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MANAGED COMPETITION
Smead.
FLEX-I-VISION® HANGING FOLDER
HASTINGS, MN
LOS ANGELES CHICAGO-LOGAN, OM
MoGREGOR, TX-LOCUST GROVE, a
PHOTOCOPY
PRESERVATION
MANAGED COMPETITION
PHOTOCOPY
PRESERVATION
file
TO:
Melanne
FROM:
Jennifer
DATE:
4/12/94
RE:
Ellwood Meeting
Attached please find the latest draft of Managed Competition
II. I thought you might like a copy for the meeting with Ellwood
tomorrow at 4:30.
MEMO TO FIRST LADY HILLARY RODHAM CLINTON
FROM: WALTER ZELMAN
RE: JACKSON HOLE PROPOSAL, "MANAGED COMPETITION II"
Tuesday, March 29
Jennifer Klein asked me to prepare a brief review of this
proposal.
MAIN POINTS OF THE NEW PROPOSAL
WITH AN EMPHASIS ON CHANGES FROM PRIOR JACKSON HOLE PROPOSALS
1.
STEP BY STEP APPROACH: Notes great uncertainty regarding
impact of reform; advocates moving from guaranteed "access"
to guaranteed "coverage" by a step-by-step approach aiming
at achieving universal coverage by about 2002.
2.
MANDATES: Suggests legislation include a mandate
(employer/individual or individual only) to be implemented
about 2002 if goals of expanded coverage are not met.
Prior Jackson Hole papers accepted an employer mandate
from the outset. The new version is more tentative,
leaving implementation of a mandate, and decision to
impose it, to the future.
Appears to favor a straight individual mandate.
Employer mandate, if used, would be phased in. Would
apply only to firms of over 100 full-time-employees.
Others would be under an individual mandate.
Advocates a "free-rider" tax to be collected by the IRS
from all individuals who don't have insurance.
2.
ALLIANCES: Expresses fears that one alliance per region
could encourage more regulation and less choice; now
advocates multiple alliance approach. This is a change from
past advocacy of a single alliance per region.
Argues that all alliances must offer all plans; opposes
HSA provision that grants alliance the right to reject
plans charging 20% over the average.
Maintains provision that all in the small group market
(100) that purchase insurance must do so through an
alliance.
3.
COMMUNITY RATING: Maintains emphasis on community rating.
Would allow health plans to reward "healthy lifestyles"
by discounting charges to individuals.
1
4.
TAX DEDUCTIBILITY OF BENEFITS: Continues Jackson Hole
advocacy that this is a core ingredient of reform. Would
set cap not at the "lowest cost plan" but at "average
accountable health plan price in lowest quartile."
Would allow individuals choosing plan below "tax cap"
to keep the difference in a "health bonus account" to
defray cost-sharing expenses or pay for additional
benefits.
5.
POINT OF SERVICE: Acknowledges consumer demand for choice;
would require that all alliances offer at least one plan
with a point-of-service option. (There is no guarantee of a
fee-for-service plan or that all health plans offer such an
option. But this is further than Jackson Hole has gone
previously).
6.
BUDGET: Acknowledges need for "fiscal discipline, and for
keeping expenditures in line with revenues. But opposes any
form of fee schedule, premium cap or other regulation.
Advocates allowing market to work with no government
interference.
Mandates that government then tailor government
spending to fit the market. I.e., if costs rise
government must either raise more revenue, cut
subsidies, reduce benefits, slow technological growth,
etc
Advocates an ongoing public debate on these issues.
Advocates setting spending targets, with National Board
making recommendations if targets not met.
7.
MEDICAID: Forms separate pool, with separate alliance, for
AFDC and SSI eligibles. (Eventually these individuals would
be moved into alliances serving the larger population).
Envisions having state and federal governments pay full
"actuarially sound" cost for these individuals.
Envisions phased-in government subsidy program for
other low-income individuals who would purchase
insurance through alliances with rest of population.
Proposal hopes that market reforms, including tax cap,
and subsidies will reduce costs and expand access
enough so that mandate may not be necessary. About
95%, they hope, should be covered.
8.
MEDICARE: Treated similar to treatment in HSA with heavy
emphasis on encouraging Medicare eligibles into HMOs.
2
ANALYSIS
Overall the approach is less like the HSA than prior Jackson
Hole proposals. It takes a more cautious, phase-in approach,
backs away from mandates, and tolorates multiple alliances in one
region.
The proposal must be seen as reflecting its proponent's fear
of any government intervention in the market. Jackson Hole
members have been very critical of every element of the HSA that
smacks of regulation: premium caps, fee schedules, any
restrictions on who can participate, large market-share alliances
(which they fear will lead to a single payer system).
SOME ELEMENTS OF THE PROPOSAL THAT MAY BE
OF PARTICULAR INTEREST OR CONCERN
1.
COMPETING ALLIANCES: The proposal would: require all
alliances to accept all health plans: require plans to offer
the same community rate to all alliances: require all plans
to cover the entire alliance region. Alliances would
compete only on their overhead and customer service.
Such an approach gives up enormous benefits in efficiency,
consumer protection and simplicity for the appearance of
more "competition" and less "regulation." Ultimately, all
will be offered the same plans at the same prices. Since
alliance "overhead" will be less than 2% of total premiums,
there isn't much to "compete" over.
The decision to move to multiple alliances obviously
reflects fears that an HSA type alliance will become too
"regulatory," and would push the system towards a single-
payer result.
2.
A JACKSON HOLE BUDGET: The proposal envisions no government
intervention in the market. But given public demand for
more, new technology, the numbers of decisions that still
rest with providers, and the overall value to the health
care sector of higher levels of spending, it is hard to see
such a scenario leading anