relative to the

budgeted amounts, so that expenditure

limits enforced by rate-setting could be

reasonably but not totally effective in controlling Medicare spending.

HCFA has considerable experience in setting

payment rates and estimating the responses of providers.

States would not be penalized for

failing to stay within their approved budgets.

The absence of prospective

budgets for hospitals, nursing

homes, and other institutional

providers of health care.

No provision for continually adjusting payment rates for noninstitutional providers (e. g., physicians) to assure that the expenditure limits were not exceeded,

nor a mechanism to recover any

excess spending that might

occur

o

g

(continued)
Crfteda for effmtiven~s rathgs

“Effectfven@s

rating” for Criter/a for ratkig Crtterfa for rating

Design o f

Propo~l

expendjtum flm~ts as effwt~ve limits as ineff~t~ve Anatysj@ ———————

expend~tun limit

———_——— —-A— Umjt in meeting ——

target ———————

In meeting target —-—————— ———— ————————— ——————.————— ———————————__— ~—

Non-Medicare Not discussed, part[clpat;on m the nattona~ health

category 25Y0 clalms network WOLJId be volun.

tary,

The data needed to determtne

compliance wtth expenditure

limits would be incomplete and

would not be available in a timely fashjon,

The calculation of the states’ option to operate their OWn sys.

terns woukj be very difficult to

make and spectfic data on

states would not exist in usabfe

form for at least severaj years,

The bill wouid exempt federa~jy

qualifled FfMos from rate-set.

ting, incfudtng some ty~s of

HMos that have not been

shown to be cost-effective.

Health &?CUI’@ CM) Premium limits for

Act @f.R. 3600/s.

9757)

1(,?0% Little discussion,

regional allian~~

exP?Wdtures

Clinton Premium limits for

MministratjM regiona~ alliance

I

10(3% Not documented

expenditures
Criteria for effectiveness ratings

“Effectiveness

rating” for Criteria for rating Criteria for rating

Design of expenditure limits as effective limits as ineffective

Proposal AnaIysisa

expenditure limit limit in meeting target in meeting target — — — —.

Lewin-VHl Premium limits for 85% The bill is specific and “specified adequately Health alliance premiums would

regional alliance the means by which cost controls will be grow at higher rates than alexpenditures implemented. ”c

lowed under the act due to the

advancing age of the baby

boom population.

Health alliances would experience losses in excess of the

premium limits due to plan

failures.

Universal Health CBO

Care Act of 1991

(H.R. 1300)

National budget 75% A single payment mechanism. Physicians and other institutional

A uniform system of reporting by all health providers would continue to be

care providers. paid on a fee-for-service basis,

Prospective budgets for hospitals and nurs- with no prompt feedback meching homes. anisms to assure that increases

Prohibition of balance billing for covered in the volume of services would

services. not offset restrictions on fees.

—— —— — . .

a Full citations for analyses are in appendix B

bCBO analyzed this bill but did not analyze H R 200, which iS Identically named and was Introduced in the 103d Congress.

CJ. F. Sheils, Jan. 21, 1994 (143) Full citation IS at the end of the report

KEY CBO = U S Congress, Congressional Budget Off Ice, HCFA = Department of Health and Human Services, Health Care Financing Administration, HMO = health maintenance organization

SOURCE Off Ice of Technology Assessment, 1994

N

-1
Government cost controls Characteristics of controls Details of controls

Expenditure limits Initial-year regional alliance

premium limits

Regional alliance premium

growth limits

Price controls Schedules for fee-for-service

services

Medicare program

Medicaid program

Optional payment methods State single-payer option

Prospective budgets for fee-forservice health plans

— —

A NHB would establish per capita regional health alliance premium limits for the standard

benefit package for the initial year of the plan implementation. A fine would be imposed

on each health plan whose accepted bid caused the regional health alliance to exceed its

premium limit and on providers receiving payment from the health plan.

Growth in health alliance premiums would be limited through national and regional inflation

factors. On average, allowable premium increases above CPI would be reduced over

subsequent years such that by 1999, average premium growth would equal CPI growth.

For the year 2000 and beyond, the average national premium would be allowed to increase at the rate of change in the CPI plus the average rate of change in real per capita

GDP unless Congress approves another rate. If a health alliance’s actual weighted-average accepted premium exceeds’ its premium limit in a given year, the inflation factor

would be reduced for the following 2 years to recover excess spending. Corporate alliances would have to adopt similar methodologies to determine their premiums.

Health alliances would negotiate with providers to establish a fee schedule for the fee-forservice component of all health plans and for fee-for-service health plans. States could

adopt a statewide fee schedule or permit providers to negotiate collectively with a health

alliance. Balance billing would be prohibited.

Payment rates to providers for Medicare services would be lower than under current law. In

addition, the new Medicare pharmaceutical benefit involves strict price controls, including the right of the Secretary of DHHS to negotiate special prices for new outpatient prescription drugs deemed to be overpriced or to exclude them from coverage. The Secretary would also appoint an advisory council on breakthrough drugs that would examine

the reasonableness of the price of new drugs that represent a breakthrough or significant

advance over existing therapies.

Federal payments to regional health alliances for Medicaid beneficiaries would be lower

than under current law.

States could choose to opt out of the health alliance system and establish a single-payer

system of health care financing, under which states would pay all health care providers

directly. The NHB would also establish premium Iimits for single-payer states. If per capita spending for the standard benefit package in those states exceeded the Iimits, those

states would be required to reduce payments to providers correspondingly.

States would have the authority to impose prospective budgets on fee-for-service health

plans offered through regional health alliances.

o

a

Fee-for-service component refers to the consumer’s option to seek services from providers outside of hls or her health plan’s network These providers would be paid according to the fee schedule

established by the state or regional alliance

KEY: CPI = consumer price index; DHHS = Department of Health and Human Services, GDP = gross domestic product, NHB = National Health Board

SOURCE. Off Ice of Technology Assessment, 1994
Chapter 2 Applying Government Cost Controls I 29

I American Health Security Act of 1993

(H.R. 1200/S, 491)

The American Health Security Act would establish a state-based single-payer system of national

health insurance similar to the Canadian system

(171). The national health insurance system

would replace most current public and private

health insurance,6 and provide universal coverage

to all citizens and legal residents. Besides its taxbased financing mechanism and universal coverage, the American Health Security Act includes a

national/state budgeting system for the national

health insurance program that could grow no faster than the percentage increase in GDP for the previous year, plus population growth.7 The act also

contains several category-specific cost-control

strategies (e.g., on prescription drugs, hospitals,

nursing homes) (see table 2-4).

I Health Care Cost Containment and

Reform Act of 1993 (H.R. 200)

The Health Care Cost Containment and Reform

Act of 1993 (H.R. 200) would expand the Medicaid program, retain the existing Medicare program, and encourage managed competition in the

private health insurance market, all operating under a national limit on expenditures (table 2-5).

The national health budget would be divided into

a Medicare category and a non-Medicare category

of expenditures. The national health budget would

not apply to all sources of national health expenditures. For example, expenditures for health services by the Department of Veterans’ Affairs, the

Department of Defense, and the Indian Health

Service would be excluded from the national

health budget.

H.R. 200 is similar to an identically named act

introduced in the 102d Congress (H.R. 5502).8

Both have two key government cost-containment

features:

■ A limit on health expenditures, covering most

public and private health spending, would be

applied to services covered by Medicare and to

services not attributable to Medicare. Expenditures for each category would be required to

grow no faster than the rate of growth GDP by

1999.

■ Payment rates for each category of personal

health services would be set at levels calculated

to keep health expenditures within the national

health budget. Rates would be set separately for

Medicare and for non-Medicare health spending (168).

In addition, the 1992 act provided for Medicaid

payment rates to be raised gradually to 90 percent

of Medicare rates (168). Other key government

cost-containment features of the Health Care Cost

Containment and Reform Act of 1993 are listed in

table 2-5.

1 Summary

Proposals often include more than one government cost-control mechanism. Proposals may

also set a growth target or limit in legislation, although none of the proposals applies such a target

or limit to NHE in the aggregate. As described below, analysts often examine the array of cost-control mechanisms and other aspects of a particular

proposal and come to a global judgment about the

effectiveness of the cost-control provisions in

meeting a particular limit on health care expenditures.

ANALYSES OF REFORM PROPOSALS

Several analyses—by the Clinton Administration, CBO, and Lewin-VHI—incorporate as6 The Department of Ve\erans Affairs’ system and the Indian Health Service (in the Department of Health and Human Services (DHHS))

would remain.

T CBO noted ~a[ the Ame~can Health Security Act defines the 1 imit on the growth of health expenditures in two different ways. ~e alt~mative definition would limit the growth of health spending to the rate of increase in GDP for the previous year ( 171 ).

% CBO analyzed the bill H.R. 5502 from the 103d Congress, but did not analyze H.R. 200.
cdo

Government cost controls Characteristics of controls Details of controls

Expenditure limits National and state budgets for the national health insurance program, limited to growth of GDP in previous

year plus population growth.

Prospective budgets

Price controls

Institutional and facility-based care

(e.g., hospitals and nursing homes).

Comprehensive health service

organization.

Independent health care practitioners

(e.g., physicians).

Pharmaceuticals,

Optional payment methods Community-based primary health

services.

Other facility-based services (e.g.,

hospice care, outpatient services,

home-, school-, and communitybased services).

The national budget would be allocated to states, with the federal contribution to

states set between 81 and 91 percent of approved state budget amounts, averaging 86 percent. States develop budgets broken down by function and categories of

services. States are responsible for funding the other 14 percent of budgets, as

well as any additional spending in excess of approved state budgets

Negotiated prospective budgets to pay for operating expenses for institutional and

facility-based care, including hospital services and nursing facility services. Budgets include payments for outpatient care and non-facility-based care furnished by

the facility. Budgets can be amended before, during, or after the year if there IS a

substantial change in any of the factors relevant to budget approval.

CHSOS would be paid either through a prospective budget or through a basic riskadjusted cavitation payment for each of its enrollees.

Negotiated prospective fee schedules for physicians and other professional services, designed to provide Incentives for practitioners to choose primary care

medicine over medical specialization, States are allowed to adjust fees depending

on whether expenditures under the fee schedule will exceed the state budgeted

amount with respect to such expenditures.

A Security Standards Board could determine or negotiate prescription drug prices

with the pharmaceutical industry.

Payments would be based on a prospective budget, on a basic primary care cavitation amount for each enrollee, or on a fee schedule.

Payments would be based on a prospective budget, cavitation for each enrollee, a

fee schedule, or other payment method.

KEY: CHSO = Comprehensive Health Service Orgaanization, GDP = gross domestic product

SOURCE Office of Technology Assessment, 1994

z

Qa

-.0

g

g

Q’

3
Government cost controls Characteristics of controls

Expenditure limits National health budget, by 1999

required to grow at the average

annual percentage Increase in

GDP during the five-year period

ending with the second previous

year.

Price controls Non-Medicare payment rates (for

services not subject to state provider payment systems or provided by staff- or group- model

HMOS).

Medicare payment rates

Optional payment methods Staff- and group-model HMOS

State provider payment systems

Details of controls

. . . —..

The national health budget would be divided into a Medicare category and a non-Medicare category of expenditures, each required to grow at the average rate of GDP by

1999, the Medicare and non-Medicare categories would be allocated to separate

“classes” of health services (e g., inpatient hospital services, outpatient hospital services, physician services, and mental health services).

Maximum payment rates would be set for each class of health service for non-Medicare

services at levels estimated not to exceed the share of the non-Medicare budget for

the relevant class. Rates would generally be set using Medicare methods (e g , DRGs

for Inpatient hospital services, Providers would not be allowed to charge more than the

maximum payment rates.

Rates under the Medicare program would be based on existing provisions of Medicare

law and reduced as needed to assure that payments to providers conform to the Medicare budget

Services provided by group- or staff-model HMOS would be exempt from the maximum

payment rates. These HMO models could negotiate rates with hospitals and physicians

directly.

States could establish payment programs for hospital and/or physician services, or for all

services. The maximum payment rates established by the Secretary of DHHS would not

apply to providers m states with approved programs Expenditures for services covered under the state payment system should not be more than what expenditures

would be if the maximum payment rates applied in the State

KEY DRG - diagnosls-related group, DHHS = Department of Health and Human Services, GDP = gross domestic product, HMO health maintenance organization

SOURCE Office of Technology Assessment, 1994

m

m
32 I Understanding Estimates of National Health Expenditures Under Health Reform

sumptions about key government cost-control

mechanisms into their estimates of NHE for the

proposals described above. Analysts have also estimated NHE for previous proposals with similar

cost-control provisions (the Universal Health

Care Act of 1991 and the Health Care Cost Containment and Reform Act of 1992, both

introduced in the 102d Congress).

1 Analyses of the Health Security Act

To estimate the effect of the Health Security Act

premium limits on changes in NHE, analysts generally consider:9

The share of NHE that would be subject to the

health alliance premium growth limits in 1995,

the year before the premium growth limits

would become effective. This assumption is

based on estimated costs of the standard benefit

package and the number of people estimated to

be served by health alliances. Analysts must estimate initial-year premiums for those health

services covered under the standard benefit

package. The Health Security Act does not

specify what the initial-year premiums must or

should be, but it provides a formula for calculating premiums (section 6002).10

The effectiveness of the various cost-containment provisions for limiting premium growth

rates to those specified in the legislation. The

assumed growth rates are applied to the portion

of NHE subject to the premium growth limits.

Clinton Administration’s Analysis of the

Health Security Act

Premium levels

According to Administration officials, the average premium in the regional alliances for a single

person would be $1,932 in 1994 (32,135). Average premiums in the regional alliances would be

$3,865 for a couple, $3,894 for a one-adult family

with children, and $4,361 for a two-adult family

with children (1 35). Rivlin and colleagues note

that premium estimates could change slightly as

economic forecasts and National Health Accounts

baselines are updated (135). The Administration

estimates are lower than comparable premium estimates by CBO and Lewin-VHI. 11,12

Premium growth rates

The Health Security Act specifies the maximum

rate of growth in the cost of the per capita regional

alliance premium targets. In 1994 and 1995, costs

would grow at a rate fair] y consistent with private

health insurance. Growth would be at the rate of

change in the CPI plus 1.5 percent in 1996, CPI

plus 1 percent in 1997, CPI plus 0.5 percent in

1998, and CPI in 1999 and 2000.

The Administration’s analysis assumes that the

premium growth limits would be 100 percent ‘effective” (i.e., that increases in the portion of NHE

covered under the premium growth limits would

equal the rate of growth set out in the legislative

language from 1996-2000) (see table 2-2).13

—.—

9 Analysts tilst) estimate how changes m the government payment fomlulae for Medicaid and Medicare would influence NHE. This part of

the analysis is m~t reviewed in this chapter.

101nl[laI. year Prcnllulll ~s[lnla[es, therefore, partially detem]ine whether analysts estimate that health expenditures in the first few years of

the plan will be higher or l~~wer than pr~)jections of NHE under the cument system (i.e., baseline spending). As noted above, the premium limits

apply only to a portitm of nati(mal health expenditures. In addition the premium limits do not apply to Medicare or Medicaid expenditures. They

also w(wld not apply to such categ(mies of spending as research and construction, some government administrative expenses, or government

public health activities. F(w exiunple, Lewin-VHl estimated that expenditures under the regional health alliances would account for approximately 33 percent of NHE in 1998 (89).

I I This Chap[cr d,)e~ not explore the underlying assurnptiims and data used by the different analysts that have caused differences in initialyear premium estimates.

I ~ In a meeting with office of Technology Assessment (OTA) staff, Administration officials stated that the regional alliance premiums,

assuming the limits, ww.dd account for approximately one third ($321 billion) of NHE in 1994(155).

I ~ The Adnlinis[ra[ion has stated that al] Administration analyses assume that the act’s premium limits will & I ~ ~rcent effective (200).
Chapter 2 Applying Government Cost Controls I 33

Lewin-VHl’s Analysis of the

Health Security Act

Premium levels

Lewin-VHI’s premium estimates for 1998 are

about 15.4 percent higher, on average, than comparable Clinton Administration estimates (145).

For individuals, Lewin-VHI estimated that a premium of $2,732 would be required to cover the

costs of the standard benefit package in 1998. The

comparable Administration average premium, according to Lewin-VHI, would be $2,336 (143).14

Premium growth rates

Although it is not entirely clear from the documentation, Lewin-VHI estimated that savings

achieved through the alliance premium growth

limits would not equal the full difference between

projected health spending growth rates under the

current system and the growth rates specified in

the act ( 143). Lewin-VHI did not assume that premium growth limits would be fully effective because, according to Lewin-VHI, two “loopholes”

in the proposal would allow alliance premiums to

increase above the 1imits.

First, Lewin-VHI concluded that the act would

permit alliances to adjust premium growth rate

limits for “material changes in the demographic

composition” of the covered population. 5 Lewin -

VHI assumed that the advancing age of the baby

boom population would cause alliance premiums

to increase at higher rates than envisioned by the

act (by about 0.6 percent per year) (143).

Second, Lewin-VHI assumed that the health alliances would experience losses in excess of the

premium growth limits due to plan failures. Lewin-VHI approximated that the addition to premium levels in each year from this loss would

equal the guarantee fund reserve premium assessments of 1 percent a year. These two adjustments

to premiums resulted in Lewin-VHI’s implicit assumption that the growth limits would be about 85

percent effective (143).

Lewin-VHI did not specifically discuss how

prospective budgets or fee schedules for fee-forservice plans might affect the likelihood of meeting the regional alliance premium limits (see

tables 2-2 and 2-3). In general, Lewin-VHI assumed that the law would be implemented and enforced as long as it was technically feasible to do

so ( 144). Lewin-VHI has decided that it is not the

role of analysts to make adjustments on the basis

of political feasibility (i.e., pressure on Congress

to change or overturn the premium limits); rather,

analysts should try to evaluate the impact of the

legislation as written (1 43).

CBO’S Analysis of the Health Security Act

CBO has produced several documents that, taken

as a whole, illustrate its general approach for estimating NHE under health reform proposals with

expenditure limits and supporting mechanisms.

CBO’S approach involves assigning an effectiveness rating to the specific legislated expenditure

limit in the bill using analysts’ judgments and an

array of criteria. It then projects health spending

for the share of NHE subject to the limit at the

growth rate implied by the limit in combination

with its effectiveness rating. However, there is no

one place in which CBO describes an overall set of

criteria that it uses for assigning an effectiveness

rating to a particular set of cost containment mechanisms (box 2-2).

Premium levels

CBO estimated that the national average premium

for the standard benefit package for a single person would be $2,100 in 1994 (172). Its premium

estimate is 15 percent higher than the Administration’s for 1994, and virtually identical to LewinVHI’S estimate for 1998 (1 72).

14 Lew in. VH] ~a]cu]a[ed [he Adn~lnlStra[l(~n’s ] 998 prernlurn by adjusting the Administration’s ] 994 average premium estimate ‘OWard ‘()

1998 ( 143).

I $ According 1,, John shells, the ]~gls]atlon ]s not clear whether this allowance, as we]] as others, must ~ a neutral adjustn~ent an]ong a]]

health alliances. Dlscussi[ms h>lween Lew in-VH1 and the Clint(m Administration about the legislative language did not rest~lve the issue ( 143).
34 I Understanding Estimates of National Health Expenditures Under Health Reform
Chapter 2 Applying Government Cost Controls I 35

●

■

■

■

●

■

■

●

●

●

■

●

●

■

■

●
36 I Understanding Estimates of National Health Expenditures Under Health Reform
Chapter 2 Applying Government Cost Controls I 37

Premium growth rates

For the purposes of making its estimates, CBO assumed that “the proposed methods for constraining the rate of growth of premiums for the

standard benefit package would be complete] y effective” (1 72). With little accompanying discussion about its rationale, CBO assumed that the

portion of NHE subject to the premium growth

limits would increase at the legislated growth

rates over the period 1996-2004, and that the

mechanisms for limiting growth of premiums

would be implemented as intended. 16

CBO acknowledged that the premium growth

limit “could have unintended consequences for

the health care system that would affect its overall

acceptability, and, hence, the sustainability of the

limits,” and that “[t]he 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” ( 172).

In addition, CBO discussed at length the difficulty agencies would have in developing the experience and the administrative and data systems

needed to undertake their assigned tasks in the

time frame envisioned by the Health Securit y Act.

For example, CBO stated that “[t]he Administration’s proposal would depend critically on timely

information, much of which has never been collected. 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.” (172)

CBO nevertheless assumed in its NHE calculations “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” ( 172).

Because CBO has used similar criteria to assign less than 100 percent effectiveness ratings to

expenditure limits in other health reform proposals, its 100 percent effectiveness rating for the pre16 OTA assunles tha[ CB(J used the default Infla[l{m factor defined in the legislatifm [() estimate premium growth beyond the year z~.

CBO included an additltmal mcreasc of 5 percenl m 2001 to ctwcr the expansl{m f~f dental and mental health benefits scheduled in that year

(172).
38 I Understanding Estimates of National Health Expenditures Under Health Reform

mium growth limits may be perceived as an

inconsistent application of its criteria (see table

2-2). However, the consistency with which CBO

rates different legislative proposals is difficult to

judge because its method for assigning effectiveness ratings is somewhat unclear.

1 Analyses of the American Health

Security Act of 1993 and the Universal

Health Care Act of 1991

CBO’S Analysis of the American Health

Security Act of 1993

CBO provided estimates of NHE under both

House and Senate versions of the American

Health Security Act (H.R. 1200/S. 491)

(170,171 ).17,18 To estimate the impact of the national budget limit on NHE, CBO:

m

■

Estimated the amount of NHE that would be

subject to the national/state budget limit in

1996, the year before the new program would

take effect.

Added the estimated amount of additional

health services that would be demanded under

the new program in the absence of the national/

state budget limit on a large portion of NHE,

and subtracted estimated administrative savings.

D Estimated NHE for 1997 through 2003 by projecting out the expenditures subject to the national/state budget limits based on the growth

limits specified in the bill and CBO’S assumptions about their likely effectiveness (17 1 ) (see

box 2-2). ]9

CBO assumed that the limit on the growth of

the national/state health budget would be only 75

percent effective (i.e., the act’s cost-containment

mechanisms would produce 75 percent of the

maximum savings possible from the prescribed

expenditure limit) .20 In arriving at that figure,

CBO concluded that the American Health Security Act contains many of the elements that “would

make its global expenditure limit reasonably likely to succeed” (171) (see table 2-2). However,

CBO concluded that the expenditure limit would

not be 100 percent effective because a state would

not be penalized if it failed to live within its budget. States might therefore choose to spend more on

covered health care services than provided under

the national health budget (171 ).

CBO did not document whether or how it took

into account all of the government cost-control

mechanisms contained in the American Health

Security Act. For example, CBO did not explain

how payment rates for health care practitioners

(e.g., physicians and dentists) based on negotiated

IT me bi]] ~P)nsors provided an estimate Of NHE under the plan ($1 .47 trillion by the year 2000, representing an estimated savings Of $203

billion, compared with pr(J@cted spending under the current system). Moreover, they estimate that the plan would save money compared with

the current system in each year over the period 1995-2000 (193). However, the sponsors did not provide documentation that would permit

observers to deduce how assumptions about government cost controls were derived.

18 CBO estimated [hat tie Senate version Of the American Health Security Act (S.491 ), with a 75-percent effectiveness mtiflg fOr tie natiOnal budget limit, would increase spending by an additional $4 billion by the year 2000 (see table 1-l in chapter I), for a total NHE estimate of

$1.62 trillion.

19 CBO estimated ~a[ enac[mnt Of H.R. 1200 (the House version of the legislation) would raise NHE over the period 1996 through 1999

above projected baseline spending, but the proposal would reduce spending by about 6 percent below the projected baseline by 2003. CBO

estimated that the bill would initially raise NHE primarily as a result of the cost of providing additional services due to expanded insurance

coverage. Over the longer run, however, the limit on the growth of the national health budget—assumed by CBO to be 75 percent effective—

would reduce the rate of growth of spending on covered services below the projected NHE baseline growth rate ( 17 I ). The same CBO methodology and estimates apply to the Senate version of the American Health Security Act, except that CBO estimated that enactment of the Senate

version would reduce NHE by about 5 percent by 2003, as a result of lower cost-sharing requirements for patients in S. 491 and differences in

dental benefits between the two bills (1 70).

ZO me estimated maximum ~)tentia] savings from the expenditure limits equals the full difference between CBO’S projected NHE growth

rate under the act in the absence of the nationallstate limits and the estimated growth rate in NHE after applying the expenditure limits in the

legislation (i.e., GDP growth in the previous year plus population growth).
Chapter 2 Applying Government Cost Controls I 39

fee schedules might have influenced its effectiveness rating (see table 2-3). In addition, CBO did

not incorporate the potential response of providers

to mechanisms such as fee schedules for physicians and prospective budgets for hospitals in its

cost estimates of unconstrained demand for these

services (203).21

CBO explicitly stated that it assumed that the

open-ended nature of state budget shares would

likely cause 25 percent of the potential savings

from a fully effective limit to go unrealized. However, it seems equally plausible to assume that excess state spending would cause 50 percent of

potential savings to go unrealized if states face

strong political pressure to fund more services.

Alternatively, since states must fund any excess

spending from their own revenues they would

have a strong incentive to stay within their share of

the national health budget, Therefore, it also

seems plausible to assume that the national budget

limits might be 100 percent effective. CBO acknowledges these plausible alternatives at the

same time that it gives its best guess of “75 percent

effective .“

According to CBO, “because the United States

has no experience with a program like the one envisioned in [the American Health Security Act],

the assumption about the effectiveness of the

spending limit in the bill is highly uncertain”

(17 1). CBO therefore provided five alternate estimates of NHE for the legislation based on its five

possible effectiveness ratings for expenditure limits.

CBO’S range of NHE estimates demonstrates

that its alternative assumptions about effectiveness substantially affect its projections of savings.

If the limits on NHE are assumed to be fully (100

percent) effective, CBO estimated sayings over

projected baseline spending of $257 billion in

2003-$143 billion more than if the expenditures

limits are assumed to be only 75 percent effective.22,23 If the expenditure limits turned out to be

only 50 percent effective, the American Health

Security Act would not lead to any savings in the

year 2003, but rather would increase NHE by $42

billion, according to CBO.

CBO’S Analysis of the

Universal Health Care Act of 1991

CBO used the same approach and very similar assumptions to project NHE under the Universal

Health Care Act of 1991, introduced in the l02d

Congress as H.R. 1300, that it used to analyze the

American Health Security Act. Both acts propose

a single-payer system. The two proposals also

contain almost identical growth limits on a large

portion of NHE and cost-control mechanisms for

specific categories of health spending.

One important difference between the American Health Security Act and the Universal Health

Care Act appears to be the states’ role in administering and funding the system. Both bills would

establish annual national and state budgets for

covered health services and various other components of NHE.24 The Universal Health Care Act

appears to leave funding at the national level, although states could administer their own programs. Under the American Health Security Act,

the federal government would transfer the majority of funding for state budgets to states, which

would be responsible for funding the other portion

2 t CBO did incorporate such behavioral responses in its estimates of potential single-payer and all-payer systems contained in its document

CBO Sln~/e-Payer andA1l-Payer Heahh Insurance Systems Using IUedicare’s Payment Rates April 1993. However, the systems modeled were

based (m .Medicare payment rates and did not include expenditure limits that applied to a large portion of NHE. In addition, CBO only estimated

the immediate effects under those systems and did not estimate growth rates in NHE over a longer period.

‘2 CBO estimates cited here are based on the bill’s higher expenditure growth limit of GDP growth plus population growth.

23 CBO’s estimate of House version of the American Security Act (H.R. 12W).

21 For example, the national budget would include funding for capital-related items for hospital and nursing facilities and for dir@ medical

education expenses.
40 I Understanding Estimates of National Health Expenditures Under Health Reform

of their budgets and for making all provider payments.

CBO assigned a 75 percent effectiveness rating

to the national budget growth limits in both the

Universal Health Care Act and the American

Health Security Act, and it lists many of the same

criteria in support of both effectiveness ratings but

different rationales for the 1ess-than-100-percent

rating (see table 2-2). Without the possibility of

states spending beyond the federally set budget

under the Universal Health Care Act, one might

have expected CBO to have concluded that the national health budget limits would be 100 percent

effective. However, CBO asserted that the national budget limit was unlikely to be completely effective because “[physicians and other

non-institutional providers would continue to be

paid on a fee-for-service basis, and the bill fails to

provide any prompt feedback mechanism to assure that increases in the volume of services would

not offset fee restrictions on their price” (168).

It is not clear from CBO’S documents whether

the above criterion also influenced its 75 percent

effectiveness rating for the national budget limits

in the American Health Security Act. It is also not

clear whether it should have been a factor. The

Universal Health Care Act specified that payments for physicians and the services of other professionals would be based on a fee schedule using

a national relative value scale consistent with the

national health budget (Universal Health Care Act

of 1991, section 2123 (a) and (b)). Similarly, the

American Health Security Act states that health

care practitioners would be paid through negotiated prospective fee schedules, designed to provide incentives for practitioners to choose primary

care medicine over medical specialization, and

that states could adjust the payment schedule

amounts to meet their budgets (American Health

Security Act of 1993, section612 (a) and (b)).25

The wording in the two acts seems too ambiguous

to determine whether the payment method for

physicians (and other independent practitioners)

was intended to be the same under both acts. Specifically, it is not clear whether the American

Health Security Act includes provisions for a

prompt feedback mechanism to assure that increases in the volume of services would not offset

fee restrictions for physicians, or whether the Universal Health Care Act precludes such a mechanism-––the rationale CBO gave for not assigning a

100 percent effectiveness rating to the Universal

Health Care Act.

The above comparison of CBO’S effectiveness

rating criteria for the two acts demonstrates some

important points about CBO’S method for assigning effectiveness ratings to health reform proposals that contain limits on a large portion of NHE:

■ It may not be clear to people outside of CBO

what factors cause a proposal expenditure

limits to be rated more or less effective by

CBO.

● Because of some ambiguities in legislation,

CBO (and other analysts) must make assumptions about how to interpret the legislation and

make subsequent assumptions about how to incorporate such interpretations into effectiveness ratings.

= Two different criteria for “ineffectiveness”

were given the same weight, perhaps because

of the restricted range of intermediate ratings

CBO uses. However, it is not obvious that the

two factors would be equal in causing higher

spending growth than stipulated in the two acts.

This problem is not necessarily a defect in

CBO’S approach. It arises from the complexity

of estimating the impact of major reforms on

the current U.S. health system, and the difficulty of assigning a precise effectiveness rating to

expenditure limits.

25 ~i~ ~ordlng applles t. the House ~,emlon of the bill, H.R. 1200. The Senate version, S. 491, is more c]ear about the inclusion Of volume

feedback provisions.
Chapter 2 Applying Government Cost Controls I 41

1 CBO’S Analysis of the Health Care Cost

Containment and Reform Act of 1992

To date, no organization has provided estimates of

NHE under the Health Care Cost Containment

and Reform Act of 1993 (H.R. 200). CBO did,

however, estimate NHE under the Health Care

Cost Containment and Reform Act of 1992 (H.R.

5502 in the 102d Congress), which was very similar. However, CBO emphasized that its estimate of

H.R. 5502 does not apply to H.R. 200 (168). Although CBO had not yet completed an assessment

of H.R. 200, it expected “that its expenditure limits will be more effective than those in H.R. 5502”

(130).

To estimate the impact of the national expenditure limit on NHE under either of the two acts,

analysts typically would:

m

●

■

Estimate the amount of baseline NHE that

would be subject to the national budget limits

and the share of those expenditures determined

to be Medicare and non-Medicare expenditures.

Estimate changes in NHE from projected baseline spending due to changes in health insurance coverage, administrative costs, and other

provisions of the legislation.

Make assumption about the growth rate to be

applied to Medicare and non-Medicare expenditures based in part on the legislated national

budget limits, and in part on assumptions about

the ability of the cost-containment mechanisms

in the legislation to support the stipulated

growth rates for each of the above spending

categories. The assumed growth rates for each

spending category are then used to project future health expenditures for those spending

categories.

CBO’S analysis of NHE under H.R. 5502 concluded that the limit on Medicare-related spending would be 75 percent effective, but that the

limit on non-Medicare spending would be only 25

percent effective (168). According to CBO,

“[e]xpenditure limits enforced by rate setting

could be reasonably but not totally effective in

controlling Medicare spending” (168).

CBO’S stated reasons for assigning a relatively

higher effectiveness rating to the Medicare limit

focus on Medicare’s data-collection capabilities

and rate-setting experience (see table 2-2). CBO

also asserted that “the history of cost-control efforts both in this country and abroad strongly suggests that setting payment rates is not sufficient

for achieving full control over health expenditures” (168). Table 2-2 also lists CBO’S criteria for

not assigning a 100 percent rating to the Medicare

expenditure limits.

CBO assumed, for several reasons, that “[t]he

limits on non-Medicare spending are likely to be

subject to much greater leakage and to be far less

effective” than the Medicare spending limit. Most

of the reasons have to do with administrative and

data-collection difficulties that would be encountered in enforcing the limits on non-Medicare expenditures (see table 2-2).

CBO’S approach to formulating assumptions

about separate growth rates for Medicare and nonMedicare expenditures illustrates its broad selection of criteria for developing effectiveness

ratings for expenditure limits. The factors CBO

considered most important include not only the

payment methods or cost-containment mechanisms, but also the data-collection and administrative support systems available for setting,

monitoring, and enforcing the limits. These considerations seem intuitively reasonable, but difficult to apply in a precise quantitative fashion.

9 Summary

Several health reform proposals include limits on

how much at least a portion of NHE would be allowed to grow. To estimate how these proposals

would affect NHE, analysts make assumptions

about the likelihood that the legislated limits actually would be achieved, based on the strength of

the proposed cost-containment mechanisms.

Generalizing about analysts’ assumptions underlying effectiveness ratings is difficult because

proposals may have different types and levels of

limits and different mechanisms to support proposed limits on expenditures. However, some
42 I Understanding Estimates of National Health Expenditures Under Health Reform

mechanisms are similar across proposals, and

OTA’s comparison of analyses suggests that there

are some inconsistencies in effectiveness ratings

across analysts for the same proposal, as well as

inconsistencies in effectiveness ratings by the

same analysts for similar proposals and mechanisms. Some inconsistencies are to be expected

since analysts acknowledge that their effectiveness ratings are based on their best judgment at the

time they perform an analysis. However, the paucity of documentation of criteria in specific analyses makes it difficult to judge the actual extent of

the inconsistencies, the reasonableness of some

judgments, and the meaning of many of the ratings. Different analysts have judged different proposals’ sets of government cost controls to be 25,

75, 85, and 100 percent effective in meeting various proposed statutory limits on spending (table

2-2).

REVIEW OF THE EVIDENCE

Reductions in health spending growth can be

achieved only by decreasing growth in the volume

of services, reducing growth in the price or average payment per unit of service, or both (8).

Instead of allowing markets to determine the allocation of funds to health services, governments

can regulate the amount of funds flowing to the

health care system (e.g., expenditure limits such

as federal or state health budgets for single-payer

systems), to health plans (i.e. premium limits), or

to different categories of health care services (i.e.,

physician or hospital payment controls such as

prospective fixed budgets or fee schedules).

This section reviews empirical evidence from

experiences of the United States and other countries with government controls for limiting

growth in health spending. The empirical literature is reviewed to answer whether:

● a particular growth rate for health expenditures

can be reliably assigned to a set of cost-containment mechanisms; and

● the evidence supports assumptions that particular government cost-containment mechanisms

would reduce growth in health spending

compared with the current system.

Research literature on expenditure limits, premium limits, and provider (hospital and physician) payment controls is reviewed. In general, the

review in this chapter relies on a combination of

previous reviews of literature on these topics, and

selected key studies.

In combination, boxes 2-3 and 2-4 provide a

framework for evaluating the evidence on government cost controls. The boxes also explain that

studies of the effects of government cost controls

may be difficult to interpret. The studies are not

conducted using experimental designs and vary in

methodological rigor.

As described in box 2-4 there are many ways to

measure the effects of particular interventions. In

reviewing the evidence, this chapter focuses on

the broadest possible measures of expenditures.

For example, if a study reports results in terms of

total hospital expenditures and expenditures per

patient day, the former result will be emphasized.

Moreover, the review emphasizes the effects of interventions on expenditures by users and payers,

rather than costs that providers incur in providing

the service. Finally, the review highlights how interventions affected the growth rate of health expenditures by examining growth rates before and

after the intervention. In some cases, the review

presents results of comparisons of the growth

rates of expenditures in areas that had the intervention to other areas that did not.

I Evidence on Expenditure Limits

Applied to Large Sources of Funding

Legislated expenditure limits that apply to designated sources of health funding (e.g., the federal

government, state governments, private insurance) specify a desired goal for the future rate of

increase for that portion of NHE.

The United States has had little experience with

setting health expenditure limits that apply to designated sources of funding for large shares of NHE

and designing mechanisms to meet those limits.

For example, the U.S. Medicare and Medicaid

programs are “entitlement” programs; they do not

receive a specific appropriation for a fiscal year,

and until recently neither program had explicit
Chapter 2 Applying Government Cost Controls I 43

SOURCE Off Ice of Technology Assessment 1994
44 I Understanding Estimates of National Health Expenditures Under Health Reform

●

●

■

■

■
Chapter 2 Applying Government Cost Controls I 45

limits on any program expenditures .26 In contrast,

other countries are perceived as having explicit

limits on government or combination public-private sector spending and international experience

might provide some evidence of whether an explicitly legislated expenditure growth limit, set by

a political entity, can be achieved. However, there

are several reasons why international experience

cannot directly answer the question of whether expenditure limits for a large portion of NHE will be

met.

Although some countries link the rate of

growth of NHE to macroeconomic variables (e.g.,

the general inflation rate, growth in GDP, or

growth in wages and salaries), they have not done

so through explicit legislated 1 in-tits.

Germany is often used as an example of a country that has legislated expenditure 1imits for a large

portion of its NHE. However, until 1993, Germany established annual targets or goals for expenditures for most categories of health services

covered under its federal insurance system. Un26 [t wasn’t Untl] passage of the filnibus Re~(Jn~iliatl[Jn Act of 1989 (o13RA 89) that (he federal governnwnt included a mechamsm to

adjust Medicare physician payment fee updates based (m how annual Increases in actual expenditures compared to previously determined performance standard rates of increase ( 122). The implcrncntatl(m of this expenditure llmit is relatively iccent (see below), and it applies only to

physician payment m the Medicare program.
46 I Understanding Estimates of National Health Expenditures Under Health Reform

like limits, as defined in this report, the targets

were nonbinding on the negotiations between

sickness funds (Germany’s quasi-public “insurance” companies) and health care providers.27 Because Germany’s overall expenditure targets only

represented a desired goal, its experience provides

little evidence of whether proposals with stronger

government cost controls are more or less likely to

achieve legislated spending limits.

Another reason international comparisons do

not provide much evidence on expenditure limits

is that proposals to reform the U.S. health care

system that include government cost controls and

limits do not exactly mirror the system of any particular country. For example, although many of

the cost-containment elements in the American

Health Security Act (H.R. 1200/S. 491) are similar to those in the Canadian system, the average

share of federal funding for state health expenditures in the act is markedly higher than the average

share of federal funding for provincial health

spending in Canada.28 The larger federal share in

the American Health Security Act might constrain

state health expenditures more effectively than

has been the case in the Canadian provinces (even

though both the act and Canada tie the federal

share to the growth in GDP).

Thus, the experience of other countries does

not provide a clear-cut answer to the question of

how quickly or slowly health expenditures would

grow given a legislated growth rate for some share

of NHE. Most countries do not have explic it legislated limits similar to those specified in the proposals. Moreover, differences between

cost-containment mechanisms in health care systems of other countries and those proposed in

health reform proposals might limit the lessons

that could be learned from other country experiences with legislated limits.

Some information on the United States experience with expenditure limits affecting large health

systems and multiple payers may become available if the state expenditure limit provisions of the

State of Minnesota’s 1993 MinnesotaCare health

reform legislation are implemented. MinnesotaCare 1993 created limits on total health care

spending for the state.29

D Evidence on Premium Limits

As discussed above, the Health Security Act

would limit the growth of health alliance

weighted-average premiums for the standard

benefit package of health services defined in the

27 &a~=n ]977 ~d 1993, G~_y ~~mted under broad f~m] ~ide]ines set by a nationa] committee designed to reduce spending

growth for different categories of health services (e.g., hospital and physician services). The purpose was to stabilize payroll tax rates, which

finance the majority of health expenditures (45,180), During the mnual bargaining sesskms, the regional German sickness funds and providers

(e.g., individual hospitals or regional associations of physicians) might agree on a greater or smaller increase than contained in the guidelines

for that category (43). The expenditure targets, as well as the category-specific cost controls (see below), in the German health system may have

contributed substantially to Germany’s ability to hold health expenditure growth rates fairly close to the rate of GDP growth (180). However,

average payroll tax rates have not remained constant, increasing from approximately 8.2 percent in 1970 to 13.4 percent in 1993 (139). Because

Gemnany has not achieved its recent spending targets, the government initiated a 3-year emergency measure in 1993 to stabilize and equalize

sickness fund payroll contribution rates. The temporary emergency measure imposes mandatory global limits on spending for physician, hospital, and dental sewices, and for prescription drugs. The limits are to closely track revenue growth of the sickness funds (180). Data are not yet

available to evaluate the effectiveness of Wmmny’s more binding expenditure limits.

28 me f&~~pr~Vi~ial fin~cing scheme in Canada ties increases in federal financial support for provincial health plans to increases in

GDP (45). This scheme is similar to the federal/state financing scheme proposed in the American Health Security Act, in which the federal

government’s financial support to the states also would grow at the rate of GDP. However, the Canadian federal government financed only about

22 percent of provincial health care budgets through transfer payments in 1991 (60), while under the act the federal government would finance

86 percent of approved state health care budgets on average.

29 State offlcia]sestimated t~t~e limit~doth~fea~~s of ~ Mi~so@C~ reforms would yie]d a total of $7 billion in savings by 1997

(19).
Chapter 2 Applying Government Cost Controls I 47

act. Strictly enforced premium limits such as

those in the Health Security Act are designed to effectively limit regional and corporate alliance expenditures, while giving health plans flexibility to

determine how best to achieve the spending goals.

No direct empirical evidence is available from

the United States or other countries to assess

whether limits on premiums can constrain increases in health expenditures, or whether premium limits can be sustained over the long term.

No country has tried to control the amount of

money spent on health care by directly controlling

the growth of premiums (66).

Some have suggested that health insurance premium regulation by state insurance commissions

could provide some evidence about sustainability

of the premium limits. In particular, state experience with premium regulation might illustrate

how the political system works when insurance

companies or health plans either become insolvent or threaten to go out of business when regulated rates are considered too strict to cover costs.

Such experiences might also provide evidence

about the effects on health insurance coverage and

access to health services when plans withdraw

from the market, issues that could be important for

judging the political feasibility of premium limits.30 However, empirical evidence about states’

ability to enforce premium limits would not definitively answer the question of whether the Health

Security Act premium limits are technically or

politically feasible. States do not have the same

enforcement powers or mechanisms as those provided under the Health Security Act.

In the future, empirical evidence on the effectiveness of premium limits may be provided as a

result of Washington State’s recent health reform

legislation. In April 1993, Washington passed legislation that is similar in some respects to the

Health Security Act in that it includes near-universal coverage, managed competition, and premium

limits (23). The premium limit is a phased reduction in the maximum premium a certified health

plan may charge for a community-rated uniform

benefit package. The premium growth rate will be

restrained while the plan is being phased in until

increases in premiums equal growth in state per

capita personal income, and premiums will be restrained in the future by the rate of growth of personal income (23). While neither the design of

Washington’s premium limits nor the incentives

for health plans to meet the limits are entirely the

same as under the Health Security Act, the two

may be similar enough to provide some useful empirical evidence about the economic consequences of a system that attempts to restrain

health expenditures by limiting premiums.

No empirical evidence is available, either from

the United States or other countries, to directly assess the effectiveness of controlling the flow of

funds for health services specifically through premium limits.

1 Evidence on Provider Payment Controls

The above two sections have concluded that there

has been little direct experience with expenditure

limits applied to comparable systems of government cost controls to assess analysts’ assumptions

about the effectiveness of expenditure limits.

Similarly, there has been little direct experience

with premium limits to assess the various assumptions about their potential effectiveness for controlling spending on health care services.

However, this does not mean that there is no evidence about the effectiveness of government cost

controls for constraining health care spending.

Many countries, including the United States, have

used government regulations to limit outlays for

certain categories of health services. The extent to

which the available evidence is applicable to contemporary national reform proposals is often unclear, however. Furthermore, the fact that many

states and governments of other countries continue to refine their approaches to regulatory cost

controls suggests that no system is perfect. The

30 T(l OTA’S kno~]edge, analysts do not now quantitatively rate pN)pOSidS in terms of their ~~lltical feasibility.
48 I Understanding Estimates of National Health Expenditures Under Health Reform

next section examines the effectiveness of some

government controls on payments for hospital and

physician services. Outlays for these two categories of services together account for approximately 50 to 60 percent of NHE in most developed

countries (120).

Hospital Payment Controls

The amount of money available to fund hospital

services can be controlled in a number of ways, either less comprehensively through price controls

alone or more comprehensively through controls

over the total amount of revenues hospitals receive for their services.

31 Different variations of

price and revenue controls have been used in this

country and abroad. For example, programs in the

United States and other countries have prospectively established prices for inpatient hospital admissions (e.g., prices based on diagnosis-related

groups), for a day of inpatient care (e.g., per diem

rates), and for individual hospital services. Under

these forms of price controls, an individual hospital’s total revenues are not limited. That is because

the number and coding of admissions, the number

of inpatient days, and the number of hospital services provided are still variable under each of

these controls respectively.

To limit total revenues, price controls have

been combined with budgets that prospectively

fix the total amount of revenues an individual hospital receives. For example, in Germany, a prospective lump sum daily rate is calculated after

determining a prospective yearly budget for individual hospitals. To arrive at the daily rate, the

budget is divided by the projected number of inpatient days. This per diem rate then functions as the

payment unit of most third-party payers (85).

New budgets are often based largely on approved budgets from the previous year, with allowable adjustments depending on a variety of

factors. These can include new programs or services, anticipated wage settlements, projections

of economy-wide inflation, changes in bed capacity, and changes in the size and composition of the

population.

This section reviews empirical evidence about

the effects of various forms of hospital payment

controls on expenditures and costs.32 Evidence

from the United States is reviewed first, followed

by evidence from other countries. U.S.-based evidence includes that from the Economic Stabilization Program of the early 1970s, the Medicare

Prospective Payment System introduced gradually between 1984 and 1987, various state mandatory hospital rate-setting programs introduced at

different times, and Rochester’s Hospital Experimental Payments Program of 1980 to 1987. Foreign evidence includes studies of various types of

hospital payment controls in Canada, France, Germany, and the Netherlands.

Empirical evidence from the United States

Economic Stabilization Program (ESP). IMP was

a broad-based system of wage and price controls

designed to deal with inflation perceived to stem

from increases in wages and other input costs (44).

ESP was introduced in several phases. In phase I

(August 1971), President Nixon imposed a 90-day

freeze on all wages and prices, including prices in

the hospital industry (25,44). Phase II controls,

introduced late in 1971, consisted of specific

inflation targets for each major sector of the economy. However, regulations specific to hospitals

were not issued until December 1972 (25). ESP

3 I Prlc.e ~,on/ro/s are defined as government involvement in detcmlining [he level or gn)w[h m inpul prim (res(wrce WStS) or output Prices

(charges) for medical services, including fee schedules and fee updates for physician services and per diem, per case, (Jr per service rate-setting

for hospital services.

32 In the context of health care, expe~iture~ are typica]]y defined as rmmies spent on the acqutsiti(m of health care C(~VCrage anWOr Xnices.

in contras(, costs are defined as e~penses incurred in the provisionof services or gmxls. }{(~spit~l expenditures w (mid refer w those funds spent

by some individual or entity to acquire hospital services.
Chapter 2 Applying Government Cost Controls I 49

controls were lifted in April 1974 (44). The December 1972 regulations imposed a ceiling of 6

percent on price increases for institutional health

care providers, including hospitals, and required

all price increases to be “cost-justified” (25).

Although the literature indicates that ESP was

able to moderate hospital cost inflation, reviewers

note that the fact that hospital cost inflation had already started to decline when ESP was introduced

complicates the evaluation of the program effect

(44).

Uncontrolled studies of the effects of ESP

found that the rate of growth of hospital room and

board costs declined by 50 percent during ESP

(25,44, 152).33 Similarly, rates of increase in costs

per adjusted patient day and costs per adjusted

admission declined by 25 percent (25,44,152).

However, multivariate econometric analyses

found annual reductions in the rate of increase in

total hospital costs and expenditures per admission to be much smaller, ranging between O and 3

percent, according to a 1981 review by Steinwald

and Sloan (1 52).

Once the controls under ESP were lifted, hospital cost inflation returned to its former level, suggesting that ESP had some effect. The CPI for

hospital service charges rose from 4.6 percent

when ESP controls were in effect to 14.6 percent

immediately after controls were lifted (44). Similarly, after ESP was discontinued, Medicare hospital expenditures increased at an even faster rate

then they had prior to the imposition of controls

(25).

Medicare Prospective Payment System. In

1983, Congress enacted the Medicare Prospective

Payment System (PPS) to control inpatient hospital expenditures for Medicare beneficiaries and to

reduce rates of increase in overall hospital cost

inflation (4,22,25,44).34 The fundamental characteristic of PPS is a fixed payment per case admission, determined in advance by the federal

government. The payment covers all inpatient

hospital services furnished during a Medicare

beneficiary’s stay in a hospital (4).35

Under PPS, hospitals are rewarded through surpluses when their costs of providing care for a particular diagnosis-related group (DRG) falls below

the Medicare payment level. Hospitals with higher costs than the adjusted national average must

bear the penalty of a loss. This section focuses on

the evidence regarding the effects of PPS on

Medicare expenditures, total NHE, and cost-shifting to other third-party payers. Because of concerns about spillover of expenditures to other

health care settings, Medicare outpatient and total

expenditures as well as inpatient hospital expenditures are also examined.

33 me revjews of ESP by Davis and colleagues, Gold and colleagues, and Steinwald and SIoan were based prinlatily (m four Or five en~Piri -

cal studies.

34 SeVera ] o[her federal programs to reduce Medicare hospital cost inflation were tried before the PPS program was a@ted ( 1 I z).

35 me fixed Paynlen( ~r case is based (m the patient’s diagnosis; patients are classified into a diagnosis-related group (DRG). DRG prices

reflect in part the average cost experience of all hospitals in the United States for the particular DRG, rather than the h(~spital “s own cost of

treating a patient classified into that DRG (4). The actual DRG payment to an individual hospital is adjusted for several characteristics particular

to the hospital and for differences in local wages (112).
50 I Understanding Estimates of National Health Expenditures Under Health Reform

A number of problems exist for evaluating the

effectiveness of the PPS program, including data

limitations and the prevailing use of a simplistic

research design (pre/post studies) (22,188).36

This OTA review relies heavily on previous reviews and analyses by Coulam and Gaumer, Gold

and colleagues, and the Prospective Payment Assessment Commission (ProPAC) (22,44,127).

ProPAC reports regularly on the impact of PPS as

part of its congressionally mandated mission

(e.g., ProPAC (127)).

Coulam and Gaumer’s 1991 review of studies

of the first 3 or 4 years of PPS concluded that the

main purpose of PPS—to control the growth of

total and inpatient Medicare benefit costs (expenditures) without increasing costs to beneficiaries-appeared to have been accomplished (22).

Coulam and Gaumer noted a clear reduction in

historic rates of growth in total Medicare spending (hospital and nonhospital, federal and beneficiary37), from an adjusted average annual growth

rate of 6.9 percent between 1980 and 1984, to only

4.0 percent annually from 1984 through 1987.38,39

Coulam and Gaumer attributed these early reductions in total Medicare expenditures to historically low growth rates in spending for Medicare

inpatient hospital benefits, citing as an example a

4.6 percent inflation-adjusted increase in inpatient

hospital benefit payments in fiscal year 1986(51).

More recently, ProPAC observed that total

Medicare expenditures per enrollee declined after

PPS was implemented in 1984, from a growth rate

of 6.9 percent between 1980 and 1983, to average

annual rates of growth of 3.0 percent between

1983 and 1987 and 4.0 percent between 1987 and

1992 (127) (figure 2-1 ).40 The Commission suggests that the decline was attributable primarily to

inflation-adjusted per-enrollee spending on inpatient care, as shown in figure 2-2.4] The Commission’s figures also show, however, that the decline

in the growth rate observed in the phase-in period

of PPS (1983 to 1987) was not entirely maintained

between full implementation and 1992 (1987 to

1992), although it was lower than in the pre-PPS

period (figure 2-1 ). Growth in Medicare expendi-

~ As of the date of Cou]am and Churner’s review (199 I ), the bulk of the published literature on PPS effects was based mainly on tie first

3 or 4 years of PPS experience, generally allowing only for evaluations of the initial effects of the program (22). The pre/post design of most

of the available empirical studies does not control for other factors that may have influenced trends in hospital spending. The widespread adoption of medical technologies that can be used on an outpatient basis, widespread implementation of managed-care programs in the private sector, and liberalization of home care, nursing home care, and hospital benefits for Medicare in the early 1980s all could independently have

caused Medicare or total inpatient hospital expenditures or costs to decline (22). An additional problem with analyzing the cost-containment

effects of PPS is that DRG rates were set too high in the first year of the program. Because of the generosity of payment rates in the first year

of PPS, hospitals may have had fewer pressures to reduce costs in the early years. After the first year of PPS, very restrictive updates to DRG

rates were made to reduce initial hospital windfalls (22). Finally, the PPS system was phased in over several years to allow hospitals time to

adjust their behavior. The actual phase-in to full national DRG rates was not completed until November 1987 (11 2). Given the gradual phase-in

and initially high DRG rates, it is striking that hospital costs declined during the early years of PPS.

37 ]n tie national hea]th accounts, premiums paid by Medicare beneficiaries for supplementary medical insurance (Medicare part B) are

counted as Medicare program expenditures, not as individual out-of-pocket expenditures.

38 Coulam and Gaumer cited studies by Long and Welch (93) and Guterman and colleagues (51) in support of this conclusion. ne studies

adjusted for inflation, changes in Medicare enrollment, and changes in the mix of Medicare beneficiaries (22).

3g~is Conlpmison” should be somewhat tempered by the fact that PPS began to be phased in during 1984; however, inclusion Of the growth

rate for 1984 would tend to dampen the growth rate for the 1980-84 period.

4CI me Cc)mmission adjusted its figures for growth in the number of Medicare enrollees.

41 Coulam ~d Gaunler’s rep)fl ofestlmates Of IOta] Medicare growth rates in the 1980-87 period are not totally comparable to those Of the

Commission because. Coulam and Gaumer present estimates for the periods 1980 to 1984 and 1984 to 1987. Nevertheless, the direction of

results is similar in the two reports.
Chapter 2 Applying Government Cost Controls I 51

10

8

6

4

2

0

Percent

_ Total health care expenditures per capita

~ Medicare expenditures per enrollee

6.9

I

.-

1

5.8

3.6

198@83 1983-87 1987-92

ing to the growth in Medicare expenditures for

nonhospital services (4).

PPS could affect total and hospital-related

health expenditures in several ways. Because

Medicare hospital spending accounts for 11 percent of personal health expenditures (86), making

Medicare the largest single source of inpatient

hospital payments, PPS’S success in this sector

could have had a dampening effect on total personal health expenditures and NHE. However,

PPS could also stimulate hospitals to increase

their prices to other payers to compensate for

12

9

6

3

0

Percent

9.3

5.7 I

198G83

0.3

7.5

6.8

2.4

1

1983-87 1987-92

SOURCE Prospective Payment Assessment Commission (127),

based on data from Department of Health and Human Services, Health

Care Financing Admmistration OffIce of the Actuary The full citation IS

at the end of the report

Q Genera] ,nflat,, )n ~ ~~ ~pproxlnlate]y ~.o ~,rcen[ In 1992 using the CPI ( 195). Using the GDP Inlp!l Cit price ~~flator (P’rcen[ change ‘ronl

the prccedlng year), mflatl{m was approximately 2.7 percent in 1992 (201).
52 I Understanding Estimates of National Health Expenditures Under Health Reform

losses of Medicare revenues (i.e., cost-shifting),

resulting in no overall change in growth in

NHE.43 Coulam and Gaumer’s 1991 review and

ProPAC’s June 1993 report provide some data

relevant to evaluating PPS’S impact in these

terms.

According to Coulam and Gaumer, there had

been little containment of overall growth in U.S.

health care expenditures in the very early years of

PPS (the period they examined), but also little

evidence of hospitals’ cost-shifting between

payers (22).45

ProPAC found some decline in the growth rate

of national (Medicare and non-Medicare) health

care expenditures (adjusted for population size)

during the implementation of PPS in 1984

through 1987 (relative to 1980 to 1983) (figure

2-1 ). However, the Commission also found that

the growth rate of national health care expenditures increased relative to the 1980-83 period from

1987 through 1992 (figure 2-1) (127).

In contrast to Coulam and Gaumer, ProPAC

found evidence of cost-shifting between payers.

Through 1991, hospitals had been able to generate

gains from private insurers (as a group) that nearly

mirrored hospitals’ total losses from Medicare,

Medicaid, and uncompensated care (127). According to the Commission, in 1991 the Medicare

program covered 88 percent of the cost of treating

its patient load (inpatient and outpatient), down

from 94 percent just 3 years earlier; in contrast,

hospitals obtained payments from privately insured patients covering almost 130 percent of

their costs.

In summary, reviewers of the literature on

PPS’S impact on expenditures (Coulam and

Gaumer, ProPAC, and Gold and colleagues) all

came to conclusions similar to ProPAC’s of June

1993. That is, to date, PPS had been effective in

reducing growth in Medicare expenditures (especially inpatient expenditures). However, “to beeffective in controlling overall health care

expenditures, the set of cost containment strategies used must be comprehensive in terms of the

types of services or providers covered, the payers

included, and the control of both price and volume” (127).

State mandatory hospital rate-setting programs. Since the early 1970s, several States have

adopted diverse forms of hospital mandatory, regulatory rate-setting programs, in some cases covering only some third-party payers and in others

covering all payers (Maryland, New Jersey, Massachusetts, and New York) (25).46 A very large

volume of literature has attempted to evaluate the

effects of these hospital rate-setting programs. Although a great majority of the studies have suggested that the programs can be effective in

taming the growth of state hospital spending (44),

it may be difficult to draw unambiguous conclusions for the purposes of assessing the impact of a

particular reform proposal.

43 Coulanl and Gaun~er suess ~at measuring cost-shifting is difficult. According to Coulam and Gaumer, “price differences by payer are

not, ipso facto, evidence of cost shifting [but are] consistent with profit-maximizing price discrimina(i(m by hospitals that have some degree of

monopoly power” (22). “Moreover,” according to Coulam and Gaumer, “profit-maximizing hospitals will not cost shift when a payer with

m(mopsony power demands lower prices, because prices to other payers will already have been set at their profit-maximizing level. ” However,

these authors m~te that “hospitals might not maximize profits; in that event, cost-shifting can occur.” Further, there would have to be a systematic

relati(mship between the stated cause and effect (e.g., between decreases in Medicare payment and increases in prices paid by third parties) (22).

44 Cou]anl and Gaun~er did n(~t cite specific evidence on this point. However, NHE had grown at least faster Ihan inflation for decades before

the Coulam and Gaumer review in 1991.

45 According t{) Cou]am ~d Gaumer, Mornsey and !jIoan found evidence of cost-shifting for urban hospitals but found that rural h@talS

lowered their prices (o other payers following PPS ( 1 I 4). Three other studies failed (o find evidence of cost-shifting, according to Coulam and

Gaumer (53,II6,215).

~ Generally, the concept of State.leve] regulation of hospital rates involves an external auth(wity (usually the state or a state agenc~r but

occasionally a private entity such as Blue Cross) that monitors each hospital’s rates (25).
Chapter 2 Applying Government Cost Controls I 53

Many of the studies failed to account for the

complexity and diversity of the state programs

and may have overstated or understated the effect

of rate regulation. Combining all rate-setting programs into a single category does not account for

the many different characteristics of the various

state programs. Different factors may help explain

differences in effects on hospital expenditures

across states. These different characteristics may

include whether the unit of payment under rate

regulation is per service, per diem, per case, or

with a fixed budget or volume adjustment; and

whether the payment rates are determined by a

state-level formula or by reviewing hospital or departmental level costs and budgets; and political

factors.

Some early studies (1 3, 1l0a, 196) of state hospital rate-setting programs simply compared hospital expenditures across states. All of these

earlier studies found that the growth of hospital

spending per day, per admission and, to a lesser

degree, per capita, was less in States with mandatory hospital rate-setting programs than in states

without such regulation. However, these early observational studies were questioned because they

failed to isolate the effects of rate regulation from

other factors that might have affected hospital expenditures (30).

Later studies attempted to statistically control

for different aspects of states’ hospital regulatory

schemes as well as coexisting regulatory efforts.

For example, in a 1983 multivariate analysis that

statistically controlled for both the specific regulatory nature of the state hospital rate-setting programs as well as other coexisting regulatory

programs, Sloan found lower hospital costs per

admission and costs per patient day in states with

mature mandatory hospital rate-setting programs,

than in states without rate-setting programs ( 150).

He also found no change in profit margins, suggesting that expenditures were also lower.

It is plausible that a self-selection process is at

work under which states with high hospital cost

inflation are more likely to adopt regulatory programs than those with low hospital cost growth.

Two studies have attempted to statistically account for this effect (29,82). One study found a

modest but measurable effect of rate regulation on

hospital cost inflation after controlling for historically high cost inflation (29), and another study

found that mature hospital rate-setting programs

were associated with lower per capita hospital expenditures (82).

Other studies have examined the effect of state

hospital rate-setting programs by examining the

rate of growth of hospital costs per discharge before and after the program was implemented.

Thorpe and Phelps studied the impact of hospital

rate-setting in New York State in 1983 (1 56). They

found that the all-payer rate-setting program reduced real inpatient cost per discharge (i.e., from 7

percent in the period 1980 and 1982, to 4 percent

in the period 1982 and 1985).

Gold and colleagues concluded that "mandatory State rate setting for all or most payers of care

has been successful in restraining hospital spending” (44). However, Gold and colleagues also cautioned that:

The outstanding issue is whether this approach

is feasible on other States and whether it would

create the same effect. Rate setting States are

atypical, and only a few States have seriously

tried to implement broad-based mandatory approaches (44).

Only Maryland maintains all-payer hospital ratesetting today (although other states maintain less

comprehensive forms of rate-setting).

Some have questioned whether hospital rate

regulation slows the growth of a state’s total

spending for both hospital services and other categories of health services. For example, Mitchell

argued that the effectiveness of hospital rate-setting programs should be measured by their effects

on per capita total health expenditures, not just

hospital expenditures (11 1). However, the available evidence is not able to provide a clear verdict

on the issue. A Lanning, Morrisey, and Ohsfeldt

study that found lower per-capita hospital expenditures in states with mandatory hospital rate-setting programs also found lower per capita

non hospital expenditures (82), but few other studies provide a direct measurement of the effect of

hospital rate-setting programs on total nonhospi-
54 I Understanding Estimates of National Health Expenditures Under Health Reform

tal expenditures. Several studies examining the

impact of state hospital rate-setting programs on

physician expenditures have presented a mixed

picture as to whether the level and growth of physician expenditures is affected by hospital ratesetting programs (6,1 11,1 15).

In order to use the findings of these studies to

estimate the effects of similar cost control provisions in reform proposals, it would be important to

understand the features that contribute to successes and failures in states that have used hospital

rate-setting (44,82, 150).

Rochester’s Hospital Experimental Payments

(HEP) Program. The United States has had only

limited experience in using budgets to pay for hospital services. The main U.S. experience comes

from the voluntary Health Care Financing Administration (HCFA) demonstration project called the

Hospital Experimental Payments (HEP) program

in Rochester, New York. Between 1980 and 1987,

government representatives, insurers, and providers in the Rochester area worked together to manage community-wide hospital revenues and to

improve the solvency of area hospitals through the

HEP program ( 179). In addition to cost control,

another goal of the program was assuring the financial viability of area hospitals, some of which

were in jeopardy in the late 1970s ( 14).

The main features of the HEP program were a

community-wide prospective revenue cap on inpatient and outpatient hospital services. Blue

Cross Blue Shield of New York State, and HCFA

provided hospitals with an annual budget. All hospitals agreed voluntarily to operate under the community-wide revenue cap. Hospital revenues were

limited to costs in a base year (the year 1978) and

updated by an annual inflation factor. Cost increases above the cap were not funded but individual hospitals could retain surpluses. Capital

investment (including medical technology) decisions were made by the hospitals as a group and

financed from a common capital fund (14,179).

HEP was administered by the Rochester Area

Hospitals Corporation, a nonprofit corporation

comprising area hospitals and the University of

Rochester School of Medicine and Dentistry

(179),

“500~

1

(n

2=

fs

,200-

Boston

9oo - Minn./St. Paul

600-

1 Rochester, NY

300

r

1974 75 76 77 78 79 80 81 82

SOURCE Reprinted with permission from Block, Regenstrelf, and Grmer, 1987 (14) Full cltatlon IS at the end of the report

Both Block and colleagues and the General Accounting Office (GAO) found lower growth rates

in expenditures or costs. However, confidence in

some of their findings is limited by aspects of their

study designs (e.g., use of unadjusted data in some

comparisons).

Block and colleagues compared Rochester

Medicare hospital expenditures post-HEP (1980

to 1982), controlling for age, sex, and wages, with

Medicare hospital expenditures in Boston, Minnesota/St. Paul and nationally, and found that the

other locales’ Medicare hospital payments increased more sharply than Rochester’s Medicare

hospital payments (figure 2-3). Similarly, a GAO

report of Medicare hospital expenditures for a

longer period of time (1980 to 1987) found that

Medicare payments to Rochester hospitals rose at

an annual rate of 7 percent, compared with 12.6

percent for the nation as a whole (179).

Similarly, GAO’s comparison of Rochester’s,

New York State’s, and the nation’s total (Medicare

and non-Medicare) hospital costs for 1980 to

1987, after adjusting for inflation and population

growth, found that real hospital costs per capita
Chapter 2 Applying Government Cost Controls I 55

for Rochester hospitals grew at an annual rate of

2.1 percent, compared with 4 percent in New York

State47 and 4 percent nationally ( 179).

As with ESP, the effectiveness of HEP is further suggested by the increase in hospital costs per

capita observed after HEP was terminated. Between 1987—when budgeting under HEP ended—and 1990, Rochester hospitals experienced

real annual growth of 7.3 percent in costs per capita, compared with 6.1 percent in New York State

and 4.9 percent in the nation (179).48

Accordingly, Rochester’s experiment with voluntary community-wide hospital budgeting under

HEP appears to have been successful for

constraining hospital costs. However, GAO conjectured that HEP’s savings to the entire Rochester health system may be limited since the

program did not address the growing segment of

health care costs incurred outside of hospitals.

OTA is aware of no studies of HEP’s effects on total health spending in Rochester.

GAO noted that key participants in Rochester’s

health care system emphasized that no single factor was responsible for the community’s performance and Rochester’s experience may not be

transferable to other states or to the Nation, for

several reasons ( 14,179). Rochester has a long

history of community-based health care planning

and cooperation. Unlike other states, for example,

New York has continued to require hospitals to

obtain approval for many capital investments

through a certificate-of-need process. Finally,

Rochester has continued to establish most insurance premiums based on community-rating principles, a situation made possible because Blue

Cross Blue Shield and one large health maintenance organization (HMO) have dominated the

health insurance market in Rochester.

Summary. In summary, some limited U.S. experience in setting hospital payment rates has

demonstrated that government (or combination

government and private sector) cost controls can

reduce the rate of growth in hospital expenditures

while they are in effect. Average annual growth

rates for hospital expenditures of 4.6 percent (44),

4 percent (22, 127)), 3 percent (127), and 7 percent

(179) have been reported for various programs

and different payers at various times; all have been

lower than national averages at the time of the

comparisons. None of the programs has been easy

to implement, however, and only PPS for Medicare and the State of Maryland’s all-payer program survive in their entirety.

Empirical evidence from

international experience

International experience may provide evidence as

to the effects of different types of regulated hospital payment. During the 1980s, several countries

shifted from a retrospective budgeting process, or

from price controls, to various forms of prospective budgets.49 The shift occurred in part because

countries experienced continued growth in hospital expenditures, suggesting that previous controls were not considered strong enough and that

countries that use government cost controls continue to modify and revise those controls.

While the shift from retrospective payment or

looser controls such as price controls to prospective budgeting for hospitals may provide insight

into this approach to controlling hospital expenditures, the empirical evidence on the impact of prospective budgets is limited. In a review of the

available literature on prospective budgeting in

the Organisation for Economic Co-operation and

Development (OECD) countries, Wolfe and Mo47 New yor~ cjlatc ,) P.rate~ un~cr an a]]-pay~r hospital rate-setting s}’stenl for parl of this period.

~ Acc(~rdlng (() GAO hospital bu~gellng Un&r HEp m(iect for several reas~ms. HCFA had implemented its PPS system. Although R(~chester could have requested pemlissi(m to amtinuc the experiment, area hmpltals recx~gnized that they C(NIM make more m(mey under PPS than

under HEP budgeting. Moretwer, one area hospital had already withdrawn from HEP in 1987.

w ~oj~ctl~,e budgets are ~)~era]l ]Inllts on the funds I(J pa)’ for a specific category of health care services, fixed in advance of the PaYn~~nt

peri(ti, regardless of where the funds originate,
56 I Understanding Estimates of National Health Expenditures Under Health

ran concluded in 1993 that “during the course of

this work, it quickly became clear that the literature is largely descriptive, and presents little evidence of rigorous empirical assessment of the

effects of the [prospective] budgeting schemes

employed in comparison to other alternatives”

(21 1).50 According to Wolfe and Moran, one of

the main reasons is that “[prospective] budgeting

schemes are typically employed as elements of a

country’s overall approach to financing health

benefits and controlling expenditures and are not

generally structured as experiments that would

permit . . . evaluation” (211).

OTA’s review of the empirical literature on the

effectiveness of prospective hospital budgeting in

other countries focuses on several of the OECD

countries for which some empirical evidence is

available: Canada, France, Germany, and the

Netherlands.

Hospital payment in Canada. Canada’s method of paying hospitals has undergone a number of

changes over the years. Beginning in 1961, funding of hospitals was characterized either by “lineby-line” budgeting or per diem reimbursement

(10). Under the former, individual institutions negotiated specific budgetary line items with provincial Ministries of Health, with the overall

budgetary allocations being the aggregation of the

line items. Per diem reimbursement involved retrospective adjustments to hospital operating

budgets according to patient loads, which left

Ministries of Health with a large open-ended line

in their budgets.

The old line-by-line budgeting approach has

largely disappeared (10). The move away from

this approach to prospective, aggregate budgeting

began in the late 1960s. Under this system funding

for the next year was based on a series of mechanical adjustments to previous expenditures. Special

provisions were made for new programs, unanticipated and justifiable volume increases, or other

unforeseen circumstances. However, during the

1970s, cost overruns

Reform

were often picked up by the

Ministries of Health. Only in the more fiscally

constrained late 1980s and the 1990s have the

Ministries of Health become more forceful in developing institutional expectations that budgets

are not a starting point, but a binding constraint.

There has been surprisingly little analysis of

the effect of prospective budgeting in Canada. According to Barer, the growth rate of hospital expenditures mirrors the shift to prospective budgets

and stronger enforcement of those budgets. Hospital expenditures increased by 10 percent per annum during the 1960s, declining sharply to just

under 6 percent in the 1970s, and declining further

to 4.6 percent in the 1980s (all figures in inflationadjusted terms) (10). However, these figures may

mask a substantial amount of variation among

provinces.

In a 1983 study, Detsky and colleagues

compared hospital expenditures in Ontario under

a system of prospective budgeting to hospital expenditures in the United States (26). The authors

found that for the period 1968-80 the cumulative

increase in inflation-adjusted total hospital expenditures in Ontario was 86 percent, compared with

130 percent in the United States.51 The authors

caution that their results are only suggestive and

that “[a] full statistical analysis of differences between the United States and Ontario would require examination of other variables that affect

costs” (such as demographic characteristics and

the use of price and wage controls in the United

States between 1971 and 1974 and in Canada between 1976 and 1978). Moreover, cross-country

comparisons fail to control for other potentially

important factors such as cultural differences and

different forms of government.

Hospital payment in France. Beginning in

1984, the French government replaced its fixed

per diem payment system for hospital services

with expenditure targets for total public hospital
spending ( 176). In the French system, budgets are

negotiated separately for each public hospital.

About t we-thirds of all hospital beds in France are

in public hospitals ( 176).52

To enhance compliance with the category-wide

spending targets, each public hospital negotiates

its proposed budget with the predominant sickness fund in its region and with the national government ( 176). Sickness funds are organizations

that administer national health insurance. The negotiated budget covers operating costs as well as

debt service for construction and high-cost medical equipment ( 176). Hospitals are paid in monthly installments, divided among France’s sickness

funds according to their share of total patient days

in each hospital (211).

Not all individual public hospital budgets increase at the category-wide target growth rate

(176). Some are allowed to grow more and others

less ( 176). However, the government is able to use

its influence with negotiating parties to restrain

the growth of aggregate hospital spending ( 176),

Although some additional funds exist to supplement individual hospitals’ budgets under exceptional situations, unlike Canada’s hospitals,

publicly owned hospitals in France cannot supplement their budgets through collect ion of fees from

privately insured patients (211). Therefore,

France’s budgets for public hospitals represent a

more binding constraint on the hospitals’ total

revenues.

GAO conducted a multivariate econometric

analysis of the effects of changes in payment

methods for hospitals in France, and also

compared the effects of the French changes to the

Chapter 2 Applying Government Cost Controls I 57

effects of

(176). 53

GAO’s

change in

Germany’s hospital payment system

econometric analysis found that the

payment systems reduced growth in

hospital expenditures by a statistically significant

amount, even after statistically controlling for the

effect of GDP growth.54 Moreover, GAO estimated that the spending targets and prospective

budgets reduced France’s 1987 level of inflationadjusted inpatient hospital care spending (both

public and private) by about 9 percent below what

would have been spent had price controls alone

(i.e., per diem reimbursement) remained in place

over the period 1984 to 1987.

However, GAO’s analysis of the French system

was based on only a few years of data for the new

payment system; therefore, its results should be

interpreted with caution .55

Hospital payment in Germany. Beginning in

1986, Germany shifted from regulating hospital

expenditures through price controls alone (i.e.,

prospective per diem payments) to per diem payments combined with "flexible” prospective

budgets for individual hospitals and aggregate

spending targets for hospital spending (85,1 76).

Germany required all hospitals to adopt flexible

prospective budgets, based on expected occupancy rates for the following year (45). Hospitals

were compensated for days of care exceeding the

annual projection, but at a reduced rate (211).

Flexible budgets were coordinated with existing

nonbinding targets for annual hospital spending

determined by Germany’s national health committee, Concerted Action in Health Care (1 76).

‘~ pr]~ate hospitals In France are still paid per diem rates (2 I I).

s ~ In c~~ ~egrcsslon ~qua(i{)ns<;, nonllnal t{)[a] health variable expenditures was the dependent variable. Independent variables included

the govemrncnt cost c(~ntrt~l In effect, the c[mntry’s natl(~nal lnc{m~e and plpula[i(m, and a measure of resources in the particular health care

sec[t~r (e.g., the number of practlc]ng ph> slclans for Germany physician payment equati~m and (he number of inpatient medical care beds for

France’s and Gem}any ”s ht)spital paymerl[ equat]{ms) ( 176).

~-$ Grow (h in GDp h:ld ;in Indcp.ndclll, ~J\ItIl c effect on growth in public ht)spi[al experiditures, as expected.

5$ French h{}splt;il sP.ndlng targets ~cre In ~ff~ct f{~r (ml) 7 full years al (he time of GAO’S anal Ysis.
58 I Understanding Estimates of National Health Expenditures Under Health Reform

However, according to GAO, the new system did

not include an enforcement mechanism ( 176). The

overall hospital spending targets served only as

informal guidelines during individual hospital

budget negotiations between hospitals and regional sickness funds ( 176).56

GAO’s econometric analysis of Germany’s

change in hospital payment systems found no statistical evidence that the combination of aggregate

hospital spending targets and flexible budgets was

more effective at limiting hospital spending increases than the previous price controls (per diem

rates) used alone. However, since GAO’s finding

was based on very limited data, it should be

viewed with caution.

Based on the different results for France and

Germany, GAO concluded that stringent enforcement with formal mechanisms to ensure compliance could make budget controls more

effective ( 176). It hypothesized that the French

government’s participation in each hospital’s

budget negotiations encourages observance of the

targets. As stated earlier, the German targets were

guidelines that lack an enforcement mechanism to

reconcile actual spending with the targets ( 176).

Even if inpatient spending were constrained

through prospective budgets and technology planning in Germany, the possibility of shifting services to other clinical settings where spending is

unconstrained or only partially constrained may

make hospital budgeting in Germany less effective for restraining national health expenditures.

German physicians have been allowed to buy

high-technology medical equipment for their private offices, allowing hospitals to shift some inpatient care to outpatient care in physicians’ offices

(2).57 However, as discussed under physician payment controls, Germany appears to have had success in placing controls on spending for

physicians’ services.

Hospital payment in the Netherlands .58 The

system of hospital payment in the Netherlands underwent various changes in the 1980s. The most

radical change took place in 1983, when the traditional system of per-service reimbursement was

replaced by a system of prospective budgeting

that covered almost all of a given hospital expenditures. 59,60

Under the new “historical” budgeting system

introduced in 1983, when expenditures exceeded

a hospital’s budget limit, the hospital was held financially responsible for the deficit. On the other

hand, if a hospital spent less than its budget, it

could add the surplus to its reserves. Retrospective budget adjustments to solve financial problems of individual hospitals were no longer

expected. 61 The primary goals of the new payS6 Beglnnlng in januav 1993 tie Gemm govemrllent initiated a 3-year emergency measure that inl~)ses nlandat(~ry linllls {m spending ‘or

physician, hospital, and dental services, and for prescriptitm drugs. The new limits are more closely linked (() revenue growth of the sickness

funds (180).

57 Hospi(a]s can contract [() use ~xps]v~mtxlicid equipment in doctors’ private offices (2).

58 me desCriptlOn of the hospi(al Paynlen[ systelll in the Netherlands is taken from two articles by Maarse and ~oll~agu~~ (96,97).

59 Interest and depredation renlalned ful]y r~in~bursed on a retrt)spective basis, and fee-for-service charges by medical SpeCHdl StS WCK not

included in the hospital budget.

@ ~or t. 1983, hospita]swere reimbursed for each medica] activity (tmtput), with inpatient per diem charges as the nlost important source

of revenue. Budgetary deficits of hospitals could be solved by retrospective temporary increases in inpatwnt per diem charges.

61 ~os~ctl~e hosplta]budgets are negotiated with the Netherlands’ sickness funds and private insurers (2 I I).
Chapter 2 Applying Government Cost Controls I 59

180

i

——

160

140

/

7

120

J

/ expenditures

100

1976 77 78 79 80 81 82 83 84 85

SOURC[ Re;]r r’ted wlttl perrwsson from Maarse, 1989 (96) Full cltatlor s at the end of the report

ment system were to curb the rapid growth of hospital expenditures, promote efficient production

of hospital services, and increase the autonomy of

hospital management.62

Based on observational studies of hospital expenditures in the Netherlands over the period

1976-89, Maarse and colleagues found that

growth in inflation-adjusted hospital expenditures increased between 1976 and 1981, stabilized, and then became negative after 1983 (96,97)

(see figure 2-4). From 1984 to 1986, actual hospital expenditures remained below the allowed

budget limits (see figure 2-5). In real terms,

growth was negative (-0.4 percent) during the period 1986-89 (not shown in figure).

The trend in hospital admissions over the period supports the finding that costs were contained

by “historical” budgeting (96). The average length

of stay was already declining before the adoption

of budgeting and continued to decline after 1983

(96). 63

As for ambulatory care, expenditures had already been rising and the shift to hospital budgeting does not appear to have accelerated that trend,

despite the intentions of the government (figure

2-6) (96).

Based on the trends in hospital spending before

and after introduction of hospital budgeting and

on the basis of actual expenditures compared with

allowed budget limits-two measures of the effectiveness of government cost controls-the indications are that “historical” hospital budgeting

in the Netherlands controlled hospital spending

9,300

9,250

~ 9,200

G

: 9,150

m

: 9,100

I r->.,

Budget

/

/’

2 9,050 ~/’

z /

\

I / Actual

9,000

b

, /

8,950 ‘+’

8,900

1983 84 85 86

— — .

SOURCE Reprinted with perrnlsslon from Maarse, 1989 (96) Full cllaton IS at the end of lhr? reporl

62 Anolhcr ~l)a,or ~e.,l~lon ~)fthc hudgctlng sy~tenl took” p]ace in ] 988 when the Nctherlimds shlftd frt)lll a ~~slclll of “’hlsumcal” budg~tlng

t~~ one {Jt “1 unctlt~n.il ” budgeting. Hlst(mcal budgeting had fr{)zen ccrtaln inequities ‘and Incfticlcncics In place (97). I“he purpose of functi(mal

hudgetlng was [(~ h:i~c ht)$pllals get the saTm budget when pcrftmnirrg equal ta~ks. ~“uncti{~na] bud.gctlng ]f c~m~tderah]y} nl~m? C{mlpllcatcd

than hlst(~rlcal budgctlng, using a ft~rn~ula that takes into account the sl]e of the p~pulat [(m m a hospital “s catchmcnt :ir~ii, a h(~spital capacity

(including spcl:ilty urrlts ). ii h(~spltal prtxlicti~ms of their productivity in t}w cx)ming year, and additltmal :igrecmcnts for strew high-ct)st trcatnwnt$ (e. g., c:irdiac surgery and renal dial} SIS). While hist(n-ical budgctlng operatccl as a ncgati~ c lnccnt]~ c w Ith I cJpecI to admissl{)ns, functl~~nal hudgctlng n~a) stln]ulate hospitals t(} increase the number of admissions (97).

6 ~ ~l(,~kc, ‘,r trcnd~ ,n ICngth ,)f stay rek ~rscd sonlewhat after [he N~[hcr];mds’ transltl{}n trx)nl htsl~mcal t{) fUnC’tl~)lU~l budgeting (95.97).
60 I Understanding Estimates of National Health Expenditures Under Health Reform

150,

I

1976 77 78 79 80 81 82 83 84 85

SOURCE Reprinted with permission from Maarse, 1989 (96) Full citation IS at the end of the report

more successfully than the previous system of

open-ended funding. Maarse, however, pointed

out that the observational studies by him and his

colleagues lead only to a provisional conclusion

because many factors that may have affected hospital spending were not controlled for through statistical techniques.

Summary. In summary, during the 1980s several countries moved from less comprehensive controls on hospital prices or budgets (i.e.,

line-by-line budgeting in Canada, per diem payment in France, Germany, and Netherlands) to

more comprehensive and stricter systems of hospital budgeting. Limited research on these

changes suggest that most countries appear to

have been successful in reducing the rate of

growth in hospital expenditures relative to previous trends. However, successful and unsuccessful countries continue to experiment with

additional measures to either reduce expenditures

further (e.g., Germany (180)) or to make their systems more equitable across hospitals (e.g., Netherlands (97)).

Evidence on Physician Payment Controls

A variety of payment methods have also been used

in this country and abroad to regulate spending on

physicians’ services. The United States has had

only limited experience with using fee schedules

to control spending on physicians’ services; other

countries have used fee schedules combined with

spending targets (goals) or spending caps (limits).

The main problem with trying to constrain health

expenditures with price-based strategies (such as

fee schedules) is that they target only one aspect of

health expenditures—prices. Increases in the

quantity of services delivered can therefore dilute

some of the cost-containment potential from price

controls.

Volume may not be constrained under price

controls for two reasons. First, when payment

rates are reduced below current rates, or when the

growth in payment rates is constrained below

what it might have been without price restraints,

providers may be able to increase the volume of

services to offset potential income losses (1 37).

However, even if provider volume offsets occur, it

does not mean price controls are totally ineffective. Price controls would be completely ineffective only if volume offsets were sufficiently large

to fully negate price reductions.64

The second reason volume might increase

without direct controls such as utilization review

is that patients needs and wishes for services may

cause an independent increase in the use of health

services. It is difficult to separate consumer demand from physician-induced demand in empirical studies. Overall, however, fee controls alone

might temporarily reduce expenditures, but longer-term spending control may not be achieved if

volume growth partially or completely counteracts the effects of price restraints.

fw$ [t 15 a150 argued (hat pr(JVl&~ cm als{~ m~e Up f{~r potential losses in revenues in t)ther ways. For example, physicians may increase

inc{m}e by recoding patient short-tern) visits that receive a lower fee to in(em~ediate visits that receive a higher fee.
Concerns about potential increases in volume

have stimulated some countries to limit physician

payment, for example, by combining price controls with more comprehensive expenditure tar- ,

gets or limits. Under physicians’ expenditure

targets, governments generally fund a portion of

excess billings above the predetermined target. In

contrast, under expenditure limits, providers cannot expect to receive any additional monies above

the predetermined limit.

Future health outlays under expenditure limits

or targets depend in part on allowed increases in

revenue under the limit or target from year to year.

If allowed increases accommodate increased costs

from the previous period because of higher input

prices, higher utilization, higher service intensity,

or newly established services or technology, expenditure caps or targets may not constrain outlays for physicians’ services any more effectively

than fee controls alone.

Empirical evidence from the United States

Economic Stabilization Program (ESP). Under

the Economic Stabilization Program (ESP) (between 1972 and 1974), noninstitutional health

care providers were allowed aggregate weightedaverage price increases of 2.5 percent, if justified

by cost increases (44, 137). Voluntary compliance

was assumed, with enforcement 1imited to cases

in which patients complained of increases that exceeded the limits (44).

Research on ESP’S effect on physician spending appears to be more limited than that on hospital spending, perhaps because controls were less

complex or demanding on physicians (44). A particular shortcoming of the available research is

that it tends to focus on Medicare and Medicaid,

perhaps because those databases were readily

available. For example, using econometric analysis, researchers at the Urban Institute investigated

the effects of ESP on Medicare and Medicaid physician payments in California. They found that

Chapter 2 Applying Government Cost Controls I 61

controls limited Medicare fees to around the ESP

target of 2.5 percent per year, but that the quantity

and complexity of services supplied to California

Medicare patients increased, causing physician

incomes to rise more under the controls than when

they were lifted (11, 44).65 Once controls were

lifted, Medicare unit prices increased and volume

dropped (44).

The Urban Institute investigators found that

ESP had little or no impact on California’s Medicaid program expenditures, presumably because

Medicaid fees were controlled effectively prior to

the introduction of ESP (11 ).

Thus, the ESP price controls do not appear to

have reduced either Medicare or Medicaid expenditures for physician services. The Urban Institute

concluded that “simply limiting average fee

growth by itself may not effectively limit undesirable growth in expenditures on physicians’ services, at least over a short time period” (11).

Medicare fee schedule for physician services.

In response to growth in Medicare physician payments, and to address perceived payment inequities between expensive, high-technology services

and basic services, Congress included a reform of

the methods by which Medicare pays for physician services in the Omnibus Budget Reconciliation Act of 1989 (44,11 2). The payment reforms

were designed to be budget-neutral in the initial

year of implementation of the program (i.e.,

Medicare physician expenditures under the new

system would match what they would have been

under the previous system) (44). The 1989 Medicare physic i an payment reforms consisted of three

parts:

● The Medicare Fee Schedule (MFS), effective

January 1, 1992. MFS is based on a relative

value scale (RVS) that established national uniform relative values for different physician services based on physician work, practice

expenses, and the cost of professional liability

insurance (11 2,123). The overall payment level

65 me ~uthom ~al~ed the ~)sslblllly that [he rc~ults ct~uld parlly reflect the subslituti{m of Medicare paflenlS ft~r Pfivate Patients while price

contn)ls were In effect (44).
62 I Understanding Estimates of National Health Expenditures Under Health Reform

under MFS is determined through a conversion

factor that translates the relative value units for

individual physician services established under

RVS into actual dollar payments (123). The

transition to MFS is scheduled to be fully

phased in by 1996 (123).

~ Volume performance standards (VPS), established as a mechanism to update physician fees

(123). VPS sets an expenditure target for physician expenditures that are used 2 years later to

update fees under the MFS to levels consistent

with the target (44). Future payment rate updates are based in part on the comparison of actual expenditure increases with the target (123).

If actual Medicare physician expenditures increase faster than the target, the rate at which

the Medicare program raises physician fees is

reduced. Alternatively, if spending grows at a

rate below the target, fee increases are enhanced. Thus, VPS adjusts rates of increase in

fees, rather than directly controlling expenditures (67). The program was implemented in

1990, and the first year that fee updates were

subject to the limits was 1992. Theoretically

the national Medicare physician expenditure

targets provide weak incentives for individual

physicians to modify their behavior because

physicians are not likely to believe that their individual responses will have much effect on

whether aggregate Medicare physician expenditures rise above or remain below the VPS

(67).

~ Limits on the ability of physicians to bill patients above Medicare’s fees (123).

Research on the effects of the Medicare physician payment reforms is limited because the program has not yet been fully implemented (44). It is

still too early to determine conclusively whether

the reforms will constrain spending for physician

services (44).

The most recent data from Physician Payment

Review Commission (PPRC) show that in 1990

and 199 1—the 2 years after VPS was implemented but before the VPS fee updates and the MFS

when into effect—actual growth in Medicare phy -

sician expenditures was higher that the VPS targets ( 10.6 percent actual growth versus the VPS of

9.1 percent in 1990, and 8.6 percent actual growth

versus the VPS of 7.3 percent in 1991) (124). In

contrast, for 1992 and 1993—years in which VPS

fee updates and the MFS affected Medicare physician fees—actual growth in Medicare physician

expenditures fell substantially short of the VPS

targets (3 percent actual growth versus a 10 percent VPS target in 1993) (124). According to

PPRC, a substantial portion of the difference between the 1992 VPS target and actual expenditure

growth in that year was due to a lower rate of increase in the volume of services than anticipated

in setting the target, as well as a decline in the average Medicare fees over the period 1991-92 (65).

Medicare payments for physician services have

also been growing more slowly in recent years under the VPS program than in previous years.

Growth in Medicare expenditures for all physician services was 3.3 percent lower in 1991 (final

data) and 5.9 percent lower in 1992 (preliminary

data) compared with historical trend growth rates

over the period 1986-89 ( 123).

PPRC cautions, however, that the recent trends

in Medicare physician expenditures, as well as

trends in volume growth rates that largely determine the patterns in physician expenditures, do

not yet lead to any firm conclusions about the effectiveness of VPS for controlling Medicare outlays for physicians’ services or volume growth. A

host of possible explanations account for the recent lower volume growth rates. These explanations include a possible return to the long-run

trend of declining rates of increase in volume temporarily interrupted by relatively large volume increases in response to payment rate reductions

legislated in 1987, 1989, and 1990and anticipated

fee adjustments under MFS; Medicare beneficiary

access problems; general trends in medical practice to reduce the volume of services; and physician response to the VPS incentives (124).

PPRC’S analyses did not allow them to directly

confirm or reject any of these possibilities for explaining recent trends in physician expenditures
Chapter 2 Applying Government Cost Controls I 63

(124). PPRC concluded that the absence of an appropriate comparison group and the effects of other policy changes that have occurred since

implementation of VPS make it impossible to

draw any definitive conclusions about the effectiveness of VPS for controlling Medicare physicians’ expenditures or volume growth (123).

Empirical evidence from

international experiences

Physician payment in Canada. Since 1971, by

which time all provinces had adopted the Federal

Medical Care Act covering physicians’ services,

every province has reimbursed physicians according to province-wide uniform, binding fee schedules established by direct bargaining between

professional physician associations and their respective provincial Ministries of Health (11).

Canada’s experience with fee schedules provides

useful information on the effectiveness of both

long-term and broadly based price controls.66

Based on an observational study of Canadian

and U.S. physician fees and expenditures for the

period 1971-85, Barer and colleagues found that

since 1971 physicians’ fees in all provinces have

risen less rapidly than general inflation in Canada

(i.e., the CPI), and in some provinces and/or periods have lagged well behind general inflation

(1 1). This is in marked contrast not only to the

U.S. pattern of consistent increases in inflationadjusted physician fees, but to Canada’s experience before 1971. Inflation-adjusted physician

fees in Canada fell by 15.9 percent between 1971

and 1985, while rising 15.6 percent in the United

States. Over the period 1960 to 1971, when Canadian physicians set their own fees, inflation-adjusted physician fees in Canada rose by 6.3

percent (11 ).

The Canadian experience with physician payment controls also illustrates some of the measurement issues described in box 2-4. One’s

conclusions about its effects in controlling physician expenditures can depend upon the measure

used. For example, Barer and colleagues found increasing divergence between the United States

and Canada in aggregate physician expenditures

between 1971 and 1985 using physician expenditures as a percentage of GDP as the measure (11).

In contrast, using a different measure (inflationadjusted physician expenditures per capita,

derived from the OECD datafiles), OTA found

that the divergence between Canada and the

United States remained quite stable between 1971

and 1985 (figure 2-7). 67

Nevertheless, both Barer’s and OTA’s analyses

show that Canada’s physician expenditures have

consistently remained below those of the United

States (figure 2-7). The OTA analysis of OECD

data suggests that, recently, Canada appears to

have been more successful than the United States

in reducing the average growth rate in physician

expenditures per capita (figure 2-7).

However, the firmness and comprehensiveness

with which fee and volume controls have been applied have varied across provinces and over time

within Canadian provinces and studies have

66 Son)e have argued that price controls” in the United States have had limited success kcause they have been aPPIied (~nlY over sh(~fl Periods, or have not applied to all payers.

67 ~e U.S.-Canada difference fc)und by Bmer and colleagues could have been the result of variations in the GDP (tie denonlinat(~r) or

physician expenditures (the numerator). In addition, differences between Barer and colleagues’ analysis and OTA’s based on OECD data could

be attributable in part to differences in physician expenditure data cited by Barer and c(~lleagues and the dala in the most current OECD datafiles

(l 20).
64 I Understanding Estimates of National Health Expenditures Under Health Reform

~W (Inflation-adjusted per capita dollars; 1985=100)

400

350

250

150

IWCA : U.S. dollarsa ~

becomes , ,

OA effective I

1968 : ~

/

/

Canadian doliarsa

+

/-

~ All provinces

I included in the

‘ FMCA, 1971

50

1960 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 91

KEY FMCA = Federal Medical Care Act (Canada).

a If Canadian per capita physician expenditure data were converted to U S dollars, the Canadian figures would be lower. On average, one would

divide the Canadian dollars by 1.23 in order to adjust for purchasing power parity, OTA did not make such a change, because such an adjustment

would introduce a distortion into the Canadian trend The point of the figure iS to show that the rate of Increase in total physician expenditures has

been different in Canada and the United States, particularly since 1986

SOURCE Organisation for Economic Co-operation and Development, 1993 (120) Full citation iS at the end of the report.

shown differences in the growth of physician ex- general practitioners and income targets for spependitures across the provinces (1 1,69,90).68 For cialists that began to take full effect in 1981 (69).

example, Hughes and colleagues’ examination of Hughes’s comparison of total and per capita

data for Quebec, Ontario, and British Columbia physician expenditures (both adjusted for inflafor 1975 and 1987 found that Quebec had the low- tion) in Quebec with those of British Columbia

est percentage increase (24.4 percent) in inflation- and Ontario69 led him to conclude that fee schedadjusted physician expenditures per capita ules were only successful when the provincial

between 1975 and 1987. Hughes suggested that, governments “could exercise the political will to

despite a rapid rise in the Quebec physician-to- respond to accelerated utilization with aggressive

population ratio, physician expenditures in Que- fee reductions, utilization controls, or both” (69).

bec were able to be kept in check in the later years According to Hughes, Quebec was most successof his analysis as a result of two factors: 1 ) holding ful in exercising such political will.

the fee schedule considerably behind inflation un- Physician payment in Germany. Physician paytil 1983, and to inflation in the period 1983-87; ment in Germany has been subject to different

and 2) a unique system of quarterly billing caps for

6E Genem]]y, he Pr{)vlnclal governments use one of three ways to recoup expenditures above a stated expendi~re target: reduce next Year’s

fee increase, temprari]y reduce fees for a set period, or discount current fees to counteract the anticipated size of the volume increase for the

year ( I I ,69,90). Until last year only a few provinces used caps.

@ Hughes found that, in British Columbia, t{~tal and percapita physician expenditures rose rapidly until 1983, but Were stabilized thereafter

by not allowing fee increases to keep up with inflation. Between 1985 and 1987, for example, British Columbia used expenditure limits that

triggered temporary fee reductions whenever the limits were exceeded. In contrast, in Ontario, the provincial government and the medical

association (negotiating on behalf of physicians in the province) had not been able to come to agreement on utilization and expenditure controls

between 1982 and 1987. Hughes found that Ontario showed the most dramatic increases in total and per capita physician expenditures as consequence of more generous increases in inflation-adjusted fees (69). Three measures of percentage change in physician expenditures between

1975 and 1987 showed Ontario to experience higher growth than the United States in the same period (69).
Chapter 2 Applying Government Cost Controls I 65

kinds of government intervention. In 1977-78,

Germany switched from paying physicians for

ambulatory services70 on the basis of fee controls

only, to a system of fee controls combined with

aggregate regional physician expenditure targets.

Then, in 1985-86, Germany switched from a system of aggregate spending targets to fee controls

combined with regional physician expenditure

caps (209).71

Sharp increases in the mandated health insurance payments through payroll deductions from

workers’ and retirees’ pay or monthly pensions

triggered an additional round of German health

care reforms in 1993 (180).72 Under the 1993 reforms, which are scheduled to be in effect for a

3-year period, total spending by sickness funds for

office-based physician services will not be permitted to grow faster than sickness fund revenues

(180).73’74 These approaches are described in

more detail below, as is the research on the effects

of the 1977-78 and 1985-86 policy changes.

The 1977-78 policy was based on fee schedules

combined with aggregate physician expenditure

targets for each region in Germany. These targets

were based on spending in the previous year, anticipated changes in service volume, and changes

in the wage base of sickness funds ( 180). When

physician billings exceeded the target, sickness

fund expenditures in the following year was to be

reduced.

In 1985-86 the method for paying ambulatory

physicians in Germany was again altered. The

method established can be understood by examining the main aspects of the process that determines

the amount of health care dollars allocated each

year for physician services (43,70,1 41 ,209). The

national health committee (Concerted Action in

Health Care) develops annual guidelines for how

much physician expenditures should increase. Regional sickness fund associations then negotiate

with regional physician associations to determine

the expenditure cap (i.e., aggregate budget) for

physician services in that region, based on the recommendations of the national health committee.

Then the sickness fund association and the physician association negotiate physician fees, based

on t he projected volume of services for t he coming

year, such that the aggregate budget will not be exceeded.75

70 Anlbtllatory scr~ ices ~~rc Prok l&~ in phjslclans’ offi~~s and do n(}t include physicians’ services prtwidui in :1 ht~spit:ll. In CJ~m~:~nY.

office-based ph} slcians are ~mtlnarlly m~t allt)w cd tt) pr{wide inpatient htmpital w-vices, and hospital-based physicians arc generally not allowed tt) proklde ambulatory care ( 141).

7 I ~15 sys[cnl of physl~lan payn]en( IS no( new [() Gcml~y, where it was the prevailing system in Germany fronl I ~~~ 1~~ ~h~ IIIId- 1960s.

The 1986 expcndlturc caps were to be tempmary, intended to keep spending under control during a period t)f other health rcf(~m~s (43).

72 T?K budget !( r) of flcc-based physic ]ans h’g inning in 1993 follows” a pattern similar to that pr{~duced \ t~luntarl Iy through pasi ncgotl -

atkms, the dctalls of the armingcrncnts arc rck iewed in GA()’s July 1993 reptwt ( 180). The diffmmce, how ever, is that the increase in phy ilclan

expend] turcs fr(~n~ year I(J year IS now strictly Ilrnitcd by [hc German gc~k cmnwrit, albeit tm a ten]pwar} (3-year) ha\ Is,

73 Sickness fund rc~ ~nucs depend (m k)[h the payroll tax rate and the wage level.

74 ]nlP)slt), )n of the ~[)~ ~mnlcnt.set caps WaS ~ccorllpan icd by several structural health care refom]s designed 1~~ funhcr r~du~~ e~~~ss utJ -

li]ati(~n as well as ngditws in the current system ( 180). These wt~uld address demographic changes, trends in major discasm, and the introduction of new mcdlcal techm)h)gws ( 1 W). Reforms specific [o the physician sect(w include establishing pr(~ccdures t{) ]denti fy and lrnp)sc firm

cial sanctl(ms (m physicians who excccd standards for drug prescribing, and procedures to align the supply of physicians and dcnt]sts with tlkcd

physlclan-to-p)pulatltm ratl(~s for each gct)graphlc area ( 180).

75 ~c reolona] slc~nc5s funds collect payroll [ales and tum the budgeted amount over to the regional physician ass(Klati(m. ‘l~c ph~ sl~lan @

assoclali(m distributes the budget to lndlwdual d(xt(ms (m the basis of each doctor’s billings, acc(mting {() (he fcc schcdulc. Phj SICIWIS arc paid

at the negt)tlatcd fee dun ng the first quarter. 1 f Ihe group of physicians subject to the rcgi(mal budget dcl Ivers n~t)re scm ICCS, {Jr rmjre c(~stl }

servIccs (i. e., services with hlghcr fees), causing t(}tal physician expenditures t{) exceed the first quarter’s share of the annual budget. fees arc

reduced during the sec{md quarter. Slrn]lar adjustments arc made during the third and f(mrth quarters, s() that the rcgrimal physlclan ass )C I ati(m budget IS met at the end of the year. I f the group of physicians delivers fewer services than expected, actual fees w III hc hlghcr than ncgt}-

tiatcd rates. In this w a}, the aggregate hudgct acts ;is a binding expenditure cap for physician ser~rces.
66 I Understanding Estimates of National Health Expenditures Under Health Reform

In summary, since the late 1970s, Germany has

seen a progression from fee controls combined

with regional expenditure targets, to fee controls

combined with regional expenditure caps, to fee

controls combined with national expenditure

caps. The 1993 reforms were intended to be temporary, and the German advisory board is to suggest alternative reforms by the end of 1994 (180).

Several studies have assessed the reforms of

1977-78, and, more tentatively, the 1985-86 reforms, and reported somewhat conflicting results

(43,72,176,180). For example, a 1991 study by

GAO indicated that the tougher budget controls

on physician spending introduced in 1977-78,

plus one year’s experience with the 1985-86 expenditure caps, together helped reduce inflationadjusted spending on physician services by as

much as 17 percent between 1977 and 1987,

compared with what expenditures were projected

to be under the previous price controls ( 176,1 80).

GAO also compared the effectiveness of the

regional expenditure targets (introduced in

1977-78) to the regional expenditure caps

(introduced in 1985-86).76 GAO reported that

caps appeared to be more effective than targets in

decreasing the rate of growth,77 although other

concomitant policy changes, and the short period

of time for which GAO had data on the caps

(1986-87) made it difficult for GAO to conclude

that the caps alone caused the relatively greater decline in growth rates beginning in 1986 (176).

Further, GAO’s analysis produced some apparently counterintuitive results.78

Subsequent OECD data on physician expenditure growth rates do not clearly show whether expenditure caps checked the rate of growth more

effectively than expenditure targets (120).79

Summary. In the United States, there has been

less experience with regulation of physician expenditures than of hospital expenditures and it

may be difficult to draw conclusions from the U.S.

experience. There was 1ittle research on the impact

of the Economic Stabilization Program on physician expenditures but the work that was done suggested that it had little effect. In 1989, Medicare

began to implement significant changes in Medicare physician payment, intended, in part, to control future expenditure growth by regulating both

fees and volume. It is too early to tell how these

controls have influenced physician expenditures

although future studies should be informative.

Other countries have had more experience with

controls on physician expenditures than has been

the case in the United States. Some research on the

experiences of Germany and Canada suggests that

these controls have been effective in constraining

spending on physician services.

All of the physician payment regulations reviewed evolved from a focus on physician fees to

76 GAO asse~s that allt~wable spending was not reduced when spending exceeded the target ( 180). However, another expefi, William GlaSer, asserted that when the expenditure targets were in effect, the federal government and the sickness funds imposed relatively small annual

increases in expenditures on the physicians’ associations (43). The associations in turn administered claims with member physicians such that

expenditure targets resembled the later, more strict expenditure caps. For example, in many regions, the sickness funds and physician associations agreed that if unpredicted increases in utilization and service intensity exceeded expenditure targets, the associations would pay discounted fees during the final months of the year (43).

77 Spending for physician semices showed 2 percent annual growth between 1985-86 and 1987, compared with 7 percent average ~nual

growth from 1977-78 to 1985-86 (176).

78 For exanlp[e, GAO’S re5ult5 for the effects Of targets and caps on physician spending in Germany indicate that increases in the Population

led to a decrease in physician expenditures, which wm.dd not generally be expected. A more important counterintuitive result was their finding

that their “point estimates indicate that with caps in place, increases in national income led to decreases in physician care spending rather than to

the moderation in spending increases that would be expected.” (176). GAO explained these findings as short-tetm effects of the caps and concluded that they would probably not continue ( 176).

79 OECD data indicate that the rate of growth between 1986 and 1990 (years of regional expenditure caps) Was S.6 percent, Oron]y slightly

lowerthan the annual growth rate in physician expenditures between 1978 and 1985 (5.8 percent) when expenditure targets were in effect ( 120).

M(weover, some year-to-year growth rates were larger during the period of expenditure caps than during the period of expenditure targets ( 120).
regulating both fees and the volume of service

(e.g., through expenditure caps and targets). Research showing that physicians respond to fee

controls by increasing volume (e.g.,Rizzo(137)),

as well as research showing that volume is a principal factor in driving up expenditures for physician services (123), suggests that controlling

volume may be important for reaching a satisfactory level of cost containment.

Whether physician expenditures controls will

result in cost-shifting to other payers (e.g., individual patients, private health insurers in the

United States) and spillover to other services will

depend on how they are implemented and whether

other payers or services are reimbursed at a higher

rate. These effects have not been well studied.

Although, the research reviewed in this chapter

does not detail the political issues involved in implementing regulations on physician payment, in

the past the imposition of fee and utilization controls has been the focus of contention between

payers and providers (69, 100).

I Findings and Policy Implications

Findings

This chapter examined assumptions made by analysts attempting to estimate the impact of various

types and levels of government cost controls on

national health expenditures in proposals that include such controls. Government cost controls

were defined as measures by which federal, state,

or local governments play a direct or indirect role

in financing and paying the facilities and providers through which health care services are delivered. The chapter then examined the empirical

research literature on previous attempts at government cost controls. Thus, this chapter set out to answer two questions:

1. Can any savings be attributed to government cost controls and, if so, is it possible to

quantify the savings resulting from a particular set of government cost controls?

The empirical evidence, while imperfect, suggests that government controls on the amount of

funds available for specific types of health care

services can reduce the growth rate in health care

spending for the targeted services.

Chapter 2 Applying Government Cost Controls I 67

Studies of experience from several countries

and states in the United States suggest that government cost controls with more “teeth” (i.e., that

put providers at more financial risk through strictly enforced expenditure caps) are, logically, more

successful than government cost controls with

less teeth (i.e., that set fee schedules and “targets”

rather than caps), However, there appears to be a

continuous search for new and more effective

ways to reduce the growth rate of health care expenditures.

It is difficult to draw overall conclusions about

the magnitude of potential savings from government cost controls. Several factors appear to be

important variables affecting success versus failure: the extent to which both prices and volume of

services are regulated, the regulator’s will and

ability to enforce controls, decisions about the

level and increase in the category of spending subject to the controls, supporting mechanisms designed to enforce the controls such as penalties

and rewards, the ability and incentives for providers to offset controls on one category of health expenditures or one payer by shifting services or

costs to other health care settings or payers, and

interaction with other aspects of the government

cost control program. In addition, success and

failure may be defined differently in different

studies and by different observers. Knowledge of

the ways in which success is defined and of the

factors that may contribute to or confound success

and failure is necessary to accurately estimate the

magnitude of the impact of a particular government cost control on NHE. In most cases, this information is difficult to obtain, model, and

synthesize.

2. Is empirical evidence available to support

the assignment of an effectiveness rating to a

set of government cost-control strategies?

As discussed earlier, an “effectiveness rating”

is sometimes “assigned” by analysts when a proposal provides for a limit on spending for a specific payer (e.g., federal or state government),

service (e.g., hospitals), or proposed combination

(e.g., a health plan). The rating depends on analysts’ judgment of how successful the array of

supporting government cost control mechanisms
68 I Understanding Estimates of National Health Expenditures Under Health Reform

(and other measures) in a reform proposal will be

in achieving the proposed statutory rate of growth

for the portion of NHE subject to the limit. Effectiveness ratings might be easier to assign if a reform proposal incorporated a package of

government cost controls identical to some other

system, and if there were documented evidence

about the effectiveness of that system in controlling health expenditures. However, none of the

current legislative proposals to reform the U.S.

health care system mirrors the cost-containment

mechanisms of any other country or previous U.S.

experience in their entirety. Moreover, the evidence for specific mechanisms similar to those

proposed may be nonexistent (e.g., premium limits), methodological y flawed (e.g., the plethora of

uncontrolled stud ies), or marginally generalizable

to current proposals (e.g., hospital budgeting in

France 80). Perhaps most important, previous

studies may report results in ways that do not allow judgments about whether specific mechanisms reached a specified target. This chapter

suggests, however, that analyses of previous experiences can provide some general guidance about

the direction of the effects of specific mechanisms.

Theoretically, the concept of effectiveness ratings may constitute an advance over all-or-nothing judgments about the effectiveness of proposed

policy changes. It may require analysts to think

more carefully about the possible effects of given

cost controls. However, given the paucity of data

and the difficulty in determining the effects of

complex systems, contemporary analysts appear

to have no choice than to assign effectiveness ratings using subjective judgment. In the policy arena a problem arises when the evidence or

uncertainty behind such ratings is neither provided nor explicitly acknowledged in an analysis.

Assigning overall numerical ratings of effectiveness, without providing further quantitative justification or sensitivity analyses, 81 may lend

analysts’ estimates an unwarranted aura of precision. In addition, it is not always clear what these

effectiveness ratings mean.

Policy Implications

Most analysts’ qualitative assumptions that government cost controls slow the rate of growth in

the sectors to which they have been applied seem

reasonable. However, because of the amount of

judgment required to make assumptions about

growth rates for the portion of NHE subject to expenditure limits under alternative reform proposals,

policymakers should be aware of the rationales for

particular ratings before ranking health reform proposals in terms of their relative savings.

In addition, because assumptions about exact

effectiveness ratings for expenditure 1imits cannot

be based entirely on the empirical literature but are

subjective, analysts may aid policy makers by providing a range of NHE estimates based on a range

of plausible alternative effectiveness ratings. In

addition, analysts should clearly document how

they arrive at their assumptions about the effectiveness of cost controls so that other people can

more easily independently assess those effectiveness ratings. This would allow outsiders who are

interpreting NHE estimates or proposing legislation to have a clearer idea of how analysts formed,

or would likel y form, an effectiveness rating for an

expenditure limit for a particular proposal.

Finally, as with other chapters in this report, policymakers and others may find it useful to think

beyond the issues raised by reviewing analysts’

assumptions about only the cost implications of

reform. Other considerations may not be amenable to modeling of NHE, but may be just as important to reform decisions.

In summary, the empirical evidence appears to

support the direction of most analysts projections

about potential savings from adopting a health

system that includes more extensive government

cost controls than are currently used in the U.S.

health care system, but no particular quantitative

rating of effectiveness is possible.

go Fr~nc~’s hosplt~] bu~ge[lng approach Is chosen as marginally general izable because it involves a system in which tw(~-thirds of the hmpitals are public, and ft)r which governments and French sickness fund representatives negotiate budgws indi~ldually with each ctwercd hospital.

8 I Sensltl},lty analyses provld~ an indlcatl(~n {~f the effect of variati{ms in analysts’ judgments (w m the avallab!e cvldcn~e.
Effects of

Managed

Competition

and HMO

Enrollment 3

M

any health reform bills before Congress are asserted to

reduce health care expenditures by introducing competition to the health care marketplace through “managed competition.” For example, the Health Security

plan press packet states that “reform will encourage competition—forcing costs down as health plans compete by offering

high-quality care at an affordable price” (207). Similarly, the

press conference statement for the Managed Competition Act of

1993 states that “[ifl costs are to be controlled, the government

must encourage the market to fundamentally restructure the way

health care is provided” ( 187). To validate these assertions, policymakers and others have looked, in part, to formal economic

analyses.

Alain Enthoven, one of the original architects of managed

competition, defines it as a "purchasing strategy to obtain maximum value for consumers and employers, using rules for competition derived from macroeconomic principles” (31). Under

managed competition “a sponsor” (either an employer, government entity, or purchasing cooperative), acting on behalf of a

large group of subscribers, structures and adjusts the market to

overcome attempts by insurers to avoid price competition (31).

Other elements of managed competition, such as limiting employer contributions to the cost of the lowest priced plan available, aim to increase consumers’ sensitivity to the price of health

insurance and to encourage more active shopping for health I

169
70 I Understanding Estimates of National Health Expenditures Under Health Reform

Specific features of the plans

General

feature

of the plans Health Security Act (H.R. 3600/S. 1757)

Health plan

purchasing

cooperatives

Risk--adjusted

payments to

insurers

Employer

contributions

tied to lower

priced plans

Standard banefit

package

Community

rating and open

enrollment

States must establish regional health alliances

that offer a choice of state-certified plans. Participation is mandatory for businesses with less than

5,000 employees and for individuals. Large employers may join regional alliances or form corporate alliances. A corporate alliance must offer to

participants at least three plans. These plans may

be certified, self-insured, or third-party plans,

Regional alliances adjust payments to insurers to

account for risk selection using a method established by the National Health Board.

Requires all employers to pay at least 80% of the

cost of the average priced plan in the regional

alliance area,

Requires a standard benefit package,

Health plans must have open enrollment and

community rating with specific rating procedures

to be established by the National Health Board,

Managed Competition Act of 1992

(H.R. 5936)

States establish health plan purchasing cooperates that offer a choice of accountable

health plans.b Employers with 1,000 employees

or less must offer, but not pay for, enrollment

opportunity in a health plan purchasing cooperative. Large employers do not have to offer

coverage through a health plan purchasing

cooperate. They must offer coverage from at

least one, but not necessarily more than one,

plan on their own. As with small employers,

there is no obligation to pay for coverage.

Each health plan purchasing cooperative

would pay accountable health plans risk-adjusted premiums based on a methodology to

be established by the National Health Board.

No requirement to Iimit employer contributions, although health plan expenses would be

tax deductible only up to the cost of the lowest priced accountable health plan in the area.

Requires a standard benefit package.

Accountable health plans must have open enrollment. Large employers may have closed

plans. All accountable health plans have modified community rating.

(continued)

plans. i In response to the greater price competi- managed competition proposals would establish

tion, health plans are expected to reduce health different regulations and entities to restructure the

care costs by using the tools of managed care.2 market for health insurance and health care. FeaAlthough there is general agreement on the tures common to the managed competition probroad outlines of managed competition, various posals include:

1 The term health pkm has no standard definition, and different insurer organizations and health reform proposals define it differently (e.g.,

the Health Security Act (S. 1757); the Managed Competition Act of 1993 (H.R. 3222); The Health Equity and Access Reform Today Act of 1993

(S. 1770)). The term health plan was coined, in part, because the term insurance plan does not indicate that many plans both provide insurance-that is they finance health care through premiums collected from employers and individuals—and are involved in the delivery of care

(e.g., through utilization management, by hiring providers, andor by providing settings). Thus, the term health plan is more general than the

term insurance p/an and includes a wide spectrum of private health care financing and delivery arrangements, ranging from traditional fee-forservice plans to traditional health maintenance organizations.

2 In some descriptions of managed competition, health plan purchasing cooperatives, or health alliances, are expected to aggressively negotiate and selectively contract with health plans, thus reducing health care expenditures. In other proposals, alliances or cooperatives must

contract with all qualified plans and are not allowed to negotiate.
Chapter 3 Effects of Managed Competition and HMO Enrollment I 71

General

features

of the plans

Changes in the

tax deductibility

of health

insurance

Reports on plan

quality

Specific features of the plans

Health Security Act (H.R. 3600/S. 1757)

Employer contributions for benefits and services

outside the scope of the standard package would

be taxed starting in 2004. The self-employed

may deduct 100% of the amount paid for health

Insurance, Iimited to the cost of the standard

benefit package

Requires each regional all lance to make available

information on prices, providers, and services,

The information requirements would be established by the National Health Board

Managed Competition Act of 1992

(H.R. 5936)

Employer payments for health plans above the

cost of the lowest priced accountable health

plan, as well as payments to a plan that is not

an accountable health plan, would be subject

to a 3470 excise tax. Individuals are allowed

tax deductions for premiums paid to an accountable health plan, but the individual and

the employer could together deduct no more

than the cost of the cheapest accountable

health plan,

Requires each health plan purchasing cooperative to analyze and distribute Information

on accountable health plans to eligible individuals and employers, including Information on

prices, health outcomes, and enrollee satisfaction,

aThis table IS meant to be illustrative and IS not a detailed analysis of the proposals.

bAccountable health plans are health insurance plans that must meet standards set by the National Health Board and offer a uniform set Of benefits

Two types of accountable health plans would exist closed plans which would be Iimited to employees of large firms and open plans which would be

required to accept all applicants

SOURCE Off Ice of Technology Assessment, 1994

■

m

health plan purchasing cooperatives or sponsors that offer several health insurance plans

and adjust payments to insurers to account for

risk selection,

incentives to limit employer contributions to

the price of the least expensive plans or a fixed

dollar amount,

standard benefit packages,

community rating3 with open enrollment4 and

limited underwriting and exclusions,

■ limits on the tax deductibility of employer contributions to employee health insurance, and

■ reports on health plan quality.

Proposals vary in how these aspects of managed competition would be implemented, whether they would be voluntary or mandatory, and how

extensively they would be applied. Table 3-1 describes the features in proposals that have been

3 Defini[]ons of cornmI~nIry J-a(Ing vary. Acc(miing to (me definition, it is a method of determining premium rates that is based on the all(xat](m of total costs w][hout regard to past claims experience. According to another definiti(m, it is an approach to pricing health insurance premiums that requires an insurer to accept all applicants at virtually the same rates. The second definition is the one used in this chapter and the onc

most applicable to the health reform proposals referred to in the chapter.

4 Open enrol/rnen( IS defined as a health insurance enrollment period during which coverage is offered regardless of health status and without med]ca] screening,
72 I Understanding Estimates of National Health Expenditures Under Health Reform

analyzed in terms of their effects on national

health expenditures (NHE).

Managed competition would attempt to change

the incentives faced by consumers, health plans,

and providers, and to create new organizations to

improve how health insurance markets function.

Because the impact of managed competition

hinges on how multiple actors in the health care

system would react and interact, modeling the dynamics of managed competition presents a daunting task. The second section of this chapter

describes the assumptions used in simulations of

the impact that managed competition proposals

would have on NHE. The analyses of proposals

reviewed in this chapter are summarized in table

3-2. Analysts’ key assumptions are summarized

in table 3-3.

The third section of the chapter describes research and experiences that form the basis for predicting how managed competition could

influence NHE.

ANALYSES OF REFORM PROPOSALS

Two proposals that contain features of managed

competition have been estimated in terms of their

impact on NHE: the Managed Competition Act of

1992 (H.R. 5936) and the Health Security Act

(H.R. 3600/S. 1757).5 Both the Congressional

Budget Office (CBO) and the Economic and Social Research Institute (ESRI) estimated the impact of the Managed Competition Act of 1992 on

NHE. CBO, Lewin-VHI, and the Clinton Administration estimated the impact of the Health Security Act on NHE. Lewin-VHI estimated the

impact of the Health Security Act both with and

without the premium limits. All of the analyses reviewed are relatively simple and use a few key ex -

plicit, quantitative assumptions. To estimate the

impact of the Managed Competition Act on NHE,

analysts posit that managed competition will

stimulate enrollment in health maintenance organizations (HMOS) and that this will result in a reduction in NHE. (See box 3-1 for a definition of

HMOS and managed care.) Analyses of the Managed Competition Act of 1992 make different assumptions as to whether managed competition

will influence the growth rate in national health

expenditures beyond the one-time impact of HMO

enrollment, although all analysts indicate this determination is extremely difficult and subject to

serious uncertainties.6

Analyses of the Health Security Act differ from

those of the Managed Competition Act in that the

key simplifying assumption is not savings from

HMOS, but rather the impact of government cost

containment. Assumptions about managed care

and managed competition are not explicitly used

in the quantitative analyses of the Health Security

Act.7

1 Analyses of Managed Competition

Proposals Without Government Cost

Controls

The Managed Competition Act of 1992 (H.R.

5936 in the 102d Congress) and of 1993 would require each state to establish a health plan purchasing cooperative through which individuals could

choose from several health plans. A national

health board would develop criteria for the specific types of plans, called accountable health plans.

Accountable health plans would be required to offer at least a minimum set of specified benefits;

charge all subscribers similar premiums (premiums could vary only by the geographic loca5 The Managed Competition Act o!’ 1992 (H.R. 5936) is very similar 10 the Managed C(mlpctition Act of 1993 (H.R. 3222/S. 1579). CBO

released an analysis of NHE under The Managed Competititm Act of 1993 ( 174) tw) law for inclusion in this report.

6 me Iem~ne.time impact means a shofl.term or linlite~ effect (m the level of health expenditures. Another interpretation of this aSSUrnPtion is that HMOS have a limited ability to contr(d the factors that are causing health care costs to increase. For example, analysts may implicitly

think that although HMOS can reduce inpatient admissions, HMOS have no ability to continue to reduce costs through other means.

7 Lewin-VHI d(ws use assumptions about managed care and managed c(mqxtition to estimate what NHE might be under the Health Security Act if implemented without the government cost controls.
Analysesa

Applying Encouraging Providing universal

government cost managed coverage to Reducing

controls competition uninsured people administrative costs

Proposal (chapter 2) (chapter 3) (chapter 4) (chapter 5)

American Health Security Act of 1993 (H, R 1200/S. 491)b

Comprehensive Health Reform Act of 1992 (H. R. 5919)C

Health Care Cost Containment and Reform Act

of 1992 (H. R. 5502)C

Health Security Act (H. R. 3600/S. 1757)b

Health Security Act (H. R. 3600/S. 1757)b, Lewin-VHl

scenario without government cost controls

Managed Competition Act of 1992 (HR. 5936)C

Managed competition plan, Starr version

National health plan, full savings scenario

National health plan, administrative savings scenario

Single-payer plan, CBO version with patient cost-sharing

Single-payer plan, CBO version without patient

cost-sharing

Single-payer plan, GAO version

Single-payer plan, Grumbach et al version

Single -payer plan, Lewin-VHl version

Single-payer plan, Woolhandler and Himmelstein version

Universal Health Care Act of 1991 (H R. 1300)C

-.

CBO

CBO

CBO

Clinton Administration

Lewin-VHl

CBO

— —

KEY CBO = U S Congress Congressional Budget Off Ice GAO U S General Accounting Office ESRI=

aFull citations for the analyses are in appendix B

bBill numbers are for 103d Congress

CBiII numbers are for 102d Congress

CBO

Clinton Administration

Lewin-VHl

Lewin-VHl

CBO

ESRI

CBO

CBO

CBO

Clinton Administration

Lewin-VHl

CBO

Sheils et al.

CBO

CBO

CBO

Economic and Social Research Institute

dAnalysis was conducted by Lewin-lCF The company was acquired and expanded in 1992. For purposes of this report all Lewin analyses are Identified as Lewin-VHl.

CBO

CBO

CBO

CBO

Clinton Administration

Lewin-VHl

CBO

ESRI

ESRI

CBO

GAO

Grumbach et al

Lewin-VHl d

Wool handler and

Himmelstein

CBO

cd

o

SOURCE Office of Technology Assessment, 1994 2
74 I Understanding Estimates of National Health Expenditures Under Health Reform

Key assumptions— —

Change in

Average growth rate of

Savings from Increase in savings NHE due to

enrollment in individuals’ Amount spent from managed

HMOS by year enrollment in in non-HMO HMOs

Analysisa ($ billions)b

competition

Proposal HMOS (millions)c plans (percent)d (percent)

The Health CBO No explicit No assumption No assumption No No assumption

Security Act estimates assumption

(HR. 3600/ Clinton No explicit No assumption No assumption No No assumption

s 1757) Administration estimates assumption

Lewin-VH l

- No explicit No assumption No assumption No No assumption

estimates assumption

The Health —Lewin-VHl 1998 $149 -All indivlduals not m $499.9 billion

—

3% No explicit

Security Act HMOS at the time of assumption

(H R 3600/ reform will join

S.1757), HMOS

Lewin-VHl

scenario

without government cost

controls

The Managed CBO 1995 1 50 94e $2,130 per enrollee 7.5% O% reduction

Competition 1996 166 9 6 2,300 per enrollee

Act of 1992 1997 1 6 9 9 2,500 per enrollee

(H R 5936) 1998 1.62 8 2,700 per enrollee

1999 1.77 8 2,950 per enrollee

2000 1.87 7,8 3,200 per enrollee

ESRI-f,g 1994 993 169 $3,916 per enrollee 15% 2% reduction

optimistic 1995 993 169

1996 9.93 169

1997 188 3.2

1998 188 3.2

ESRI -f,h 1994 247 6 3 $3,916 per enrollee 10% 1 % reduction

pessimistic 1995 247 63

1996 247 63

1997 247 6.3

1998 247 6 3

1999 031 0.8

2000 031 0 8

2001 031 0 8

2002 031 0 8

2003 031 0 8

(continued)
Chapter 3 Effects of Managed Competition and HMO Enrollment I 75

KEY: CBO - U S Congress, Congressional Budget Off Ice, ESRI = Economic and Social Research Institute HMO = health maintenance organization,

NHE = national health expenditures

a

Full citations of the analyses are in appendix B

bFigures exclude Medicaid The amount saved through managed care would be higher if Medicaid were included For example, under the Managed

Competition Act of 1992, CBO estimated that Medicaid enrollment in HMOs would increase from approximately 12 to 80 percent Savings from having

Medicaid enrollees join HMOS were assumed to be $6 billion from 1995102000

c

Flgures exclude Increased enrollment in HMOS by Medicaid recipients

dThis column only indicates what HMOs were assumed to save on average. Some analysts made different assumptions about how much particular

forms of HMOS would save (I e group- and staff-model HMOS versus indvidual practice associations) and how savings would differ for specific

types of services (e.g., inpatient versus outpatient care)

eCBO assumed 75 percent of the nonpoor, urban popuIation would join HMOS Increased enrollment iS phased in over 6 years

fThe savings from HMOS do not include its growth rate assumptions. ESRI assumed that the growth rate of health care expenditures would be reduced

under managed competition by 1 to 2 percent

YE SRI assumed an additional 75 percent of workers in small firms and an additional 50 percent of workers in large firms would join HMOS Increase in

enrollment iS phased in over 4 years

hESRI assumed an additional 50 percent of workers in small firms and an additional 25 percent of workers in large firms would joln HMOS. lncrease in

enrollment IS phased in over 10 years

SOURCE Office of Technology Assessment 1994

tire, family status, or age); and report on quality.

Accountable health plans would either be closed

plans that would be limited to groups of at least

1,000 people in the act of 1992 and 100 people in

the act of 1993, or open plans that would be required to have open enrollment and could not

deny coverage on the basis of poor health.

Changes in the tax code would be used to encourage the purchase of coverage through accountable health plans. Small employers, defined

as those with fewer than 1,001 employees in the

act of 1992 and fewer than 101 in the act of 1993,

would be required to enter into agreements with

health plan purchasing cooperatives that would allow employees coverage through accountable

health plans. Employer contributions to health insurance above the cost of the lowest priced accountable health plan, and payments for plans that

were not accountable health plans, would be

taxed.

Congressional Budget Office’s Analysis of

the Managed Competition Act

In a July 1993 publication, Estimates of Health

Care Proposals from the 102nd Congress, CBO

reported estimates of the impact of the Managed

Competition Act of 1992 (H.R. 5936) on NHE

(168).

CBO states that one of the principal ways that

the bill would reduce NHE from current levels

would be through increasing HMO enrollment

(168). CBO estimated savings from enrollment in

HMOS by privately insured individuals of $1.5

billion in 1995, and $10.1 billion in total from

1995 through 2000. It also estimated that enrollment in HMOS by Medicaid recipients would save

$6 billion over the same period (59).

To estimate the savings that would accrue from

HMO enrollment, CBO:

1.

2.

Estimated premiums of non-HMO plan for

1995 through 2000. It estimated that in 1995,

non-HMO plan premiums would be $2,130 per

enrollee (for those under age 65), and assumed

premiums would increase at the rate of baseline

per capita national health expenditures thereafter (59,1 68).

Estimated how many individuals would leave

their non-HMO plan and join an HMO. CBO

assumed that several factors would encourage

people to join HMOS. First, it assumed that

group- or staff-model HMOS would offer the

lowest priced plan in the area. Second, CBO as-
76 I Understanding Estimates of National Health Expenditures Under Health Reform
Chapter 3 Effects of Managed Competition and HMO Enrollment I 77

3. .

4.

sumed that H.R. 5936 would increase the difference in effective prices to the enrollee

between HMOS and non-HMO plans because

enrollees would have to pay for the cost of more

expensive plans with aftertax rather than pretax

income. In addition, CBO assumed that the

standardization of benefits would make the

price differences much more apparent. Due to

these factors, CBO predicted that three-quarters of the nonpoor, urban population would

leave their non-HMO plans and join an HMO

over the 6 years following the bill passage. In

total, CBO predicted that 51.8 million people

would switch from fee-for-service (FFS) plans

to HMOS between 1994 and 2000 (59). To support this assumption, CBO referred to the experience of California and Wisconsin-states

whose health insurance programs for public

employees have similarities to managed competition and who have a relatively high percentage of employees in HMOS.

Predicted that eventually 80 percent of the

Medicaid population would join HM0s.8

Assumed that group- and staff-model HMOs

would reduce personal health expenditures by

about 15 percent compared with traditional

private health insurance with higher patient

cost-sharing ( 168). However, CBO stated that

the evidence that other forms of HMOS can reduce costs is much less conclusive. Therefore,

CBO assumed that enrolling additional people

in various types of HMOS would, on average,

reduce their personal health expenditures by

7.5 percent. The CBO assumption of HMO

savings appears to be based on three studies, although it is not clear how the assumptions of a

15 or 7.5 percent savings were derived from the

studies (161, 163).9

Multiplied the 7.5 percent cost difference by the

estimated cost per covered person in non-HMO

plans and by the number of individuals expected to switch to an HMO plan to arrive at

HMO savings. For example, CBO assumed

that in 1991, 9.4 million people would switch

to HMO plans and that persons in non-HMO

plans would spend $2,130. Therefore CBO calculated that increased HMO enrollment by privately insured people would save $1.5 billion

in 1991, 10

Did not predict any reduction in the growth rate

of health expenditures under managed com--

petition, except for the estimated savings from

increased enrollment in HMOS. CBO states,

however, that “by restructuring the market for

health insurance . . . this version of managed

competition might produce additional savings

over a longer time period” ( 168). In other publications, CBO has written that “[although] the

overall effect [of managed competition] could

be to reduce national health expenditures in the

longer term, the available evidence does not

permit one to forecast changes in magnitude or

timing with any precision. Moreover, important behavioral responses to these changes have

not yet been quantified” (166).

Economic and Social Research Institute’s

Analysis of the Managed Competition Act

ESRI provides a second example of how the effects of managed competition have been estimated. In a May 1993 report, Manage d

8 Under H.R. 5936, the federal jywcmmcnt w [mid 5uhs IdIi’c the health Insurtincc premiums t~f pm pc{)plc. The subsidy wtmld c[wcr any

prern]um m~t paid by the Indlf Idual.s emph)jcr, up [c) the C(JSI of the low csl-prlcd acct}untahle health plan. CBO assun~cd thal this would increase HMO mrt)llrnent by those w ht} rcccl~ d Mdlcaid pr]{)r to Ihc act.

9 The CB() rev IW stmmxl tt) rely on st~nw of SIUCIICS (~f Hhlos u ]th the strt~ngcst nwthtxh)loglcs, Including th(m of Manning and ctJlkagues (98), Brown, 1987 ( 101 ), and Grecn[icld and ct)lleagucs. 1992 (46).

10 ]nfomlatlon” on ho~ [his Ca]cula[lon w aS nm.k and the spcc ific .’1 Inc items” were provIdd through personal ammmnicalions With CBO

staff (59).
78 I Understanding Estimates of National Health Expenditures Under Health Reform

Competition in Health Care: Can It Work?, the

authors analyze the impact on NHE of a managed

competition plan proposed by the Conservative

Democratic Forum and introduced in the 102d

Congress as H.R. 5936 (108).

Separate analyses were conducted using “optimistic” and “pessimistic” assumptions. Under an

optimistic scenario, ESRI estimated that increasing enrollment in HMOS would save approximately $10 billion in 1994. Under pessimistic

assumptions, it estimated savings of $2.5 billion

in 1994. To arrive at these figures (108,149),11

ESRI:

1.

2.

3.

4.

Estimated expenditures in non-HMO plans to

be $3,916 per enrollee in 1994 or approximately $403 billion in total.

Assumed the proposal would cause employees

to switch from non-HMO plans to HMOS. lt estimated that, before the reform, 10 percent of

employees in small firms and 28 percent of employees in large firms are enrolled in HMOS.

After reform, under the pessimistic scenario, it

assumed that 50 percent of workers in small

firms would switch to HMOS over a 5-year period, and that 25 percent of workers in large

firms would switch to HMOS over a 10-year period. This assumption translates into about 35.5

million workers joining HMOS over a 10-year

period. Under the optimistic scenario, ESRI assumed that 70 percent of workers in small firms

would switch to HMOS over a 3-year period,

and 50 percent of workers in large firms would

switch to HMOS over a 5-year period (for a total

of 57 million people over 5 years) .12

Assumed that some proportion of Medicaid enrollees would enroll in HMOS.

Assumed that HMOS offered savings of 15 percent over non-HMO plans under the optimistic

scenario, and 10 percent under the pessimistic

scenario.

5.

6.

Multiplied the number of people who would

switch to an HMO by the cost of a non-HMO

plan ($3,916) and by HMO savings (10 or 15

percent). This resulted in total savings of

approximately $34 billion over 5 years under

optimistic assumptions, and $14 billion over

10 years under pessimistic assumptions.

Assumed that there is “likely to be some deceleration in the growth of health care spending

over the long-run” due to other elements of

managed competition, such as price competition, administrative cost savings, and monop -

sonistic buying power ESRI posited that these

factors will reduce the growth rate of personal

health expenditures for the nonelderly population by 1 to 2 percentage points below the baseline (i.e., the growth rate under current law) by

2003. The growth rate assumption was applied

after taking into account the reductions in the

level of expenditures. This assumption contributed to ESRI’S considerably higher savings under managed competition than CBO’S. As with

other examples, ESRI’S growth rate assumption is not based on an explicit model of individual or organizational responses to managed

competition, or on any explicitly cited evidence, but rather represents the judgment of the

analysts. Indeed, the authors note that their assumptions are “highly speculative.”

Lewin-VHl’s Analysis of the Health Security

Act Without Government Cost Controls

As part of its overall analysis, Lewin-VHI estimated the impact of the Health Security Act on

NHE if the Health Security Act were implemented

without the premium limits (89). To arrive at its

estimate of savings from increased HMO enrollment under the Health Security Act (equal to

$14.9 billion in 1998), Lewin-VHI:

I I me ~eth(~S “Sed in tie EZR1 ~alySe5 t. e5timate saving5 under rnanagcd competition” were &SCribed in a published report and were

elaborated upon through personal communication with the authors.

I 2 EcJR]a55umed the managed co~petition” pr(psa]s would gk eMpk)yCKS Of Small fIITIIS mOK of an incentive t{) ‘nrO1l ‘n HMOS ‘d

theref(m more employees would be enrolled at a faster rate.
Chapter 3 Effects of Managed Competition and HMO Enrollment I 79

1. Determined how much money would be spent

on non-HMO plans in 1998 under current law.

The expenditure estimates were based on 1987

National Medical Expenditure Survey data

projected forward to 1998 using a variety of

sources, primarily the March 1992 Current

Population Survey and Health Care Financing

Administration’s (HCFA) health expenditure

projections. The market shares of HMOS and

non-HMO plans were projected to 1992 using

either data from the Group Health Association

of America or the Health Insurance Association

of America (it is unclear from the document

which was used). The analysis seemed to assume that the market share of HMOS would not

change from 1992 to 1998 under current

trends. 13 Lewin-VHI estimated that spending

by non-HMO plans for inpatient and outpatient

services and prescription drugs would be

$499.9 billion in 1998.

2. Assumed that “under managed competition,

people would be able to choose among a variety of plans with differing levels of effectiveness

in controlling utilization. ” Further it assumed

that “savings under these plans would be consistent with the overall average savings

achieved by the current mix of all types of

HMOS.”

3. Estimated the average difference in health service utilization between HMO and non-HMO

members. 14 For persons younger than age 65,

the estimate was based on a Lewin-VHI study

that used the 1989 National Health Interview

Survey Health Insurance Supplement data

(89). For persons 65 and older, the estimated

change in utilization was based on the Medicare Tax Equity and Fiscal Responsibility Act

(TEFRA) evaluation results (1 05).15

4. Determined the savings that would occur if all

individuals were enrolled in plans with savings

“consistent with the overall average savings

achieved by the current mix of all types of

HMOS. ” It did this by multiplying the average

percent difference in utilization in hospital

days and physician visits in HMOS compared

with non-HMO plans—found in a Lewin-VH1

study (for under 65) and the Medicare TEFRA

evaluation (for over 65)—by the estimated

baseline expenditure on care on inpatient and

outpatient care in non-HMO plans in 1998.

Note that there is an implicit assumption of a

linear, one-to-one relationship between

changes in utilization and expenditures. For example, Lewin-VHI assumes that every 1 percent decrease in hospital days will reduce

inpatient expenditures by 1 percent.

5. Calculated separate expenditure estimates by

location (metropolitan/nonmetropolitan), age

(under 65/over 64), inpatient/outpatient category, and for prescription drugs. For example,

inpatient care in metropolitan areas for persons

under 65 and not enrolled in HMOS was estimated to cost $188.9 billion in 1998 under current policy. This number was then multiplied

by 11.7 percent, the assumed percent reduction

in inpatient days in HMOS. The resulting figure, $22.1 billion, is the estimated reduction in

expenditures for inpatient care in metropolitan

areas in 1998 for individuals under age 65. Using an assumption about the percent increase in

physician visits in HMOS, the same method

was repeated for outpatient care provided in

metropolitan areas to individuals under age 65,

inpatient and outpatient care provided in nonmetropolitan areas to individuals under age 65,

inpatient and outpatient care provided to indi13 ]f tie market share of HM(Js grows over these years under current law, as II has in previous years, Lewin-VHI ‘S CStlnlated savings fr{~nl

managed care are overstated since some of the potential savings assumed frf)n~ HMOS would occur anyway, wi[h(wt refoml.

14 Utlllzatlon was memured in temls of hospital days and physician visits.

]s Under the aegis of the Tax Equl[y and Fiscal Responsibility Art, Me~icarC a]] OW,ed HMos [() enr(j]] Me(jicare beneficiaries and Mcdlcare

paid them a capitated payment in return for providing or arrang]ng for Iheir Medicare-covered services.
80 I Understanding Estimates of National Health Expenditures Under Health Reform

viduals age 65 and older, and for prescription

drugs. The totals were then added to arrive at

total savings from moving the entire non-HMO

population to HMOS, or $14.9 billion in 1998.

This is equal to approximately 3 percent of estimated expenditures in non-HMO plans. 16

In a section labeled “caveats” in an appendix to

the report, Lewin-VHI stated that: “[t]hese estimates are based upon observed experience in existing managed care environments. It is possible

that changes in the delivery system envisioned under the Health Security Act will result in substantially more managed care savings than estimated

here.”

I Analyses of Managed Competition

Proposals With Government Cost

Controls

The Health Security Act incorporates many features of Enthoven’s original concept of managed

competition. A key distinction, however, is that it

would impose a government-enforced limit on the

growth rate of premiums. The act and analysis of

the act are described in greater detail in chapter 2.

Congressional Budget Office’s Analysis of

the Health Security Act

The CBO analysis of the Health Security Act did

not make any explicit, quantitative assumptions

about savings from managed care or managed

competition (132, 172). Rather, CBO projected

NHE under the proposal by assuming expenditures would grow at either the legislated growth

rate for services covered by the act’s standard

benefit package; at the growth rate expected in the

federal programs for services covered by these

programs (e.g., Medicare and Medicaid); or at

baseline growth rates for services not covered under the comprehensive benefit package or other

government programs. 1 7

Clinton Administration’s Analysis of the

Health Security Act

Similar to CBO, the Administration’s analysis of

the Health Security Act did not make any explicit,

quantitative assumptions about savings from

managed care or managed competition (202).

Rather, like CBO, the Administration projected

NHE under the proposal by assuming that expenditures would grow at either the legislated growth

rate for services covered by the standard benefit

package; at the growth rate expected in the federal

programs for services covered by these programs

(e.g., Medicare and Medicaid); or at baseline

growth rates for services not covered under the

standard benefit package or other government

programs. The Administration explained that assumptions about savings from managed care and

managed competition entered implicitly into the

model. Specifically, the anticipated effects of

managed care and managed competition were

thought to support the assumption that the legislated growth rate for the premiums could be

achieved.

Lewin-VHl’s Analysis of the

Health Security Act

Consistent with CBO and the Administration, the

overall Lewin-VHI analysis of the Health Security Act (i.e., with government cost controls) did not

explicitly consider the impact of managed competition or HMO enrollment on NHE.

~ Summary

Estimates of managed competition proposals

without government cost controls are based on the

assumption that the proposals will increase HMO

enrollment. In turn, this is expected to reduce

health care costs. Analysts typically use several

calculations and assumptions to estimate the potential savings from encouraging individuals to

join HMOS.

16 Note that $ ] 4,9 bi]]ion is ~ ~rcent of $5OO bi]]it)n, estimated by Lewin-VH1 (o be totai expenditures in n(m-HMO plans in 1998 under

current law, or 1 percent of $1,394 billion (total pro~cted baseline NHE in 1998).

I T s= chapter 2 for more discussion on govemlnent COSt COntrO]S.
Chapter 3 Effects of Managed Competition and HMO Enrollment I 81

First, an estimate is made of non-HMO plan expenditures at the time of reform. For example, in

its estimate of the Health Security Act without

government cost controls, Lewin-VHI assumes

$500 billion would be spent on non-HMO plans in

1998. Second, a prediction is made of the number

of individuals who would switch to HMOS.

All of the analyses assume that increasing enrollment in HMOS can reduce utilization and that

this will translate into a one-time reduction in expenditures. Estimates of the savings from greater

HMO enrollment vary. For example, Lewin-VHI

calculated that, on average, moving individuals to

HMOS would save about 3 percent of health care

expenditures spent in traditional fee-for-service

plans. CBO puts the savings at 7.5 percent of expenditures, on average. ESRI figured the savings

for privately insured would come to 10 to 15 percent.

Lewin and CBO indicate that, in their judgment, managed competition might reduce the

growth rate of NHE. However, analysts cite a lack

of explicit research evidence to support this prediction and only ESRI makes a quantitative prediction of how managed competition might

reduce the growth rate in health expenditures after

taking into account savings from managed care

enrollment. Table 3-3 summarizes analysts’ estimates of savings from HMO enrollment and the

key assumptions used in the estimates of managed

competition.

The analyses of managed competition with

government cost controls do not use any explicit

assumptions about the effect of HMO enrollment

or managed competition on national health expenditures.

REVIEW OF THE EVIDENCE

Analysts of managed competition proposals make

assumptions about current expenditures in traditional FFS plans, the number of individuals that

will enroll in HMOS as a result of managed competition, and the difference in expenditures between FFS and HMO plans. One analysis

reviewed (ESRI) assumed that managed competition might lower the growth rate in heath care expenditures beyond the impact of HMO

enrollment, while another did not (CBO). 18 The

following section reviews the empirical evidence

on enrollment in HMOS, savings from HMOS, and

the impact of managed competition on the growth

rate in national health expenditures.

9 Will People Join HMOS?

In its analysis of the Managed Competition Act of

1992, CBO assumed that 75 percent of the nonpoor, urban population would join HMOS, or that

51.8 million people would switch from non-HMO

to HMO plans between 1995 and 2000. ESRI assumed that 50 to 70 percent of workers in small

firms and 25 to 50 percent of workers in large

firms would switch to HMOS (35.5 million to 57.3

million people). (Only CBO cites specific evidence in support of its enrollment estimate, based

on two health insurance programs for public employees in California and Wisconsin.)

Do these estimates imply a relatively large or

small shift in HMO market share as a result of

managed competition? In 1992, approximately 41

million individuals were enrolled in HMOS, making up approximately 19 percent of the insured

population and 16 percent of the total population
82 I Understanding Estimates of National Health Expenditures Under Health Reform

(49). 19 Figure 3-1 shows the percentage of insured

persons who might be enrolled in HMOS in the

year 2000 under current policy, assuming enrollment increases at 3 million enrollees per year.20 It

also shows the HMO market share under the Managed Competition Act as projected by various

analysists. 21 In general, analysts predict that a large

number of individuals will join HMOS compared

with current policy.

Three implicit assumptions underlie aggregate

assumptions about the size of HMO enrollment:22

m

●

8

Managed competition will create incentives for

plans to compete on price and HMOS will offer

the lowest priced plans.

Managed competition will create incentives for

consumers to switch to lower-priced plans.

Enough is known about insurance plan pricing

and the demand for insurance to make a quantitative prediction about HMO enrollment under

reform.

Research evidence supports the contention that

consumers are responsive to the price of health insurance (16,34,92,99, 106,113, 148,206). Thus increasing the effective price of insurance to

consumers is likely to encourage them to switch to

lower-priced plans. Moreover, research provides

some indication of the size of the price differentials between HMO and FFS plans needed to

cause consumers to switch from FFS to HMO

plans (33).

Whether HMOS will offer the lowest priced

plan, and more importantly the size of the price

differences between various plans that would result under managed competition, are less certain.

The prices charged by a particular health plan will

80

70

60

50

40

30

20

10

0

HMO market share of private insurance (percent)

+ Baseline (GHAA)

~ CBO

+ ESRI-optimistic

o ESRI-pessimistic

[ 1 I r 1 ) I I ) I , 1 I I I 1 I I 1

:

,

1

I

1980 82 84 86 88 90 92 94 96 98 2000

KEY: CBO = U S Congress, Congressional Budget Office, ESRI= Economic and Social Research Institute, GHAA= Group Health Association

of America, HMO = health maintenance organization

SOURCE Off Ice of Technology Assessment, 1994, based on data from

Group Health Association of America, prepared by S. Palsbo (49), J A

Meyer, S Snow-Carroll, and E Wicks (108), U S Congress, Congressional Budget Office (168)

depend on many factors, including the other characteristics of the plan (e.g., benefits offered and

patient cost-sharing); degree of consumers’ responsiveness to price differences; degree of consumers’ responsiveness to other characteristics of

the plan (e.g., access to specialists); how actively

consumers shop for plans; the number, type, and

prices of other plans offered; the market share of

19 GroupHealthAss(~lation of America inc]udes staff-, group-, and network-model HMOS and Individual practice Organizations (]pAs) In

its definition of HMOS (49).

20 According tO ~~ fn)m the Group Health ASS(~iariOn of America, enrollment in HMOS grew by approximately ~ mi]] i(m pawms annually from 1986 to 1992 (49).

21 Estimates were calculated by the Offlce of T’eChnO]~gy Assessment (OTA) based on analysts’ assumptions (WId OTA assumptions abOW

the baseline growth rate of HMO enrollment.

22 It shou]d & noted that none (If these ~SUrnpti(JnS are explicitly used, That is, no analyst used assumptions ahwt [he price elasticity of

demand for insurance or about price differentials in its models.
Chapter 3 Effects of Managed Competition and HMO Enrollment I 83

plans; health status of plan members; and the behavior of employers and health plan purchasing

cooperatives.

23 Because of the difficulty in determining consumer behavior and HMO pricing under reform, the magnitude of the shift to HMOS

that will occur under reform is difficult to predict.

Evidence from Public Employee

Insurance Programs Used as Examples

of Managed Competition

Some evidence on HMO enrollment maybe available from public employee insurance programs

that incorporate some of the features of the managed competition proposals. The CBO analysis

cites two state employer insurance programs—the

California Public Employees’ Retirement System

(CalPERS) and the insurance program for Wisconsin State employees—as the basis for its enrollment assumptions. Other state and federal

health insurance programs that are looked to as examples of managed competition include the Minnesota and Missouri State employee health

insurance programs and the Federal Employees

Health Benefits Program (FEHBP).24 However,

none of these programs incorporates all of the features of the managed competition proposals, complicating attempts to make inferences from them.

Table 3-4 shows HMO market share in 1993 for

the public employee insurance programs sometimes used as examples of managed competition.

The table also shows HMO market share for the

relevant State’s insured population as a whole. As

table 3-4 indicates, the market share of HMOS in

the state public employee insurance programs is

substantially higher than the HMO market share

in the relevant state overall, suggesting that the

programs resulted in a higher level of HMO enrollment than would have otherwise occurred.

Both the Wisconsin and Missouri programs experienced dramatic increases in HMO enrollment a

year after employer contributions were limited to

the lower cost plans and other changes were instituted. In the Missouri program, HMO market

share went from 35 to 65 percent in counties with

HMOS in 1 year. In the Wisconsin program, HMO

market share grew from 18 to 62 percent of active

employees (74). In contrast, the HMO market

share has remained relatively low in FEHBP.

Table 3-5 describes the elements of managed

competition proposals in relation to the characteristics of the state and federal employee insurance

programs. Features of managed competition proposals include the opportunity for individuals and

employers to join a health plan purchasing cooperative and to choose from several plans; community rating and open enrollment; standardized

benefits; employer contributions limited to the

cost of the lowest priced plan (or at least limited to

a fixed dollar contribution); limits on the tax deductibility of employer contributions (usually tied

to the lowest-cost plan); risk-adjusted insurance

plan payments; and reports on plan quality. The

state programs and FEHBP have some, but not all,

of these features. For example, all allow employees to choose from several plans offered

through a sponsor or “health alliance.” In addition, most plans are required to use community

rating, which means that every plan must accept

all applicants at virtually the same rate.

23 For example, such factors as how many plans employers or alliances offer and how aggressively they negotiate Premiums maY influence

HMO prices and HMO enrollment.

24 ~ls chapter reviews tie ~own publlshed research on programs similar to managed Compe(ltlon,and provides some additional inf(Jmlation that has not been previously published. It includes all of the State programs that are known to have several of the features of managed

competition proposals. There may be other examples that are claimed to be managed competition not reviewed in this chapter. For example,

many private employers have banded together to form insurance purchasing groups and even individual private employers may have adopted

some of the features of managed competition proposals. These models have to be considered carefully, however, since they may differ in significant ways from the reforms described in some managed competition proposals (e.g., they may not offer employees a choice of plans, they may

aggressively negotiate with plans, they may not limit employer contributions to the cost of the lowest priced plan). In any event, none have been

subjects of research published in peer-reviewed journals.
84 I Understanding Estimates of National Health Expenditures Under Health Reform

HMO market share HMO market share for HMO market share

for all participants participants in urban in the state (1992)

(percent) areas (percent) (Percent)b

CalPERSa

89 NA 41

FEHBP 25 NA na

Minnesota 55 86 33

Missouri 25 65 15

Wisconsin 84 NA 25

KEY: CalPERS = California Public Employees’ Retirement System, FEHBP = Federal Employees Health Benefits Program, HMO = health maintenance organization; NA = not available, na = not applicable

aFigures exclude retirees and out-of-state members. Otherwise, approximately 75 percent of CalPERS participants are

enrolled in HMOS if retirees and out-of-state members are included

bData are from the Group Health Association of America, Inc.

SOURCES Off Ice of Technology Assessment, 1994, based on information from R Cleverly (21 ), R. Gresch (48), Group

Health Association of America, Inc. (49), J. Klein (73), T. Korpady (76), R Meyer (109)

However, neither CalPERS nor FEHBP limits

employer contributions to the cost of the lowest

priced plan (although CalPERS is getting close

since it froze its contribution to 1991 levels). The

Wisconsin program limits contributions to 105

percent of the lowest-cost HMO premium available in the county of residence or to 90 percent of

the conventional insurance premium, whichever

is less. Only the Missouri and Minnesota programs limit employer contributions to the cost of

the lowest priced HMO or plan in a given area.

HMO enrollment might have been greater in CalPERS, FEHBP, and the Wisconsin program had

they limited employer contributions to the lowest

priced plan.

Another difference between the state and federal programs and one of the managed competition

proposals (i.e., H.R. 5936 in the 102d Congress) is

that state and federal employees automatically

participate in the “health alliance” or “health plan

purchasing cooperatives.” In contrast, under the

Managed Competition Act of 1992 only employees of small firms would be offered tax incentives to enroll in a health plan offered through a

health plan purchasing cooperative. Employees in

large firms would be offered tax incentives to enroll in certain types of certified plans (e.g., accountable health plans, which could not deny

coverage on the basis of health status and would

have to use community rating), but the employees

would not be encouraged to purchase plans

through a health plan purchasing cooperative or to

choose from several plans.25

Another problem in generalizing about HMO

enrollment based on these public programs is that

the relative prices of plans may differ under the

managed competition proposals from that experienced in the public employee programs. Unlike

the managed competition proposals, the public

employee programs have not paid plans risk-adjusted premiums (21,73,76). Currently, premiums

of plans in public insurance programs reviewed

above reflect differences in the characteristics of

plan members, “administrative efficiency,” and in

some cases, the benefits provided. Therefore,

HMOS may have lower premiums because of favorable risk-selection (that is, because they have a

healthier population of members) rather than because of greater efficiencies. For example, analy -

‘s The Health Security Act would require that large firms that form corporate alliances offer at least three plans.
Chapter 3 Effects of Managed Competition and HMO Enrollment I 85

Public employee Insurance programs with managed competition features

Features of managed competition CalPERS FEHBP Minnesota Missouri Wisconsin

proposals

Consumers can buy insurance through Yes Yes Yes Yes Yes

an “alliance” and can choose from

several plans.

Plans have community rating and open Yes Yes Yes Yes Yes

enrollment

Plans have standardized benefits Yesa No Yes Yes Yes b

Employers’ contribution IS Iimited to N o

c Nod Yese Yesf N o

g

cost of the lowest priced plan

Consumers are provided with lnforma- N o

h No Yes’ Noj

No

tion on the “quality” of competing

health plans

Tax deductibility of premiums IS No No No No No

Iimited

Plans are paid risk-adjusted No No No No

k No

payments.

KEY: CalPERS = California Public Employees Retirement System; FEHBP = Federal Employees Health Benefits Program

aThe CalPERS program required health maintenance organizations (HMOS) to provide a standard package of benefits in 1993

bIn 1994, the Wisconsin program required uniform benefits for all HMOS and preferred provider organizations but not for the fee-for-service plans.

Previously, the HMO plans had very similar benefits.

cPrior to 1991, CalPERS paid an amount equal to 100 percent of the weighted average premiums in the four largest plans (1 82) Since 1991, the State

agreed to set the contribution in collective bargaining agreements with State employee unions From 1991 through 1994, the State paid a fixed amount

frozen at the 1991 level (1 82)

dUnder FEHBP, the government contribution for each enrollee’s premium IS a fixed dollar amount equal to 60 percent of the average premiums in six

plans 1) the two government-wide plans (Blue Cross and Blue Shield and Aetna) 2) the two employee organizaton plans with the largest number of

enrollees, and 3) the two HMOS with the largest number of enrollees (48,1 83) The government contribution cannot exceed 75 percent of the cost of

any plan’s premium, and in most plans of the FEHBP, the government contribution iS at or near the maximum (48)

eThe employer contribution in the Minnesota program iS Iimlted to the lowest priced health plan in a given county (as of 1985)

The employer contribution in the Missouri program is Iimited to the lowest priced HMO in each service area (as of 1993).

9The employer contribution in the Wisconsin program equals 105 percent of the lowest priced HMO premium available in the county Of residence or 90

percent of the conventional Insurance premium, whichever IS less (as of 1983) Administrators of the program argue that this formula has sigmficantly

Impeded price competition and incentives to join the cheaper plans relative to a contribution of 100 percent of the lowest priced plan

hIn 1994 CalPERS wil require plans to submit data on a list of quality indicators. Beginning in 1995 published information on plan quality wlll be

distributed to members

‘The Minnesota program conducts surveys of enrollee satisfaction with providers and plans The results of these surveys are distributed in the form of

a brochure during open enrollment (73)

JThe Missourl program wiII distribute information on pIan quality

kThe Missouri program IS planning on paying plans risk-adlusted payments in the future (49).

SOURCE Off Ice of Technology Assessment 1994
86 I Understanding Estimates of National Health Expenditures Under Health Reform

ses of the FEHBP program have found that selection had a significant impact on the premiums

charged (126, 184). If plans are paid risk-adjusted

payments, their premiums may differ from those

currently charged in the public employee insurance programs and HMO enrollment could be reduced.

Finally, cities with public employee insurance

programs tend to have relatively high HMO penetration rates and may have experienced greater

and more rapid HMO enrollment than might occur

elsewhere (49). In other areas, providers may be

less willing to join an HMO and plans may have

more difficulty recruiting providers.

Summary

There is some research on consumers’ sensitivity

to the price of health insurance and the size of the

price differences that will lead them to join

HMOS. Moreover, evidence from state employee

insurance programs that have implemented some

aspects of the managed competition proposals indicate that these reforms could significantly increase enrollment in HMOS. However, given the

complexity of the reforms and the market for

health insurance, it is difficult to predict the magnitude of HMO enrollment.

1 Will Increasing HMO Enrollment

Save Money?

As stated previously, estimates of the potential reduction in NHE under managed competition proposals rest on three key premises, namely that:

● Individuals will leave non-HMO plans and join

HMOS.

~ After switching to HMOS, individuals will pay

less for health care than they would have if they

had remained in a non-HMO plan.

= HMOS will, or will not, have a limited one-time

effect on NHE.

The previous section examined the first premise that individuals would join HMOS. This next

and the following sections examine the premise

that NHE would decline after individuals joined

HMOS and whether this is likely to be a one-time

effect. This section reviews the evidence on savings from HMOS and from the public employee

insurance programs often deemed to exemplify

managed competition.

HMO and Non-HMO Expenditure Differences

The simulation models reviewed above made various assumptions about savings from HMOS. In

its analysis of the Managed Competition Act of

1992, CBO assumed that HMOS could save 7.5

percent of non-HMO expenditures, on average

(for all types of HMOS). CBO based this assumption on a CBO review of published studies, although exactly how the estimated savings were

derived is unclear. Lewin-VHI estimated that

HMO enrollment could save, on average, 3 percent of health expenditures in non-HMO plans,

based on its own analysis of utilization differences

using the National Health Interview Survey and

the National Medical Expenditure Survey (142).

ESRI assumed that HMOS could save 10 to 15

percent of non-HMO expenditures and stated that

its assumption was based on CBO’S review and

studies “conducted by Rand and others” (107).

Several comprehensive reviews have been

done of studies comparing utilization in HMOS to

FFS plans (62,95,104,110).26 The studies consistently show that enrollees in IPAs, and staff-, and

group-model HMOS have lower hospital utilization (i.e., hospital admission rates, length of stay,

days per enrollee) than FFS plans, although studZ6 of~ese four ~vlews, tie one by Miller and Luft was the most comprehensive. They selected studies that met the following criteria: tita

from 1980 forward, private insurance or Medicare enrollees, a comparison group, a reasonable attempt at statistical adjustment for noncomparable HMOS and indemnity insurance enrollees, and peer-reviewed findings (with two exceptions) (11 O). Andrews and Lake reviewed studies

published in the last 10 years. Most of the studies reviewed were published in refereed journals, although a small number of unpublished papers

were also included (104). Health Care Strategy Associates, Inc., reviewed studies conducted from 1985 to the present, found using literature

searches of computerized databases and other sources. They included only studies that contained “reasonable attempts to control for important

confounding variables such as selection bias” (62).
Chapter 3 Effects of Managed Competition and HMO Enrollment I 87

ies vary in the magnitude of the difference

(95,104,1 10). Comparisons of physician visits per

enrollee in HMOS and FFS plans produce mixed

results, with some studies showing HMO members make fewer visits and an equal number of

studies finding the opposite (11 O). Several studies

have found that HMOS use fewer expensive procedures, tests, and treatments (11 O).

Researchers continue to debate what aspects of

HMOS are necessary to reduce overall expenditures. For example, in their 1992 review, CBO

found insufficient evidence to assess the effect of

IPAs and stated that savings from IPAs are generally thought to be appreciably smaller than those

from staff- and group-model HMOS (161). However, some studies have found no difference between IPAs and group- and staff-model HMOS

(105), although the data are limited. Since IPAs

and other hybrid forms of managed care plans

make up the largest and fastest growing portion of

the HMO market (49,63), determining which features of health plans are necessary to control costs,

and which types of plans subscribers will join under reform, is critical.

Most observers assume that because HMO

members use fewer services than members of FFS

plans, they also have lower health care expenditures. However, the relationship between utilization and expenditures may not be straightforward.

HMOS could have lower expenses for patient care

but higher administrative expenses. Alternatively,

HMOS might reduce the number of hospital days

or physician visits, but increase the intensity of

services received during each day or visit. In their

recent review, Miller and Luft found almost no

studies on total expenses per enrollee by plan type

(110). In part the difficulty arises because, unlike

FFS plans, HMOS do not need to generate billed

or paid charges. In addition, data on plan members’ costs and characteristics are not reported.

Plan premiums are one source of data on expenditures. In fact, premium data indicate that HMOS

may, on average, have lower premiums than FFS

plans; however, unadjusted average premium levels are not good indicators of the savings that increased HMO enrollment might produce. This is

because the data are not adjusted for the level of

benefits, patient cost-sharing, and the population

covered (63,78). Moreover, they do not reflect the

out-of-pocket costs of services used but not covered by the plan.

As a result of the limited direct data on expenditures, researchers have to translate utilization differences between HMO and FFS plans into

expenditure differences.

Some studies that have measured utilization

differences between FFS and HMO plans have

imputed expenditures for those differences. For

example, data from the Rand Health Insurance

Experiment were used to impute an expenditure

difference of 28 percent between members of the

HMO and FFS plans without cost-sharing. Similarly, data from the Medicare TEFRA demonstration were used to impute an expenditure

difference of 10 percent between the HMOS and

the FFS plans. Neither of these calculations included administrative costs.

Other analysts have synthesized the findings

from a number of studies of utilization differences

between HMO and FFS plans and attempted to apply them more broadly to estimate the magnitude

of potential savings from increased HMO enrollment. These analysts confront a voluminous and

diverse literature on utilization differences by plan

type. The exercise of assigning a dollar value to

the utilization differences presents serious obstacles (62). The issues include:

m How the various studies on each type of service

should be synthesized. For example, should the

results be based on the “best” study or on a

combination of some or all of the studies?

~ Whether to assume that managed care affects

various health services differently (e.g., hospital, physician, dentist, home health).

● How to combine estimates for different types of

services. Should one assume that the differences are additive (e.g., that the reductions in

length of stay should be added to the reduction

in hospital admissions)? Should one assume

that there are offsetting effects (e.g., that a de-
88 I Understanding Estimates of National Health Expenditures Under Health Reform

crease in hospital days will be offset by an increase in outpatient or nursing home use)?

■ Whether to assume that utilization effects differ

by type of HMO (e.g., IPA, or group-, staff-,

and hybrid models).

● Whether to assume that the effect of managed

care differs by insurance status (e.g., private insurance, Medicare, Medicaid, and uninsured)

or by other population characteristics?

● What to assume about the intensity of services

received. Should every decrease in a unit of service be multiplied by the average cost of that

service, or should a unit of service be valued at

less or more than the average cost?

= Whether to assume that administrative costs,

including profits, are equivalent across HMOS

and FFS plans.

The problems of synthesizing the literature and

determining how much HMOS would save are illustrated by three studies of potential savings from

enrolling into HMOS all persons who are not already members of HMOS (62, 142,163). The estimates range from savings of 3.3 to 27.1 percent

(see table 3-6).27

In some ways, each of the three studies took a

relatively similar approach to estimate savings

from HMO enrollment. All estimated the extent to

which utilization differs between managed care

plans and traditional FFS plans. Then they applied

those utilization differences to expenditures for

persons not currently enrolled in HMOS. The

studies differ, however, in other important ways

that make them difficult to compare. All of the

analysts note that the estimates are very uncertain.

For example, CBO writes that its “illustrative estimates should be interpreted with considerable

caution. . . By necessity, the analysis incorporates

a large number of assumptions, but the data or evidence supporting them have many limitations”

(163). Similarly, Health Care Strategy Associates,

Inc., notes “[i]t is a tenuous exercise to distill a

simple savings number from a large and diverse

literature” (62).

Generalizing to Health Reform

Analysts who estimate savings from greater HMO

enrollment make the implicit assumption that past

evidence on savings will apply equally to the new

population of subscribers and providers that

might join HMOS under reform. However, HMO

enrollees may not be demographically representative of the population as a whole. For example,

they tend to be younger than members of FFS

plans (46, 102). Since older individuals tend to use

more health care services, increasing enrollment

of older individuals may increase savings from

HMOS if HMOS can reduce their health care expenditures for new, older, enrollees. Alternately, a

review found that service use by people who subsequently join an HMO is significantly lower than

use by those who choose to remain in a conventional plan (64). Therefore, savings for the new

subscribers could be lower than that found in studies based on the current population of subscribers

if part of HMO savings previously found are

derived from favorable selection.

As HMO enrollment increases, the number of

providers serving the plan must increase, and

these new providers may be less conservative in

their practices and less responsive to administrative controls than providers already in HMOS (3).

Alternatively, as HMO enrollment increases plans

may have more leverage with individual providers

and thus be able to generate more savings.

Finally, HMOS may be structured differently

under reform than they are now. For example, in

the Health Security Act, HMOS must offer an

“out-of-network” option. Since, there is little research on which aspects of managed care plans are

necessary to control costs, it is difficult to predict

with certainty how policies that alter the structure

27 ~e lwgest estimate is veV optimistic relative to other estimates. II is almost equivalent to the difference in expenditures imputed in the

Rand Health Insurance Experiment, which only looked at one, well-established group-model HMO.
Estimated savings

Total as proportion of

savings expenditures that

estimated could be affected

Authors ($ billions) (percent)

CBO, Aug. $51 to $64 108 to 135

1992 (1 990 dollars)

Health Care $81.4 271

Strategy (1 990 dolAssociates, Iars)

Inc., 1993

Enrollment

assumption

All individuals

enroll m group

or staff-model

HMOS

All individuals

enroll in HMOS.

No distinction IS

made by HMO

model type All

HMOS are

assumed to provide an equivaIent level of

savings,

Source for

assumptions

about HMO

savings

Literature

review

Literature

review

Key assumptions

Assumptions about how HMO

difference in utilization translate

into differences in expenditures

Multlply utilization differences by

expenditures Indicated in the national health accounts according to

category of Insurance status (i.e., ,

Medicare, Medicaid, privately ininsured) and by category of service

(e g , hospital, physicians, dentists)

Multiply utilization differences by

expenditures indicated in the national health accounts according to

category of insurance status (I e ,

Medicare, Medicaid, privately ininsured) and by category of service

(e g , hospital, physicians, dentists)

Assumptions regarding HMO savings

Staff and group-model HMOS reduce personal health expenditures by 15% for privately Insured persons and Medicare

beneficiaries

Staff- and group-model HMOS reduce personal health expenditures by 7.5%. for

Medilcaid beneficiaries

“Effective forms” of utilization review reduce personal health expenditures by

1 to 4% under traditional insurance and

Medicare

“Effective forms” of utilization review reduce personal health expenditures by

0.5 to 2%. under Medicaid

All forms of HMOS reduce hospital expenditures by 39.4% for privately insured

persons

All forms of HMOS Increase physician expenditures by 3.3% for privately insured

persons.

All forms of HMOS reduce expenditures on

dentists, other professionals, vision products and durables, and other personal

health care by 16% for privately insured

persons

All forms of HMOS increase expenditures

on home health and nursing home care

by 15%. for privately insured persons

All forms of HMOS reduce expenditures on

drugs and medical nondurable by 757.

for privately insured persons

HMOS increase costs to Medicare by 5.7%.

HMOS decrease costs to Medicaid by 7. 5%.

—

cd

o

(continued)
co

o

Total

savings

estimated

Authors ($ billions)

Lewin-VHl, $342

Mar 18, (1 994 dol1993 Iars)

Estimated savings

as proportion of

expenditures that

could be affected

(percent)

3 3

Enrollment

assumption

Individuals in

metropolitan

areas enroll in

group-model

HMOS. lndividuals in nonmetropolitan areas

enroll in IPAmodel HMOS.

Source for

assumptions

about HMO

savings

Lewin-VHl

econometric

analysis of National Health

Interview

Survey

Key assumptions

Assumptions about how HMO

difference in utilization translate

into differences in expenditures

Multiply utilization differences by

expenditures Indicated in the 1987

National Medical Expenditure Survey aged to 1994. Divide expenditures into categories according to

whether metropolitan or nonmetropolitan, inpatient or outpatient, and

over or under age 65, and by type

of service (e g., prescription

drugs)

—

Assumptions regarding HMO savings

Group-model HMOS reduce hospital days

by 19.1% and increase outpatient visits

by 6.6% for privately insured persons

IPA-model HMOS reduce hospital days by

69% and increase outpatient visits by

9.9% for privately insured persons.

All forms of HMOS reduce hospital admissions by 16% for Medicare beneficiaries.

All forms of HMOS increase physician services by 12% for Medicare beneficiaries,

KEY: IPA = individual practice association

aThese estimates were calculated independently by each analyst. The estimates have not been incorporated into any of the legislative proposals examined by OTA.

SOURCE Off Ice of Technology Assessment, 1994; based on sources shown. Full citations can be found in the list of references at the end of this report

o
Chapter 3 Effects of Managed Competition and HMO Enrollment I191

of MOS will affect their ability to reduce expenditures (104).

Summary

Although a substantial amount of research points

to lower utilization in HMOS, no research has directly measured total per capita expenditures for

demographically similar members of HMO and

FFS plans. Using the research on utilization differences by plan type to estimate expenditure differences between HMOS and FFS plans raises

thorny issues and requires a number of assumptions. Given the uncertainties raised by using the

incomplete research on HMO and FFS plans, future analyses of managed competition might be

improved by using a range of probable savings

from HMOS. However, efforts to find an appropriate range of savings confront difficulties similar to

those encountered in developing a point estimate.

A simple approach is to base the range of estimated savings on the assumptions used in the simulation model analyses—that is, that HMO plans

can save 3 to 15 percent relative to non-HMO

plans. Although this range is somewhat ad hoc, it

is relatively wide and thus could indicate the uncertainty that surrounds estimates of HMO savings.

1 Will Managed Competition Have a

Continuing Impact on the Growth Rate

of National Health Expenditures?

Some of the analyses reviewed assume that managed competition will result in one-time or limited

savings. This implies that although greater enrollment in HMOS will reduce the level of health care

spending, once these savings are achieved, costs

will grow at the same rate as in current FFS plans.

One-time savings might occur, for example, if

HMOS reduced hospital admissions compared

with FFS plans, but adopted new technologies and

procedures at the same rate as FFS plans. Consequently, in later years hospital costs would grow at

the same rate in both types of plans.28

Proponents of managed competition assert that

the growth rate in national health expenditures

will slow over time as consumers choose plans

based on price and quality, and as health plans

compete for enrollees by offering the best care at

the lowest price. None of the estimating approaches OTA reviewed explicitly models this

process; rather the analysts simply offer a judgment as to whether the process would succeed. Le -

win-VHI and CBO indicate that managed

competition might reduce the growth rate of NHE,

although CBO notes that the magnitude and timing of any decreases are highly uncertain. ESRI

assumes that managed competition would reduce

the growth in NHE by 1 to 2 percent, although it

called this assumption speculative. In general, as

the following section indicates, very little research has been done to explore the question of

whether HMOS or managed competition is likely

to substantially reduce the growth rate in health

care expenditures.

There are only two peer-reviewed studies

comparing the growth rate in spending for HMO

and FFS plans. Both used data collected prior to

1982, before the widespread growth in HMOS and

other forms of managed care. One of the studies

(1 19) found no difference in the growth rate of

HMO premiums and premiums in conventional

plans. The other study found very weak and mixed

evidence of differences (94).

Recent employer health insurance surveys provide some weak and preliminary indication that

HMOS may have experienced a lower rate of premium increases than conventional FFS plans

(38,41,1 10,1 81). These data must be interpreted

cautiously, however. Premium information has

only been collected by benefits consulting firms

and the samples have been relatively small and

may not be representative. Moreover, higher

28 One.time ~aving~ should not& confi~ with ~ne-yea~’~ savings. Forexarnple, if expanding the market share of HM()~ r~du~es costs bY

$10 billion in 1 year, then savings over 5 years would be over $50 billion. However. the assumption of (me-time S:IJ ings Implies tha{ plans

cannot continuously or significantly limit factors that are causing health care costs to rise substantially each > car.
92 I Understanding Estimates of National Health Expenditures Under Health Reform

growth rates of FFS plan premiums might be due

to an increase in benefits or to a change in the population mix within different types of plans. Overall, a much more careful analysis of premiums by

type of plan needs to be completed before any conclusions can be drawn about the differential

growth rate of premiums.

Some studies have examined how the growth

of health care costs is influenced by HMOS and

competition by comparing the rate of growth of

total health care expenditures in markets with

greater HMO enrollment to the growth rate in

markets with less HMO enrollment.29

Empirical studies based on data from before

1985 consistently have failed to find an association between HMO enrollment and either average

hospital costs per admission or average health care

costs per capita (11 O). However, a study that used

data from private non-HMO-plan hospitals in

California for 1983-88 concluded that a 10 percent

increase in HMO market penetration lead to a 9.4

percent lower increase in total hospital costs per

admission over the 6-year period (138). However,

overall hospital costs per admission grew by 74.5

percent over the same period (138).

Another source of evidence about the impact of

managed competition on the growth rate of national health expenditures might come from programs that have implemented some of the reforms

proposed under managed competition. Unfortunately, little evidence from such programs currently exists (1,3 1,1 66). The most commonly

cited examples are the state employee insurance

programs discussed above—including those in

California, Minnesota, and Wisconsin—and the

FEHBP. The experiences of these programs, in

terms of their growth rate of health expenditures,

might provide some basis for predicting the effects of managed competition.

A General Accounting Office (GAO) study of

CalPERS found that for contract years 1989

through 1991, the average CalPERS premium

grew by 16.7 percent annually, compared with increases of 15.3 percent per year reported by employers nationally (182). For contract year 1992,

CalPERS negotiated premiums that increased by

an average of 6.1 percent compared with a 10.1

percent increase in employer premiums nationally. For the 1993 contract year, CalPERS negotiated rate increases averaging 1.4 percent,

compared with 8 percent for other employers.30

For contract year 1994, CalPERS negotiated an

overall rate change of -1.1 percent (21).

GAO wrote that:

. . . several factors contributed to CalPERS recent success in negotiating health insurance

rates: 1 ) a budget crisis led the state of California

to freeze its premium contribution in 1992; 2)

CalPERS began exercising its purchasing power

by negotiating more aggressively, for example,

asking HMOS not to increase their rates [e.g.,

CalPERS froze enrollment in the plan with the

largest market share when the plan refused to

hold down its premiums]; and 3) CalPERS

introduced a standard benefit package for

HMOS in 1993 that requires patient copayments

for certain health services, thereby allowing

some plans to restrain the growth in premiums.

Drawing conclusions based on the CalPERS

experience is difficult. There are a number of possible explanations for the lower premium increases over the last 3 years, including: greater

patient cost-sharing, tougher negotiations, and a

standardized benefit package. It is not clear

whether the success over the past 3 years will continue, nor is it clear whether the experience would

be recreated under the managed competition proposals. For example, under most managed competition proposals, the extent to which health

alliances would have the desire or ability to

aggressively negotiate premiums are either not

clear or are limited.

29 Analysts have questioned whether HMOS may reduce health care ct~sts ft~r their members but leave tolal, system-level health care expenditures unchanged (e.g., because of cost-shifting). These studies address the issue of cost-shifting by examining tt~tal expenditures.

~~ CalpERS Premiunl increases were also below those for’ other employers in California for 1992 and 1 ~~.
Chapter 3 Effects of Managed Competition and HMO Enrollment I 93

Percent increase in premiums 30

–- Wisconsin

20-‘“

United States

lo-‘-

\

\

L_

0

1983-84b 1984-85 1985-86 1986-87 1987-88 1988-89 1989-90 199G91 1991-92 1992-93

a Wlsconsm Employees Health Insurance Program

D Indicates the year the program started

SOURCES T Korpady (76), KPMG Peat Marwck (77), KPMG Peat Marwck (78), C B Sullwan and T Rice (153), Congressional Research Serwce (1 84)

A Congressional Research Service (CRS)

study of FEHBP for the period 1980 to 1989 found

that premiums rose by 12 percent, compared with

14 percent nationwide (1 84). The CRS attributed

much of the difference to a 1982 benefit reduction

mandated by the Office of Personnel Management. It also noted that a reduction in reserves in

1986 reduced premiums. A more recent analysis

also compared the growth rate of premiums in the

FEHBP for the period 1980 to 1990 (37). It found

that total premiums grew by 9 percent a year in

FEHBP and at around 12 percent per year for private employers nationwide.

Figures 3-2 and 3-3 show the rate of increase in

premiums in the Wisconsin and Minnesota state

employee insurance programs, respectively,

compared with the rate of increase nationally.

Wisconsin implemented features of managed

competition in 1983 (see table 3-5). Over the period 1984 to 1993, premiums rose an average of

approximately 10 percent a year in the Wisconsin

state employee program as a whole (75). Nationally, premiums rose an average of 11 percent per

year (39,184).31 This could be interpreted as evidence that managed competition may reduce the

growth rate in premiums slightly. However, premium increases have been cyclical (40,42) and

therefore the time period of comparison matters

greatly. When compared for the period 1985 to

1993, premiums rose 10 percent a year nationally,

and 11 percent in Wisconsin. Thus, there does not

appear to be convincing evidence of any difference in the growth rate of premiums.

J I me data from Ga&} (39) is from a Pers(ma] c(mlnmnicati(m. He derived natitmal premium growth rates using data from the Depafiment

of Labor’s Bureau of Lahor Statistics, Hay/Huggins, the Health Insurance Assoeiati(m of America (HIAA), and KPMG Peat Manvick. The

Congressional Research Service (CRS) data were for the period 1984-88 and rep~rted in a Committee Report ( 184). Data for later years came

from HIAA and KPMG Peat MarWick.
94 I Understanding Estimates of National Health Expenditures Under Health Reform

Percent increase in premiums

50

40

30

20

10

0

[“A” . . . . . . +—Minnesota

- -

United States~~/ -—

10’

~w----= =--=

I

1983-84 1984-85 198&86b 1986-87 1987-88 1988-89 1989-90b 199091 1991-92 1992-93 1993-94

a Minnesota Employee Health Insurance Program

b Indicates the year the program started It IS not clear whether the Minnesota program started In 19t35 or 1989

SOURCES J Kleln (73), KPMG Peat Marwlck (77), KPMG Peat Marwlck (78), C B Sullvan and T Rice (153), Congressional Research Service (184)

Similarly, there is evidence that the Minnesota

program did not reduce the growth rate in premiums, although different interpretations of the

evidence lead to different conclusions (73). The

State of Minnesota Employee Group Insurance

Program implemented aspects of managed competition beginning in 1985. From 1985 through

1993, premiums grew by approximately 10 percent a year in the nation and in the Minnesota program. From 1986 through 1993, premiums grew

by approximately 12 to 13 percent a year in the nation and by approximately 12 percent in the Minnesota program. Administrators of the Minnesota

program argue that the program really did not get

going until 1990 and therefore premiums should

be compared beginning in 1989, not 1985. Before

1989, the FFS plan had the lowest cost. In 1989,

the FFS plan raised premiums substantially, in

part to makeup for very low premiums in previous

years. At that point the viability of the FFS plan

seemed questionable and it was subsequently reorganized as a preferred provider organization

(PPO). The premium increases from 1989 to 1993

in the Minnesota program have remained below

the national average.

Administrators of the Minnesota program review health plans’ rates and negotiate with plans

over their premiums. Administrators of the program describe this process as an active review and

negotiation process and explain that they will

challenge rates that seem excessive. Moreover,

administrators use the review process as a way to

discover causes of cost increases and to develop

responses (e.g., an increase in utilization of chiropractic services might cause administrators to negotiate a change in benefits or to encourage greater

controls on chiropractic services). The administrators state, however, that negotiations are not

heavy-handed in the sense that rate increases are

dictated with the threat of discontinuing plans or

freezing enrollment. The influence that this process has had on rate increases, as opposed to the

other aspects of the program, is not clear (19).

As discussed in the previous section, although

the experiences of these programs may provide
Chapter 3 Effects of Managed Competition and HMO Enrollment I 95

useful lessons, generalizing from these programs

must be done cautiously. Potentially important

differences between the programs and the reform

proposals—such as risk-adjusted payments and

the ability to negotiate with plans—may limit

their generalizability. Moreover, the results to date

are subject to different interpretations as to what

actually caused or prevented the program from

having an impact on health expenditures. For example, simple observations leave open the question of whether consumer choice, premium review

and regulation, a change in benefits, or some other

factor influenced health care expenditures.

Summary

An important question is whether savings from increased HMO enrollment can be sustained over

time or whether they reflect a “one-time” effect.

There are limited data to address this question.

There are on] y two relative] y old peer-reviewed

studies of differential growth rates in costs between HMOS and FFS plans. Premium comparisons by private consulting firms do not control for

important differences between plans.

However, more data may be forthcoming from

studies examining the effect of HMO market penetration on health care costs and from studies on

programs with elements of managed competition.

FINDINGS AND POLICY IMPLICATIONS

Quantitative predictions of the impact of proposed

managed competition plans on NHE have been

based on a relatively simple framework. The three

critical assumptions are that: 1) managed competition will increase enrollment in HMOS, 2)

HMOS will reduce the health expenditures of

those new enrollees, and 3) managed competition

will, or will not, reduce the growth rate in NHE beyond the one-time impact of increased HMO enrollment. It is important to understand that this

framework is a highly simplified model of a very

complex market proposal.

The review of the research supporting the three

key assumptions found that although evidence exists on which to base HMO enrollment assumptions, there are still uncertainties that make this

prediction difficult. Evidence indicates that consumers are responsive to the price of insurance

and will switch to lower priced plans, although it

is difficult to foresee what choices they will face

under reform. State and federal employee health

insurance programs indicate that as many as 90

percent of employees may join HMOS and these

programs may serve as examples of what will occur under health reform. However, the population,

location, and elements of these programs may

limit the extent to which they are appropriate

models for managed competition. In the absence

of empirical evidence, simulations that attempt to

be evidence-based should probably use a relatively wide range of enrollment assumptions.

A number of studies have found that HMO enrollees use fewer of some types of services than individuals in FFS plans, suggesting that HMOS

may reduce the health expenditures of those in

HMOS. Yet no direct evidence exists on per capita

expenditures by plan type. To generate savings estimates, analysts impute expenditure differences

from the large and diverse literature on HMO and

FFS utilization differences. The process of imputing expenditures requires a number of assumptions that influence the size of the estimated

savings. The difficulties inherent in this process

have not been explicitly recognized in the simulation models reviewed. The analyses were either

based on one study or referenced a few more rigorous studies but did not explain how the studies

were used to estimate savings from greater HMO

enrollment. Future estimates might better reflect

the degree of uncertainty about HMO savings if

they used alternative and explicit assumptions to

synthesize the research literature. In the absence

of such a synthesis, using a range of 3 to 15 percent

savings would reflect the range of assumptions

used in the simulation models reviewed and

would indicate that there is considerable uncertainty about HMO savings.

At this time there is almost no direct empirical

evidence on which to base predictions as to whether managed competition is likely to reduce the

growth rate in national health expenditures beyond a “one-time” impact. This is because very

little data exist on expenditures by plan type and
96 I Understanding Estimates of National Health Expenditures Under Health Reform

very little recent research has been done on the issue of differences in expenditures by plan type

over time.

Managed competition would rely largely on the

private sector to allocate resources. For example,

proponents of the concept have written that “[i]n

an environment of managed competition, doctors,

hospitals, and health plan administrators would

figure out how many resources are needed to take

good care of an enrolled population” (81). Moreover, proponents have explained that the “primary

justification for private insurance is the hypothesis that a health care delivery system in which

competing health plans vie for patients will cause

physicians and hospitals to make better decisions

regarding resource consumption than would a system in which the public sector makes direct payments to providers” (81). Because the market for

health care and health insurance is so complex,

and involves the decisions of multiple actors, it is

extremely difficult to predict how NHE would be

affected. For example, will providers and plans be

willing to forego the latest technology to contain

costs or will new, less expensive technology be invented? Will consumers continue to choose less

expensive plans knowing that their choice may result in longer waits for procedures or appointments, less choice of providers, older

technologies, lower-paid providers, and less investment in capital improvements, or will new efficiencies limit the necessity of these tradeoffs?

How will health care providers react if health

plans and health plan purchasers attempt to substantially curtail their incomes? These questions

are not addressed within the relatively simple

framework used to estimate NHE under managed

competition reforms.
Effects of

Providing

Insurance to

Uninsured

People 4

w

ith national health expenditures (NHE) rising rapidly,

many policy makers fear the cost implications of reform

proposals that would extend coverage to the estimated

37 to 38 million uninsured Americans. Thus, new

health expenditures by or on behalf of those who otherwise would

be uninsured are perceived as an important element of reforming

the nation’s health care system. Analysts and policymakers come

to different conclusions about the likely cost of covering this segment of the population. This chapter examines the assumptions

underlying estimates of the costs of covering uninsured people.

The analyses reviewed are summarized in table 4-1.

The first part of this chapter briefly discusses the different approaches various reform proposals take to provide coverage to

uninsured people. Then it examines the different assumptions

analysts make for estimating the incremental and total costs of

those provisions. The third section compares approaches taken in

analyses of reform proposals with methods and findings of recent

studies about utilization and expenditure differences between insured and uninsured people (e.g., Long and Marquis (91 ); Spillman (151)). The final section compares the results of these studies

with the results of analyses.

The chapter’s focus is on analyses of proposals that would provide for universal coverage by a specific date (e.g., the American

Health Security Act of 1993 (H.R. 1200/S. 491), other singlepayer, tax-financed proposals, and the Health Security Act of

1993 (H.R. 3600/S. 1757)). Some attention is given to analyses of

proposals that would provide coverage gradually (e.g., H.R.

5502, H.R. 5919, and H.R. 5936 in the 102d Congress), although

there is typically less information on the methods and results of

these analyses than for the universal coverage proposals. I 97
Analysesa

Applying Encouraging Providing universal

government cost managed coverage to Reducing

controls competition uninsured people administrative costs

Proposal (chapter 2) (chapter 3) (chapter 4) (chapter 5)

American Health Security Act of 1993 (H.R. 1200/S. 491)b

Comprehensive Health Reform Act of 1992 (H.R. 5919)C

Health Care Cost Containment and Reform Act of 1992

(H.R. 5502)C

Health Security Act (H. R. 3600/S. 1757)b

Health Security Act (H.R. 3600/S. 1757)b, Lewin-VHl

scenario without government cost controls

Managed Competition Act of 1992 (H.R. 5936)C

Managed competition plan, Starr version

National health plan, full savings scenario

National health plan, administrative savings scenario

Single-payer plan, CBO version with patient cost-sharing

Single-payer plan, CBO version without patient

cost-sharing

Single-payer plan, GAO version

Single-payer pIan, Grumbach et al. version

Single-payer plan, Lewin-VHl version

Single-payer plan, Woolhandler and Himmelstein version

Universal Health Care Act of 1991 (H.R. 1300)C

CBO CBO CBO

CBO

CBO CBO CBO

CBO CBO CBO

Clinton Administration Clinton Administration Clinton Administration

Lewin-VHl Lewin-VHl Lewin-VHl

Lewin-VHl

CBO @ O

ESRI

Sheils et al.

CBO

CBO

CBO CBO

CBO

Clinton Administration

Lewin-VHl

CBO

ESRI

ESRI

CBO

GAO

Grumbach et al.

Lewin-VHl d

Woolhandler and

Himmelstein

CBO

KEY: CBO = U.S. Congress, Congressional Budget Office; GAO = US. General Accounting OffIce; ESRI = Economic and Social Research Institute.

a

Full citations for the analyses are in appendix B.

bBill numbers are for 103d Congress.

CBill numbes are for 102d Congress.

dAnalysis was conducted by Lewin-lCF, The company was acquired and expanded in 1992. For purposes of this report all Lewin analyses are Identlfied as Lewin-VHl.

SOURCE: Office of Technology Assessment, 1994.

co00

o
Chapter 4 Effects of Providing Insurance to Uninsured People I 99

The chapter also devotes attention to the distinction between incremental and total expenditures related to covering uninsured people.

Incremental expenditures are the additional expenditures that might be incurred by or on behalf

of people previously (or currently) without insurance if they became insured. Total expenditures

combine the baseline healthcare expenditures that

uninsured people incur even in the absence of insurance, plus the incremental expenditures estimated to result from insurance-induced demand

for services. 1 The amount of incremental expenditures is important to projections of NHE, the subject of this report. Total costs maybe important in

so-called distributional analyses, and for analyses

of Federal budget impacts. These issues are important, but are beyond the scope of this report.

The Office of Technology Assessment (OTA)

faced several obstacles in developing this chapter.

One that may be particularly frustrating to users

interested in the cost of a covering uninsured

people under a specific proposal is that some analysts do not report these costs in their publications.

A second obstacle is that when cost estimates are

available, they may be difficult to compare because they are based on different assumptions.

Some analysts assume that newly insured people

will have utilization patterns typical of those insured under current law, not reflecting in their estimates the scope and depth of the benefit package

proposed by the reform (e.g., Lewin-VHI (89);

Sheils, Lewin, and Haught ( 146)).2 In other analyses, the estimates do reflect the benefit package

and other aspects of a particular reform proposal

(e.g., Doyle (28); Thorpe (154)). Analysts may

make different assumptions about baseline spending by uninsured people. Using a lower baseline is

likely to result in higher incremental costs, all other things being equal. Finally, analysts differ in

how they take into account currently “uncompensated” care for uninsured people, some or all of

which is now cost-shifted to people with insurance.

It is difficult to compare evidence from the empirical research literature on the incremental costs

of covering uninsured people to analysts’ estimates because the few current research studies

available focus largely on expenditures for a subset of the health services that might be covered under any particular reform bill (91,1 51), or do not

compute total costs (198).3

PROVISIONS FOR PROVIDING

COVERAGE FOR UNINSURED PEOPLE

IN REFORM PROPOSALS

Proposals to extend coverage to uninsured people

vary according to whether the purchase or provision of coverage is mandatory, the scope of services covered, the depth in terms of patient

cost-sharing, 4

and how quickly the coverage is

phased in. Selected proposals that provide for universal coverage or incremental approaches to coverage are described below and summarized in

table 4-2.

I Proposals for Universal Coverage

OTA characterizes a proposal as a universal coverage proposal if it provides that all Americans 1egally in the United States would have insurance

coverage by a specified date. Universal coverage

proposals that take this approach and that have

‘ As described later in this chapter, people with insurance have been found to use more services than those without insurance, all other things

being equal. The expected increase in the use of services that is associated with obtaining insurance is sometimes referred to as insurance-induced demand. In economic terms, consumer demand increases as the price decreases; the (immediate) price to the consunwr decreases because most or all of the cost of a service is being paid by a third party (the insurer).

2 Ana]y~t~ may account for differences ~tween the expenditures expected undercurrent benefiI packages and exwdit~res expect~ unkr

the benefit package described in a reform proposal elsewhere in their analytic process.

J There is m[)re rexarch evidence on the Utl]izatlon (as opp)sed to expenditure) patterns of insured versus uninsured PeoPle (e.g.! ~~ng ~d

Marquis (9 I ); Office of Technology Assessment ( 189)).

4 Patient cost-sharing is the share of providers” charges that insured patients are obligated to pay themselves (191).
Proposal Approach to expanding coverage Scope and depth of benefits

Universal Coverage

American Health Security Act of

1993 (H. R. 1200/S. 491)

Consumer Choice Health

Security Act (H.R. 3698/S. 1743)

Health Equity and Access

Reform Today (H.R. 3704/S.

1 770)

Health Security Act (H. R. 3600/S.

1 757)

Managed competition plan, Starr

version

Single-payer plan, CBO version,

with patient cost-sharing

Single-payer plan, CBO version

without patient cost-sharing

Universal Health Care Act of

1991 (H. R. 1300)

Proposals that gradually

expand coverage

Comprehensive Family Health

Access and Savings Act (HR.

3918/S. 1807)

Comprehensive Health Reform

Act of 1992 (H.R. 5919)

Tax-financed, government-administered Insurance

program

Individual mandate, with individuals assisted by refundable tax credits

Individual mandate effective January 2005; prior to

2005, voluntary, but availability increased by employers mandated to offer but not required to contribute

and phase-in of Federal subsidies for low-income persons depending on savings

Individual and employer mandate, plus Federal

subsidies

Individual and employer mandate, plus Federal

subsidies

Tax financed, government-administered insurance

program

Tax-financed, government-administered insurance

program

Tax-financed, government-administered insurance

program

Purchase of Insurance voluntary, subsidies for premium expenses of certain persons with pre-existing

conditions, phase-m of Federal subsidies, contingent

on Federal Medicare and Medicaid savings

Tax deductibility of health insurance for self-employed,

regulation of employment-based health insurance

Comprehensive, including long-term care, no patient costsharing

All medically necessary acute care and prescription drugs; maximum deductibles at $1,000 per indvidual and $2,000 per family

through 1998, adjusted to reflect CPI increases after that; out-ofpocket Iimit is $5,000 for years prior to 1998

Scope and depth to be determined largely by a board but voted

on by Congress; cost-sharing differs between “standard” and

“catastrophic” plans

Comprehensive, a excluding long-term careb

; three levels of

combination patient cost-sharing and delivery systemsc

Comprehensive, high cost-sharing and low cost-sharing

Actuarially equivalent to Medicare and current private coverage;

patient cost-sharing equivalent to current typical levels

Same as above, but no patient cost-sharing

Comprehensive, including nursing home, home health, longterm care for disabled, no patient cost-sharing

Relatively minimal standards for catastrophic plans, high costsharing (at least a $3,000 deductible)

Not specified

A

o

0—
Proposal Approach to expanding coverage Scope and depth of benefits

Health Care Cost Containment Voluntary Improvements in Medicare and Medicaid, Most would be covered by same scope and depth of coverage

and Reform Act of 1992 (H R new Federal health Insurance program for children, as today, some expansion of public benefits

5502) and extension and expansion of tax deductibility of

health Insurance costs for self-employed Insurance

market reforms

Managed Competition Act of Voluntary: Subsidies for low-income people, regulation Uniform package to be specified by a national health board

1992 (H R. 5936) of private Insurance market expansion of Medicare preventive service benefits

KEY: CPI = consumer price index

aComprehensive can have different meanings, but typically Includes a mandated benefit package that covers payment for hospital care, physcian and other professional services, prescription drugs

preventive health services, and some mental health benefits.

bLong-term care refers to home- and community-based services to assist people unable to perform specified numbers of activitles of daily living.

cThe three levels are lower cost-sharing, higher cost-sharmg, arid combination cost-sharing For purposes of calculating premium costs of covering uninsured people, the Clinton Administration uses

the higher cost -sharing plan, which is essentially equivalent to current conventional fee- for-service indemnity plans (e.g., with annual indivldual and family deductibles and coinsurance of 20 percent

for most services) except that fee schedules are required The Iower cost-sharing and combination cost-staring plans differentiate cost-sharing for In-network and out-of-network services The lower

cost-sharing plan specifies a table of flat copayments for most in-network care, but does not include a deductible

SOURCE Off Ice of Technology Assessment, 1994 0
102 I Understanding Estimates of National Health Expenditures Under Health Reform

been analyzed in terms of their impact on NHE include the American Health Security Act of 1993

(H.R. 1200/S. 491) and the Health Security Act

(H.R. 3600/S. 1757), both introduced in the 103d

Congress, and the Universal Health Care Act of

1991 (H.R. 1300), introduced in the 102d Congress. In addition, the Consumer Choice Health

Security Act (H.R. 3698/S. 1743) and the Health

Equity and Access Reform Today Act (H.R.

3704/S. 1770) are universal coverage proposals

that have been introduced during the 103d Congress, but, to OTA’s knowledge, have not been

subject to analysis in terms of their impact on

NHE.

As summarized in table 4-2, these proposals for

universal coverage use different strategies. The

American Health Security Act of 1993 would establish a federally-mandated single-payer national health insurance program administered by the

states. The program would replace most private

and public health insurance programs and provide

coverage for a comprehensive set of health and

long-term care benefits. The program would require no per-service cost-sharing by patients.

In contrast, the Health Security Act (H.R.

3600/S. 1757) would require all persons to either

purchase or be covered by a comprehensive health

benefits package. The act would require all employers to pay for a portion of health insurance.

Unemployed and self-employed individuals

would be required to buy their own insurance.

Subsidies would be available to people below a

certain income and to certain types of firms, and

increases in premiums for the standard benefit

package would be held to the rate of growth in the

Consumer Price Index (CPI) (see chapter 2 for details).

Under the Consumer Choice Health Security

Act (H.R. 3698/S. 1743), all persons would be required to purchase health insurance through plans

that meet Federal benefits, rating, and underwriting standards. Employers currently providing

health benefits would be required to convert them

into added wages, at least in the first year. Federal

subsidies would be in the form of refundable tax

credits for a portion of the premium cost of qualified health insurance plans and other medical expenses. The plans would have relatively higher

patient cost-sharing than those under the Health

Security Act and the American Health Security

Act of 1993. This reform proposal has not been

analyzed in terms of its impact on NHE.

The Health Equity and Access Reform Today

Act (H.R. 3704/S. 1770) would combine an individual mandate effective in the long-term (i.e., in

2005) with phased-in subsidized coverage for

low-income uninsured individuals as savings

from other provisions of the proposals are

achieved. There has been no analysis of this proposal in terms of its impact on NHE.

I Proposals That Phase in Coverage

Some proposals attempt to extend coverage by relying on incentives and market reforms to encourage individuals and families to purchase health

insurance, including: the Managed Competition

Acts of 1992 (H.R. 5936 in the 102d Congress)

and 1993 (H.R. 3222/S. 1579 in the 103d Congress), the Comprehensive Health Reform Act of

1992 (H.R. 5919 in the 102d Congress), the Affordable Health Care Now Act of 1993 (H.R.

3080/S. 1533 in the 103d Congress), and the

Comprehensive Family Health Access and Savings Act (H.R. 3918/S. 1807 in the 103d Congress) (table 4-2). Not all of these proposals have

been subject to analysis in terms of expenditures

associated with covering uninsured people or their

impact on NHE.5

It is important to try to estimate the effects of

expanded coverage on NHE for all these approaches, but this chapter focuses primarily on the

methods used to project costs of covering uninsured people under “universal coverage” bills that

have been analyzed. A brief section is devoted to

methods and assumptions used in analyses of a

5 me congre~~lc)nal Budget Offlce (CBO) completed an analysis of the Managed Competition Act of 1 %3 as this reW Was being p~pa~d

for publication (134, 174).
Chapter 4 Effects of Providing Insurance to Uninsured People I 103

more incremental approach to covering uninsured

people.

ANALYSES OF REFORM PROPOSALS

9 Overview of Basic Analytic Approaches

Although projecting the cost of covering newly

insured people for any year and under any proposal requires answering a series of complex questions (see box 4-1 ), the typical overall conceptual

approach can be described quite simply. Analysts

overall seem to follow a relatively similar framework:

1. They estimate the expenditures that uninsured

people would incur if they remained uninsured

in the first full year of the reform;

2. They estimate the expenditures currently insured people who are demographically similar

to uninsured people would incur in the first full

year of the reform;

3. Then analysts subtract 1 from 2, to derive an estimate of the incremental cost of (expenditures

associated with) covering previously uninsured people.6

There are differences among analysts in how

they implement their framework and in what estimates and information on methods they choose to

publish. These differences are important to the interpretations that may be placed on any particular

number.

These differences include the following:

●

m

D

■

m

●

how analysts define the benefit package under

reform (i.e., services covered and patient costsharing);

how analysts account for a change in benefits

under reform;

how analysts define insured and uninsured

people;

how analysts determine what prices will be in

the future, particularly if the prices are regulated;

how analysts take account of previously uncompensated care; and

the general statistical approach that analysts

take to estimating the costs of covering uninsured people.7

The next section of this chapter reviews in

greater depth the methodological detail that is

available on the key assumptions and inputs underlying the analytical approaches used to estimate costs of covering uninsured people under

proposals for universal coverage. The section focuses on analyses of the American Health Security

Act of 1993 (H.R. 1200/S. 491); other tax-financed, single-payer, universal-coverage plans

(e.g., the Universal Health Care Act of 1991 and

generic single-payer plans with and without coinsurance); and the Health Security Act of 1993

(H.R. 3600/S. 1757). Analyses of these bills were

conducted by the Congressional Budget Office

(CBO), the Clinton Administration, and/or Lewin-VHI. Table 4-3 summarizes the available es6 An impllclt assumptl(~n of this approach is that previously uninsured people will use health services as do demographically similar people

who are already insured. Analysts make this assumption in part because there is little or no experimental data on how uninsured people will

res~md once they become insured. This issue is discussed later in this chapter.

7 General statistical approaches include the folk) wing:

■ Use a two-part econometric model, which involves first estimating if uninsured people have used any services, and then estimate how much

they cost, using a variable for insurance status;

- Statistically match expenditures of insured people to uninsured people;

■ Use an econometric nl(del for estimating utilization differences and use average expenditure figures to cost out new services;

■ Statistically match utilization (physician visits and hospital days) and use average expenditure figures to cost out new services;

● Multiply insurance costs ft)r currently privately insured people by a previously calculated factor that measures insurance-induced demand.
104 I Understanding Estimates of National Health Expenditures Under Health Reform

I

■

●

●

■

■
Chapter 4 Effects of Providing Insurance to Uninsured People I 105

timates of costs, in 1994 dollars, of covering

uninsured people under universal coverage proposals that have been subject to analysis. Table

4-4 sets out some of the key assumptions underlying these estimates. Table 4-5 summarizes the estimates as percentages of projected baseline NHE.8

1 Analyses of Proposals

for Universal Coverage

CBO’S Analyses of SingIe-Payer Universal

Coverage Proposals

Box 4-2 presents CBO’S general approach to estimating the demand response of previously uninsured people to insurance coverage under any

benefit package. As described below, aspects of

particular reform proposals or other factors may

cause CBO to make additional or alternative assumptions that may change the results of its analysis. It is not always possible to discern the effects

of the alternative assumptions because, as noted

above, CBO rarely reports its estimates of costs of

covering uninsured people separately from its

overall NHE estimates (see table 4-3).

CBO has concluded generally that with universal coverage, expenditures by or on behalf of currently uninsured people would increase by 57

percent under typical employment-based insurance with 25 percent coinsurance, and by 93 percent under policies without requirements for

patient cost-sharing.9 It is important to note that

these percentage increases do not represent percentage increases in overall NHE, but only percentage increases in expenditures on behalf of

uninsured people.

Generic single-payer proposals

CBO’S April 1993 analysis examines two hypothetical single-payer systems (not related to specific reform proposals). CBO defined a

single-payer system as one in which all covered

health care services are insured and paid for by a

single insurer.

The first single-payer system (SP1 ) formulated

and costed out in terms of NHE by CBO in its

April 1993 memorandum had the following features: it would require the kind of patient costsharing that is now typical in the United States; the

plan’s benefits would be actuarially equivalent to

the average benefits now paid under Medicare and

private insurance; and it would prohibit balance

billing.

As formulated by CBO, the second singlepayer system (SP2) is a “Canadian-style singlepayer system” with universal coverage, but no

cost-sharing.

CBO’S April 1993 analysis of the two singlepayer reform systems incorporated into its estimates of the cost of covering uninsured people

some, but not all, assumptions about the potential

effects of hypothetical reform systems (see table

4-4). For example, analyses of SP1 and SP2 assumed the use of Medicare’s payment rates for

hospital and physician services to estimate the

costs of services now covered by all types of third

party payers.

10 On the other hand, CBO did not include in its April 1993 analysis ‘the effects of cost

containment provisions-such as effective expenditure caps or price and utilization controls-that

might reduce spending if these were part of the

new system” (165).

CBO’S April 1993 analysis estimated that the

increase in expenditures for new physician and

hospital services in 1991 would be $21.9 billion

under SP1 (with coinsurance), and $30.9 billion

under SP2 (with no coinsurance); these estimates

are inflated to 1994 dollars in table 4-3.

8 Each table also presents findings from the research evidence on costs reviewed later in this chapwr.

9 According to CBO and others, the increase would be greater for physician services than for hospital services .

[o In ~on~mt, in ~ example descfi~d in CBO’s November 1993 memorandum pr(~viding backgr(mnd on IIS behavioral assumptions, CBO

noted that it assumed “no change in average payment rates for providers.”
—

Estimated increase in Estimated total Estimated total

&

m

Proposal subject to analysis and spending spending “premium” costs 3

g

research evidence Analysisb

(1994 $ billions) (1994 $ billions) (1994 $ billions) a- .

Proposal

Single-payer proposals

American Health Security Act of

1993 (H.R. 1200/S. 491)

Single-payer, CBO version with

patient cost-sharing

Single-payer, CBO version without

patient cost-sharing

Universal Health Care Act of 1991

(H.R. 1300)

Managed competition proposals

Health Security Act (H.R. 3600/S.

1757)

Managed competition plan, Starr

version, low patient cost-sharing

Managed competition plan, Starr

version, “typical” patient costsharing

Research evidence

CBO

CBO

CBO

CBO

CBO

Clinton Administration

Lewin-VHl

Sheils et al.

Sheils et al.

Long and Marquis

Spillman

NA

$29.2

$41.1d

NA

NA

$83.6e

$28.4

$39.8f

$33.7

$17.6 -31.9 (0) (P)

$41,4 (o) (P)

NA NA

$75.8 (0)c NA

$87.7 (O)c

NA

NA NA

NA NA

NA NA

NA $82.2 (0)’

$85.2 (0)g NA

$78.0 (0)h NA

$62.3 -$77.0 (0) (P) $77.0

$66.6 (P) NA

KEY: CBO = U.S. Congress, Congressional Budget Office; NA = not available, O = OTA calculation, P = partial estimate, not comparable to others that may consider all of personal health care expenditures

aAll estimates have been converted to 1994 dollars by either increasing or decreasing the amounts at annual rates of 10 percent Ten percent IS a rough estimate of recent annual inflation in national

health expenditures

bFull Citations for the analyses are in appendix B. Full citations for the research studies--Long and Marquis (91) and Spillman (151)--are in the Iist of references at the end Of the report

cBy addition.

dAssumes no patient cost-sharing (therefore, higher projected utilization).

o
eCalculated based on method suggested by Off Ice of Management and Budget analysts as follows The Administrations unpublished estimate of costs of newly expanded coverage for insured people,

plus costs of covering previously uninsured people, is $95 billion in 1994 dollars (155,202) The Administration does not have a separate estimate for covering previously uninsured people, but suggests

that using the same proportions used by Lewin-VHl in its analyses of the Health Security Act would provide a rough idea of the distribution between newly covered people and expanded benefits for

previously insured people (202) In Lewin-VHl’s December 1993 analysis, it estlmated that the cost of covering uninsured people and the cost of expanded coverage for people already insured would

be a total of $47 billion in 1998, the flrst full year of plan Implementation (89) (A total of $47 billion in 1998 is approximately equivalent to $28.4 billion in 1994, using a 10% annual discount (inflation) rate)

The $416 billion of this total relevant to covering previously uninsured people iS equivalent to 88 percent of $47 billion. Eighty-eight percent of $95 billion iS $836 billion

fAssumes low Patient ~ost-sharing (a $10 copayment per Outpatient visit, but no deductible). Further assumes that total utilization under the IOW patient-cost-sharing plan would be about 2 percent

higher than in the high cost-sharing plan for persons who are not now enrolled in plans with lower cost-sharing Sheils and colleagues identified privately insured persons in the National Medical

Expenditure Survey data who are already in plans without cost-sharing by examining the source of payment data reported for services used by those individuals (1 46)

9Calculated by adding Sheils and colleagues’ estimate for baseline 1998 spending by uninsured people to Sheils and colleagues’ estimate for new 1993 spending by newly insured people with low

cost-sharing, plus the estimated impact of reduced patient cost-sharing, and inflating to 1994 dollars

hCalculated by adding Sheils and colleagues’ estimated baseline to their estimate of expenditures associated with Increased utilization by newly insured people and inflatlng to 1994 dollars.

IOTA calculation, based on Lewin’s premium estimate being 15 percent higher than the Administration’s ($1 ,933 ● 1.15 = $2,223) times 37 million full -time-equivalent uninsured people.

SOURCE Office of Technology Assessment, 1994.

o
Analysis or

Proposal subject to analysis studya Key assumptions

Proposal

Single-payer proposals

American Health Security Act of CBO

1993 (H.R. 1200/S, 491)

Single-payer plan, CBO version with

patient cost-sharing

Single-payer plan, CBO version without patient cost-sharing

Universal Health Care Act of 1991

(H.R. 1300)

Managed competition proposals

Health Security Act (H.R. 3600 /S.

1 757)

The program would cover virtually all spending for hospital care, physician and other professional

services, nursing home care, and home health services, all spending on prescription drugs, and

“all baseline third-party payments and half of baseline out-of-pocket expenditures for durable

medical equipment ,. “b

For hospital care, physician and other professional services, nursing home care, and home health

services, “the estimate excludes only other private funding (Including nonpatient revenues and

philanthropic contributions), 20 percent of current out-of-pocket spending (representing an estimate of services that the new program would not cover), and spending by the Veterans Administrationc and Indian Health Service.”

State plans would have to cover routine dental care for all beneficiaries.d

‘

[Spending for drug abuse treatment [apparently, for newly Insured and others] would triple over

baseline expenditures, adding $16 billion to the cost of these benefits by the third year of the

plan. ”

“The benefit for home and community-based services and the unlimited mental health benefit

would add over $50 billion a year to uncapped health spending after three years [this apparently

applies to newly insured and previously insured people combined].”

CBO “Typical” contemporary coinsurance (e.g., deductible + 20% coinsurance, with out-of-pocket

maximum); e Medicare payment rates;e baseline spending $46.6 billion (1994 dollars); no effects

of supplementary coverage; potential provider offsets not considered; effects of potential costcontainment provisions not included.

CBO First dollar coverage;e Medicare payment rates;e baseline spending $46.6 billion (1994 dollars); no

effects of supplementary coverage; potential provider offsets not considered; effects of potential

cost-containment provisions not included.

CBO Policy parameters as specified in H.R. 1300; “estimated additional demand for health services

generally based on the methodology detailed in CBO’S April 1993 staff memorandum (165)”;

spending would increase in proportion to the growth in the use of health services.

CBO Estimate of insurance induced demand uses the assumptions described in CBO’s November 1993

memorandum (169).

Clinton Coverage equivalent to that under the Health Security Act; OTA calculation, per Administration

Administration guidance-product not equivalent to multiplication of average alliance fee-for-service premium

by 37 million FTE uninsured people.

o
Proposal subject to analysis

Managed competition plan, Starr

version, low patient cost-sharing

Managed competition plan, Starr

version, “typical” patient costsharing

Research evidence

NA

NA

.

Analysis or

studya Key assumptions

Lewin-VHl Incremental costs represent increased health expenditures under current law and utilization patterns following from existing distribution of insurance plans (I e., not adjusted for proposed costsharing or other provisions of the act), total premium costs calculated by OTA, based on LewinVHI premiums 15% higher than Administration’s and 37 million FTE uninsured

Sheils et al Impact of reduced patient cost-sharing

Sheils et al. Makes assumptions about nature of high versus low patient cost-sharing, assumes a relatively

comprehensive uniform minimum benefit package f

Long and

Marquis

Incremental and total expenditure costs are for physician and hospital expenditures only, baseline

spending for physician and hospital services equivalent to $447 billion (1994 dollars) total premium costs include coverage for physician and hospital services plus coverage for ‘ other professional’ services and prescription drugs, with typical coinsurance under a mix of managed

care and indemnity plans

Spillman Expenditures for basic’ (physician and hospital services) only baseline spending estimate was

$252 billion (1994 dollars).9 

KEY: CBO=U.S. Congress Congressional Budget Office. FTE = full-timeequivalent: NA + not applicable.

a

Full citations for the analyses are in appendix B Full citations for the research studies are at the end of the report.

bCBO notes that, "The bill authorizes the board to place Iimits on the cost and frequency of benefits for eyeglasses and durable medical equipment "However, the source of these figures used by CBO to

estimate the impact of this provision of the bill is not provided in CBOs memorandum (170)

CThe Veterans Administration is now the Department of Veterans Affairs

dCBO estimates that this represents approximately 50 percent of baseline dental spending from alI sources of payment in 1996, initialIy about $100 per person per year. The SOurce of these flgures is not

provided in CBOs memorandum (170)

e

These were assumptions rather than poIicy parameters set forth in a particular reform proposal because CBO designed the generic systems analyzed in its April 1993 analysis

fThe benefit package was assumed to include hospital Inpatient and outpatient care, physclan care, laboratory tests and x-rays, psychiatric services, prescription drugs, preventive and primary care.

and other professional services referred by a physician The plan was assumed to not cover dental care eyeglasses or cosmetic surgery.

gBy excluding from calculations of use and spendlng by currently uninsured people those who received some pubic benefits under various programs Spillman's analysis excluded those with the

potentially heaviest use of services (169). Spillman's estimate of baseline spending by ininsured people under her definitlon of uninsured) was $15.6 billion in 1989 dollars (equivalent to $25.2 billion in

1994 dollars) Spillman's estimate of baseline spending by uninsured people IS substantially different from Long and Marquis's estimate of baseline spending ($40 6 billion in 1993 dollars equivalent to

$447 billion in 1994 dollars)

SOURCE Office of Technology Assessment 1994

o
110 I Understanding Estimates of National Health Expenditures Under Health Reform

Proposals subject to analysis

and research evidence Analysisa

Proposal

Single-payer proposals

American Health Security Act of 1993 (HR.

1200/s, 491)

Single-payer plan, CBO version with patient

cost-sharing

Single-payer plan, CBO version without patient

cost-sharing

Universal Health Care Act of 1991 (H.R. 1300)

Managed competition proposals

Health Security Act (H.R. 3600/ S. 1757)

Managed competition plan, Starr version

Empirical research studies not connected to

particular proposals

CBO

CBO

CBO

CBO

CBO

Clinton Administration

Lewin-VHl

Sheils et al.c

Spillman

Long and Marquis

—

Estimated Increase as a

percentage of baseline NHE

in projection year

NA

2.9%

4.1%

NA

NA

NA

3.0%b

3.4%

39% (O) (P)d

1.8-3 2% (P)

KEY: CBO = U.S. Congress, Congressional Budget Office; NA = not available, NHE = national health expenditures, O = OTA calculation, P = partial

estimate, not comparable to other estimates

aFull citations for analyses are in appendix B. Full citations for the research studies are at the end of the report.

bBaseline for 1998 NHE used by Lewm-VHl (89) waS $1,395 billion.

cNote that under Sheils and colleagues’ method, the particular reform proposal iS Irrelevant except to the extent it affords universal coverage and the

benefit package (services covered) are more-or-less comprehensive (i.e., typical of a package sponsored by a large group such as in an employment setting) See text

dCalculation by OTA using CBO baseline of $664 billion for 1989 (167).

SOURCE Off Ice of Technology Assessment, 1994

American Health Security Act of 1993

(H.R. 1200/S. 491)

CBO published little description of its method for

estimating additional demand for health services

by previously uninsured people in its December

1993 analysis of S. 491 (170). Instead, CBO referred readers to the methods detailed in its November 1993 memorandum, “Behavioral

Assumptions. . . .“ and noted that its analysis of

insurance-induced demand under S. 491 does not

distinguish between the additional spending attributable to currently uninsured persons and

additional spending due to enhanced coverage.

Rather, all of the figures “represent weighted averages of the estimated increases in demand on the

part of the currently uninsured, Medicare beneficiaries, Medicaid recipients, and people with private health insurance coverage” ( 170).

Analyses of Managed Competition Universal

Coverage Proposals

Lewin-VHl’s analysis of Starr’s managed

competition proposal

Sheils and his colleagues’ 1993 analysis of Starr’s

managed competition proposal with universal
Chapter 4 Effects of Providing Insurance to Uninsured People I 111
112 I Understanding Estimates of National Health Expenditures Under Health Reform

coverage projected a $30.6 billion increase in

NHE in 1993 ($33.7 billion in 1994 dollars; table

4-3), equal to about 3.4 percent of baseline projected NHE in 1993 (table 4-5). As CBO did, Lewin-VHI based its estimates on a comparison of

expenditures by otherwise similar demographic

groups who differed only in whether they had insurance during the year.

Lewin-VHI’s method differs from CBO’S in at

least one way. According to CBO, projections by

Lewin-VHI (e.g., Sheils, Lewin and Haught

(146)) of the percentage increase in expenditures

related to increased utilization by newly insured

people may be too high because Lewin-VHI included people with public benefits, such as Medicare-disabled 11 and Medicaid, in the group it

defined as “insured” ( 169).

According to CBO, this is the reason one of Lewin-VHI’s estimates of increases in health care

utilization and expenditures for newly insured

people (74 percent overall) is higher than CBO’S

estimate of 57 percent (see above). Lewin-VHI

has countered that including people with public

coverage in the insured group is legitimate because nearly all health reform plans would excuse

patient cost-sharing for low-income persons even

if they are employed (144). In any event, LewinVHI’S and CBO’S estimates do not differ by much

when adjusted roughly for health care cost inflation (see table 4-3). For example, CBO’S April

1993 estimate for universal coverage with a typical cost-sharing plan is $29.2 billion (when adjusted to 1994 dollars by OTA) (165).

Lewin-VHI’s estimate for the “high cost-sharing”

version of managed competition (essentially

equivalent to contemporary cost-sharing arrangements) is $33.7 billion ( 1994 dollars) ( 146), a difference of $4.5 billion.

Lewin-VHl’s analysis of the

Health Security Act

In December 1993, Lewin-VHI calculated that the

Health Security Act would increase expenditures

by previously uninsured people by $41.6 billion

in 1998 (approximately $28.4 billion in 1994 dollars; table 4-3), equal to approximately 3 percent

of both baseline and reform 1998 NHE1

2 (table

4-5). As with the Lewin-VHI estimate for Starr’s

managed competition proposal, this figure represents the incremental costs of coverage, assuming

utilization patterns similar to those of people with

insurance coverage in 1987, adjusted for estimated changes in utilization between 1987 and

1990 (89).

Clinton Administration’s analysis of the

Health Security Act

The Clinton Administration produced projections

of NHE in January 1994( 197) but did not publish

estimates of the costs of covering newly insured

people. Two groups in the U.S. Department of

Health and Human Services (the Agency for

Health Care Policy and Research (AHCPR) and

the Health Care Financing Administration

(HCFA)) have included estimated expenditures

associated with covering previously uninsured

people to model premium costs under the Health

Security Act (28, 135, 154). Their methods are described in box 4-3. In addition, in response to

OTA’s requests, Administration analysts have

provided an estimate of the costs of new and enriched insurance coverage taken together and explained how one could then derive a separate

dollar estimate of costs of covering uninsured

people under the Health Security Act (box 4-4) As

explained in box 4-4, the resulting Administration

estimate of incremental costs of covering uninI I people under 65 with disahi]ities nlay be eligible for, and receive services that arc paid for. by Mcdlcare.

I z According [() Lewin.VHI ana]ysis, baseline and ref(~m~ NHE w(~uld be nearly ldCntlCa] in I ~~.
Chapter 4 Effects of Providing Insurance to Uninsured People I 113

—
114 I Understanding Estimates of National Health Expenditures Under Health Reform
Chapter 4 Effects of Providing Insurance to Uninsured People I 115

sured people (table 4-3) is not equivalent to other

analysts’ estimates of incremental costs. The primary reason is that Administration analysts do not

include previously uncompensated costs in their

base] inc. 13

CBO’S analysis of the Health Security Act

CBO’S February 1994 analysis of the Health Security Act of 1993 (H.R. 3600/S. 1757) provides a

brief overview of projected NHE by sources of

funding. However, CBO does not go into any detail about how it arrived at costs of covering uninsured people, or what proportion of increased

NHE in any year would be attributable to coverage

for previously uninsured people (172). CBO’S

analysis refers to coverage for uninsured people as

a factor contributing to increases in demand for

services (and associated expenditures), and as a

component of its estimates of average health insurance premiums for the standard benefit package.

14 However, CBO provides no quantitative

estimates of the amount of the increase from covering uninsured people.

According to CBO, the calculation of the average premium follows the method specified in section 6002 of the Health Security Act. According to

CBO, the estimate proceeds in three steps:

1. calculate the initial amount of health spending

in the baseline that would be paid for by premiums collected by the alliances,

2. 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,

3. divide the result by the number of people covered by alliance premiums.

CBO assumed 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. It is unclear

from its report how CBO used this assumption to

13 A~nlinistra[ion analysts argue that it is more ratimal to think about the costs of enriched insurance overall, rather than considering separately the costs of providing insurance for those currently without any insurance and providing enriched benefits to those who are already insured (202).

I q CBO notes that: ‘“[the proP)sa]’s] provisions for covering the uninsured [and other provisions] would increase the demand for health

services. But the 1 imits on the growth of health insurance premiums and the reducti(ms 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. . . . From 2000 on, however,

nati(mal health expenditures would fall below the baseline by increasing amounts.”
116 I Understanding Estimates of National Health Expenditures Under Health Reform

1 J

= Total baseline expenditures /$
Chapter 4 Effects of Providing Insurance to Uninsured People I 117

calculate increased spending attributable to newly beneficiaries, and federal Medicaid payments for

insured people. disproportionate share hospitals.” Thus, CBO’S

CBO also says that its “estimate of the base definition of the base amount differs from the Adamount of spending includes all baseline private ministration’s.

health insurance premiums, subsidies from State Overall, CBO says its premium estimates are

and local governments for public hospitals and about 15 percent higher than the Administraclinics, half of State and local subsidies for mental tion’s. 15,16

institutions, all Medicaid spending for noncash

1 S The difference was smaller for the single-person premium: CBO estimated a $2, I (Xl total premium for a single person; the Adnlinistrati(~n

estimated $1,933 for a single p.mon.

16 T(J get a rough estimate ,)f the t{)ta] prenllurn Costs for covering uninsured people, OTA multiplied CBO’S pren~iunl estin~ate for a single

person by the approximately 37 million to 38 million full-time-equivalent uninsured people in the United States, for an estimate of $77.7 billion

to $79.8 billion (all figures in 1994 dollars; see table 4-3); this estimate is slightly lower than similar estimates calculated by others (e.g., from

using the same method to calculate total premiums for uninsured people using Lewin-VH1’s estimated premiums (see table 4-3)). Given that

OTA used the same rough formula to calculate Lewin-VHI and CBO total premium costs, the difference between the OTA estimates can be

accounted for by different premium estimates for single pers(ms provided by Lewin-VHI and CBO. These calculati(ms are not helpful in tiguring the incremental costs of covering uninsured people (i.e., how much NHE w(mld increase due to providing insurance ti) uninsured people),

however.
118 I Understanding Estimates of National Health Expenditures Under Health Reform

To estimate the incremental spending attributable to newly insured people, CBO reports it used

an estimate of induced demand using the assumptions described in its November 1993 memorandum (see box 4-2).

Summary of Analyses of Universal

Coverage Proposals

Because of differences in analysts’ assumptions,

available estimated spending increases attributable to insurance coverage for previously uninsured people appear at first glance to differ

markedly. Overall, the available range of increases is $28.4 billion to $83.6 billion (1994 dollars) (89,165).

Several problems arise in trying to draw solid

conclusions about the actual range in estimated increases, however. Comparisons of estimated total

spending may provide a better sense of the estimated magnitude of spending by previously uninsured people, ’7 but such comparisons do not

provide information on the incremental change in

expenditures associated with covering uninsured

people.

Issues raised in comparing estimated increases

in spending include:

= Very few incremental estimates are actually reported, so the range presented above may not be

representative of analysts’ estimates of the cost

of insuring uninsured people.

● Perhaps more importantly, the estimates that

are presented by or obtained from analysts may

have strikingly different components. For example, the estimates make different assumptions about benefits covered. Some estimates

represent spending assuming past insurance

coverage and utilization patterns, not the types

of insurance coverage and utilization patterns

that may occur under particular reforms

(89,165). Other estimates include spending by

previously uninsured people that would occur

under the benefit package provided under reform. In addition, some analyses differ in their

definitions of insured and uninsured, and estimates differ in what they assume about uncompensated care costs.18

The next section of this chapter provides a brief

overview of analyses of proposals that would

phase in coverage. The analyses report no separate

estimates of the cost of covering uninsured

people. The analyses were all done by CBO.

Analyses of Proposals That

Phase In Coverage

The preceding section reviewed analyses of proposals that would require universal coverage by a

specific date. Other proposals may aim to increase

the proportion of Americans with coverage gradually. Some proposals aim to increase coverage by

subsidizing the purchase of private health insurance or by other measures to reduce the price of insurance. In estimating the cost and impact of such

bills, a critical assumption is the extent to which

the purchase of insurance would rise with a fall in

price. Other bills would place more emphasis on

expanding coverage from public programs, in

which case key assumptions include eligibility

and participation (e.g., H.R. 5502 introduced in

the 102d Congress, H.R. 200 introduced in the

103d Congress). Neither approach would necessarily achieve universal coverage. In either case,

analysts may have a problem in attempting to predict how many people will either purchase private

insurance or be eligible for public coverage in any

given year. Assumptions about voluntary purchase of coverage may be particularly difficult.

Further, not every eligible person participates in

public coverage programs (145).

17 AS shown in the ]ast two ~OIumns of table 4-3, most estimates of the rola/ spending (or premium costs) of WJering prevk)usly uninsured

people are in the $70-billion to $80-billion range.

18 Questions a~)ut the range in estimates are different from questions about whether afIY of the estimates reflect reality. This issue is addressed later in this chapter.

19 Two Paprs prepared under contract t. OTA review the literature on insurance choice aIllW’lg consumers (35,1 ~).
Chapter 4 Effects of Providing Insurance to Uninsured People I 119

In projecting NHE and the federal budget impact of plans that were introduced in the 102d

Congress, with no specific date for universal coverage, CBO projected increases in the number of

people likely to be covered by health insurance in

selected calendar years (168). However, CBO did

not report estimates of the incremental costs of

covering these people. Because the benefit packages differ across the reform proposals (or are unspecified), it would be difficult to use ‘*typical”

employment-based coverage (and associated premium costs) to estimate gross premium costs per

year. In its July 1993 document, CBO did not provide enough information to enable another analytic group to understand or replicate the results in

terms of net new increases in covered individuals,

or in terms of the impact of these increases on

health expenditures. However, in response to

OTA’s request, CBO provided information on

how it arrived at the numbers of newly insured

people under each of three proposals (see box

4-5).

CBO says that under the Managed Competition

Act of 1992 (H.R. 5936 introduced in the 102d

Congress), newly insured people would increase

their use of health services by 80 percent. CBO

does not, however, explicitly state why, nor the

specific impact this increase would have on national health expenditures (1 68).20

1 Summary of Analyses

Because analyses of the incremental costs of covering previously uninsured people under alternative reforms use varying assumptions and publish

varying types and levels of analysis, comparing

and reaching conclusions about the likely range of

estimates in costs of covering uninsured people is

difficult.

REVIEW OF THE EVIDENCE

OTA’s review of the evidence on the costs of covering previously uninsured people has two sections: evidence on utilization and evidence on

expenditures.

1 Evidence on Utilization with

Expanded Coverage

The most compelling evidence on how newly insured individuals would increase their utilization

would come from comparing representative samples of individuals randomly assigned to insurance coverage or not.

21 N. such study has been

conducted, nor is one likely to be conducted (1 89).

Instead, researchers infer evidence on differences

in utilization among people who are insured or

uninsured, or who go in and out of these conditions, from either the Rand Health Insurance Experiment (HIE) conducted between 1974 and

1981 or, more typically, from surveys that collect

information on health care utilization from people

in various insurance circumstances (e.g., the

Health Interview Survey (HIS), the Survey of Income and Program Participation (SIPP), and the

National Medical Expenditure Survey (NMES).22

This section reviews the evidence from these

sources.

Numerous studies have looked at differences in

utilization between insured and uninsured people.

This review relies heavily on a previous report by

OTA (189) and on a draft review of existing literature conducted under contract for OTA and for

the Library of Congress’ Congressional Research

20 me go ~rcen[ increa5e 15 not cimsis[ent with CBO’S generic method for calculating increased utilizatimt (169).

2’ Obviously such a study would not be a simple undertaking.

22 Smnetinws, analysts infom~ally “combine” l-x~th types of infomlation. F(w example, CBO says that it uses the Rand HIE evidence as a

“fl(x)r” for respmses to hectmllng lnsurcd ( 169).
120 I Understanding Estimates of National Health Expenditures Under Health Reform
Chapter 4 Effects of Providing Insurance to Uninsured People I 121

Service (CRS) by Long and Marquis (91).23 Selected recent studies not included in the previous

OTA and the Long and Marquis reviews are also

examined (55,56, 151 ).

Reviews

U.S. Congress, O TA

In September 1992, OTA published a comprehensive review of the association between being uninsured or insured on patients’ use of health services

(1 89).24

OTA’s review of available multivariate studies 25 found that, in the aggregate, uninsured

people used health services at approximately 30 to

100 percent the rate of privately insured individuals, and at approximately 10 to 50 percent the rate

of publicly insured individuals, depending on the

study. Further, OTA found that uninsured people

had less access to more intensive, relatively high

technology, expensive services. OTA’s findings

support analysts’ assumptions that uninsured

people typically use fewer services and incur fewer expenditures than insured people, and that the

gap is considerable.

Given the limitations of available data and

studies, however, OTA could not conclude that

there was a causal relationship between health insurance and utilization. Other factors, not well

controlled for in studies, could potentially influence both patients’ and health care providers’ decisions about the use of health services (e.g.,

availability of health care services, income, patient and provider attitudes and beliefs, and unmeasured health characteristics).

OTA’s review provided little indication of what

newly insured people might do once they obtain

insurance. Finding that insured and uninsured

people use services differently, or that previously

insured people who lose their coverage use fewer

.

‘~ The L{mg and Marquis analysis refcrrtxi to in this report is being prepared under contract to OTA and CRS in ctmnecti(m with another

OTA assessment ( Te(tln(d(jg~, In.$w-m?cr,and fk }Ieaifh Care .Svlem) and in connection with CRS continuing respmslhll ity to prt~vlde C(m -

gress w}th ad~lce on health financing issues. The paper by Long and Marquis will be printed jointly by CRS and OTA.

24 The main pur-pjse f~f OTA’s September 1992 re~ iev was 10 determine whether having health insurance made a difference to Individuals’

health (wtctmws, as oppmd to their health-scm ice-related expenditures. The fact that there were alrnos[ no studies [hat directly tracked the

effects of health lnsurtincc status {m health (wtc(mws, c(mtroll ing fm other appropriate factors, required OTA to U-Y to trace p)tential effects of

health Insurance status on health care utilization.

25 Multi vanatc studies usc (~bser~ ati(mal d:ita but c(mtrol statistically for factors that could p(~tcntially account for differences in the variable

of interest, In the studies that OTA reviewed In 1992 and that arc of interest In this report, the variable of interest was use of health services.

Potential c[mf(wnding variables Included such factors as Inc(mw, health status, gender, ethnicity, and availability of services. P!ot all nlultivanatc studies c(mlrollcd for the same p~tcmtiat conf(mnding fact(m ( 189).
122 I Understanding Estimates of National Health Expenditures Under Health Reform

,

I

services, does not necessarily indicate the quantity or cost of services that individuals might use

once they are covered. OTA’s analysis of the population of people who are uninsured found that they

are a very diverse group in terms of health status,

age, income, employment, education, family

composition, ethnicity, residence (i.e., metropolitan versus nonmetropolitan area), and region (i.e.,

West, South, Midwest, Northeast). This diversity

suggests that a range of responses to obtaining insurance coverage could be expected.

Long and Marquis, in press

In preparation for their own analyses of available

data (see below), Long and Marquis reviewed past

studies of estimates of the gap in utilization between insured and uninsured people. The studies

were published between 1982 and 1992, and had

used survey data from 1976 through 1987. The

studies differed in many respects, including their

definitions of insured and uninsured populations

and the way in which they measured utilization

(91). Not surprisingly, Long and Marquis found

that studies differed widely in their estimates of

the access gap. Depending on the study, uninsured

people had from 46 to 100 percent as many ambulatory encounters as insured people,26 and obtained 31 to 81 percent as many inpatient hospital

services as insured people. In the context of estimating the costs of covering uninsured people,

this wide range of estimates could be of considerable concern. As noted above, the larger the gap,

the greater the estimated additional resource cost

of universal access (91).

Long and Marquis’ examination of the past literature led them to hypothesize that differences

among past studies could possibly be attributed to

one or more of the following factors:

■

■

m

●

8

studies were done at different times and there

were changes over time in uninsured people’s

use of services relative to insured people’s use

of services,

different populations or different control variables in the analyses,

different definitions of health care use,

different definitions of insurance and lack of it,

different data collection methods (91 ).

Studies

Rand HIE results

The Rand HIE is the largest experimental study of

people with health insurance, although it has a

number of limitations (118,191). Its biggest limitation may be that, except for one year in one site

(1 17), no one in the experiment lacked health insurance.

27 According to the Rand HIE study team,

26 Anlbu]a[OV encounten were defined differently in dlfferenl studies.

27 ]n tie R~d HIE, approximately 5,8(K) penons in six sites (Dayton, Ohio; Seattle, Washington; Fitchburg and Franklin County, Massachusetts; Charleston and Georgetown County, South Carol ina) were randomly assigned, for 3 years or 5 years, to one of over a dozen fee-forservice health insurance plans. In Dayton, Ohio, in the initial year of the study, some research participants were uninsured. In all other sites and at

all other times, research participants had health insurance, although coverage varied in terms of patient-cost-sharing requirements ( 1 I 8,191 ).
Chapter 4 Effects of Providing Insurance to Uninsured People I 123

“Strictly speaking, our results have nothing to say

about uninsured individuals” (118).28,29

Spillman, 1992

Spillman used data from the 1980 National Medical Care Utilization and Expenditure Survey

(NMCUES) 30 to estimate how being uninsured

affects utilization of “basic” health care services

(151). Spillman defined basic health services as

emergency visits to hospital emergency departments, nonemergency services in hospital emergency departments and other ambulatory settings,

and inpatient hospital services. Spillman’s analysis differed from many others primarily because

she used various State- and county-level variables, including county-level supply of primary

providers of services, to control for factors affecting market price and access to services.3t

Spillman found that:

■ Uninsured men, women, and children who use

services had only 70 to 80 percent as many nonemergency ambulatory visits as their insured

counterparts.

= Uninsured men and women had slightly less

than two-thirds the expected visits to hospital

emergency rooms

32 of their insured Counterparts, but children’s visits did not differ by insurance status.

■ Uninsured men, women, and children were

only 24 to 30 percent as likely to have any hospital admissions as their insured counterparts. 33

Long and Marquis, in preparation

In an unprecedented effort to try to narrow the

range of estimates, Long and Marquis used data

from a range of surveys (i.e., the HIS, NMES,

SIPP) and applied similar statistical methods to

the dissimilar surveys.

Long and Marquis’s analysis suggests the following:

= In a single year, adults reporting a complete lack

of health insurance have 61 percent as many

ambulatory health services contacts (that is,

contacts with a physician or other medical provider working in a physician’s office or clinic,

including a visit to a doctor’s office, a clinic, or

hospital emergency room, and telephone contacts with a physician’s office) and 67 percent

28 Some argue that the exwriment’s condition in wtlich family members were obligated to pay 95 percent of the fee for each heal~ care

service (e.g., visit to a physician, x-ray) is functionally equivalent to being uninsured. But the fact that people who are reimbursed even 5 percent

of health care charges, especially with an income-adjusted annual out-of-pocket maximum, makes this conclusion tenuous. In addition, there

were other factors that made these study participants different from the typical insured or uninsured person (e.g., their physicians knew that the

patients were in a major national study).

29 me Rand HIE d(~s have some evidence on how insured ~Ople respond to the Iikelihmti of decreased coverage. Newhouse and Colleagues compared utilization and expenditures in the year prior to the experiment (the “accounting year”) to the first year of the experiment. In

addition, they examined differences among groups covered for 3 and 5 years, and spending after families exceeded their annual maximum

dollar expenditures. Newhouse and colleagues found no statistically significant increase in average expenditures during the first year of coverage, that the 3- and 5-year groups did not differ measurably, and that spending after exceeding the out-of-pocket maximum did not rise above the

“free plan’” rate. They concluded that “In general, transitory effects for medical services were weak....” The same was not true, however, for

dental services “Dental utilization on the lower coinsurance plans, especially on the free-care plan, was markedly higher in the first year than in

subsequent years” (11 8). There was also an effect for mental health services (11 8). Unfortunately, however, Newhouse and colleagues do not

repwt results separately for people who were completely uninsured before the experiment began. lnforrnation on this group would have been

useful in the current debate.

so NMCUES was the pr&CesSor to the 1987 NMES.

J I Splllman’s analysis also controlled for factors such as health status (including pregnancy), age, race or e~nicitY, education, and income

32 Emergenc.v ,lS1lS were defin~ as hospital emrgency r(mm visits for which the respondent repofled hat treatment ‘as ‘ceded ‘ithin a

few hours (15 I).

33 Average days ~r admission were found tO be ]ess responsive to price than the probability of admission, and the results Vmied by age and

gender (15 1).
124 I Understanding Estimates of National Health Expenditures Under Health Reform

as many hospital days in the year as people with

health insurance coverage all year.

~ Children lacking health insurance had 70 percent as many ambulatory contacts and 81 percent as many inpatient days as children with

coverage all year.

Long and Marquis point out several factors that

they were unable to resolve that could increase or

decrease their estimates of increased utilization by

previously uninsured people. For example, Long

and Marquis tested the impact of using more complete health status measures (e.g., number of

chronic conditions) than the typical measure of

perceived health status, 34 and found that the use of

such measures would increase by about 10 percent

their estimate of the number of ambulatory contacts that uninsured people would use once they

were insured, and slightly increase their estimate

of the number of inpatient services that uninsured

people would use once they became insured.35 In

contrast, Long and Marquis concluded that their

estimate of insurance-induced demand could be

50 percent too high if other unobserved differences between insured and uninsured people

meant that previously uninsured people use services at 85 percent the rate of those who were previously insured.

Hafner-Eaton, 1993

Hafner-Eaton’s analysis of data from the 1989 National Health Interview Survey examined only the

likelihood of a person having made any physician

visits during the previous 12 months (55). HafnerEaton theorized that initial physician visits are

more patient-initiated than are follow-up visits

and are therefore more sensitive to insurance status differences. According to Hafner-Eaton, “If

patients are able to obtain some care, they have

passed the threshold of such utilization determinants as their own perceptions, physician screening, geographic supply barriers, and so forth”

(55). Hafner-Eaton’s analysis also controlled statistically for a number of factors other than insurance status that could affect use of physician

services. In addition to the variables that most researchers control for (gender, age, ethnicity, and

perceived health status), Hafner-Eaton simultaneously controlled for functional health status,36

comorbidities, region, metropolitan statistical

area, and household head’s education. Hafner-Eaton provided results for three different groupings

of survey respondents: 1 ) those reporting chronic

conditions (who may or may not also have had

acute conditions); 2) those reporting acute illnesses during the 12-month period, but reporting

no chronic conditions; and 3) those reporting neither chronic nor acute conditions (designated the

“well” people). Hafner-Eaton’s findings apply to

people under 65.

Hafner-Eaton found that, overall, uninsured

people were fifty percent as likely as insured

people to have had an initial physician visit. Taking into consideration that Hafner-Eaton defined

the insured population to include people with either private or public coverage, this estimate is

roughly similar to that of other researchers. Hafner-Eaton’s findings are also consistent with others in that uninsured individuals perceiving

themselves to be in poor health had more visits

than uninsured people in good health, but that

uninsured persons reporting acute illnesses were

less likely to go without care than both uninsured

chronically ill individuals and uninsured well persons.

Hahn, 1994

Hahn’s recently published article based on NMES

also reports findings roughly consistent with other

analysts (e.g., Long and Marquis (91 )). Hahn examined data only for adults ages 18 to 64, used relatively complex measures of utilization (e.g.,

reactive versus proactive visits) and insurance sta34 perCclved heallh status is rr~asured by questions such as “]n general, would you say that your health IS exce]]ent, g(x)d, fair, or W)r’?”

M me increase in inpatient services was not quantified.

~~ Fun(.[ionfll /lf,a//h ,$laruJ was not fu~her defined, and results in Hafncr-Eattm appear to k’ presented (m]y f(w perceived health SlatUS.
Chapter 4 Effects of Providing Insurance to Uninsured People I 125

tus (see table 4-6), and controlled for health status

using only perceived health status. Hahn controlled for sociodemographics using family income and education, but did not include controls

for region or residence (i.e., metropolitan area versus nonmetropolitan area).

Hahn presented her findings in terms of the expected additional (or fewer) visits or hospital

nights that could result from extending full-year

private insurance coverage to uninsured people.

Hahn estimates that, on average, reactive physician visits would increase 69 percent (from 1.6

visits per patient per year to 2.7 visits per patient

per year), preventive visits would increase 60 percent (from .204 visits per patient per year to .327

visits per patient per year), and hospital nights

would increase 83 percent (from .331 nights per

patient per year to .606 nights per patient per

year). In contrast, Hahn found that physician visits

and hospital nights for people with Medicaid coverage could decrease if they received private coverage instead.37

1 Evidence on Expenditures with

Expanded Coverage

As described earlier in this chapter, analysts who

calculate the costs of covering uninsured people

under particular reform proposals may take somewhat different statistical approaches. The researchers who have done estimates of costs of

covering uninsured people under a universal coverage scheme, although not in the context of particular reform proposals, also take differing

statistical approaches. For example, the Long and

Marquis and Spillman estimates described below

first estimated differences in utilization as described above, and then assigned expenditures to

services that were: 1 ) used previously and 2) expected to be used under universal coverage.38 In

contrast, the third study reviewed here only uses

survey data on expenditures for health services by

insured and uninsured individuals without first estimating utilization differences (198). This section reviews conclusions of three studies of

estimated costs of covering previously uninsured

people.39

Spillman, 1992

Following her analysis of differences in utilization of physician and hospital services (see

above), Spillman asked, “What is the monetary

cost of the additional resources that would have to

be committed to health care if the uninsured were

to use basic services on a par with the insured?” To

arrive at this estimate in 1989 dollars, Spillman

adjusted utilization differentials for nonemergency ambulatory and inpatient care using:

= estimates of the percentage of persons uninsured for any part of 1987 (the most recent year

for which such estimates were available when

she did her analysis),

● the average share of the year spent without insurance computed from NMCUES data,

● population estimates by age, and

● per capita spending data derived from HCFA’S

1984 and 1989 National Health Accounts.40

ST This is an interesting example of a situati(m in which, although utilization maybe lower under private coverage, expenditures are likely tt~

be higher, because of relatively low Medicaid provider payment rates (56).

IX Only two ~tudles descn~d in the “utl]lzatlon’” section ahwe went (m to estimate the costs associated with reducing tic gap in utilization

between insured and uninsured people.

w son)c ha~e nlade [he argument that COY,erlng the cu~ent]y uninsured w(wld lead t(} Cos( Savings because the c~e received bY ‘ninsured

pw)ple is t)ften of a more expensive, emergency nature. However, no analyst has made this assumption.

M Spl]lrllan used a ~(lnlplicated nlcth(~ t. ~onlvnsate for several deficiencies (relative to hcr goals) in the HCFA and NMCU~S data (e.g.,

the fact that national health accounts do not include separate estimates for individuals y(mnger than 65, for adults separately from children, or

for (mtpatient against inpatient hospital spending). Spillman notes several implicit and explicit assumpti(ms that arise from the methods she used

(e.g., that spending ratios for elderly and noneldcrly people were roughly the same in 1984 and 1989; that spending is approximately proportl(mal to utlli~ati(m; that being uninsured affects Ihe pr(hability of usc by children but m)t average use (mce admitted to the hospital; and that

ratios of mpat!ent to {mtpatien! care in community hospitals are similar to those for all hospital spending) (151 ).
126 I Understanding Estimates of National Health Expenditures Under Health Reform

Type of health insurance for

Study cited in source of evidence which relevant — ——— ——

Selected original studies

Spillman, 1992 Health insurance on average

Long and Marquis, in preparation Private employer-sponsored coverage; adjusted for all versus partial -

year coverage

AHCPR, December 1991

Hafner-Eaton, 1993

Hahn, 1994

Any private insurance or public insurancec but no private Insurance

versus persons uninsured throughout 1987

Any private insurance, Medicaid,

Medicare, military coverage (e.g.,

CHAMPUS); the category uninsured

was a residual

Five mutually exclusive Insurance

groups created from the data. 1)

uninsured for the full year, 2) private

Insurance for the full year, 3) private

insurance for part of the year and

uninsured for the remainder; 4) Medicaid coverage for the full year, and

5) Medicaid coverage for part of the

year. Privately Insured Included military coverage (e.g., CHAMPUS)

Study sample of persons with public

Insurance Included only those covered under AFDC or a similar program, and excluded people who

had coverage because they were

sick and disabled (e g., medically

needy Medicaid coverage).

-. .

Measures of utilization used

Emergency visits to hospital ED, nonemergency services in hospital EDs and

other ambulatory settings; inpatient hospital servicesb

Numbers of ambulatory encounters and

numbers of inpatient days, ambulatory

services Included contacts with physiclans in their offices and clinics, as well

as, to the extent it was able to be differentiated, outpatient hospital services

Expenditures for personal health services. direct expenses Incurred for hospital stays, emergency room and outpatient clinic visits, ambulatory physician

visits, nonphysician ambulatory care,

dental visits, prescription medicines,

home health care, and other items (e.g.,

medical equipment and supplies)

Llkelihood of a person having any physician visits during the previous 12

months

Three types of medical care visits

Reactive ambulatory measured using

the sum of 3 variables (1) number of

outpatient hospital visits to a physician,

2) number of medical visits not in an

outpatient hospital setting to a physician; and 3) number of visits to an emergency room) only if the reason for the

visit was not preventive or proactive,

Preventive or proactive, measured using

same 3 variables as reactive visits, but

counted as prevent we or proactive if

identified as a vision exam, maternity

care visits, immunization, or general

checkup not associated with a condition;

Hospitalization, measured as 1) number

of hospital stays, 2) number of nights

spent in the hospital
Chapter 4 Effects of Providing Insurance to Uninsured People I 127

Type of health insurance for

Study cited in source of evidence which relevant Measures of utilization used

Reviews

OTA, September 1992 Varied; studies did not provide Utilization Patient reports of having a

enough information to distinguish usual or regular source of care, and of

among scopes and depths of foregone or delayed care, physician viscoverage its, inpatient hospital stays, use of clinical preventive services.

Long and Marquis, in preparation Varied

(review portion)

Process of care Hospital length of stay,

cost of hospital care, number of procedures, types of procedures, negligent

adverse events, patient satisfaction with

process of care,

Ambulatory encounters (probability of

an ambulatory contact, plus number of

contacts, combined)d

, Inpatient hospital

services (probability of an inpatient stay

plus length of stay, combined)

KEY: AFDC = Aid to Families with Dependent Children, AHCPR = U S Department of Health and Human Services, Public Health Service, Agency for

Health Care Policy and Research; CHAMPUS = Civilian Health and Medical Plan of the Uniformed Services ED - emergency departments NA= not

applicable or not available, OTA – U S Congress, Off Ice of Technology Assessment

aStudy results are shown in table 4-2

bSpillman used the two-part model of utilization made standard after the Rand Health Insurance Experiment

cPersons with public insurance include those with Medicaid, Medicare, CHAMPUS and State and local medical assistance programs (198)

dAmbulatory encounters can include phone calls or visits to physicians’ or other providers Offices or visits to hospital outpatient departments Surveys do not always distinguish among these types of encounters and settings for encounters and studies using surveys do not always define their

terms clearly

SOURCES Off Ice of Technology Assessment, 1994 based on sources as shown Full citations are at the end of this report

Spillman projected the incremental cost of

closing the service gap at $25.7 billion in 1989

dollars ($41.4 billion in 1994 do11ars) (151), an increase by or on behalf of previously uninsured

people of approximately 165 percent.41 Spillman’s estimate amounts to 3.9 percent of NHE,

using a baseline of $664 billion for 1989, and is

higher than estimates from the other two studies

reviewed here (OTA calculation, based on baseline from CBO ( 168)).

In its November 1993 publication on behavioral assumptions, CBO comments that the Spillman

analysis probably overstates the increase in expenditures because of the way Spillman defined

the uninsured population: “By excluding those

who received some public benefits under various

programs, she excluded the only segment of the

uninsured population that has significant health

care expenses” (169). As a result, Spillman’s estimate of expenditures on behalf of uninsured

people was atypically low.

As noted above, CBO estimated that baseline

spending by uninsured people was approximately

$35 billion in 1991 ($46.6 billion in 1994 dollars,

by OTA’s calculation (165)). By comparison,

Spillman estimated that baseline spending by

uninsured people was $15.6 billion in 1989 ($1 8.9

billion in 1991 dollars, and $25.2 billion in 1994

dollars, by OTA’s calculations (151 )). The difference between CBO’S approach and Spill man ap41 mat is $25.7 in new sPnding/$ 15.6 in spending at uninsured utilization l~v~l = 1.65.
128 I Understanding Estimates of National Health Expenditures Under Health Reform

preach suggests the importance of understanding

how the uninsured population is defined for estimates of incremental costs of covering uninsured

people. It is also important to understand that Spillman’s total applies to a smaller portion of personal health care expenditures than the analysts’

estimates (see table 4-5).42

Long and Marquis43

Long and Marquis converted estimates of differences between insured and uninsured people into

predicted units of ambulatory and hospital inpatient services (i.e., numbers of ambulatory encounters and numbers of inpatient days) for

uninsured people, and used the predicted units to

calculate the potential cost of covering the uninsured (91 ).

As did Spillman’s, Long and Marquis’s cost information came primarily from the HCFA National Health Accounts (86), and their estimates of

aggregate use came from the HIS.44

Long and Marquis concluded that, if previously uninsured people were insured with a typical

employment-based policy, they would incur an

additional $19.9 billion in payments to physicians

and hospitals in 1993 alone ($21.9 billion in 1994

dollars, as calculated by OTA) (91). Long and

Marquis estimated that this increment is equal to

2.2 percent of projected baseline 1993 NHE.45

In addition to noting uncertainties that could affect their estimates of utilization, Long and Marquis noted other uncertainties that could affect

their estimates of the costs of covering uninsured

people (91 ). In 1993 dollars, Long and Marquis

estimate that incremental costs could range from

$16 billion to $29 billion.

AHCPR Analysis of NMES, 1987

The National Medical Expenditure Survey

(NMES) is the basic source of information on expenditures that most analytical groups use to make

projections of the costs of more complete insurance coverage. In a 1991 report, analysts at the

AHCPR analyzed the NMES data and found that

“differences in health care use and expenditures

according to insurance coverage remained when

economic status, ethnic/racial background, and

health status were considered separately” (198).

The NMES results suggest that individuals under 65 who were uninsured all year incurred average total expenditures of $915 per user, compared

with an averageof$1,316 for people with any private insurance all year, and $2,619 for people with

public insurance only. Thus, prior to adjustments

for other factors likely to affect the use of services,

uninsured individuals who used services incurred

costs that were 69 percent of those incurred by

people with private insurance, and 35 percent of

those incurred by people with public insurance

only.46 Thus, to bring expenditures of the average

uninsured health care user to the level of a privately insured health care user would increase expen42 phySician and h(,Spitalse~lces account for about 65 percent of personal health care expenditures, and 60 Percent Of overall NHE (83).

43 s= previous nt}te on the Long and Marquis analysis.

44 ~her sources of &ta were also used. For example, charges per inpatient day for privately insured patients compared with self-pay or

no-charge patients were derived from AHCPR’S Hospital Cost and Utilization ~~~ct, adjusted by data on days per discharge from the 1990

National Hospital Discharge Survey (9 I ).

45 Adding b~]ine expenditures t. the increment] costs of covering uninsured people for physician and hospital SerViCtX would KSult in

total spending m physician and hospital services of $67.0 billion (in 1994 dollars). As an example of what gross premium costs might be, Long

and Marquis assumed that “other professional” services and prescription drugs might be covered under a universal coverage proposal, and that

adding those services, adjusting for coinsurance (which would decrease premium costs), and adjusting for “administrative load” on the insurance premiums (which would increase premium costs at about the same amount that patient cost-sharing would decrease, according to Long

and Marquis) could result in gross premium costs of $77.0 billion in 1994 dollars (table 4-3).

~ OTA calculations based (m table 1 in AHCPR’S WOfi (198).
Chapter 4 Effects of Providing Insurance to Uninsured People I 129

ditures an average $401 per user, a 44

increase on average.47

percent

B Findings and Policy Implications

Tables 4-3 and 4-5 earlier in this chapter present

analysts’ estimates of incremental or total health

spending for newly insured people under universal coverage proposals, alongside results from

empirical research on the same topic,48 Table 4-4

presented key assumptions used by the analysts

and the researchers.

●

m

These summary tables highlight three issues:

Many analyses do not report dollar estimates of

the incremental or total costs of covering newly

insured people but some estimates are available

(e.g., Lewin-VHI (89); CBO (165)).

While the available estimates are all similar in

direction (i.e., covering uninsured people will

add to national health expenditures under reform), they appear to vary a great deal from

each other in magnitude, even for the same proposal (from $28.4 billion (89) to $83.6 billion

(Clinton Administration, based on OTA’s calculation) (both figures are in 1994 dollars, as

calculated by OTA). The greatest difference between these estimates can probably be explained, at least in part, if one knows that the

Clinton Administration included part of the

costs of previously uncompensated (i.e., costshifted) care in their estimate of new spending

for previously uninsured people, while the other analyst included an estimate of cost-shifted

care in their estimates of baseline spending by

uninsured people.49 Both analysts subtracted

some of the cost-shifting elsewhere in their

NHE analyses. Other differences between analysts’ estimates appear to stem primarily from

the type and scope of insurance coverage that

50 and policy parame--

is assumed under reform,

ters for patient cost-sharing requirements.

■ Research studies support analysts’ conclusions

that adding new people to the insurance rolls

will increase national health expenditures, but

the two available studies also vary from each

other ($17.6 billion to $41.4 billion in incremental costs (in 1994 dollars, as calculated by

OTA)). The two research estimates would naturally tend to be lower than estimates associated

with reform proposals because the research estimates generally apply to a smaller portion of

personal health and national health expenditures.

Without access to the analysts’ models or documentation, it is only possible to explain differences among analysts’ estimates qualitatively; it

is not possible to reconcile them.

In summary, all available evidence suggests

that providing coverage to uninsured people is

likely to increase national health expenditures under reform. Some of the differences among estimates can be explained, at least in part, through a

relatively close examination of the assumptions

underlying the analysts’ and researchers’ estimates. However, it is not possible for OTA to select or calculate a specific dollar figure as the

correct incremental (or total) cost of covering previously uninsured people under reform.

47 NOI a]] Uninsured ~C)pIe use services. According to AHCPR’S analysis of the NMES, GS.7 percent of unimurc~ Pe@e and sT.~ percent

of priva[ely insured people used services in 1 %7. (Uninsured was defined as uninsured all year).

48 As dl~cussed in chapter 1, OTA uses the ICmls ~nfl/}.Y/ and an~lvsts in relati(m to estimates of specific pr~)p)sals for health refoml. Enlpirl -

cal research stwhes are estimates of the costs of c{~~cring uninsured Pet)ple, having m) specific refoml pro~)sal in mind.

@ CBO d(~s not provide separate dollar figures on costs of ct)vm-ing uninsured people, but, as discussed ahwe, II appears lo ha~~ ln~luded

uncompensated care and public spending m its base figures for the Health Security Act (172).

so For exanlp]e, ~w in-VH] assulllcs an extrapolation” ~~f current coverage (89), and the Clinttm Administration (and CB~ ( 172)) assunle the

expanded benefit package under the Health Sccunty Act.
130 I Understanding Estimates of National Health Expenditures Under Health Reform

Policy Implications

As noted above, analysts predicting the impact of

reform on NHE do not always report information

about the component of the change in NHE that

derives from the potential cost of covering uninsured people. Analytical groups may require clear

guidance from Congress about whether Congress

requires such discrete estimates.

If Congress is interested in having analysts report separately projections of the potential costs of

covering uninsured people, it will likely have to

determine the types of information that it will find

most useful. Are estimates of the cost of covering

uninsured people under assumptions of current

policy (i.e., with no other aspects of reform embedded) sufficient? Or do policy decisions require

analysts to integrate into their estimates of costs of

covering uninsured people the potential effect of

other aspects of reform, such as the proposed

benefit package? How should current cost-shifting be treated?
Effects of

Administrative

Changes

Under

Reform 5

P

roponents of many health reform proposals in the 103d

Congress claim that their bill will generate administrative

savings. Examples include:

A = The American Health Security Act of 1993 (S. 491)

■

■

“would simplify and streamline the administration and financing of health care, and administrative costs would drop dramatically” (193).

The Health Equity and Access Reform Today Act of 1993 (S.

1770) “establishes standardized forms and electronic information reporting and exchange requirements to eliminate bureaucratic red tape and reduce administrative costs and burdens”

(194).

The Health Security Act (S. 1757) would “lower administrative costs. . . [by] cutting through the paper jungle generated

by some 1,500 insurance companies, and stripping away conflicting regulations imposed by a variety of federal, state, local

and private agencies” (208).

The Managed Competition Act of 1993 (H.R. 3222) would n

achieve

among 

processing and administrative simplification” (187).

health plans, malpractice reforms, electronic claims

“cost savings. . . through enhanced competition K

Some analysts have projected large administrative savings under certain reform proposals, further highlighting the importance

of assessing the assumptions behind estimates. One analyst, for

example, estimates that $113 billion in administrative savings

could be achieved in reduced insurer and provider overhead if the

United States adopted a Canadian-style single-payer system

(107).

This chapter addresses the two policies that underlie most estimates of administrative costs under reform-adopting a single- I 131
132 I Understanding Estimates of National Health Expenditures Under Health Reform

payer system and reforming the private insurance

market. Analysts believe that a single-payer system may reduce administrative costs by replacing

private insurers with a single payer (i.e., the government), and thus eliminate the overhead of private insurers and reduce the overhead of health

care providers. Analysts estimate that reform of

the private insurance market may reduce administrative costs by allowing small firms to purchase

insurance through purchasing pools and limiting

underwriting (an insurance company’s determination whether and on what basis it will accept an application for insurance). However, these savings

could be offset, to some extent, by administrative

costs for new programs associated with pooling

and related policies, such as health alliances or

health plan purchasing cooperatives, and a national health board to establish a standard benefits

package.

Other reforms also may affect administrative

costs, such as requiring uniform paper claim

forms or standardized electronic claim formats.

Analysts do not feature these factors prominently

in their analyses, if they consider such secondary

factors at all, estimating they would produce only

small savings. Accordingly, this chapter does not

concentrate on these secondary factors beyond

stating that there is little reliable evidence on potential savings from uniform claim forms and

electronic claims processing.

Although frequent references are made to administrative waste in the current health care system, administrative spending can produce

services that are viewed as valuable. Administrative costs for hospitals, for example, can be defined to include utilization review, assessments of

the appropriateness of care, and patient information systems, all of which may improve the quality

of care. This chapter examines administrative

costs as viewed in analyses of proposals by the following organizations or individuals: the Clinton

Administration (32, 202), the Economic and Social Research Institute (ES RI) ( 107), Grumbach et

al. (50), Lewin-VHI (87,89), the Congressional

Budget Office (CBO) (165,168,172), the General

Accounting Office (GAO) ( 178), and Woolhandler and Himmelstein (212). Analysts from these

organizations appear to include in their definitions

of administrative costs private insurance load

(usually regarded as the difference between premiums and claims paid), the costs of operating

public programs related to the delivery of health

services, and provider overhead (usually hospitals

and physicians).2

What analysts include in these three specific

categories differs, however, and affects their estimates of the impact of reform. For example, while

other analysts regard private insurance load as the

difference between premiums and claims paid (including profit), CBO excludes taxes, which it considers to be an income transfer, and thus not real

administrative costs, 3 Excluding taxes lowers

CBO’S estimate of administrative savings under a

single-payer system. Variations in definitions of

provider overhead are greater still, as outlined below, and contribute to wide ranges of estimated

savings under reform.

Analysts estimate that under a single-payer

system relatively large insurer and provider administrative savings could be achieved (ranging

from $47 billion to $113 billion in 1991 ),4 often

based on comparisons with Medicare and Canada’s system. Estimates of insurer administrative

savings based on the experience of other singlepayer systems appear reasonable, though addi1 Danzon argues that standard accounting measures of administrative costs igntwe certain real s(~ial costs (24). For example, estimates of

public single-payer insurance administrative costs do not include the limited choice of type of insurance coverage.

‘2 Emp](~yers ~dindividuals al~) incur adminis~ative cmts in the health care system. These cx)sts, however, are not generally cstinlated by

analysts and are not included in national health expenditures (NHE).

3 CBO estimates these taxes at $1 billion in 1990, based on an unpublished estimate by GAO (1 65).

4 l%e estimate of $113 billion assumes that U.S. health spending as a percentage of gross domestic product (GDP) will fall to Canadian

levels. Other high estimates of savings rely on optimistic assumptions about changes in pr(wider aclivtt]es under a single-payer system.
Chapter 5 Effects of Administrative Changes Under Reform I 133

tional administrative functions (e.g., greater

utilization review) may be performed in the

United States under a single-payer system. Estimates of provider savings are less certain and vary

widely due to an incomplete understanding of the

administrative activities of physicians and hospitals.

Analysts project that administrative savings

from insurance market reform would be offset partially or completely by new administrative costs

growing out of reform, for little net effect on national health expenditures. The evidence supports

this conclusion, since potential savings from reduced insurer administrative costs are limited and

providers would continue to be reimbursed by a

multitude of payers. Several analysts cite studies

that compare administrative costs for small and

large firms and assume that pooling small firms

and limiting underwriting will reduce administrative costs. This assumption is intuitively reasonable, but there is little empirical evidence on the

impact of pooling on administrative costs to support it.

This chapter first outlines analysts’ assumptions about administrative costs in estimates of reform, focusing on their treatment of proposals that

would implement a single-payer system or reform

the private insurance market (table 5-1 ). Next it

analyzes the theoretical and empirical evidence

related to these assumptions. The chapter concludes with an analysis of the uncertainty surrounding estimates of changes in administrative

costs.

ANALYSES OF REFORM PROPOSALS

9 Analyses of Single-Payer Proposals

Many analysts estimate that large administrative

savings could be achieved if the United States

converted from the current multipayer system of

private insurers and public programs (e.g., Medicare and Medicaid) to a single-payer system. Analysts assume that under such a system, private

insurer marketing, eligibility determination costs,

and profits would be largely eliminated, reducing

insurer overhead. They would be replaced with

the overhead expenses of running a single-payer

system. Health care providers would deal primarily with one payer, which according to analysts

would lower their overhead costs as well. In most

single-payer proposals, hospitals would be given

budgets, physicians would be paid according to a

fee schedule, and there would be no patient costsharing, 5 further lowering provider overhead

costs, according to analysts.

Although only CBO has analyzed the American Health Security Act (H.R. 1200/ S. 491), a

single-payer proposal in the 103d Congress, other

organizations have analyzed single-payer systems

that have not been written into formal legislation

(50,87,107,178,212). Like the American Health

Security Act, the other systems analyzed are assumed to have hospital budgets, physician fee

schedules, and no patient cost-sharing. CBO’S

analysis of the American Health Security Act and

five general analyses are presented here to highlight assumptions made about administrative

costs under a single-payer system.

■

m

■

These examples illustrate that analysts:

anticipate large administrative savings under

single-payer proposals;

often project savings based on comparisons

with Medicare and Canada; and

use different baselines for provider overhead

under current policy.

The assumptions and conclusions of these analyses are summarized in table 5-2 and figure 5-1.

CBO’S Analysis of the

American Health Security Act

CBO estimates that administrative costs would

fall considerably under the American Health Security Act (170, 171 ). Insurer overhead would fall

S Patient ct}st-sharmg is the general set of financial arrangements under which a p~rti(m of the payment to a provider of health care services is

the liability of the patwnt (may Include dcductihlcs, c(~payn}ents, and ct~insurance).
-—— .

Analysesa

Applying Encouraging Providing universal

government cost managed coverage to Reducing

controls competition uninsured people administrative costs

Proposal (chapter 2) (chapter 3) (chapter 4) (chapter 5)

American Health Security Act of 1993 (H.R. 1200/S. 491)b

Comprehensive Health Reform Act of 1992 (H.R. 5919)C

Health Care Cost Containment and Reform Act of 1992

(H.R. 5502)C

Health Security Act (H.R. 3600/S. 1757)b

Health Security Act (H.R. 3600/S. 1757)b, Lewin-VHl

scenario without government cost controls

Managed Competition Act of 1992 (H.R. 5936)C

Managed competition plan, Starr version

National health plan, full savings scenario

National health plan, administrative savings scenario

Single-payer plan, CBO version with patient cost-sharing

Single-payer plan, CBO version without patient

cost-sharing

Single-payer plan, GAO version

Single-payer plan, Grumbach et al. version

Single-payer plan, Lewin-VHl version

Single-payer plan, Woolhandler and Himmelstein version

Universal Health Care Act of 1991 (H.R. 1300)C

CBO

CBO

CBO CBO

Clinton Administration Clinton Administration

Lewin-VHl Lewin-VHl

Lewin-VHl

CBO

ESRI

CBO

CBO

CBO

CBO

Clinton Administration

Lewin-VHl

CBO

Sheils et al

CBO

CBO

CBO

CBO

CBO

CBO

CBO

Clinton Administration

Lewin-VHl

CBO

ESRI

ESRI

CBO

GAO

Grumbach et al.

Lewin-VHI d

Woolhandler and

Himmelstein

CBO

KEY: CBO = U.S. Congress, Congressional Budget Office; GAO = U.S. GeneraI Accounting Office, ESRI = Economic and Social Research Institute.

aFull citations for the analyses are in appendix B.

bBill numbers are for 103d Congress.

cBill numbers are for 102d Congress.

dAnalysis was conducted by Lewin-lCF. The company was acquired and expanded in 1992. For purposes of this report all Lewin analyses are identified as Lewln-VHl

SOURCE: Office of Technology Assessment, 1994.
Chapter 5 Effects of Administrative Changes Under Reform I 135

from the current level of about 7 percent of “covered services” to 3.5 percent and 3 percent under

H.R. 1200 and S. 491, respectively.6 CBO also estimates that provider overhead would be reduced

under both bills, stating that “hospitals, physicians, home health agencies, and other health care

professionals could save about 6 percent of revenues by dealing with only one payer and eliminating copayments and other billing.”7

CBO does not explain its assumptions in its

December 1993 memorandum, but in a previous

general study examining the impact on administrative costs of a single-payer system with no copayments,8 CBO assumes that insurer overhead

would fall to Medicare rates (“about 1.9 percent of

the cost of covered services”) (165),9 (CBO estimates total administrative savings of $52 billion

in its general study of a single-payer system.)

CBO does not state why administrative costs under the American Health Security Act would only

approach, but not reach, the level of Medicare.

CBO may assume that functions additional to

those performed under Medicare would be performed under the act.

CBO defends its assumption of Medicare rates

in its general study of a single-payer system. Although some have said that economies of scale in

processing claims would yield lower insurer overhead rates for a national system, CBO states that

these economies of scale are already fully realized

under Medicare. Others have stated that a national

system would have higher overhead costs than

Medicare. They argue that the size of the average

Medicare claim is higher than the national aver-

,2 0$ billions

7

U Insurer savings

a Provider savings

= Combined insurer and provider savings

90--

60--

~

30--,

0

LewinVHI

— —

CBOb GAO Grumbach ESRI ESRI

et al. (admin.) (full)

KEY: CBO = U S Congress, Congressional Budget Off Ice ESRI= Economic and Social Research Institute, GAO - U S Congress, General

Accounting Off Ice

a Full citations for the analyses are in appendix B. Descriptlons of assumptions behind estimates are m table 5-2

b Single

.payer plan, CBO version without patient cost-sharing

SOURCE Off Ice of Technology Assessment 1994

age, yielding low estimates of Medicare administrative costs when expressed as a percentage of

total costs. CBO refutes the argument that the size

of the average Medicare claim is higher than that

b CBO d(~s not state explicitly why the estimates of the two bi 11s vary by a half percent, th(mgh it notes that S. 49 I w~~u!d prohibit c~Jinsurance or copay menls “for all items, ” wh i Ie H.R. 1200 “would prohibit coinsurance or copayments (rely for acute care or preventive servlccs. ”

7 cBo aS5un1es [hat nur51ng homes wou]d a]so save 6 percent of revenues under S. 491. The estimate of adminis~ative sav ing~ under S. 49 I

and its analysis is similar to CBO’S estimate of H.R. 1300, a single-payer bill of the 102d Congress, with the excepti(m that adminis~rative ct)sts

fall to 3 percent m(we quickly under S. 491. ( 168)

g Referred to in tables 5-1 and 5-2 as single-pa}er p/un, CBO \’ersion w’ifhoutputient cost-sharing. CBO uses [he teml c(~paynwnt to refer to

patient cost-sharing.

9 For all scr~ Ices except Iong-teml care, which w(mld be covered by a residual Medicaid pr(~gram.
- — — -.

Key assumptions

Savings in

administrative

costs ($ billions)

Estimate

Analysisa

year(s)

CBO 1997-2003

Proposal insurer overhead assumptions

.—

Administrative costs as a percentage of “covered services” would fall

from current level of “about 7940” to

3.5% in 4 years c

Administrative costs as a percentage of “covered services” would fall

from current level of “about 770” to

3% in 4 years

Assumes overall administrative

costs would fall from current levels

(1 9%-24%) to Canadian levels

(8%-11%) but does not assume total

health spending would fall to Canadian levels

Assumes health spending as a percentage of GDP and overall administrative costs would fall to Canadian

levels. Estimates provider and insurer administrative savings together,

(Assumes health spending would fall

from 12.8% to 8 7% of GDP in 1991.)

(r assume[s] that the single payer

would have Medicare’s rate of program overhead costs as a percentage of insured services. In addition,

overhead costs for other public programs would continue. “d

Provider overhead assumptions

American Health

Security Act

(HR. 1200)

NA Would fall by 6% of revenues,

phased in over 2 years.

American Health

Security Act (S. 491)

CBO 1997-2003 NA Would fall by 6% of revenues,

phased in over 2 years

National health plan,

administrative savings

scenario

ESRI 1991 $90 total See “Insurer overhead assumptions. ”

National health plan ESRI

full savings scenario

1991 $113 total See “Insurer overhead assumptions “

Single-payer plan, CBO CBO

version without patient

cost-sharing

1991 $52 total

($26.8 insurers,

$25.2 providers)

Physician Assumes physician administrative costs (estimated at 8,3%

of revenues) would fall to Canadian

levels (2%)e

Hospital, Assumes hospital administrative costs (estimated at 15% of

revenues) would fall to Canadian levels (9%). f
Key assumptions

Savings in

Estimate administrative

Proposal Analysisa

year(s) costs ($ billions) — —

Single-payer plan, GAO 1991 $67 total

GAO version ($34 insurers,

$33 providers)

Single-payer plan,

Grumbach et al.

version

Single-payer plan,

Lewin-VHl version

Grumbach 1991

et al.

Lewin-VHl 1991

$67 total

($27 insurers,

$40 providers)

$468 total

($22 5 Insurers,

$243 providers)

——— — - — —

Insurer overhead assumptions — -..

“We assumed that the Insurance

overhead share of total health expenditures in the United States

[5.8% in 19899

] was reduced to the

proportion obtained in Canada

[1.2% in 1987h

]”,

Assumes insurer overhead (estimated at 5.9% of personal health

expenditures in 1987)j would fall to

Canadian levels (1.4%)k

Assumes Medicare per capita overhead, with adjustments for claim level and elimination of hospital billing

Provider overhead assumptions

Physician: Assumes physicians

would save 10% of current revenues,

based on comparisons with Ontario.

(Examines differences in non-physiclan personnel, physician time spent

on insurance claims, and outside billing services. )

Hospital: Assumes hospital administrative costs (estimated at 15.4%)

would fall to Canadian Ievel (9.0%)I

Physician: Assumes physician administrative costs (estimated at 8.3%l

of expenses) would fall to Canadian

levels (2%), m

Hospital; Assumes hospital administrative costs (estimated at 20.2% of

revenues) would fall to Canadian levels (estimated at 9.0 Ye). n

Examines Individual provider overhead functions (labor and services

not directly related to patient care)

and determines which would be reduced under a single-payer system

and by how much

Physician: Assumes physician administrative costs would fall from the

current level of 31.6% of revenues to

23.5% of revenues

Hospital Assumes hospital administrative costs would fall from the current level of 33.4°A of revenues to

28 7% of revenues,

——

(continued)

m
—

A

Savings in

Estimate administrative

Proposal Analysisa

year(s) costs ($ billions)—

Single-payer plan, Wool- Woolhandler 1987 $83.2 total

handler and Himmelstein and ($21,7 Insurers,

version (method 1 ) Himmelstein $61.4 providerso

)

Single-payer plan, Wool- Woolhandler 1987

handler and Himmelstein and

version (method 2) Himmelstein

$69.0

($21.7 Insurers,

$47.2 providers)

Key assumptions

Insurer overhead assumptions

Assumes Insurer administrative

spending (estimated at 5.1% of covered spending) would fall to Canadian levels (1.2%)

Same as method 1.

Universal Health Care CBO

Act of 1991 (H.R. 1300)

1995-2000 N A Administrative costs as a percentage of “covered services” would fall

from current level of “about 7%” to

3% in 5 years.

Provider overhead assumptionsb

Physician: Method 1 is based on

physicians’ reports of their overhead

and billing expenses. Assumes physician administrative costs (estimated at 48.1% of costs) would fall

to Canadian levels (34.4%).

Hospital: Assumes hospital administrative costs (estimated at 20.2% of

costs) would fall to Canadian levels

(9.0%). P

Physician: Method 2 is based on

comparisons of clerical and managerial personnel. Assumes physician

administrative costs (estimated at

25.1% of costs) would fall to Canadian levels (18.3%).

Hospital: Same as method 1.

Would fall by 6% of revenues,

phased in over 2 years,

KEY: CBO = U S Congress, Congressional Budget Off Ice, GAO = U S General Accounting Off Ice, ESRI = Economic and Social Research Institute; NA = Not available

aFull citations for the analyses are in appendix B.

bAs noted in text, all estimates Of provider overhead savings may be inpreclse due to difficulties in measuring current U S and Canadian provider overhead

cSeveral of CBO’S assumptions about administrative costs in the H.R. 1200, S. 491, and H R 1300 bills appear to be found in CBO’S April 1993 report (Sing/e-Payer and A//-Payer Health Insurance

Systems Using Medicare's Payment Rates) It IS not clear, however, why CBO does not assume that Insurer overhead under these bills would fall to Medicare levels as it does in the April 1993 report

dAssumes residual Medicaid program for long-term care

‘Physician administrative costs estimates are based on Grumbach et al s 1991 study and relate primarily to billing costs

fHospital administrative costs estimates are based on GAO’s 1991 study (1 75) and relate primarily to billing and management Information systems.

9GA0 uses data from “National Health Expenditures 1988, ” Health Care Financing Review 11 (4) 47-48, summer 1990
hGAO uses data from Health and Welfare Canada, National Health Expenditures in Canada 1975-1987, September 1990, pp. 184-185 The comparability of the U.S. and Canadian definitions of Insurer

administrative costs IS unclear

IHospital administrative costs included are “general accounting patient accounts and admittlng, medical records purchasing and stores and data processing” and are derived from American Hospital

Association data for the United States and unpublished data from Health and Welfare Canada for Canada

JGrumbach et al use data from Health Care Financing Administration, “National Health Expenditures 1986 -2000,” Health Care Financing Review 8(4) 1-36, 1987

kGrumbach et al use data from “National Health Expenditures “Ottawa, Ontario: Health and Welfare Canada, 1990.

IGrumbach et al. use data from an American Medical Association survey Includes billlng expenses only.

‘Grumbach, et al use data from written communication with Ontario Medical Association offficial Includes billing expenses only

‘Study does not indicate what IS Included under hospital administrative costs, but estimates appear to come from the study by Woolhandler and Himmelstein.

‘Expense-based estimate of physician overhead. Per capita estimates presented in report were converted by OTA to dollar estimates of total savings to providers and insurers (These numbers do not

add up due to rounding ) Only thls study (both method 1 and method 2) includes nursing home administrative savings ($4.1 billion of savings attributable to reduced nursing home administrative costs),

inflating overall estimates of administrative savings relative to other studies.

PStudy Includes the following hospital administrative costs “hospital administration (“other”), adverting, assoclahon-membership fees, business machines, collection fees, postage, auditing and

accounting fees, other professional fees, service-bureau fees, telephone and telegraph, indemnity to board members, travel and convention expenses, medical records and hospital Iibrary, and

nursing administration “

qPersonnel-based estimate of physician overhead

SOURCE Office of Technology Assessment, 1994

4

cdCa
140 I Understanding Estimates of National Health Expenditures Under Health Reform

of the population at large, arguing that “the higher

costs of the Medicare population are very closely

tied to higher claim rates, rather than higher

amounts per claim.”10

Although CBO does not explain its assumptions about provider overhead savings under the

American Health Security Act, it appears to take

them from its April 1993 analysis of a singlepayer system with no copayments (165). In that

study, CBO assumes that hospital administrative

costs (mostly billing and management information systems) would fall from the estimated current level of 15 percent of revenues to the

Canadian level of 9 percent,11 and that physician

billing costs would fall from the estimated current

level of 8.3 percent of revenues to the Canadian

level of 2 percent. ’2

Lewin-VHI’s Analysis of a

Single-Payer System

In its analysis of a single-payer system,13 LewinVHI estimates that administrative costs would decrease by $47 billion (1991), with the savings

coming almost evenly from reduced insurer and

provider overhead (87, 147). For insurer overhead,

Lewin-VHI assumes that a national system would

operate with per capita administrative costs just

below the levels of the Medicare program. It estimates administrative costs slightly below Medicare levels because it assumes utilization levels of

the Nation population would be lower than those

of the population currently covered by Medicare.

Also, Lewin-VHI assumes that hospital budgeting would reduce insurer administrative costs of

processing hospital claims.

For provider overhead, Lewin-VHI does not

make comparisons with Canada, but instead estimates the extent to which individual physician

and hospital administrative activities would decrease under a single-payer system. Lewin-VHI

appears to base these estimates on its analysts’

judgments rather than data. Lewin-VHI defines

provider overhead broadly to include all activities

other than those directly related to patient care

(unlike CBO, which focuses on billing and collection costs). Lewin-VHI estimates that physician

overhead would fall from the current level of 31.6

percent of revenues to 23.5 percent, savings of 8.1

percent of revenues. Hospital overhead would fall

from 33.4 percent of revenues to 28.7 percent,

savings of 4.7 percent of revenues.

Although Lewin-VHI avoids the difficulties in

assuming that U.S. provider overhead under a

single-payer system would fall to Canadian provider levels, it may add new uncertainty with its

judgments about how individual provider functions would change under a single-payer system

(which are not based on data). In addition, LewinVHI acknowledges the difficulties of determining

current administrative costs, pointing to the lack

of comprehensive data on provider administrative

activities. For estimates of baseline hospital overhead, Lewin-VHI relies on California hospital

data. Estimating physician overhead is more problematic still, according to Lewin-VHI, since

‘'[c]omprehensive data on physician overhead and

administrative costs are largely unavailable” (87).

lo CB() re~)ns [hat its exanlinallon of [he Nati(mal Medical Expenditure Survey for 1987 indicates that average health expenditures per

per.wm per year f~~r the aged are 2.8 times higher than the national average, and claim rates (number of claims ~r person per year) for the aged

are 2.5 times higher than the national average.

I I CB~ uses GAO estlnlates of hospital overhead for the two countries ( 175). This assumption appears to conflict with CBO’S d@.Jeof the

GAO report found in the appendix, however, which states, ”... IO]nly about half of the savings estimated by GAO is the result of billing costs for

hospitals in the United States that do not exist for Canadian hospitals. The rest might be obtair-d only if U.S. hospitals discarded the more detailed management systems they currently maintain, and this development seems unlikely.”

i z CBO base. these estlnlates on a Study by Gmnlbach ‘t a’” (50).

13 Refereed t. in tables 5.1 and 5-2 as .rirr~le-pa~er p/cIn, Lew’in-VHl I’er.$iOn.
Chapter 5 Effects of Administrative Changes Under Reform I 141

Economic and Social Research Institute’s

Analysis of a Single-Payer System

A study of a single-payer system by the Economic

and Social Research Institute (ES RI) predicts that

administrative savings could reach $113 billion in

the first year of reform, 1991 (“Full Savings Scenario”) (107). 14 To arrive at this estimate, ESRI

first assumes that health spending as a percentage

of gross domestic product (GDP) ( 12.8 percent in

the U.S. in 1991) would fall to Canada’s level (8.7

percent), for total savings of $241 billion in 1991.

Next, ESRI assumes that administrative costs as a

percentage of health care spending would fall

from the U.S. level, which it estimates is 19 to 24

percent, to the Canadian level of 8 to 11 percent.15

The assumption of this estimate that total U.S.

health spending as a percentage of GDP would fall

to Canadian levels appears unlikely, and is made

by no other analyst. It is one of the key reasons

why ESRI estimates very high administrative savings under a single-payer system. Furthermore,

ESRI’S estimate of the difference in administrative spending as a percentage of health care spending between the United States and Canada is high

and appears to rely on optimistic predictions of

how provider behavior would change under a

single-payer system.

Under a second single-payer scenario (“Administrative Savings Scenario”) that does not assume that total U.S. health spending as a

percentage of GDP will fall to Canadian levels,l6

ESRI estimates that $90 billion in 1991 in administrative savings would be achieved. While lower

than under the previous scenario, this estimate remains high relative to other studies.17 ESRI assumes that a single-payer system would operate at

Canadian overhead rates, which are lower than

Medicare rates, and that all provider activities not

directly related to patient care currently performed

in the United States but not in Canada would be

eliminated.

Woolhandler and Himmelstein’s

Analysis of a Single-Payer System

Woolhandler and Himmelstein estimate administrateive savings ranging from $69.0 billion to $83.2

billion in 1987 if the United States were to adopt a

single-payer system (212).18 Estimates of insurer

savings are based on comparisons of administrative costs for the United States and Canada.

Estimates of hospital overhead savings are also

based on comparisons with Canada, using

California data for U.S. estimates, Woolhandler

and Himmelstein define hospital administrative

costs broadly, including such expenses as advertising, medical records, and travel and convention

expenses.

In estimating physician administrative savings,

Woolhandler and Himmelstein note, “Only indirect or incomplete information is available on the

billing costs of Canadian and U.S. physicians. We

therefore used two different methods. . .“ Their

first approach compares U.S. and Canadian physicians reports of professional expenses devoted to

administrative activities and contributes to their

estimate of $83.2 billion in total administrative

14 R~fc~ed t{) in tables 5-] and 5-2 as notional heal!h pkm, jull .WLtlnR Y \~’1’!lllrtc~.

I S ~ese estima[es inc]ud~pr]va[e insuranc~, public prt~granl, and pri)vder adJll inistral ik c Cxpenscs.Tk SOUrCC Cl[Cd for lhes~ fXTCCJll; I&!CS,

“Himmelstein and Wt~Jlhandler, 1991 ,“ is not listed in the rqxwt’s bibliography. but appears ti) c~m~c frt~m ‘The Deteri(~raIing Efficlencj of the

U.S. Health Care System,” W()()lhandler and Himmelstein.

I ~ Refened t. in tables 5. I and 5-2 as n~fj~>nfl/ }IcfJ/(h pifln, dminislrdll~te .Ya\’ing Y $t’(’n{iric~.

17 ESR1 estlnla(es admin]s[ra[lve C{)$ts as a ~rcen(ag~ of N}IE would fall appn)ximatcl} 12 pcrccrrt. ()(her s[udies cslimaft! d~creiisc$d administrative costs as a percentage of NHE at 9.5 percent (50), 9.1 ~xxmt ( 175), 7, I percent ( 165), ,arrd 6.4 percent ( 147), Percentages (e<cept

ESRI) as reported in a CBO April 1993 repwt ( 165).

18 w/( N)lhandler and H1nlIne]steln ~stlnlatc sallngs based ,)n c{~mparlson$ t~f per capita adnlinistra[ivc costs ft)r [hc United sliiltX i311d (’allada. This approach fails to c(mtrol for differences in the Icvcl of spending (m health services and may overstate savings (24). W{~~lhandler and

Himmelstein’s estimates are also inflated by the lnciusifm of nursing home administrative savings of $4. I billi(m. (N() ()(her analyst includes

nursing home savings. )
142 I Understanding Estimates of National Health Expenditures Under Health Reform

savings.

19 Their second approach compares the

number of clerical and managerial personnel

employed in physicians’ offices in the United

States and Canada and contributes to their estimate of $69.0 billion in total savings.20

Grumbach et al. ’s Analysis of a

Single-Payer System

Grumbach et al. estimate $67 billion in savings in

administrative costs in 1991 (50).2’ They assume

that insurer overhead expenses would fall to Canadian levels. For hospital administrative savings,

Grumbach et al., like Woolhandler and Himmelstein, use California hospital data and make

comparisons with Canada. For physician administrative savings, Grumbach et al. compare billing

costs only for the United States and Canada, using

a survey of the American Medical Association for

U.S. estimates.

GAO’s Analysis of a Single-Payer System

GAO estimates $67 billion in 1991 in insurer and

provider administrative savings under a singlepayer system based on comparisons with Canada

(178).22 GAO assumes insurer overhead as a percentage of NHE will fall to the levels of Canada’s

system.

GAO estimates provider savings based on data

it analyzed on U.S. and Canadian hospital and

physician administrative costs. For hospital overhead savings, it assumes billing and management

information system costs would fall to Canadian

levels. For physician overhead savings, it assumes

that time spent by physicians in billing, expenses

for outside billing services, and nonphysician personnel levels would fall to Canadian levels.

1 Analyses of Proposals That Reform the

Private Insurance Market

Analysts have estimated that reforming the private insurance market by pooling firms into large

purchasing blocs and limiting underwriting

would generate administrative savings (88,89,

168,21 4). The pooling of firms is assumed to lower administrative costs by reducing sales expenses

and facilitating economies of scale in providing

insurance to small employers. Limiting underwriting is assumed to lower administrative costs

by reducing insurers’ expenses in determining the

health status of insurance applicants. If reforms

stabilize the insurance market, employers may

change insurers less frequently, thereby lowering

enrollment expenses. Some analysts conclude,

however, that certain new administrative costs

would be incurred underinsurance market reform,

such as for forming health alliances or health plan

purchasing cooperatives.

Three organizations’ analyses of the Health Security Act are presented here as examples of assumptions about the effect of insurance market

reform on administrative costs.23 The examples

illustrate that analysts:

= may estimate savings from pooling and 1imiting underwriting, although these savings are

partially or completely offset by new administrative costs, yielding a small net change; and

B are sometimes unclear in their assumptions

about administrative costs.

Lewin-VHl’s Analysis of the

Health Security Act

Lewin-VHI estimates that changes in administrative costs under the Health Security Act would

III ~efemed ~() in table 5.2 ~~ ~lng/e.payer plan, Woolhandler and HimmelStein ~’ersiun (method ] )

20 Referred to in table 5-2 as single-payer plan, Woolhandler and Himmelsfein \>ersion (method 2).

z [ Referred to in tables 5-1 and 5-2 as single-payer pkm, Grumbach et a/. \’ersion.

22 Referred to in tables 5- I and 5-2 as sing/e-payer plan, GAO \Fersion.

2J F(M general discussion of how administrative costs may change under reform, see GAO’s May 1994 report (GAO/HEHS-94-158),

“Health Care Reform: Most Proposals Have Potential to Reduce Administrative Costs,” and the American Academy of Actuaries’ May 1994

issue paper, “Administrative Costs for Regional Alliances and Health Plans Under the Health Security Act.”
Chapter 5 Effects of Administrative Changes Under Reform I 143

have relatively little impact on total health spending. According to its analysis, administrative

costs under the Health Security Act would increase by $6.9 billion in 1998, or just 0.5 percent

of what Lewin-VHI estimates total health spending will be then.

Lewin-VHI assumes the Health Security Act

would reduce insurer administrative costs by “1)

reducing the practice of medical underwriting; 2)

restricting pre-existing condition limitations; and

3) reducing large premium variations across insurers that often lead to frequent changes in coverage” through pooling (89). It estimates that

small-firm insurance load would approach the average load of large firms, using as its baseline a

Hay/Huggins study comparing administrative

costs for small and large firms under current

policy. Lewin-VHI projects that insurance load

spending by employers would decrease by 30 percent.24 It also estimates small provider administrative savings due to standardized insurance

benefits and reduced physician adjudication expenses.

Lewin-VHI estimates that insurer and provider

administrative savings would be offset by the

costs of alliances and new federal administrative

costs. To estimate alliance administration costs, it

assumes that there would be, on average, one alliance per one million people, or approximately

255 alliances. Each alliance would have a staff of

200 persons at a cost of $100,000 per person, or

$20 million per alliance. Lewin-VHI does not explain how these assumptions were developed. For

new federal administrative costs, Lewin-VHI uses

estimates by the Administration.25

Clinton Administration’s Analysis of the

Health Security Act

The Administration does not appear to estimate

administrative costs separately under the Health

Security Act. Instead, it projects NHE based on

legislated or expected growth rates of insurance

premiums, expenditures in government programs, and other expenditures. The act, however,

makes two specific references to administrative

costs. The first is that health alliance administrative costs are limited to 2.5 percent of premiums. 26 The second is that for the first year up to

15 percent would be added to the calculated cost

of the standard benefit package for the administration of health plans and health alliances and for

state premium taxes .27

In estimates of federal spending under the

Health Security Act, Administration officials

have included small increases in spending for new

federal administrative costs (32).28 (It is not clear,

however, what federal administrative costs the

Administration includes in its estimates.)

24 SFcl~c ~d~l~lSlratlve costs examined were claims adrnlnis~atlon, general administration, interest credit, risk and profit, c~~mmissi(ms~

and premium taxes. Lewin-VHl estimated administrative costs savings using a similar approach in its 1992 study of the “Bush plan.” In that

study, Lewin-VHI estimated that insurance overhead as a percentage of claims for firms with one to four employers would fall from 40 percent

under current policy to 18.9 percent under the Bush plan (versus 12.5 percent under the Health Security Act). Although Lewin-VHI estimates

greater administrative savings to small firms under the Health Security Act than under the Bush plan, its description of its assumptions for both

estimates are very similar. Lewin-VHI writes of the Bush plan, ‘The Bush plan would reduce administrative costs by: I ) reducing the practice of

medical underwriting; 2) restricting pre-existing condition limitations; and 3) reducing large premium variations across insurers that often lead

to frequent changes in coverage” (88). It is unclear why Lewin-VHl estimates of administrative savings under the two proposals differ despite

apparently very similar assumptions about both proposals’ impacts on the insurance market.

25 New federal Progmm administrati(m costs were estimated at $1.7 billion in 1998. (89).

26 .’ln n. Cme shall a [regional alliance] administrative percentage exceed 2.5 percent.” (secti(m I S52 (c))

27 me calculated avemge benefit “shall be increased by an estimated percentage (detemnined by the Board, but no m(lre than 15 percent)

that reflects the proportion of premiums that are required for health plans and regional alliance administration. . . and for state premium taxes.”

(section 60C)2 (b) (2) (D)) This 15 percent figure is an allowance for the first year, not a limit on the administrative costs of health plans.

28 “New Federal Administrative and Stan-up COSIS” are estimated at $1.8 billion in 1998. (32)
144 I Understanding Estimates of National Health Expenditures Under Health Reform

Administration officials may believe that under

the Health Security Act insurer overhead would

decrease through pooling and limited underwriting, and that provider overhead would decline in

response to uniform benefits packages and electronic claims processing. Administration analysts, however, do not estimate these savings

separately (202).

CBO’S Analysis of the Health Security Act

CBO’S analysis of the Health Security Act contains little discussion of administrative costs

(172). Its approach may be similar to the Administration’s approach. It is unclear whether CBO believes the bill would increase or decrease total

administrative costs, and whether CBO believes

that pooling of small firms would reduce their insurance load.

Although CBO makes no specific estimates of

costs for the alliances, it indicates that they would

perform such tasks as “collecting, maintaining,

and updating large amounts of information on individuals, employers, and health plans.” CBO

does not say whether these functions could be performed within the capped allocation of 2.5 percent

of premiums. It makes small estimates of “other

administrative and start-up costs,” although it is

not clear what costs it includes.

CBO’S Analysis of Private Insurance Market

Reform Proposals of the 102d Congress

CBO estimates the effects on national health expenditures of three proposals from the 102d Congress that would reform the private insurance

market. In its analysis of the Managed Competition Act of 1992 (H.R. 5936), CBO assumes that

pooling small firms through health plan purchasing cooperatives would reduce administrative

costs.29 CBO writes, “The health plan purchasing

cooperatives created by H.R. 5936 would reap

some economies of scale in providing insurance to

individuals and small groups.” CBO, though, estimates no administrative savings for the Comprehensive Health Reform Act of 1992 (H.R. 591 9),

which would allow pooling but not mandate

membership by small employers in health plan

purchasing cooperatives, or for the Health Care

Cost Containment and Reform Act of 1992 (H.R.

5502), which would limit underwriting with no

pooling. CBO writes about these two bills, that

“incremental changes in administrative practices

would not reduce either insurers’ or providers’ administrative costs” (168). CBO does not define

what it views as “incremental changes in administrative practices,” and it is unclear from these analyses of bills from the 102d Congress how CBO

would estimate the impact on administrative costs

of other proposals that would reform the insurance

market.

REVIEW OF THE EVIDENCE

Following is a review of the empirical evidence on

potential administrative savings under reform. Included are baseline numbers on administrative

costs, evidence on insurer and provider overhead

under a single-payer system, and evidence on administrative costs under private insurance market

reform.

1 The Baseline Numbers

In 1991, private insurance overhead and public

program administration costs were estimated at

$43.9 billion by HCFA in the widely used national

health accounts (86). This amounted to 5.8 percent of national health expenditures or 6.2 percent

of personal health expenditures.30 Private insurance overhead was estimated at $35.1 billion, or

4.7 percent of NHE, and the cost of administering

29 me Mm~gcd co~wtltlon” Act of 1992 would m~e membership in health care purchasing C(X)perativ~s mandattwy for fim~s with fewer

than 100 employees (but would not mandate purchase of insurance through the health care purchasing cooperatives).

JO pers~~nal heai~ eX~ndltUreS am SeWlceS and pr(~ucts ass(~iated with individual health care, such as hospital services, physician services, drugs, and nursing home care. Excluded is research and construction, public health, and administrative cm.ts.
Chapter 5 Effects of Administrative Changes Under Reform I 145

state and federal public programs was estimated at

$8.1 billion, or 1.1 percent of NHE (86).31 Provider administrative costs are also counted in estimates of NHE. They are not estimated separately,

however, but instead are included with total physician expenditures.32

B Evidence on Administrative Costs

Under a Single-Payer System

Many analysts estimate that large administrative

savings could be achieved if the United States

adopted a single-payer system, based on comparisons with Medicare and the Canadian health care

system (see table 5-2 and figure 5-1 ).33 To assess

these estimates, two questions must be answered:

1 ) Are there differences in administrative spending between the current U.S. multipayer system

and a single-payer system? 2) Would these differences be captured if the United States converted to

a single-payer system?

Two elements make up analysts’ estimates of

reduced administrative costs under a single-payer

system, insurer savings and provider savings. For

insurer savings, analysts assume that a singlepayer system in the United States would operate at

Medicare34 or Canadian35 overhead rates. To understand if there are real differences in insurer

overhead for these systems and the U.S. system,

this section compares estimates of insurer overhead for the various systems and addresses issues

of comparability of public and private insurance

systems.

Insurer Administrative Costs

Total insurance overhead in the United States was

estimated to be 6.2 percent of personal health expenditures in 1991 .36 Private insurance load specifically was estimated at 14.4 percent of private

health insurance expenditures (86). The Health

Care Financing Administration (HCFA) estimates private insurance load using a variety of

data sources, which makes an assessment of its estimate difficult.37

Medicare overhead was estimated to be 2.1 percent of expenditures in 1991. Estimates of Medicare overhead represent administrative spending

as a percentage of total program costs, which

HCFA calculates by using expense reports from

Medicare and the Department of Treasury. In addition to direct expenses of HCFA,38 this estimate

includes expenses to the Department of Treasury,

the Social Security Administration, and the Public

Health Service incurred in the provision of Medicare services.39

Canadian overhead was estimated to be 1.4 percent of personal health expenditures in 1990

~ I AdT1llnl$tr:i[l Y ~ ctJsIs of prI\ atc phllanlhrt)plc programs were estimated at $o.b billif~n.

‘z Adm)nlstratl\ r costs lncurrcd by cn)pl{)yrrs and indlv iduals in the health care system, th(mgh, are not included in NHE.

1 I ~lniil} ~t~ PrcstlTlliihl} ~(, n{~t II1:lLC ~,~lllpilrlsons With lvte(flcald because its eligibility determination expenses nla} be higher than those of

. .

a nati(mal pr{)gram.

~~ CB() as$url}cs Mcdlciirc t)~ ~rh~:~d as a percentage c~f claims would apply (excluding residual Medicaid pr(~grml for l(~ng-teml care)

( [65); Lcwln assumes Nlcdlcarc per capl(a overhead (with adjustments for claim level and no hospital billing) w(mid apply ( 147).

15 ESR1 ( 107, GA() ( 17x) and Gmnlbach et al. (50), and Woolhandler and Himmelstein (21 2).

lb personal health ~.v.nd[ttlrc$ rather than NHE, is used here to be c(msistent with analysts’ treatment of adnlinistrative c(~sls and to facilitate cfm~parls(ms with !Wxflcarc and Canadian administrative costs estimates.

17 ~e ~()~Jrces 1~C~}~ ~lscj ,ncltldc the Health ]nsurance Association of America, National Underwriter Conlpany, BIue Cr’t)ss Blue shield

Asstwlatl(m, Grt~up Hc:i]th In$urancc Associatmn of America, HCFA survey of self-insured and prepaid health plans, Department of Labor

Consunwr Ekpcndlture SuIIcy, and \’lsiting Nurse Associati(m (6 I ).

~~ Adm)nlst~rs Medlc;irc pr~)gram, Pm of the Department of Health and Human Services.

w Included as P:in ,)f ~ledlcare ;i~Illlnlstratlle exP>nses are “’Treasu~ administrative expenses,” “salaries and expenses, SSA!” “salaries

and c~pcnses, HCFA, [ lncludcs Intcmwdiarici]. ““salaries and expenses, Office of Secretary,” “construction, “‘“l%)fessi(mal Standards Review

organlzatlt)n, “ “Pa~ nwnt Asw\smcnt Con~mlticc,’” “pol]cy and research,” “public Health Service, “ “Office of Pers{mnel Management expmsc~, ” and ‘“ph] s]clan~ pal n~c’nt rci ICW. ” ( 15, 186).
146 I Understanding Estimates of National Health Expenditures Under Health Reform

(50).@ The Canadian government derives estimates by compiling provincial reports on administrative spending.

41 Included in estimates are

provincial governments’ administrative costs for

providing insured services, federal government

expenses, and private insurance load for supplemental insurance (178). Although the broad categories of administrative costs appear to be the

same as those included in U.S. estimates, the numbers are not entirely comparable due to differing

accounting methods for certain specific items

(47,121,125). Other comparability issues that

arise when estimating savings based on comparisons of private and public insurers include:

= Private insurance overhead includes premium

taxes, which is an income transfer rather than

a real expense, but public programs do not include premium taxes. Savings will be overstated if taxes are not subtracted from private

overhead. 42

● The private insurance market is said to experience a 6-year cycle of fluctuating profitability,43 affecting insurance load for any given year

(42). Savings will be overstated or understated

if private insurance overhead (premiums minus

claims) is estimated on the basis of a single

year.

44

Even in light of the comparability problems

highlighted above, however, the administrative

expenses of the Canadian system and Medicare

appear to be lower than those of the entire U.S.

system. Private insurers have certain administrative costs that public insurers do not, such as marketing, profits, and costs for determining

eligibility. Adopting a single-payer system will

likely yield administrative savings as these private insurer costs are eliminated. Precisely estimating savings is difficult, however, and there are

several reasons why assumptions that overhead

rates would fall to Canadian levels (ESRI, GAO,

Grumbach et al., Woolhandler and Himmelstein)

or to Medicare levels (CB0,45 Lewin-VHI46) may

be incorrect:

- The United States may not administer a nationwide single-payer system with the same efficiency as Canada or Medicare.

= Functions additional to those of the Canadian

system or Medicare may be performed, such as

greater utilization review or more extensive

data collection.

= Average claim size may differ in the United

States from those in Canada and those under

Medicare, increasing or decreasing administrative costs as a percentage of claims. Lower average claim size in a national U.S. system (due

to different benefits or utilization), for example, would lead to higher administrative costs

as a percentage of claims.

● The Medicare program covers a limited set of

benefits to a subset of the population, whereas

a nationwide single-payer system may have

broader benefits that would be available to the

entire population.

40 Gmmbach et a]. Cite “Nationa] Health Expenditures,” Ottawa, ont~o: Health ~d Welfme Canada? 1990.

41 Cmadim ~)fflclals ~W~ that what individual pr~vlnces irlclu(ie as administrative costs varieS somewhat. Repofis from Provinces me not

detailed enough for Health Canada, the organization that estimates total Canadian health spending, to completely adjust for variance in accounting methods ( 121).

42 CBO recognizes this.

43 ca~] ~P)tis that health insumm typica]ly experience 3 consecutive years of underwriting gains followed by 3 consecutive Yems of

losses. Premiums charged by insurers tend to reflect this cycle of losses and gains (Gabel, et. al, “Tracing,” 1991 ),

44 CBO ~d ~win.VH1 recognize this.

45 cBo ~SumS Medicare Ovefiead ~tes in its analysis of a general single-payer proposal (excluding residual Medicaid progmm for longterm care) (165). In its estimate of H.R. 1200 and S. 491, however, CBO estimates that insurance overhead will be higher than the Medicare

overhead rate ( 170,171).

~ ~win.VH1 adjusts Medic~e mtes for claim size and the elimination of hospital billing.
Chapter 5 Effects of Administrative Changes Under Reform I 147

Provider Administrative Costs

Analysts’ estimates of provider savings under a

single-payer system have been as high as $61.4

billion in 1987 (212).47 By comparison, the highest estimate of insurer administrative savings is

$34 billion in 1991 (table 5-2) (178). Estimates of

savings from reduced provider overhead appear

less certain than estimates of insurer savings. Intuition indicates having physicians reimbursed by a

single-payer rather than a multitude of insurers

and eliminating hospital billing through hospital

budgets would reduce provider administrative

costs. Estimating precise provider savings is difficult, however, since estimates of provider overhead under the current U.S. system are uncertain,

and there is little empirical evidence of how much

U.S. providers would save under a single-payer

system.

Current provider administrative costs

Definitions of what constitutes provider administrative costs vary by analyst, contributing to widely differing estimates of savings under a

single-payer system. For example, one analyst defines hospital administrative costs to include expenses for billing and management information

systems (178),48 while another defines hospital

administration more broadly, including expenses

for such functions as utilization review, medical

records, and libraries (213).49 The narrower definition resulted in an estimate of hospital administrative savings of $18.2 billion in 1991, while the

broader definition resulted in an estimate of hospital savings of “about $50 billion” in 1990.

There is no standard or widely accepted definition of provider overhead. Although HCFA estimates private insurance and Medicare overhead

annually, no comparable benchmark of provider

overhead exists.

Varying data sources contribute to the wide

range of estimates of provider overhead. For example, analysts estimate hospital overhead using

California data (50,87,2 12), nationwide data from

the American Hospital Association (178), and nationwide data from Medicare reports (21 3). Furthermore, analysts acknowledge difficulties in

estimating provider overhead because of the inadequacy of data.50

Varying definitions, coupled with varying data

sources, produce estimates of U.S. hospital administrative costs that range from 15.4 percent

(178) to 33.4 percent (87) of revenues (table 5-2).

Estimates of physician overhead range from

8.3 percent (165)51 to 48.1 percent of revenues

(21 2). Here too, the use of different data sources

and definitions may lead to different estimates.

Estimates of physician overhead are based on

data from the American Medical Association

(50,178,21 2), the Medical Group Management

Association (87), and the Census Bureau’s Cur4Y Offlce of Techn~]ogy Assessment calculation based on study’s per capita estimates. Study includes savings in nUrSing administrative

costs ($4. I billion), which is not included in other studies.

~ G,AO includes “genera] accounting, patient recor& patient accounts and admitting, medical records, purchasing and stores, and data

processing,” and estimates overhead at 15.4 percent of total hospital expenses in 1988.

49 W(x)]handler, Himmelstein, and ~wontin’s 1993 analysis of hospital administrative costs Oniy under a single-payeI’ SyStenl. (T’hiSanalYsis differs from Woolhandler and Himrnelstein study of insurer, physician, and hospital administrative costs under a single-payer system referred to in tables 5-1 and 5-2 as single-payerpkm, Woo/hand/er and Himmelstein }ersion.) Categories of administrative costs included in the

hospital administrative costs analysis are “administrative and general,” “nursing administration,” “central services and supply,” “medical records and library,””employee benefits department (salary costs only),“ “administrative and general—home health,” and “skill ed-nursing-facility utilization review.”

so ~wln-VH] notes, for examp]e, hat “C~rnprehenSiVe, nationwide Clata on administrative costs in U.S. hospitals do not exist. ’’(Sheiks,

Young, and Rubin, ”0 Canada,” 1992) On physician administrative costs, Woolhandler and Himrnelstein write, as noted above, “Only indirect

or incomplete information is available on the billing costs of Canadian and U.S. physicians.” (Woolhandler and Himmelstein, “Deteriorating”

May 5, 1991).

51 fim~ly billing costs.
148 I Understanding Estimates of National Health Expenditures Under Health Reform

rent Population Survey (212). Two analysts estimate physician overhead using an American

Medical Association survey of billing services

costs and time spent by physicians in billing

(50,178). Specifically, this survey asked physicians how much time they spent per month on activities related to billing Medicare and Blue

Shield (5).

Estimates of physician overhead based on surveys such as this may increase levels of uncertainty, since physicians may have difficulty

estimating the time they spend on administrative

activities accurately (84). Directly observing physicians and recording time spent on administrative

activities may yield better estimates of overhead

costs (47).

Provider administrative savings under a

single-payer system

Estimates of provider administrative savings vary

because of uncertainty about provider administrative activities under a single-payer system. No

empirical evidence documents how U.S. providers would behave under a single-payer system.

(Provider expenses related to Medicare have not

been isolated.) As a result, most analysts must rely

instead on comparisons with Canada, and assume

that under a single-payer system administrative

expenses of U.S. hospitals and physicians would

fall to Canadian provider levels.

Comparisons with Canada are problematic,

however, because Canadian estimates may not be

comparable with U.S. estimates. Furthermore, it

is difficult to scrutinize estimates of Canadian

provider overhead because they are based on unpublished information.52

Finally, it may be unreasonable to assume that

U.S. provider overhead would drop to Canadian

levels. Certain functions (such as utilization review) that are currently performed in the United

States may continue even if hospitals were paid

through budgets and physicians were reimbursed

by the government at a set rate for services performed. As noted in the previous section and in

table 5-2, GAO assumes that nonphysician personnel would be reduced to Canadian levels,

though it is unclear that current differences stem

solely from the two countries’ health financing

systems. CBO, which assumes Canadian provider

overhead rates would apply to the United States,

attempts to avoid overstating savings by comparing only those functions that relate to the ways that

health care is financed, particularly billing and

collection expenses. Lewin-VHI avoids comparisons with Canada and instead estimates which individual administrative functions of the current

system would be reduced, and to what extent. Although Lewin-VHI’s approach recognizes that administrative activities of U.S. providers may be

unique, it is not based on data and may yield somewhat arbitrary estimates of savings.

S Evidence on Administrative Costs

Under Private Insurance Market Reform

Many proposals would reform the insurance market by limiting underwriting and permitting or requiring small firms53 to purchase insurance

through purchasing cooperatives. As discussed

earlier, analysts appear to assume that health alliances or health plan purchasing cooperatives for

small firms would reduce insurance administrative costs, but that these savings would be offset

somewhat--or completely—by new administrative costs associated with insurance market reform.

In estimating savings from pooling, several

analysts assume that there are differences in administrative load for large and small firms and that

~Z GAO ~~tinlate~ Canadian ~hy~ician overhead using “unWb]ished information provided by the Ontafio Medical Association” ‘d h(}sPltal overhead using unpublished data from Health and Welfare Canada (178). Grumbach et al. estimate Canadian physician overhead through

data collected by written communication with D. Peachy, MD, Ontario Medical Association and hospital overhead through data collected by

written ctmmwnication with L. Raymer, Health and Welfare Canada (50).

f 1 me tcnll~ir,n refers t[~ en]ployers or groups, not insurance C(>rnpanies.
Chapter 5 Effects of Administrative Changes Under Reform I 149

the load for small firms could be reduced by reforming the insurance market. This assumption

raises two questions: does insurance load actually

differ for small and large firms, and will proposals

that would reform the insurance market reduce

this small-firm load?

Theoretically, large firms may have lower administrative costs than small firms because:

Fixed costs are distributed over a larger number of individuals. Enrollment (commissions,

marketing) and underwriting costs may be a

fixed amount per employer group. For larger

firms, these costs are spread across more members, resulting in lower administrative costs per

claim.

Turnover is lower. Small firms may have higher

administrative costs because they change insurers more frequently than large firms .54

Large firms, which change insurers less frequently, may have lower costs for commissions, marketing, general administration, and

underwriting (157).

Economies of scale are greater. Certain functions, such as processing claims, may be performed at a lower cost per claim for larger

groups.

Risk margins are lower. Insurers retain a portion

of premiums as reserves or risk margins. Risk

margins may be lower for large firms because

total claims are more predictable (185).

Administrative support needs are lower. Large

firms may be more likely to have benefits managers to perform such services as communicating with members, which insurers themselves

perform for small firms. These services may be

reflected in higher administrative costs for

small firms (1 85).

Empirical evidence appears to support the assumption that administrative costs for large firms

are lower than for small firms. A study by Hay/

Huggins found that administrative expenses of

small firms (1 to 4 employees) are 40 percent of

claims (28.6 percent of premiums), while those of

large firms (10,000 or more employees) are 5.5

percent of claims (5.2 percent of premiums)

(183). 55 An unpublished study by the Health Insurance Association of America (HIAA) concludes that administrative expenses of small firms

(fewer than 25 employees) are 33 percent of

claims (25 percent of premiums), while those of

large firms (2,500 or more employees) are 6.4 percent of claims (6 percent of premiums) (58).

However, these studies have some limitations.

Neither study has a published methodology, making a critical evaluation of their methods difficult.

Further, both studies are based on a small number

of insurers whose experiences may not be applicable to the market as a whole.56

Data sources for both studies are problematic as

well. Private insurer expense reports are not traditionally broken down by firm size, making a comparison of administrative costs difficult (9). Both

studies attempt to divide administrative expenses

into specific categories, such as claims administration and commissions, even though insurers do

not normally track or post administrative costs in

those categories.

57 HIAA reports that there is

“little consistency among insurers when looking

M (JndeWrl[ing Practices of insurers t. screen out small firms with health risks may lead to rapidly rising rates and high tumt~ver.

55 me Hay/ Huggins study was based on insurer rating manuals, rather than insurer cost data on administrative COStS. Rating manuais c(Jntain formulae which are used to charge administrative expenses to various sized firms, based on such factors as claim amounts as well as certain

fixed costs. Rating manuals are based on the experience of insurers in providing administrative services 10 firms, th(wgh it is unclear if administrative charges generated by them precisely match actual administrative costs incurred by fimls. If the difference between administrative

charges and actual C(NS were great, however, other insurers would presumably enter the market with administrative charges closer to firms’

actual costs.

56 ~e Hay/Huggins study ~as based on three insurers ( 18); the HIAA study was based on five insurers (HIAA members) ( 57).

ST Categories ,)f ~dnllnlstm[lve costs in the Hay Huggins Smdy, for example, are “claims administration, general administration, interest

credit, risk and profit, conm~issl(ms and premium taxes. ” Lewin-VH1 uses this detailed breakdown as its baseline in estimating savings under

refoml. (88,89)
150 I Understanding Estimates of National Health Expenditures Under Health Reform

at expenses across group size” (58). It notes difficulties in dividing insurers’ aggregate expenses

by group size and into finer categories such as

claims processing expenses.58

Although both the Hay/Huggins and HIAA

studies conclude that large firms have lower administrative costs under current policy; neither offers evidence to indicate insurance market reform

would actually lower the administrative costs of

small firms. Very little evidence exists on the effect of pooling or limiting underwriting on administrative costs. No published study has compared

administrative costs of firms before and after the

implementation of insurance market reform. Several states, however, have established health care

purchasing cooperatives for small firms, which

may provide evidence on the effect of pooling in

the future.

Even if it could be stated conclusively that

pooling and limiting underwriting reduce administrative costs, potential savings appear to be relatively small. Total private insurance overhead in

1991 was estimated at $35.1 billion, or 4.7 percent

of NHE (86). If private insurance overhead, estimated at 16.8 percent of claims (14.4 percent of

premiums) in 1991, fell to the levels of large firms

as estimated by Hay/Huggins, total savings would

be $23.6 billion (3.1 percent of NHE).59 These

savings would be achieved only if differences in

insurer administrative costs for small and large

firms were completely eliminated (an assumption

no analyst reviewed makes60). Any savings from

reduced provider administrative costs would likely be limited under reform plans that maintain the

private insurance market because physicians and

hospitals would continue to be reimbursed by a

multitude of payers.

Any savings from reduced overhead for small

firms may be offset partially or completely by new

administrative costs. Under several proposals,

new administrative organizations would be

created such as health plan purchasing cooperatives and health boards, that would, among other

things, negotiate with and monitor plans and update benefits packages. Several reform proposals

include programs with new data gathering and reporting requirements to measure the quality of

health care. The costs of operating quasi-public or

private health plan purchasing cooperatives and

federal programs related to pooling and limiting

underwriting would depend on the functions performed and the personnel and materials needed to

perform them. 61 Administrative costs may increase if health plan purchasing cooperatives assume tasks currently performed by employers,

such as negotiating rates with insurers.62

58p AnthonY Ha~n)f)nd, ~)llcy research actua~, HIAA, who supervised the study, supplied OTA with a copY of a ~mt~randum that bfiefly outlines the report’s methodology.

59 OTA calculation. Hay Huggins estimates administrative costs of large firms at 5.5 percent of claims. If all private insurance ex~nditums

had administrative costs equal to 5.5 percent of claims, total administrative costs would have been $11.5 billion. (.055= x/209.3; x -11 .5.)

Savings is $35.1 -11.5-$23.6 billion.

60 F{)rexamp]e, ~wjn-VHI assunles in its analysis of the Health Security Act that small-firm (one to four employees) overhead would fall to

12.5 percent of claims, not to 5.5 percent, the overhead level of large firms.

G] The Callfomja ~b]ic Employees” Retirement System (CalPERS) has charged employers five tenths of a percent of premiUmS to Cover

CalPERS’ operating expenses (182). Costs Of administering the FEHBP program (Federal Employees Health Benefits Program) in 1988 was

$10 million, or approximately one tenth Of a percent of premiums ( 177). These figures do not include the administrative costs of the health plans.

Unlike alliances or health plan purchasing cooperatives outlined in reform prqwsals which would primarily assist private firms in purchasing

insurance, CalPERS and FEHBP serve public employees. For more discussion of state health plan purchasing cfx)peratives, see GAO’s May

1994 report, “Access to Health Insurance: Public and Private Employers’ Experience With Purchasing Cooperatives” (GAO/HEHS-94-l 42).

62 Administmtive COStS, as defined in the HCFA’S national health accounts, do not include costs incurred by ernpbyers in Contracting for ~d

administering health insurance to employees. These functions, if performed by health care purchasing cooperatives, would be included by analysts in their estimates of administrative costs under reform.
Chapter 5 Effects of Administrative Changes Under Reform I 151

The complexity of private insurance market reform adds uncertainty to estimates of administrative costs under specific proposals. The potential

impact of specific policies remains unclear. For

example:

Administrative costs may increase under a system of health care purchasing cooperatives as

employer transactions with insurers are replaced with a greater number of individual

transactions (36,1 58). Costs also may decrease

as cooperatives communicate with insurers on

behalf of many firms, reducing marketing

costs.

Frequent changing of insurers, which may

cause higher administrative expenses, may decrease if premiums become more predictable,

or increase if annual open enrollment is permitted.

Profits of insurers may decrease in response to

greater competition, or increase as a result of

insurers greater market clout with providers.

Savings from eliminating underwriting may be

offset by new costs to health alliances of making risk adjustments to health plans.

Proposals may shift individuals from fee-forservice plans to managed care plans, which

may have differing administrative costs.

In summary, reform proposals that would

maintain the current private insurance market appear unlikely to generate large administrative savings. Lack of evidence on the impact of pooling

and limiting underwriting and the difficulty of estimating potential new costs related to insurance

market reform make precise estimates of administrative costs under reform uncertain.

FINDINGS AND POLICY IMPLICATIONS

In 1991, administrative costs of private and public

insurance programs (i.e., insurer overhead) under

the current system were estimated at $43.9 billion

(86). This represents the maximum savings that

could have been achieved by reducing insurer

overhead under any of the reform proposals in

1991. Physician and hospital overhead (i.e., provider overhead) is not measured separately in the

national health accounts and other estimates have

limitations. Using the most conservative estimates of provider overhead generates an estimated overhead of $55.1 billion in 1991.63 Thus,

completely eliminating insurer and provider administrative costs (as estimated using these data

sources) would save $98.9 billion, or 13.2 percent

of national health expenditures in 1991, Of

course, under no system would administrative

costs be completely eliminated, but this provides a

boundary for assessing estimates. Savings beyond

this level are probably unrealistic.

The significance of administrative costs to estimates of changes in NHE varies by type of proposal. Predictions of administrative savings under

single-payer proposals are relatively large, ranging from $47 billion (1991 dollars) (87) to $113

billion (1991 dollars) (108).64 (The high estimate

unrealistically assumes that total U.S. health

spending would fall to Canadian levels. ) Estimates of savings in insurer administrative costs

under a single-payer system range from $21.7 bil -

lion (1987 dollars) (21 2) to $34 billion ( 1991 dollars) ( 178).65 Predictions of savings appear

plausible since administrative expenses of private

insurers (including marketing, profits, and enroll63 of fIce Of Technology” Assessment calculation. Grurnbach et al. ’s estimate of physician billing costs of 8.3 percent of physician revenues

was used (50); GAO’s estimate of hospital administrative ct)sts of 15.4 percent was used ( 178). These estimates were multiplied by HCFA national health accounts estimates of hospital and physician expenditures for 1991. (86) (8.3 percent ($ I 42.0) + 15.4 percent ($288.6) -$56.2

bill ion.)

w only CB() has estimated [he specific sing] e-payer proposals of the 103d Congress, H.R. 1200 or S. 491 (but d(~s not include specific

dollar estimates of administrative savings). Studies that included specific estimates of administrative savings referred to here are those that

studied the impacts of a single-pa)er system in the United States with no patient copayments, gl(~bal budgets for hospitals, and negotiated fee

schedules for physicians.

65 ESR] Which generated the estlnla(e of $ ] 1 ~-bl]lion [()[a] savings, does not bre& this estimate &wn into insurer and provider SaVlngS.
152 I Understanding Estimates of National Health Expenditures Under Health Reform

ment costs) would be replaced with the lower

costs of a public single-payer. Estimates of reduced insurer administrative costs are informed

by the experience of the Canadian system and

Medicare and fall into a fairly narrow range. It is

possible, however, that functions additional to

those performed in Canada and under Medicare

would be performed under a national U.S. singlepayer system. Hence, actual insurer administrative savings may be less than analysts predict.

Estimates of reduced provider administrative

costs under a single-payer system range from

$24.3 billion (1991 dollars) (87) to $61.4 billion

(1987 dollars) (21 2). It appears intuitively reasonable that physician and hospital costs incurred in

billing would be reduced as the current system of

multiple payers and billing requirements is replaced by a single-payer. Estimates of provider

administrative savings are more uncertain than estimates of insurer administrative savings, however, due to varying definitions of provider

overhead and an incomplete understanding of the

administrative activities of physicians and hospitals. In addition, although Canada provides a

model of provider administrative costs under a

single-payer system, it is unclear how the functions performed by U.S. providers would change

under reform.

Analysts estimate that administrative costs will

change very little under proposals to reform the

current private insurance market. This judgment

appears reasonable, since the multipayer insurance system would be maintained, with providers

continuing to be reimbursed by many parties.

Analysts estimate some administrative savings if

small firms were to purchase health insurance

through cooperatives. Although this assumption

appears plausible as purchasing pools and limits

on underwriting may lead to economies of scale

and reduced turnover, no studies have documented the impact of pooling on the administrative costs of small firms. Analysts estimate these

savings will be offset, partially or completely, by

new administrative costs associated with the reforms, such as the costs of running the purchasing

cooperatives. Estimates of these new administrative costs are uncertain because it is difficult to determine exactly what administrative functions

would be performed, and at what cost.
Appendix:

Acknowledgments A

OTA wishes to thank the individuals and organizations listed below for their assistance with this report. These

individuals and organizations do not necessarily approve, disapprove, or endorse this report. OTA assumes full

responsibility for the report and the accuracy of its content.

Bob Andersen

U.S. Executive Office of the

President

Office of Management and

Budget

Washington, DC

J. Scott Armstrong

The Wharton School of the

University of Pennsylvania

Philadelphia, PA

Henry Bachofer

Blue Cross Blue Shield

Association

Washington, DC

Karen Bandy

U.S. Congress

Office of Technology Assessment

Washington, DC

Morris Barer

Institute for the Future

Menlo Park, CA

Harold L. Barney

American Academy of Actuaries

Washington, DC

Harold Beebout

Mathematical Policy

Research, Inc.

Washington, DC

Marc Berk

Project HOPE

Bethesda, MD

John M. Bertko

Coopers and Lybrand

San Francisco, CA

Linda Bilheimer

U.S. Congress

Congressional Budget Office

Washington, DC

Linda Blumberg

U.S. Executive Office

of the President

Office of Management

and Budget

Washington, DC

Howard J. Bolnick

Celtic Life Insurance Company

Washington, DC

Mark Boroush

U.S. Congress

Office of Technology Assessment

Washington, DC

I 153
154 I Understanding Estimates of National Health Expenditures Under Health Reform

Sally T. Burner

U.S. Department of Health

and Human Services

Baltimore, MD

Kenneth Cahill

U.S. Congress

Congressional Research Service

Washington, DC

Charles Cangialose

Health Services Research

Associates, Inc.

Charlottesville, VA

Jim Cantwell

U.S. General Accounting Office

Washington, DC

Arthur CapIan

University of Minnesota

Minneapolis, MN

Sandra Christensen

U.S. Congress

Congressional Budget Office

Washington, DC

Constance Citro

National Academy of Sciences

Washington, DC

Robert Coulam

Abt Associates Inc.

Cambridge, MA

Robert Crittenden

University of Washington

Seattle, WA

David Cutler

Harvard University

Cambridge, MA

Patricia Doyle

U.S. Department of Health

and Human Services

Washington, DC

Steven R. Eastaugh

George Washington University

Washington, DC

David T. Ellwood

U.S. Department of Health

and Human Services

Washington, DC

Mark H. Epstein

National Association of Health

Data Organizations

Falls Church, VA

Jose J. Escarce

University of Pennsylvania

Philadelphia, PA

Dean Farley

U.S. Department of Health

and Human Services

Washington, DC

Marilyn Field

Institute of Medicine

Washington, DC

Mark S. Freeland

U.S. Department of Health

and Human Services

Baltimore, MD

Sara Frey

Charter Oak Health Center

Hartford, CT

Robert Friedman

U.S. Congress

Office of Technology Assessment

Washington, DC

Jon R. Gabel

KPMG Peat Marwick

Washington, DC

Thomas E. Getzen

Temple University

Philadelphia, PA

Robert B. Giffin

Health Care Strategy

Associates, Inc.

Washington, DC

William Glaser

New School for Social Research

New York, NY

Sherry Glied

Columbia University

New York, NY

Marsha Gold

Mathematical Policy

Research, Inc.

Washington, DC

Donald Goldstone

U.S. Department of Health

and Human Services

Rockville, MD

Julie Gorte

U.S. Congress

Office of Technology Assessment

Washington, DC
Appendix A AcknowledgmentsI 155

Ron Gresch

U.S. Office of Personnel

Management

Washington, DC

Michael Gutowski

U.S. General Accounting Office

Washington, DC

Steven Hill

University of Wisconsin

Madison, WI

John Holahan

Urban Institute

Washington, DC

Janet Holtzblatt

U.S. Department of the Treasury

Washington, DC

Mark S. Joffe

Washington, DC

David L Kass

U.S. Department of Commerce

Washington, DC

Bradford Kirkman-Liff

Arizona State University

Tempe, AZ

John Klein

Minnesota Department of

Employee Relations

St. Paul, MN

Janet Kline

U.S. Congress

Congressional Research Service

Washington, DC

Tom Korpady

State of Wisconsin Department

of Employee Trust Funds

Madison, WI

Wendy Krasner

McDermott, Will and Emery

Washington, DC

Catherine M. Kunkle

National Business Coalition

Washington, DC

Jack Langenbrunner

U.S. Executive Office of the

President

Office of Management and

Budget

Washington, DC

Judith R. Lave

University of Pittsburgh

Pittsburgh, PA

Katherine Levit

U.S. Department of Health and

Human Services

Baltimore, MD

Peter Long

The Henry J. Kaiser Family

Foundation

Washington, DC

Harold Luft

University of California,

San Francisco

San Francisco, CA

Jim Mays

Actuarial Research Corporation

Annandale, VA

Frank B. McArdle

Hewitt Associates LLC

Washington, DC

Brian McCue

U.S. Congress

Office of Technology Assessment

Washington, DC

Thomas G. McGuire

Boston University

Boston, MA

Waiter McNerney

Northwestern University

Evanston, IL

David Mechanic

Rutgers University

New Brunswick. NJ

Glenn Melnick

Rand Corporation

Santa Monica, CA

Stephen T. Mennemeyer

University of Alabama

Birmingham, AL

Mark Merlis

U.S. Congress

Congressional Research Service

Washington, DC

Jack Meyer

Economic and Social Research

Institute

Washington, DC

Ron Meyer

Missouri Consolidated

Health Care Plan

Jefferson City, MO
156 I Understanding Estimates of National Health Expenditures Under Health Reform

Steven H. Miles

University of Minnesota

Minneapolis, MN

Karl Polzer

George Washington University

Washington, DC

John Sheils

Lewin-VHI, Inc.

Fairfax, VA

Karen Milgate

Washington Business Group

on Health

Washington, DC

Pamela Short

U.S. Department of Health

and Human Services

Washington, DC

M. Edith Rasell

Economic Policy Institute

Washington, DC

Robert D. Reischauer

U.S. Congress

Congressional Budget Office

Washington, DC

Robert Miller

University of California

San Francisco, CA

Sharon Silow-Carroll

Economic and Social Research

Institute

Washington, DC

Ralph Monaco

University of Maryland

College Park, MD

John Rizzo

Yale University

New Haven, CT

Frank A. Sloan

Duke University

Durham, NC

Curt Mueller

Project HOPE

Bethesda. MD

Michael D. Rosko

Widener University

Chester. PA

Fred Steinmetz

California Public Employees’

Retirement System

Len Nichols Sacramento. CA

U.S. Executive Office

of the President

Office of Management

and Budget

Washington, DC

Dale Rublee

American Medical Association

Chicago, IL

Cynthia Sullivan

Sullivan Research Services

Chicago, IL

Ronald J. Schoenberg

RJS Associates, Inc.

Seattle, WA

Michael O’Grady

U.S. Congress

Congressional Research Service

Washington, DC

Ming Tai-Scale

University of California

Los Angeles, CA

Carl E. Scott

Mutual of Omaha Insurance

Company

Omaha, NE

Kenneth Thorpe

U.S. Department of Health

and Human Services

Washington, DC

Susan Palsbo

Group Health Association

of America

Washington, DC

Charles Seagrave

U.S. Congress

Congressional Budget Office

Washington, DC

Cheryl B. Travis

University of Tennessee

Knoxville, TN

Pamela B. Peele

Virginia Polytechnic Institute

Blacksburg, VA

Thomas Selden

U.S. Department of Health

and Human Services

Rockville, MD

Judith L. Wagner

U.S. Congress

Office of Technology Assessment

Washington, DC

Gary Persinger

Pharmaceutical Research and

Manufacturers of America

Washington, DC
Mark Warshawsky

Internal Revenue Service

Washington, DC

W. Pete Welch

Urban Institute

Washington, DC

Patricia Willis

U.S. Department of Labor

Washington, DC

Barbara Wolfe

University of Wisconsin

Madison, WI

Patrice R. Wolfe

SysteMetrics

Washington. DC

Herbert S. Wong

U.S. Department of Health

and Human Services

Rockville, MD

Dale H. Yamamoto

Hewitt Associates LLC

Washington, DC

Donald A. Young

Prospective Payment Assessment

Commission

Washington, DC

Appendix A Acknowledgments I 157

Thomas E. Zabelsky

U.S. Department of Commerce

Washington, DC

Sheila Zedlewski

Urban Institute

Washington, DC

Don Zimmerman

George Washington University

Washington, DC

Jack Zwanziger

University of Rochester

Medical Center

Rochester, NY
Appendix:

Method of

B the Study

T

his report, Understanding Estimates of National Health

Expenditures Under Health Reform, is published as part

of the Office of Technology Assessment’s (OTA) study,

Understanding the Estimates Under Health Reform. This

report evaluates analyses of the impact of various health reform

proposals on national health expenditures (NHE) by comparing

analysts’ assumptions about key policies in proposals with the

available empirical research on these policies.

To summarize the method used for this report, this appendix

divides the report’s development into four sections: focus of the

study, research, analysis, and review. These sections overlap to

some extent and are not strictly chronological. This appendix also

contains complete references of analyses reviewed in this report

(table B-l).

FOCUS OF THE STUDY

This report was requested in August 1993 by OTA’s Technology

Assessment Board and Senator Ted Stevens in response to findings in the OTA report An Inconsistent Picture: A Compilation of

Analyses of Economic Impacts of Competing Approaches to

Health Care Reform by Experts and Stakeholders published in

June 1993. The Technology Assessment Board members and

Senator Stevens expressed concern at the wide array of predictions of changes in NHE outlined in An Inconsistent Picture, and

requested that OTA do a followup study to assist policy makers in

understanding why predictions might be so variable. The

Technology Assessment Board approved the study in July 1993,

and OTA staff began working on the project in August 1993.

158 I
Appendix B Method of the Study I 159

Proposal Analysis Reference citation

American Health Security Act of CBO

1993 (H.R. 1200/ S.491)a

Comprehensive Health Reform CBO

Act of 1992 (H.R. 5919)b

Health Care Cost Containment CBO

and Reform Act of 1992 (H.R.

5502) b

Health Security Act (H.R. 3600/S CBO

1757)a

Clinton Administration

Lewin-VHl

Health Security Act (H R Lewin-VHl

3600/S. 1757),a Lewin-VHl scenario without government cost

controls

Managed Competition Act of 1992 CBO

(HR. 5936)b

ESRI

Managed competition plan, Starr Sheils et al

version

National health plan, full savings ESRI

scenario

National health plan, adminlstra- ESRI

tive savings scenario

U.S. Congress, Congressional Budget Off Ice, “H. R

1200, American Health Security Act of 1993, ” Washington, DC, December 1993, U.S. Congress, Congressional Budget Off Ice, “S 491, American Health Security Act

of 1993, ” Washington, DC, December 1993

U.S. Congress, Congressional Budget Office, Estimates of Health Care Proposals From the 102d Congress, Washington, DC, July 1993

U.S. Congress, Congressional Budget Off Ice, Estimates of Health Care Proposals From the 102d Congress, Washington, DC, July 1993

U S Congress. Congressional Budget Off Ice, An Analysis of the Administration's Health Proposal, Feb. 8,

1994

U.S. Department of Health and Human Services, Office

of the Assistant Secretary for Planning and Evaluation,

Washington, DC, unpublished table, Apr. 7, 1994, U S

Department of Health and Human Services, Off Ice of

Assistant Secretary for Planning and Evaluation, “The

Health Security Act A Financial and Distributional Analysis,” Washington, DC, January 1994

Lewin-VHl, Inc., The Financial Impact of the Health

Security Act, (Washington, DC; Dec. 9, 1993)

Lewin-VHl, Inc., The Fmancial Impact of the Health

Security Act, (Washington, DC: Dec. 9, 1993)

U.S. Congress, Congressional Budget Off Ice, Estimates of Health Care Proposals From the 102d Congress, Washington, DC, July 1993.

Meyer, J A , Snow-Carroll, S , and Wicks, E , “Managed

Competition in Health Care: Can It Work?’, Economic

and Social Research Institute, Washington, DC, May

1993,

Sheils, J.F, Lewn, L.S., and Haught, R A “Potential

Public Expenditures Under Managed Competition, ”

Health Affairs 12 (suppl.): 229-242, 1993

Meyer, J.A., Silow-Carroll, S., and Sullivan, S., A National Health Plan in the U.S. The Long-Term Impact

on Business and the Economy, (Washington, DC Economic and Social Research Institute, 1991 )

Meyer, J A, Snow-Carroll, S , and Sullivan, S , A National Health Plan in the U. S.. The Long-Term Impact

on Business and the Economy, (Washington, DC Economic and Social Research Institute, 1991 )

—
160 I Understanding Estimates of National Health Expenditures Under Health Reform

Proposal Analysis Reference citation

Single-payer plan, CBO version

with patient cost-sharing

Single-payer plan, CBO version

without patient cost-sharing

Single-payer plan, GAO version

Single-payer plan, Grumbach

et al. version

Single-payer plan, Lewin-VHl

version

Single-payer plan, Woolhandler

and Himmelstein version

Universal Health Care Coverage

Act of 1991 (H R 1300)b

CBO

CBO

GAO

Grumbach et al.

Lewin-VHl c

Woolhandler and

Himmelstein

CBO

—

U.S. Congress, Congressional Budget Office, Sing/ePayer and A//-Payer Health Insurance Systems Using

Medicare’s Payment Rates, CBO staff memorandum,

Washington, DC, April 1993.

U S Congress, Congressional Budget Off Ice, Sing/ePayer and All-Payer Health Insurance Systems Using

Medicare’s Payment Rates, CBO staff memorandum,

Washington, DC, April 1993.

U.S. Congress, General Accounting Off Ice, Canadian

Health Insurance: Estimating Costs and Savings for the

United States, GAO/HRD-92-83 (Washington, DC: U.S.

Government Printing Office, April 1992).

Grumbach, K., Bodenheimer, T., Himmelstein, D., et al.,

“Liberal Benefits, Conservative Spending The Physicians for a National Health Program Proposal, ” Journal

of the American Medical Association 265(19) 2549-54,

1991.

Lewin-lCF, National Health Spending Under a SinglePayor System: The Canadian Approach (staff working

paper prepared by J.F. Sheils and G.J. Young) (Fairfax,

VA 1992),

Woolhandler, S., and Himmelstein, D., ‘r

The Deteriorating Administrative Efficiency of the US, Health Care

System, ” New England Journal of Medicine

324(18):1253-1258, 1991.

U.S. Congress, Congressional Budget Office, Estimates of Health Care Proposals From the 102d Congress, Washington, DC, July 1993

KEY: CBO = U S Congress, Congressional Budget Off Ice, ESRI = Economic and Social Research Institute; GAO = U S General Accounting Off Ice

aBill numbers are for 103d Congress.

bBill numbers are for 102d Congress.

CAnalysis was conducted by Lewin - ICF. The company was acquired and expanded in 1992 For purposes of this report all Lewin studies are Identified

as Lewin-VHl.

SOURCE Off Ice of Technology Assessment, 1994

OTA assembled an advisory panel to assist it in

determining what issues and materials to consider

in examining estimates of NHE under health reform. The 14 individuals who agreed to serve on

the panel represented a variety of perspectives and

had expertise in health policy, health economics,

quantitative analysis, economic models, macroeconomics, health care delivery, and health systems of foreign countries (see listing at the front

of this report). Joseph Newhouse, Professor at

Harvard University, Division of Health Policy Research and Education, chaired the panel.

The advisory panel first met September 8,

1993. At that meeting, the panel discussed the purpose and possible methods of the study. The panel

agreed that OTA should study the key assumptions made by analysts that drive analysts’ estimates of changes in NHE under reform. The panel

also encouraged OTA to study analysts’ methods

for estimating the federal budget effects of reform.
Appendix B Method of the Study I 161

At a second meeting of the advisory panel held

December 22, 1993, OTA staff updated panel

members on the progress of the report and asked

whether the panel felt that the assumptions that

OTA staff were examining were important ones.

Members of the panel who attended the meeting

agreed that most of the assumptions being examined by OTA were key to projections of NHE

under reform, and provided further direction for

the study. OTA was not able to examine evidence

on every key assumption that goes into every estimate of NHE under reform.

In order to determine which assumptions were

critical to projections of the impact of reform,

OTA carefully examined documentation of available analyses. OTA studied estimates of specific

health reform proposals from the 102d and 103d

Congress as well as analyses of general health reform approaches not introduced as formal legislation. OTA also spoke to analysts, attended

briefings, attended relevant hearings in Congress,

and attended conferences related to health reform

to understand which assumptions would be most

important in estimating NHE under reform proposals.

RESEARCH

OTA’S research for this study took two approaches: 1) understanding analysts’ methods of

estimating the effects of key policies on NHE under health reform, and 2) reviewing the available

empirical research literature on the assumptions

used to make these estimates. OTA examined

available written documentation on analyses of

health reform proposals, and contacted analysts

for further clarification and explanation.

OTA staff members met with representatives

from the Agency for Health Care Policy and Research, 2 the Congressional Budget Office, Department of the Treasury, the General Accounting

Office, Hewitt Associates, Lewin-VHI, Mathematical Policy Research, Inc., the Office of Management and Budget, the Office of the Assistant

Secretary for Planning and Evaluation,3 the Urban

Institute, American Academy of Actuaries, and

the Wyatt Company. OTA staff spoke with representatives from the Health Care Financing Administration, 4 the Economic and Social Research

Institute, and the Economic Policy Institute.

OTA’s review of the empirical evidence included studies in published research literature on

topics relevant to policy assumptions made by

analysts. OTA examined the methods and findings of key studies.

OTA also commissioned contractor papers to

assist in analyzing relevant empirical evidence.

OTA convened a workshop of the contractors on

October 1, 1993 to discuss the relation of the various contractor papers to the report as a whole.

Many of the contractor papers were reviewed externally; some will be available from the National

Technical Information Service (NTIS). For a list

of contractor papers, see table B-2.

ANALYSIS

OTA compared its findings from its review of the

empirical research literature with assumptions

made by analysts in estimates of NHE under

health reform. OTA attempted to assess the reasonableness of assumptions made in analyses and

whether other equally plausible assumptions

could be made.

1 For example, adk ist~~ panel members and OTA staff agreed that the cost of the benefit package under alternative refomls would be a

critical determinant of NHE and that it could be useful to examine how benefit packages are “priced” by different entities. However, the panel

also agreed with OTA staff that this qucstl(m was of such magnitude and complexity than an analysis of it could not be comp]eled by the deadline

for this report.

2 Within the Department of Health and Human Services.

1 Ibid,

4 lb]d.
162 I Understanding Estimates of National Health Expenditures Under Health Reform

Jon B. Christianson, Ph. D., Bryan Dowd, Ph. D., John Kralewski, Ph. D., University of Minnesota, Minneapolis, Minnesota, and Catherine Wisner, Health Care Consultant, Minneapolis, Minnesota, “Minnesota as a Model of Managed

Competition, ” forthcoming.

Baruch Fischhoff, Ph. D., Carnegie Mellon University, Pittsburgh, Pennsylvania, “Assessing the Assumptions Behind

Projections of Individual Consumer Decisions in Health Care Reform, ” in preparation.

Kathryn Langwell, Ph. D., KPMG Peat Marwick, Washington, DC, “Employment Effects of Health Reform, ” in preparation.

‘Robert Miller, Ph. D., and Harold Luft, Ph. D., University of California at San Francisco, San Francisco, California,

“Assessing the Assumptions Behind Health Reform Projections: Cost-Savings Due to HMOS,” January 1994.

Lynn C. Paringer, Ph. D., California State University at Hayward, Hayward, California, “Assessing the Assumptions

Behind Definitions, Projections, and Uses of Baseline National Health Expenditures, ” in preparation.

● John A. Rizzo, Ph. D., Yale University, New Haven, Connecticut, “Physician Volume Responses to Fee Changes, ”

December 1993.

● Dennis Scanlon, M. A., and Mark Kamlet, Ph. D., Carnegie Mellon University, Pittsburgh, Pennsylvania, “Assessing

the Assumptions Behind Consumers’ Choice of Health Insurance Plans and the Implications of Such Choices for Projecting Economic Impacts of Differing Approaches to Health Reform, ” April 1994.

Cynthia Sullivan, Ph. D., Sullivan Research Services, Chicago, Illinois, “Strengths and Weaknesses of Employer

Health Benefits Surveys as Inputs to Microsimulation Modeling of the Effects of Health Reform on National Health Expenditures,” December 1993.

NOTE. Asterisks Indicate those papers available from National Technical Information Service, Springfield, VA, (703) 487-4600

In its report OTA discussed evidence that supported specific assumptions and also highlighted

gaps in the knowledge base that contributed to the

uncertainty of estimates. OTA attempted to examine how altering assumptions surrounded by

uncertainty affected estimates of NHE. Performing this type of sensitivity analysis was not always

possible, however, because OTA’s access to models used by analysts was limited.

REVIEW

Before sending a draft of this entire report for external review, OTA asked analysts to review preliminary drafts of sections of the report related to

their analyses. Not every analyst had time to review the document at this stage.

OTA next sent a draft of the full report to the

project’s advisory panel and to relevant outside

experts (see appendix A). Reviewers included

members of organizations whose analyses were

examined in this report, as well as individuals

from academia (health economics, health services

research, and health law), think tanks, private consulting firms, public interest groups, philanthropic organizations, the health insurance industry,

health law, state and local governments, congressional support agencies, and the executive branch.

Reviewers’ comments and critiques were incorporated where appropriate.

The OTA staff who wrote this report received

assistance in their analysis from other staff members of OTA. Meetings were held with a “shadow

panel” consisting of OTA staff from other programs with particular expertise and interest in

methods and approaches to estimating the economic impacts of health reform. Members of this

panel assisted in identifying overarching themes

from across the individual chapters of the report

and in developing general critiques of the analytical process. Further meetings with other OTA staff

sharpened the report’s conclusions and policy implications outlined in the first chapter. The final

draft of the report was sent to the Technology Assessment Board March 25, 1994.
Appendix:

Implications of

Uncertainty in Selected

Estimates of NHE

Under Health Reform c

c

hapter 1 of this report presented examples of how changing certain plausible alternative assumptions can affect

estimates of national health expenditures (NHE) and possible policy implications drawn from those estimates.

This appendix provides more detail on how sensitivity analyses

summarized in chapter 1 were calculated.

The first sensitivity analysis is based largely on Congressional

Budget Office (CBO) publications. The other two examples were

calculated by OTA using the original analytic framework but substituting one different assumption. In both examples, the alternative assumptions are plausible in the sense that they appear to be

equally well supported by the empirical literature. OTA only had

enough information about the analytic approaches to perform

these calculations for some of the analyses.

CBO’S ANALYSIS OF THE AMERICAN HEALTH

SECURITY ACT AND THE HEALTH SECURITY ACT

According to CBO,

. . . its approach to estimating the potential impact of limits on

expenditures in legislative proposals [that have provisions for

such limits] is to examine the proposal with respect to both the

stringency of the limits and the specified enforcement mechanisms. Based on its best judgment, CBO then assigns a rating of

effectiveness (168).

CBO notes that the ratings are “difficult and imprecise.” This example shows how this imprecision might influence the relative

ranking of two plans.

To estimate NHE under the American Health Security Act of

1993 (H.R. 1200), CBO assumed that the spending controls in the

American Health Security Act would only be “75 percent effec- I 163
164 I Understanding Estimates of National Health Expenditures Under Health Reform

tive” (171). Under this assumption, CBO predicted that NHE would be $1,429 billion in 1998.

However, CBO also presented an estimate under

the alternative assumption that the spending limits

in the American Health Security Act would be

“100 percent effective,*’ as opposed to 75 percent

effective. Under an assumption of 100 percent “effectiveness,” CBO predicted that NHE would be

$1,372 billion in 1998.

Changing the assumptions about the effectiveness of the spending limits could alter how the

American Health Security Act is viewed in relation to another proposal later examined by CBO,

the Health Security Act (H.R. 3600/S. 1757)

(172). For example, CBO estimated that under the

Health Security Act, NHE would be $1,411 billion in 1998. Thus, according to CBO, the American Health Security Act would leave NHE $18

billion higher in 1998 than the Health Security

Act. However, under the assumption that the

spending limits in the American Health Security

Act were “100 percent effective,” also presented

by CBO, the American Health Security Act would

leave NHE $39 billion lower than the Health Security Act. By changing the assumption about effectiveness, the ranking of the two bills would

switch. Thus, the key determinant of which bill

would save more money in 1998 is the analyst’s

educated guess about the effectiveness of the cost

containment mechanisms in the two bills. A more

detailed explanation of CBO’s justification for the

75-percent effectiveness rating, and the possible

reasons why some might disagree with the 75-percent rating are discussed in box C-1.

GAO’S ANALYSIS OF A

“CANADIAN-STYLE SYSTEM”

Altering key assumptions in certain analyses can

yield different predictions about the direction of

change in national health spending. For example,

varying the General Accounting Office’s (GAO)

assumptions about administrative costs under a

single-payer system would change GAO’s conclusion that a “Canadian-style system” would decrease NHE in year 1991 (relative to baseline), to

the conclusion that it would increase NHE in that

year (relative to baseline).

GAO estimated that under a “Canadian-style

system” overall health spending would fall $3 billion from baseline. To make this estimate, GAO

determined that a “Canadian-style system” would

have lower administrative overhead, but would

add additional costs by providing coverage to the

uninsured and eliminating patient cost-sharing.

GAO’s overall estimate represents the sum of administrative savings and additional costs from expanded and enhanced insurance coverage. For

administrative savings, GAO assumed that insurer overhead would fall to Canadian levels. An alternative assumption is that insurer overhead

would fall only to the Medicare rate (an assumption CBO has used to estimate the impact of

single-payer plans). ] Under the assumption of insurer overhead at the Medicare rate, OTA calculated that the “Canadian-style system” would be

predicted to increase national health spending by

$3.6 billion in 1991 (table C-1).

LEWIN-VHI’S ANALYSIS OF THE HEALTH

SECURITY ACT

Another example of the implications of changing

an assumption can be constructed using LewinVHI’S analysis of the Health Security Act (H.R.

3600/S. 1757), and substituting a CBO assumption about managed care savings. Lewin-VHI estimated that under the Health Security Act (H.R.

3600/S. 1757), savings from increasing enrollment in HMOS might equal $14.9 billion (89).

Lewin-VHI’s estimate of savings from managed care is summarized in table C-2 (column 5).

Lewin-VHI based its estimate in part on an assumption that group- and staff-model HMOS reduce inpatient expenditures by 11.7 percent and

increase outpatient expenditures by 8.4 percent.

1 see ~hapter 5 in this reP)fl for a full discussion Of alternative assumptions and estimates of admlni Strati Ve COStS Under CUrrent propOSalS.
Appendix C Implications of Uncertainty in Selected Estimates of NHE Under Health Reform I 165
166 I Understanding Estimates of National Health Expenditures Under Health Reform

GAO’s assumption Alternate assumption

(Insurer overhead at (insurer overhead at

Canadian level) Medicare level)

Administrative savings ($66.9) ($60.3)

Increased utilization $63,9 $63.9

Net change in NHE ($3.0) $3.6

KEY GAO = U S GeneraI Accounting Off Ice, NHE = national health expenditures

SOURCE Off Ice of Technology Assessment, 1994, based on assumptions from CBO (165) and GAO (178). Full citations are in appendix B and at the end of this report

Lewin-VHI’s analysis further assumed that independent practice associations (IPAs)2 reduce inpatient expenditures by 6.9 percent and increase

outpatient expenditures by 9.9 percent.

Further, Lewin-VHI assumed that under the

Health Security Act individuals in metropolitan

areas would enroll in group- and staff-model

HMOS (or in plans with equivalent savings) and

that individuals in nonmetropolitan areas would

enroll in IPAs (or in plans with equivalent savings). Lewin-VHI’s analysis made additional assumptions regarding managed care savings for

people 65 and older and for prescription drug expenditures under managed care. Lewin-VHI’s

analysis assumed that prescription drug expenditures would be reduced in proportion to overall

managed care savings. It also made assumptions

about the change in utilization for people 65 and

older based on Medicare TEFRA3 evaluation results.

In contrast, CBO has assumed in past reports

that staff- and group-model HMOS can reduce expenditures by 15 percent (table C-2, column 4)

(163). CBO has stated that there is no evidence

that IPAs can reduce expenditures and therefore it

has made the conservative assumption that no savings can be achieved by increasing enrollment in

IPAs.4 Given the extreme difficulty in trying to

synthesize the diverse literature on HMO savings,

and the questions that are left unanswered by this

literature (e.g., do HMOS have higher administrative costs?), CBO’S assumptions seem as plausible as those used by Lewin-VHI.5

OTA calculated what might happen if LewinVHI’S managed care savings estimates were replaced with CBO’S assumptions that 1 ) group- and

staff-model HMOS reduce expenditures 15 percent below fee-for-service plans, and 2) IPAs have

expenditures equivalent to fee-for-service plans.

OTA’s calculation suggests that total estimated

savings from managed care would be increased in

the Lewin-VHI analysis from $14.9 billion to

approximately $48.8 billion (table C-2).

2 As discussed in chapter 3 in this report, IPAs are one type of managed care organization.

3 TEFRA is the Tax Equity and Fiscal Responsibility Act of 1982 (Public Law 97-248). The act included provisions for a “Medicare risk

program” that was intended to be a means of reducing costs to Medicare by encouraging enrollment of individuals with Medicare coverage in

HMOS (105).

4 CBO has just revised its assumptions about the effects of managed care (173).

s me research ]Iterature on cost savings from managed care is reviewed in chapter 3 of this repofl.
Appendix C Implications of Uncertainty in Selected Estimates of NHE Under Health Reform I 167

Percentage Percentage Dollar Dollar

change in change in change in change in

expenditures expenditures expenditures expenditures

for those not for those not for those not for those not

now enrolled now enrolled now enrolled now enrolled

in HMOS in HMOS in HMOS in HMOS

Dollar

Baseline Percent Dollar change under

Expenditures Percent change under change under ‘'CBO and

for those not change under “CBO and Lewin-VHl Lewin-VHl’s

Population or service now in HMOS Lewin-VHl Lewin-VHl’s analysis assumptions”

affected ($ billions) analysis assumptions” ($ billions) ($ billions)

People under age 65, by

area of residence and

setting for care

Metropolitan areas

inpatient care

Outpatient care

Nonmetropolitan areas

inpatient care

Outpatient care

People 65 and eider, metro

and nonmetropolitan areas

combined, by setting

inpatient care

Outpatient care

Prescription drugs

Total

$1889 -11.770

$120 1 8.4 %

$81, 2 -6.9 %

$51 6 9.9 %

- 155zoa

- 15Yoa

O

a

O

a

($22.1) ($28.3)

$10 0 ($18.0)

($5 6) o

$51 0

$13 7 -16.0 % -16.0 % ($2.2) ($2 .2)

$ 7 1 13.0% 13.O’XO $0.9 $0.9

$37,2 -3.1% -3.1% ($1.2) ($1 .2)

$499.9 -3.3% -10.9% ($149) ($48.8)

KEY: CBO = U.S. Congress, Congressional Budget Office, HMO = health maintenance organization

aCBO assumption

SOURCE Off Ice of Technology Assessment, 1994, based in part on Lewin-VHl (89) and CBO (163) Full citations are in appendix B and at the end of

this report
Appendix:

Abbreviations

and

D Glossary

ABBREVIATIONS

AHCPR

AHP

AHSIM

ASPE

BLS

CalPERS

CBO

CES

CHAMPUS

CHAMPVA

CHSOS

CON

CPI

CPS

168 I

Agency for Health Care Policy

and Research (PHS)

Accountable Health Plan

Agency for Health Care Policy

and Research’s Simulation

Model

Office of the Assistant Secretary for Planning and Evaluation (DHHS)

Bureau of Labor Statistics (Department of Labor)

California Public Employees’

Retirement System

Congressional Budget Office

(U.S. Congress)

Consumer Expenditure Survey

Civilian Health and Medical

Program of the Uniformed Services (Department of Defense)

Civilian Health and Medical

Program of the Veterans Administration

comprehensive health service

organizations

Certificate-of-Need

consumer price index

Current Population Survey

CRS

DHHS

DRG

ESP

ESRI

FEHBP

FFS

GAO

GDP

GHAA

GP

HCFA

HEP

HIAA

HIE

HIS

Congressional Research Service

(Library of Congress)

Department of Health and Human Services

diagnosis-related group

Economic Stabilization Program

Economic and Social Research

Institute

Federal Employees Health

Benefits Program

fee-for-service

General Accounting Office

(U.S. Congress)

gross domestic product

Group Health Association of

America

general practitioner

Health Care Financing Administration (DHHS)

Hospital Experimental Payments program

Health Insurance Association of

America

Health Insurance Experiment

(Rand)

Health Interview Survey
Appendix D Abbreviations and Glossary I 169

HMO

HPPC

IPA

MFS

NHA

NHB

NHE

NMCUES

NMES

OBRA-1989

OECD

OMB

OTA

PHS

PPO

PPS

RCT

SIPP

SP1

SP2

SSA

TAB

TEFRA

VPS

GLOSSARY

health maintenance organization

health plan purchasing cooperative

individual practice association

Medicare fee schedule

National Health Accounts

National Health Board

national health expenditures

National Medical Care Utilization and Expenditure Survey

National Medical Expenditure

Survey

Omnibus Budget Reconciliation

Act of 1989

Organisation for Economic Cooperation and Development

Office of Management and

Budget (U.S. Executive Office

of the President)

Office of Technology Assessment (U.S. Congress)

Public Health Service (DHHS)

preferred provider organization

prospective payment system

(Medicare)

randomized clinical trial

Survey of Income and Program

Participation

Single payer 1 (CBO)

Single payer 2 (CBO)

Social Security Administration

(DHHS)

Technology Assessment Board

(OTA)

Tax Equity and Fiscal Responsibility Act of 1982

Volume Performance Standards

(Medicare)

Accountable Health Plan (AHP)

Under the Managed Competition Act, the term accountable health plan means a health plan registered with the National Health Board that meets

standards established by the National Health

Board.

Acute care

Medical services offered within a hospital setting

over a short period of time designed to treat patients for acute episodes of illness, injuries, and

post-surgery.

Administrative costs

Expenses related to the management or supervision of the provision of health care coverage and/

or services. Analyses of reform approaches,

proposals, or plans frequently do not share a common definition of what components constitute administrative costs, but most commonly refer to

insurer (including government programs and private plans) and provider (including hospital and

physician) administrative costs.

Administrative load

With private health insurance, the difference

between premiums and claims paid, including

profit.

Adverse selection

In health insurance, the tendency of persons with

poorer than average health expectations to apply

for, or continue, insurance to a greater extent than

persons with average or better heath expectations.

Affordable Health Care Now Act of 1993

(H.R. 3080/S. 1533)

A health reform proposal sponsored primarily by

Rep. Robert Michel and Sen. Trent Lott in the

103d Congress that would require employers to

offer, but not pay for, a basic health benefit plan.

The proposal includes regulation of underwriting

and rating practices in the small group market and

requirements that insurers offer three different

health plans and portability of coverage. It also includes measures to encourage development of

multiple employer purchasing groups.

Aging

Temporal extrapolation to actualize or further

forecast a sample.

All-payer system

A payment system in which services are covered

and paid for by multiple payers, but where all

payers adopt the same payment methods and rates.

Compare singlc-payer system.
170 I Understanding Estimates of National Health Expenditures Under Health Reform

Ambulatory encounters

Ambulatory encounters can include phone calls or

visits to physicians’ or other providers’ offices, or

visits to hospital outpatient departments. Surveys

do not always distinguish among these types of

encounters and settings for encounters, and studies using surveys do not always define their terms

clearly. In the health services literature, ambulatory means other than on an inpatient basis.

American Health Security Act of 1993

(H.R. 1200/S. 491)

A health reform proposal sponsored by Rep. Jim

McDermott and Sen. Paul Wellstone in the 103d

Congress that would establish a single-payer national health insurance program, federally mandated and administered by the States. This

program would replace private health insurance

and public program coverage. The program would

provide coverage of comprehensive health and

long-term care benefits. A national board would

establish a national health budget that would be

distributed among the States, based on the national average per capita cost of covered services, adjusted for differences among the States in costs

and the health status of their populations.

Analysis

In this report, an estimate of the impact of a health

reform proposal.

Analysts

In this report, those individuals and organizations

using analytical tools and methods for simulation

of national health expenditures, redistributive,

and macroeconomic effects of changes in policy.

Assumption

The supposition that something is true. In this report, assumption refers to the parameters used to

estimate national health expenditures under reform.

Balance billing

In the Medicare program, the practice of billing a

Medicare beneficiary in excess of Medicare’s allowed charge. The balance billing amount would

be the difference between Medicare’s allowed

charge and the physician’s (or other qualifying

provider’s) fee.

Baseline

Baselines are projections of expenditures assuming no reform (e.g., assuming the continuation of

current policies).

Baseline national health expenditures

See baseline and national health expenditures.

Behavioral assumptions

Assumptions concerning behavioral responses to

a change in policy, that is, changes in behavior of

an individual decision unit, such as a family, employer, or hospital. In turn, behavioral responses

have feedback effects on program costs and recipients.

Benefit package

The package of health care services covered by a

particular insurer.

Billings

The physician’s (or provider’s) actual (billed)

charge for a service.

Budgets

A financial plan for allocating resources.

Cavitation (or per capita) payment

A method of payment for services in which a service provider (e.g., a physician, hospital, or other

agency or individual) is paid a fixed amount for

each person served regardless of the actual cost of

services provided for the person.

Case mix index

A measure of the type of cases being treated by a

particular health care provider that is intended to

reflect the patients’ different needs for resources.

Certificate-of-Need (CON)

A regulatory planning mechanism required (in

order to receive certain federal funds) by the

National Health Planning and Resources Development Act of 1974 (Public Law 93-641) to control expenditures for and distribution of expensive

medical care facilities and equipment. Each State

was required to enact a CON law with specific

characteristics, such as expenditure thresholds.

Compliance with this federal planning requirement has not been enforced because of a series of

legislative amendments. In States where CON

laws have been enacted and have not expired or
Appendix D Abbreviations and Glossary I 171

been repealed, CON applications by institutions

are reviewed by local health systems agencies and

are then denied or approved by State health planning agencies.

Charge

The price of a service or the amount billed for services rendered.

Coinsurance

That percentage of covered hospital and medical

expenses, after subtraction of any deductible, for

which an insured person is responsible. Under

Medicare Part B, after the annual deductible has

been met, Medicare will generally pay 80 percent

of approved charges for covered services and supplies; the remaining 20 percent is the coinsurance,

for which the beneficiary is liable.

Community hospitals

As defined by HCFA, those nonfederal acute care

hospitals whose average length of stay is less than

30 days and whose facilities and services are open

to the general public.

Community rating

Definitions of community rating vary. One definition is a method of determining premium rates that

is based on the allocation of total costs without regard to past claims experience. Another definition

is an approach to pricing health insurance premiums that requires an insurer to accept all applicants at virtually the same rates. The second

definition is the one most applicable to the health

reform proposals referred to in this report.

Comprehensive Family Health Access

and Savings Act (S. 1807/H.R. 3918)

A proposal introduced by Sen. Phil Gramm and

Rep. Rick Santorum in the 103d Congress that

gives new federal tax exclusions, deductions, and

refundable credits to individuals for the purchase

of health insurance and/or for contributions to

medical savings accounts. The proposal would

also prohibit certain insurance underwriting practices, and would subsidize premium expenses for

certain persons with pre-existing conditions.

Phase-in of new federal subsidies would be contingent on the achievement of federal savings under the Medicare and Medicaid programs.

Comprehensive Health Reform Act of 1992

(H.R. 5919)

A proposal introduced by Rep. Robert Michel in

the 102d Congress. It allows the self-employed to

deduct their health insurance costs from taxable

income, regulating employment-based health insurance to improve its availability and affordability, standardizing medical and health insurance

information, and reforming the system of liability

for medical malpractice.

Comprehensive health service organizations

As defined in the American Health Security Act of

1993 (H.R. 1200/S. 491), a public or private organization which, in return for a capitated payment

amount, undertakes to furnish, arrange for the provision of, or provide payment with respect to: 1 ) a

full range of health services (as identified by a National Health Board), including at least hospital

and physician services, and 2) out-of-area coverage in the case of urgently needed services, to an

identified population that is living in or in or near a

specified service area and that enrolls voluntarily

in the organization.

Consumer Choice Health Security Act of 1993

(S. 1743/H.R. 3698)

A bill introduced by Sen. Don Nickles and Rep.

Cliff Steams in the 103d Congress in which all

persons would be required to purchase health insurance through a plan meeting federal standards

relating to minimum benefits and rating and underwriting practices, or through a state-established health plan. Current tax exclusions for

employer-sponsored health plans would be replaced with refundable tax credits for a portion of

the premium cost of qualified health insurance

plans and for other medical expenses. Employers

currently providing health benefits would be required to convert them into added wages.

Copayment

In insurance, a form of cost-sharing whereby the

insured pays a specific amount at the point of service or use (e.g., $10 per visit).

Corporate alliances

A term used in the Health Security Act (H.R.

3600/S, 1757) that refers to entities created by em-
172 I Understanding Estimates of National Health Expenditures Under Health Reform

ployers with 5,000 or more employees to provide

health insurance. Corporate alliances would have

to enroll all eligible persons and provide the comprehensive benefit package. They would have to

offer a choice of at least three health plans, one of

which would be a fee-for-service plan.

costs

Expenses incurred in the provision of services or

goods. Many different kinds of costs are defined

and used (e.g., allowable, direct, indirect, and operating costs). It is important not to confuse costs

with charges, which are the price of a service or the

amounts billed for services rendered.

Cost-sharing

The provisions of a health benefits plan that require the enrollee to pay a portion of the cost of

services covered by the plan, typically exclusive

of premium cost-sharing (sharing the cost of a

health care plan premium between the sponsor and

the enrollee). Usual forms of cost-sharing include

deductibles, coinsurance, and copayments. These

payments are made at the time a service is received

or shortly thereafter, and are only made by those

insured people who seek treatment.

Coverage

Promise by a third party to pay for all or a portion

of expenses incurred for specified health care services.

Current law

Refers to the status quo or current health care

policy and law as of the time of the analysis.

Current Population Survey (CPS)

Sponsored by the Department of Labor’s Bureau

of Labor Statistics, and the Department of Commerce’s Bureau of the Census, the CPS is a continuing monthly cross-sectional survey of about

60,000 U.S. households. Data collected includes

labor force status for ages 15 and older. The March

CPS includes supplementary questions on income, employment status, and health insurance

coverage during the previous calendar year.

Demand for services

Use of services.

Depth of coverage

The aspect of insurance benefit plans related to the

extent of patient cost-sharing.

Diagnosis-related groups (DRGs)

Entries in a taxonomy of types of hospitalizations

based on groupings of diagnostic categories

drawn from the International Classification of

Diseases and modified by the presence of a surgical procedure, patient age, presence or absence of

significant comorbidities or complications, and

other relevant criteria. DRGs have been mandated

for use in establishing payment amounts for individual admissions under Medicare’s prospective

hospital payment system as required by the Social

Security Amendments of 1983 (Public Law

98-21).

Disproportionate share hospitals

Hospitals that serve a relatively large volume of

low-income patients and therefore may be eligible

for a payment adjustment under the prospective

payment system (PPS).

Distributional analyses

Analyses of the distribution of costs and benefits

of a particular policy across different sectors in the

economy, populations, income groups, or other

identifying characteristics of groups.

Durable medical equipment

Medical equipment that is capable of withstanding repeated use, generally not useful to someone

in the absence of injury or illness, and appropriate

for home use. Examples include intravenous poles

and infusion pumps.

Economic efficiency

Economic efficiency exists when resources are allocated in an optimal way.

Employment-based health insurance

A group health plan that is sponsored by an employer for employees and their dependents.

Enrollee

An individual who qualifies for benefits under a

health benefits plan and has taken any required action to register or otherwise signify his or her participation in the plan.
Appendix D Abbreviations and Glossary I 173

Estimate

An approximate calculation, a numerical value

obtained from a statistical sample or economic

model (in this report, used most often to refer to

the outcome of simulations of national health expenditures).

Expenditures

In the context of health care, monies spent on the

acquisition of heath care coverage and/or services.

Expenditure caps

An approach to government cost controls in which

a regulatory authority sets a limit on aggregate

spending levels or increases for a specific category of health services (e.g., physician or hospital

services), and in which billings exceeding the cap

trigger certain penalties, the effects of which

would be felt in the current period. Compare with

expenditure targets.

Expenditure limit

Refers broadly to a government regulatory strategy that set limits on aggregate spending levels or

increases for large sources of funding for national

health expenditures.

Expenditure targets

An approach to cost containment in which a regulatory authority sets targets or goals for aggregate

spending levels or increases for a specific category of health services (e.g., physician or hospital

services). However, billings exceeding the target

do not necessarily trigger penalties. Compare with

expenditure caps.

Experimental data

Data from experiments.

Federal poverty level

The official U.S. government definition of poverty based on cash income levels for families of different sizes. Responsibility for changing poverty

concepts and definitions rests with the Office of

Management and Budget.

Fee-for-service

A method of billing for health services under

which a physician or other practitioner charges

separately for each patient encounter or service

rendered. Fee-for-service is used in this report and

in most studies comparing fee-for-service and

managed care to refer to insurance arrangements

that do not “manage” care (i.e., pure indemnity arrangements), but managed care principles are

increasingly being used in fee-for-service indemnity plans .

Fee-for-service plan

Used in this report to mean a traditional or conventional health insurance plan that permits insured

individuals to select providers of services and that

pays the providers according to the fees charged

for such services. The term is used to distinguish

such plans from HMOS, under which the enrollee

generally must obtain services from HMO providers whose payments from the HMO are not necessarily directly related to the type or quantity of

services actually provided.

Fee schedule

An exhaustive list of medical services and fees in

which each entry is associated with a specific

monetary amount that represents the approved

payment amount for the service under a given insurance plan.

First-dollar coverage

Coverage without patient cost-sharing requirements.

Fixed costs

Operating expenses that do not vary, at least over

the short term, with the volume of services provided.

Government cost controls

Measures by which federal, state, or local governments play a direct role in financing and paying

health care facilities and providers. Government

cost controls include limits on prices of health insurance (i.e., premiums), prices of particular categories of health services (e.g., physicians’ fees),

overall expenditures for a particular health care

category or facility (e.g., hospital), or overall outlays for a particular source of funding (e.g., national, state, or local government budgets).

Gross domestic product (GDP)

The total value of the goods and services produced

in a country.
174 I Understanding Estimates of National Health Expenditures Under Health Reform

Group-model HMO

An HMO that contracts with one independent

group practice to provide health services.

Growth rate of national health expenditures

The extent to which national health expenditures

increase, usually expressed as an annual percentage increase.

Health alliances

A term used in the Health Security Act (H.R.

3600/S. 1757) to refer to regional purchasing

pools that would allow employees and individuals

to comparison shop for health plans, along with

other responsibilities.

Health Care Cost Containment and

Reform Act of 1992 (H.R. 5502)

A proposal Rep. Pete Stark introduced in the 103d

Congress that would make three major changes to

the health system. It would attempt to slow the

growth of health care spending by establishing

limits on most health care expenditures and by setting payment rates for all personal health services.

It would establish national standards for health insurance plans and simplify the administration of

health insurance. Finally, it would expand benefits under Medicare and Medicaid and establish a

new Federal program to provide health insurance

to all children under age 19.

Health Equity and Access Reform Today Act of 1993

(H.R. 3704/S. 1770)

A reform proposal introduced by Rep. Bill Thomas and Sen. John Chafee and others in the 103d

Congress that would require all persons to purchase coverage through a qualified health plan, or

face a penalty for noncompliance. All employers

would be required to offer their employees enrollment in a qualified health plan, or face a penalty

for noncompliance. No employer, however,

would be required to make contributions for coverage of an employee. Small employers and individuals could participate voluntarily in

State-established purchasing cooperatives or select other qualified health plans. All plans would

have to offer standard benefits and would be subject to restrictions on rating and underwriting

practices. Federal subsidies in the form of vouchers would be phased in for low-income persons,

subject to savings being achieved under the Medicare and Medicaid programs.

Health insurance

In this report, the term health insurance is used

broadly to include various types of health plans

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

(as in HMOS) to arrange for the delivery of that

care, including traditional private indemnity feefor-service coverage, prepaid health plans such as

HMOS, self-funded employment-based health

plans, Medicaid, and Medicare.

Health maintenance organization (HMO)

A health care organization that acts as both insurer

and provider of health care. A defined set of physicians (and, often, other health care providers such

as physician assistants and nurse midwives) provide services to an enrolled population. Benefits

are usually provided with minimal patient costsharing. Types of HMOS include group-model

HMOS, staff-model HMOS, and individual practice associations.

Health plan

The term health plan has no standard definition,

and different insurer organizations and health reform proposals define “health plan” differently.

The term health plan was coined, in part, because

the term health insurance plan does not indicate

that many plans both provide insurance, that is

they finance care through premiums collected

from employers and individuals, and are involved

in the delivery of care (e.g., through utilization

management, by hiring providers, and/or providing setting). Thus, the term health plan is more

general than the term health insurance plan and includes a wide spectrum of private health care financing and delivery arrangements, ranging from

traditional fee-for-service plans to traditional

health maintenance organizations.
Appendix D Abbreviations and Glossary I 175

Health plan purchasing cooperatives

Groups that arrange for the purchase of health insurance usually on behalf of a large number of

people, such as employees of small businesses.

Health Security Act (H.R. 3600/S. 1757)

A proposal devised by the Clinton Administration

that would require all persons to obtain a comprehensive health benefits package from large insurance purchasing cooperatives called health

alliances. Health plan premiums would be paid

through a combination of employer and individual contributions, supplemented by Federal subsidies for some types of firms, early retirees, and

persons with incomes below certain levels. A national health care budget would be established for

expenditures for services covered under the comprehensive package. This budget would limit both

initial premiums and the year-to-year rates of increase that could be charged by health plans participating in the alliances. Ultimately, premiums

could grow no faster than the rate of growth in per

capita gross domestic product, unless Congress

specifies a different inflation factor.

Home health services

Items and services provided as needed in patients’

homes by a home health agency or by others under

arrangements made by a home health agency.

Hospital mandatory rate setting

A state program that involves mandatory review

and compliance by all hospitals in the state with

hospital rates set by a state rate-setting authority.

Hospital market basket index

An index of the national average annual change in

the price of goods and services that hospitals purchase to produce inpatient services.

Hospital operating budget

The fixed amount of revenues that pays for day-today costs of running a hospital. Generally, the

budget does not include funds to finance capital

expenditures such as the expansion of building facilities or the purchasing of expensive hightechnology equipment.

Individual practice association (I PA)

A type of HMO that contracts directly with physicians in independent practice, with one or more

associations of physicians in independent practice, and/or with one or more multi specialty group

practices to provide health services.

Input (real)

A measure of cost defined in terms of the factors

used to produce a good or service. In the context of

the hospital sector, these factors include labor

(e.g., nurses, nursing assistants, administrators,

and custodial staff) and nonlabor units (e.g.,

buildings, equipment, and supplies).

Insurer overhead

The administrative load of private health insurance and the costs of operating public programs

that provide health care coverage.

Length of stay

The number of days a patient stays in the hospital

from admission to discharge.

Level

The amount of spending in a particular specified

time period.

Managed care

A general term applied to a range of initiatives

from organized health care delivery systems (e.g.,

HMOS) to features of health care plans (e.g.,

preadmission certification programs, utilization

review programs) that attempt to control or coordinate enrollees’ use of (and thus to control the

cost of) services.

Managed competition

An approach to health reform that would combine

health insurance market reform with health care

delivery system restructuring. The theory of managed competition is that the quality and economy

of health care delivery will improve if independent groups compete with one another for consumers in a government-regulated market.
176 I Understanding Estimates of National Health Expenditures Under Health Reform

Managed Competition Act of 1992 (H.R. 5936)

A proposal sponsored by Rep. Jim Cooper in the

102d Congress that attempts to control costs and

expand access to health insurance by restructuring

the way health insurance and health care are provided. A national health board would oversee the

health insurance market and establish criteria for

accountable health plans (AHPs); regional health

plan purchasing cooperatives (HPPCS) would allow individuals and small groups to purchase

health insurance on the same terms as large

groups. The tax deduction for health insurance

premiums would be limited to the cost of the least

expensive AHP in the region. The bill would replace the Medicaid program with a new Federal

program that would help low-income people purchase health insurance coverage through their local HPPC. Other provisions of the bill are

designed to improve access to health care in rural

and other underserved areas, expand preventive

health programs, establish uniform standards for

malpractice claims, and simplify the administration of health insurance.

Managed Competition Act of 1993

(H.R. 3222/S. 1579)

A proposal sponsored by Rep. Jim Cooper and

Sen. John Breaux in the 103d Congress that would

allow states to establish health plan purchasing

cooperatives (HPPCS) that would contract with

accountable health plans (AHPs). AHPs would be

required to cover a uniform set of benefits and

comply with premium rating and underwriting

standards. All employers would be required to offer, but not pay for, coverage in an AHP. Small employers with 100 or fewer employees would have

to participate in the HPPC; larger employers could

offer their own AHP. Health plan expenses would

be tax-deductible up to the cost of the lowest-cost

basic plan in the area. An excise tax would be imposed on employer contributions in excess of this

level.

Medicaid

A joint federal-state program intended to provide

health care and health-related services for low-income individuals. Medicaid regulations are established by each state within federal guidelines, and

the eligibility requirements and services covered

vary significantly among the states. In general,

Medicaid pays for medical, nursing home, and

home health care for individuals who meet the eligibility requirements for those services. In some

states, Medicaid also pays for adult day care and

in-home services such as personal care and homemaker services. Financial eligibility for Medicaid

is determined by a means test, in which a ceiling is

placed on the maximum income and assets an individual may have in order to qualify for assistance. The income and assets levels are low in all

states and very low in some states.

Medical savings account

A trust created or organized exclusively for the

purpose of paying the medical expenses of beneficiaries of such trust.

Medicare

A nationwide, federally administered health insurance program authorized by Title XVIII of the

Social Security Act of 1965 to cover the cost of

hospitalization, medical care, and some related

services for eligible persons over age 65, persons

receiving Social Security Disability Insurance

payments for 2 years, and persons with end-stage

renal disease. Medicare consists of two separate

but coordinated programs—hospital insurance

(Part A) and supplementary medical insurance

(Part B). Health insurance protection is available

to insured persons without regard to income.

Medicare payment rates

The amounts that the Medicare program agrees to

pay for hospital or physician services provided to

Medicare beneficiaries.

Medigap insurance

Private supplementary medical insurance covering out-of-pocket expenditures (deductibles and

coinsurance) of Medicare beneficiaries, but typically not covering the patient liability for physician services not covered by assignment.

Model

In this report, a general term applied to a collection of analytical tools used for estimating,

projecting, or simulating national health expenditures under health care reform. A National Acade-
Appendix D Abbreviations and Glossary I 177

my of Sciences (N AS) panel defines formal

models as “models that are based on a coherent

modeling strategy and set of assumptions, developed for repeated application, and designed to

produce consistent estimates for a range of policy

proposals within a common framework that is, or

can be, well documented and evaluated. By their

nature, formal models circumscribe, although

they do not eliminate, the role of individual analysts’ judgments. Such models . . . vary in size,

scope, and the types of data and modeling strategies they use, but they share the attributes we have

listed.” Not all of the analytical tools for making

estimates and projections of national health expenditures, redistributive, and macroeconomic effects of policy changes meet the NAS criteria for

formal models. NAS notes further that “formal

models, as [NAS has] defined them, are at one extreme of a continuum of policy analysis tools.”

Between “back of the envelope” calculations and

formal models are “models that are developed by

an analyst on an ad hoc basis--often using personal computer spreadsheets—to respond to a specific policy debate. Such models, which vary greatly

in complexity and approach, will reflect the analyst best efforts to use all available data to develop the estimates needed for the particular debate,

but they are not generally designed with any future

application in mind” (20).

Monopsonistic buying power

A market condition that allows a single buyer to

control the demand side of the market for a product or service.

Multivariate econometric analysis

An analysis that uses statistical methods to estimate and test models of economic behavior and

measures the effects of several factors on the variable of interest.

National Health Accounts (NHA)

The National Health Accounts are statistics representing total national health expenditures used to

identify all goods and services relating to health

care, and the amount spent on these goods and serNational Health Board

A body that would be established under several

health reform proposals and given varying degrees of responsibility for creating and regulating

different aspects (i.e., a standard benefit package)

of these proposals.

National health expenditures (NHE)

An estimate by HCFA of national spending on

health care made up of two broad categories: 1)

health services and supplies, which, in turn, consist of personal health care expenditures (the direct provision of health care), program

administration and the net cost of private health

insurance, and government public health activities; and 2) research and construction of medical

facilities.

National health expenditure-to-GDP ratio

The ratio of a country’s national health expenditures to the country’s gross domestic product.

National health insurance program

Any system of health insurance benefits, covering

all or nearly all citizens, established by federal

law, administered by the federal government, and

supported or subsidized by taxation.

National Health Interview Survey

A continuing nationwide sample survey in which

data are collected through personal household interviews. Information is obtained on personal and

demographic characteristics, illnesses, injuries,

impairment, chronic conditions, utilization of

health resources, and other health topics. For individuals under age 17, information is collected

from a proxy respondent, typically a parent or

guardian. The survey is conducted by the National

Center for Health Statistics in DHHS.

National Medical Care Utilization and Expenditure

Survey, 1980 (NMCUES)

Sponsored by the National Center for Health Statistics in the DHHS, the NMCUES survey involved five rounds of data collection over a

15-month period around 1980 for a national sample of 6,000 households. Data were collected on

vices. health insurance coverage, episodes of illness,
178 I Understanding Estimates of National Health Expenditures Under Health Reform

number of bed days, hospital admissions, physician and dental visits, other medical care encounters, prescription purchases, access to medical

care services, income, and demographic and socioeconomic characteristics. Information was

also collected on provider characteristics, services

provided, charges, sources, and amounts of payments.

National Medical Expenditure Survey (NMES)

A survey conducted by the DHHS involving five

rounds of data collection, between February 1987

and July 1988, sampling 14,000 households

(Household Survey). The NMES also surveys

physicians and health care facilities providing

care to members of a household sample during

1987 and employers and insurance companies responsible for their insurance coverage (Health Insurance Plan Survey). The NMES also included

an institutional survey of 13,000 residents of nursing and personal care homes, psychiatric hospitals, and facilities for mentally retarded persons.

Network-model HMO

An HMO that contracts with two or more independent group practices to provide health services.

Nominal

Variables (e.g., fees, expenditures, or gross domestic product) expressed in nominal terms

means data that is not adjusted for the effects of

price changes. Compare with real.

Open enrollment

A health insurance enrollment period when coverage is offered regardless of health status and without medical screening.

Out-of-pocket expenses (costs) or spending

Payments made by a plan enrollee, beneficiary, or

insured for medical services that are not reimbursed by the health plan. These may include payments for deductibles and coinsurance for covered

services, for services not covered by the plan, for

provider charges in excess of the plan’s limits, and

for enrollee premium payments.

Per-case payment

A type of hospital payment system that pays the

hospital a specific amount for each case treated,

regardless of the number and types of services or

number of days of care provided. Medicare’s DRG

payment system for inpatient services is a per-case

payment system.

Per-diem payment

An established rate and method of payment based

on the cost of providing a day of hospital inpatient

care.

Personal health expenditures

Expenditures that include all services and products purchased that are associated with individual

health care, such as hospital services, physician

services, drugs, and nursing home care. Excludes

expenditures for government public health activities, research and construction, and administrative

costs. This is a subcategory of national health expenditures.

Point estimate

A single number rather than a range of numbers.

Preexisting condition

A condition (such as an injury, a disease, or a

physical disability) existing in an individual before an insurance policy goes into effect that may

in some way hinder the insurance coverage.

Preferred provider organization (PPO)

A term that refers to a variety of different insurance arrangements under which plan enrollees

who choose to obtain medical care from a specified group of participating providers receive certain advantages, such as reduced cost-sharing

charges. Providers usual] y furnish services at lower than usual fees in return for prompt payment by

the health insurance plan and a certain assured

volume of patients.

Premium

The periodic payment made to an insurer under

the terms of an insurance contract.

Premium limits

A limit on the growth rate or level of premiums.

Price controls

Government involvement in determining the level

or growth in input prices (resource costs) or output

prices (charges) for medical services, including

fee schedules and fee updates for physician ser-
Appendix D Abbreviations and Glossary I 179

vices and per-diem, per-case, or per-service rate

setting for hospital services.

Price elasticity of demand

Percent change in quantity demanded that results

from a 1 percent change in the price of a product.

For example, if a 10 percent increase in the fee for

a physician’s office visit caused a 5 percent decrease in patient visits, the price elasticity of demand would be minus 0.5.

Private health insurance

Health insurance that is taken up and paid for at the

discretion of individuals, or employers on behalf

of individuals.

Private insurance load

The difference between premiums and claims

paid, including profit. (Also referred to in this report as private insurance overhead.)

Proposal

In this report, proposal refers to plans to reform

the health care system, usually in the form of legislation.

Prospective budgets

An overall limit on the funds to pay for a specific

category of health care services, fixed in advance

of the payment period, regardless of where the

funds originate.

Prospective payment

Payment for medical care on the basis of rates set

in advance of the time period in which they apply.

The unit of payment may vary from individual

medical services to broader categories, such as

hospital case, episode of illness, or person (cavitation). Medicare’s DRG payment system for inpatient hospital services is a particular form of

prospective payment.

Prospective payment system (PPS)

A payment system that pays health care providers

for their services according to a predetermined,

fixed amount. Although prospective payment

rates may be related to the costs providers incur in

providing services, the amount a provider is paid

for a service under a prospective payment system

is unrelated to the provider’s actual cost of providing that specific service. Medicare and CHAMPUS use prospective payment systems to pay for

inpatient hospital services.

Provider

A physician, hospital, group practice, nursing

home, pharmacy, or any individual or group of individuals that provides a health care service.

Provider overhead

Provider expenses associated with activities not

directly related to patient care. Definitions of what

specific activities are included vary widely.

Provider volume offset

Provider behavior that changes the volume of services in response to changes in provider payment

rates.

Public coverage

Third-party coverage that is chiefly administered,

operated, or financed by federal or state governments. Examples are Medicaid, Medicare, and

CHAMPUS. Compare private health insurance.

Rand Health Insurance Experiment (HIE)

A large-scale controlled trial in health care financing with the objective of examining the effects of

different organizational and patient cost-sharing

arrangements. The HIE was conducted between

1974 and 1982.

Randomized clinical trial (RCT)

An experiment designed to test the safety and efficacy of a medical technology in which people are

randomly allocated to experimental or control

groups, and outcomes are compared.

Rate-setting system

A method of payment in which a governmental

regulatory body (usually a state) decides what

prices a hospital, for example, may charge in a

given year.

Real

Variables (e.g., fees, expenditures, or gross domestic product) expressed in real terms means

data that is adjusted for the effects of price

changes. Compare with nominal.

Real expenditures

Expenditures adjusted for inflation.
180 I Understanding Estimates of National Health Expenditures Under Health Reform

Regional alliance

As defined in the Health Security Act, a nonprofit

organization, an independent state agency, or an

agency of the state which contracts with certified

health plans to provide coverage to residents of the

region. An alliance would be required to offer a

contract to any certified plan seeking to serve in its

area unless the plan’s proposed premium exceeded the per capita premium target by more than 20

percent. The alliance would also be required to ensure that at least one fee-for-service plan was

available among plan offerings.

Relative value scale (RVS)

An index that assigns weights to each medical service. The RVS used in the development of the

Medicare fee schedule consists of four cost components: physician work, practice work, practice

expense, and malpractice expense.

Retrospective cost-based reimbursement

A payment method for health care services that

pays hospitals (or other providers) their incurred

costs for treating patients after the treatment has

occurred. In this country, the term has traditionally referred to hospital payment, since other providers have generally been paid on the basis of

charges instead of costs.

Risk-adjusted payments

Payments to providers or insurers that are adjusted

for the relative risk of using health services. Common risk adjustment factors include age, gender,

health status, and prior use of health services.

Scope of coverage

The services covered.

Sensitivity analysis

An analysis of the effect of changes in assumptions on the findings and outcome of an overall

study.

Service intensity

The number and complexity of patient care resources, or intermediate outputs, used in producing a patient care service.

Sickness fund

Organizations that administer national health insurance; the term is used primarily in European

countries.

Simulation

Used in this report to mean an artificial model of

the health care system, set up in order to test an

outcome of a potential health reform proposal.

Single-payer system

A payment system in which all covered health

care services are insured and paid for by a single

insurer.

Skilled nursing facility

A facility that provides skilled nursing care. A distinct part skilled nursing facility is a distinct unit

within the hospital that provides such care (i.e.,

beds set up and staffed specifically for this service), is owned and operated by the hospital, and

meets Medicare certification criteria.

Small-market reforms

Changes in the health insurance market for small

businesses.

Staff-model HMO

An HMO in which physicians practice solely as

employees of the HMO and are paid a salary.

Standardized benefit package

Under reform, a requirement that all or many

health insurers must provide coverage for an identical scope and depth of services.

Statistically significant

The likelihood that an observed association is not

due to chance.

Supplemental insurance

Coverage that is designed to insure expenses not

covered by a basic plan.

Survey of Income and Program

Participation (SIPP)

Sponsored by the Department of Commerce’s Bureau of the Census, the SIPP is an ongoing panel

survey of adults ages 15 and older in the civilian,

noninstitutionalized population. The first panel,
Appendix D Abbreviations and Glossary I 181

held in the fall of 1983, completed nine interviews

at 4-month intervals with 20,000 households.

Subsequent panels have begun in February of each

year with varying numbers of households and

numbers of interviews. For the purposes of this report, the most important data collected concerned

monthly information on detailed sources and

amounts of income from public and private transfer payments, noncash benefits including food

stamps, Medicaid, Medicare, and health insurance

coverage.

Third-party payer

Private insurers or government insurance programs that pay providers for health care given to

patients they insure, either directly or by reimbursing patients for payments they make.

Uncertainty

In this report, as in a recent report of the National

Research Council, the term is used as “an umbrella term for the quantification of the differences between a model’s estimates and the truth” (20).

Underwriting

The process by which a health insurer determines

whether or not and on what basis it will accept an

application for insurance.

Univariate econometric analysis

An econometric method for measuring the effect

of only one factor on the variable of interest.

Compare multi variate econometric analysis.

Universal coverage

Guaranteed health insurance coverage for all individuals in a given population.

Utilization

Use; commonly examined in terms of patterns or

rates of a single service or type of service (e.g.,

hospital care, physician visits, prescription

drugs). Measurement of utilization of all medical

services in any given period is sometimes done in

terms of dollar expenditures. Use is also expressed

in rates per unit of population at risk for a given

period (e.g., number of admissions to a hospital

per 1,000 persons over age 65 per year or number

of visits to physician per person).

Volume feedback

A method of reducing physician fees in the current

or proceeding period based on the volume of services provided in the current or past period.

Volume Performance Standards (VPS)

Established under the Omnibus Budget Reconciliation Act of 1989 (Public Law 101 -239) as a

means of affecting Medicare payments to physicians; volume performance standards act as a

mechanism to update physician fees, as an expenditure target for physician expenditures that are

used 2 years later to update fees under the Medicare fee schedule, and to assist in updating future

payment rates based in part on the comparison of

actual expenditure increases with the target.
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I ndex

A

Accountable health plans, 72,75

Administrative changes under reform

analyses of proposals that reform the private insurance market, 142-144

analyses of single-payer proposals, 133-142

the baseline numbers, 144-145

evidence on administrative costs under a singlepayer system, 145-148

evidence on administrative costs under privat{

insurance market reform, 148-151

findings and policy implications, 17-18, 151-

introduction, 131-133

Affordable Health Care Now Act of 1993 (H.R.

3080/S. 1533), 102

Agency for Health Care Policy and Research,

112-115, 128-129

52

AHCPR. See Agency for Health Care Policy and

Research

American Health Security Act of 1993 (H.R.

1 200/s. 491)

administrative changes under reform, 131, 133,

135, 140

cost controls, 23, 29, 38, 46

insuring uninsured people, 103, 110

uncertainty in selected estimates of NHE under

health reform, 163-164, 165

as universal coverage proposal, 102

American Hospital Association, 147

American Medical Association, 142, 147, 148

Analyses of reform proposals

administrative changes under reform, 133-144

analysts’ process of coming to estimates, 8

cost controls, 29-42

critical assumptions in estimates of policy

changes, 10

general findings, 3-14

insuring uninsured people, 103-119

managed competition and HMO enrollment,

72-81

OTA’s use of empirical research literature, 9

Applying government cost controls. See Cost

controls

B

Barer and colleagues study, 63

Baseline spending by uninsured people, 17,99, 129

Block and colleagues study, 54

c

California

administrative cost estimates based on compar

sons with California data, 140, 141-142, 147

California Public Employees’ Retirement

System, 83-84,92

CalPERS. See California, California Public En~-

ployees’ Retirement System

Canada

administrative cost estimates based on comparisons with Canadian system, 140, 141-142,

145-146, 148

hospital payments, 56

physician payments, 63-64

Canadian-style single-payer system

administrative savings under, 131

analysis of, 105, 164

CBO. See Congressional Budget Office

Clinton Administration analysis of the Health Security Act

adnlinistrative changes under reform, 143-144

cost controls, 32-33

insuring uninsured people, 112-115, 116

managed competition and HMO enrollment, 80

Collaboration between analytic organizations and

the larger research community, 19

Community ratings, 83

Comprehensive Family Health Access and Savings

Act (H.R. 391 8/S. 1807), 102

Comprehensive Health Reform Act of 1992 (H.R.

5919)
196 I Understanding Estimates of National Health Expenditures Under Health Reform

administrative changes under reform, 144

insuring uninsured people, 102

Congressional Budget Office

administrative changes under reform

American Health Security Act of 1993

analysis, 133, 135, 140

Comprehensive Health Reform Act of 1992

analysis, 144

Health Care Cost Containment and Reform

Act of 1992 analysis, 144

Health Security Act analysis, 144

Managed Competition Act of 1992 analysis,

144

approach to estimating demand response, 105,

111

approach to estimating numbers of newly insured

people without universal coverage, 119,

120-121

cost controls

American Health Security Act of 1993

analysis, 38-39, 40

effectiveness rating criteria, 34-37, 40, 41

Health Care Cost Containment and Reform

Act of 1992 analysis, 41

Health Security Act analysis, 33-38

Universal Health Care Act of 1991 analysis,

39-40

insuring uninsured people

American Health Security Act of 1993

analysis, 110

Health Security Act analysis, 115, 117-118

Managed Competition Act of 1992 analysis,

119

single-payer system analyses, 105

on Lewin-VHI’s analytical methods, 112

managed competition and HMO enrollment

Health Security Act analysis, 80

Managed Competition Act of 1992 analysis,

75,77,81,83,86,91

on Spillman study techniques, 127

uncertainty in selected estimates of NHE under

health reform, 163-164, 165

Congressional Research Service, 93

Conservative Democratic Forum, 78

Consumer Choice Health Security Act (H.R.

3698/S. 1743), 102

Cost controls

analyses of managed competition proposals with

government cost controls, 80,81

analyses of managed competition proposals without government cost controls, 72, 75, 77-80

analyses of reform proposals, 29-42

evidence on expenditure limits applied to large

sources of funding, 42-46

evidence on premium limits, 46-47

evidence on provider payment controls, 47-67

findings and policy implications, 14-15,67-68

introduction, 21-23

key government cost-control strategies, 22,23-29

Coulam and Gaumer review, 50-52

CRS. See Congressional Research Service

Current Population Survey, 79, 147-148

D

Detsky and colleagues study, 56

Documentation of estimates, 18-19

E

Economic and Social Research Institute

Managed Competition Act of 1992 analysis,

77-78,81,86,91

single-payer system analysis, 141

Economic Stabilization Program, 48-49,61 “ Empirical evidence. See Review of the evidence

Employer contribution limits, 84

Enrollment issues. See Managed competition and

health maintenance organization enrollment

Enthoven, Alain, 69

ESP. See Economic Stabilization Program

Estimates of Health Care Proposalsfiom the 102nd

Congress, 75

Expanded coverage. See Insuring the uninsured

Expenditure limits applied to large sources of

funding, 42-46

F

Federal Employees Health Benefits Program, 83-84,

86,93

Fee-for-service plans vs. health maintenance

organizations

costs to consumer, 16, 82,95

expenditures, 81,91-92,95

utilization, 86-88,91

FEHBP. See Federal Employees Health Benefits

Program

FFS plans. See Fee-for-service plans vs. health

maintenance organizations

Findings and policy implications

administrative changes under reform, 17-18,

151-152

background information, 1-3, 19-20

cost controls, 14-15,67-68

findings summary, 3-18

insuring uninsured people, 17, 129-130

managed competition and HMO enrollment,

15-16,95-96

policy implications summary, 18-19
Index I 197

France

hospital payments, 56-57

G

GAO. See General Accounting Office

General Accounting Office

administrative costs under a Canadian-style

system analysis, 164

administrative costs under a single-payer system

analysis, 142

CalPERS study, 92

hospital cost comparisons, 54-55,57-58

physician payment study, 66

Generalizing to health reform, 88,91

Germany

expenditure limits, 45-46

hospital payments, 57-58

physician payments, 64-66

Gold and colleagues study, 50-52,54

Government cost controls. See Cost controls

Group Health Association of America, 79

Grumbach et al. analysis of single-payer system,

142

H

Hafner-Eaton study, 124

Hahn study, 124-125

Hay/Huggins study, 143, 149-150

HCFA. See Health Care Financing Administration

Health alliances

administrative changes under reform, 132-133,

142-144, 148-151

managed competition and HMO enrollment, 83,

84

Health Care Cost Containment and Reform Act of

1992 (H.R. 5502)

administrative changes under reform, 144

cost controls, 23, 29,41

insuring uninsured people, 118

Health Care Cost Containment and Reform Act of

1993 (H.R. 200)

cost controls, 29

insuring uninsured people, 118

Health Care Financing Administration, 79, 112-115,

125, 128, 145

Health Equity and Access Reform Today Act (H.R.

3704/s. 1770)

administrative changes under reform, 131

insuring uninsured people, 102

Health Insurance Association of America, 79,

149-150

Health Interview Survey, 119, 123

Health maintenance organizations. See Managed

competition and health maintenance organization

enrollment

Health plan purchasing cooperatives

administrative changes under reform, 132-133,

142-144, 148-151

managed competition and HMO enrollment, 84

Health Security Act (H.R. 3600/S. 1757)

administrative changes under reform

administrative savings claims, 131

CBO analysis, 144

Clinton Administration analysis, 143-144

Lewin-VHI analysis, 142-143

cost controls

CBO analysis, 33-38

Clinton Administration analysis, 32-33

key strategies, 23

Lewin-VHI analyses, 33

premium limits, 46-47

insuring uninsured people

CBO analysis, 115, 117-118

Clinton Administration analysis, 112-115, 116

Lewin-VHI analysis, 112

as universal coverage proposal, 102, 103

managed competition and HMO enrollment

CBO analysis, 80

Clinton Administration analysis, 80

generalizing to health refoml, 88

introduction, 69

Lewin-VHI analyses, 78-80, 81,86,91

overview of analyses, 72

uncertainty in selected estimates of NHE under

health reform

CBO analysis, 163-164, 165

Lewin-VHI analysis, 164, 166

HEP program. See Hospital Experimental Payments

program

HIAA. See Health Insurance Association of

America

HIE, See Rand Health Insurance Experiment

HIS. See Health Interview Survey

HMOS. See Managed competition and health maintenance organization enrollment

Hospital Experimental Payments program, 54-55

Hospital overhead savings. See Provider overhead

savings

Hospital payment controls

in Canada, 56

Economic Stabilization Program, 48-49

in France, 56-57

in Germany, 5’7-58

Hospital Experimental Payments program, 54-55

introduction, 48
198 I Understanding Estimates of National Health Expenditures Under Health Reform

Medicare Prospective Payment System, 49-52

in the Netherlands, 58-60

state mandatory hospital rate-setting programs,

52-54

summary, 55, 60

Hughes and colleagues study, 64

I

Implications of uncertainty in selected estimates of

NHE under health reform, 10-12, 18-19, 163-167

Improving the estimation process, 19

An Inconsistent Picture, 2

Incremental costs of coverage, 99, 112-118, 119,

128, 129

Individual Practice Associations, 87

Information required to estimate the effects of insuring uninsured people, 104

Insurance-induced demand

CBO on, 110, 112, 115, 117-118

concept of, 99

evidence on utilization with expanded coverage,

119, 120-125

Insurance market reform. See Private insurance market reform

Insurer overhead savings

the baseline numbers, 144-145

evidence on costs under a single-payer system,

145-146

findings and policy implications, 151-152

introduction, 131-133

under private insurance market reform, 143-144

under single-payer proposals, 133, 135, 140-142

Insuring uninsured people

analyses of proposals that phase in coverage,

118-119

analyses of universal coverage proposals,

105-118

basic analytic approaches, 103-105

evidence on expenditures with expanded coverage, 125, 127-129

evidence on utilization with expanded coverage,

119, 120-125

findings and policy implications, 17, 129-130

introduction, 97-99

provisions of proposals that phase in coverage,

102-103

provisions of universal coverage proposals,

99-102

International experience with government cost controls, 55-60,63-66

IPAs. See Individual Practice Associations

L

Lewin-VHI

administrative changes under reform

Health Security Act analysis, 142-143

single-payer system analysis, 140

cost controls (with)

Health Security Act analysis, 33,80

cost controls (without)

Health Security Act analysis, 78-80,81,86,91

insuring uninsured people

Health Security Act analysis, 112

Starr’s managed competition proposal

analysis, 110, 112

uncertainty in selected estimates of NHE under

health reform

Health Security Act analysis, 164, 166

Long and Marquis review of past studies, 122

Long and Marquis study, 123-124, 128

M

Maarse and colleagues study, 59-60

Managed Competition Act of 1992 (H.R. 5936)

administrative changes under reform

CBO analysis, 144

insuring uninsured people, 102

CBO analysis, 119

managed competition and HMO enrollment

CBO analysis, 75,77,81,83,86,91

ESRI analysis, 77-78,81,86,91

overview of analyses, 72

public employee insurance programs

compared with, 83-84

Managed Competition Act of 1993 (H.R. 3222/S.

1579)

administrative changes under reform, 131

insuring uninsured people, 102

managed competition and HMO enrollment, 69

Managed competition and health maintenance organization enrollment

analyses of managed competition proposals with

government cost controls, 80,81

analyses of managed competition proposals without government cost controls, 72,75,77-80

findings and policy implications, 15-16,95-96

forms of managed care and health maintenance

organizations, 76

introduction, 69-72

will increasing HMO enrollment save money?,

86-91

will managed competition have a continuing impact on the NHE growth rate?,81, 91-95
Index I 199

will people join HMOS?, 81-86

Managed Competition in Health Care: Can It

Work?, ‘77-78

Managed competition universal coverage proposals,

110, 112-118. See also Managed competition and

health maintenance organization enrollment; specific legislation, i.e. Health Security Act (H.R.

3600/s. 1757)

Measures of effectiveness of cost controls, 44-45

Medical Group Management Association, 147

Medicare

data from reports, 147

fee schedule for physician services, 61-63

rates, 135, 140, 145-146

Medicare Prospective Payment System, 49-52

Medicare Tax Equity and Fiscal Responsibility Act,

79,87

Methods of the study, 158-162

Minnesota

state employee insurance program, 83-84, 93, 94

Missouri

state employee insurance program, 83-84

N

National Health Accounts, 125, 128

National Health Interview Survey, 124

National Health Interview Survey Health Insurance

Supplement, 79,86

National Medical Care Utilization and Expenditure

Survey, 123, 125

National Medical Expenditure Survey, 79,86, 119,

123-125, 128-129

The Netherlands

hospital payments, 58-60

New York

Hospital Experimental Payments program, 54-55

NMCUES. See National Medical Care Utilization

and Expenditure Survey

NMES. See National Medical Expenditure Survey

o

Omnibus Budget Reconciliation Act of 1989,61-62

Overhead costs. See Administrative changes under

reform; Insurer overhead savings; Provider overhead savings

P

Patient cost-sharing, 17,99, 102, 112

Phased-in coverage proposals, 102-103, 118-119.

See also specific legislation, i.e. Managed Competition Act of 1992 (H.R. 5936)

Physician overhead savings. See Provider overhead

savings

Physician payment controls

in Canada, 63-64

Economic Stabilization Program, 61

in Germany, 64-66

introduction, 60-61

Medicare fee schedule for physician services,

61-63

summary, 66-67

Physician Payment Review Commission, 62-63

Policy implications. See Findings and policy

implications

Pooling of small firms. See Health alliances; Health

plan purchasing cooperatives

PPRC. See Physician Payment Review Commission

PPS. See Medicare Prospective Payment System

Premium costs, HCFA and AHCPR methods for

projecting, 112-115

Premium growth rates

CBO analysis of the Health Security Act, 37-38

Clinton Administration analysis of the Health

Security Act, 32-33

Lewin-VHI analysis of the Health Security Act,

33

and managed competition impact on the NHE

growth rate, 91-92,95

Premium levels

CBO analysis of the Health Security Act, 33

Clinton Administration analysis of the Health

Security Act, 32

as indicator of savings due to increased HMO

enrollment, 87

Lewin-VHI analysis of the Health Security Act,

33

Premium limits

analyses of managed competition proposals with

government cost controls, 80,81

evidence on, 46-47

Premiums, risk-adjusted, 84,86

Private insurance market reform

analyses of proposals, 142-144

evidence on administrative costs under reform,

148-151

findings summary, 17-18

introduction, 132-133

ProPAC, See Prospective Payment Assessment

Commission

Prospective Payment Assessment Commission,

50-52

Provider overhead savings

the baseline numbers, 144-145

findings and policy implications, 151-152

introduction, 131-133

under private insurance market reform, 143-144

under single-payer proposals, 133, 135, 140-142,

147-148
200 I Understanding Estimates of National Health Expenditures Under Health Reform

Provider payment controls

hospital payment controls, 48-60

introduction, 47-48

physician payment controls, 60-67

summary, 66-67

Providing insurance to uninsured people. See Insuring uninsured people

Public employee insurance programs, 83-86,92-95

Purchasing blocs. See Health alliances; Health plan

purchasing cooperatives

R

Rand Health Insurance Experiment, 87, 119,

122-123

Review and negotiation of rates and premiums,

94-95

Review of the evidence

administrative changes under reform, 144-151

cost controls, 42-67

general findings, 6,8-9

insuring uninsured people, 119-129

managed competition and HMO enrollment,

81-95

research and data collection, 19

Risk-adjusted premiums, 84,86

Rochester’s Hospital Experimental Payments

program, 54-55

s

Sensitivity analyses, 18, 163-167

Sheik and colleagues’ analysis, 110, 112

Single-payer proposals. See also speci~c legislation,

i.e. Universal Health Care Act of 1991 (H.R. 1300)

administrative costs under, 145-148

administrative savings under, 131-133

analyses of generic proposals, 105

analyses of reform proposals, 133-142

findings summary, 17-18

SIPP. See Survey of Income and Prog

Participation

Small-firm insurance load, 143, 144,

Spillman study, 123, 125, 127-128

Standards of evidence, 43

am

49-150

Starr’s managed competition proposal, 110, 112

State employee insurance programs, 83-86,92-95

State mandatory hospital rate-setting programs,

52-54

Studies. See Review of the evidence

Survey of Income and Program Participation, 119,

123

T

Tax policy, managed competition and, 75,77

u

Uncertainty in selected estimates of NHE under

health reform, 10-12, 18-19, 163-167

Underwriting limits, 132-133, 142-144, 150-151

Uninsured people. See Insuring uninsured people

Universal coverage proposals, 17,99-102, 105-118.

See also specific legislation, e.g., American Health

Security Act of 1993 (H.R. 1200/S. 491)

Universal Health Care Act of 1991 (H.R. 1300)

cost controls, 39-40

insuring uninsured people, 102, 103

Urban Institute study, 61

Utilization

assumptions made by analysts, 99

evidence on utilization with expanded coverage,

119, 120-125

HMO enrollment effects on, 81

HMO vs. FFS utilization, 86-88,91

v

Volume performance standards, 62

VPS. See Volume performance standards

w

Washington State

premium limits, 47

Wisconsin

state employee insurance program, 83-84,93

Wolfe and Moran study, 55-56

Woolhandler and Himmelstein analysis of a singlepayer system, 141-142

a U.S. GOVERNMENT PRINTING OFFlCE:1994-301-804/17410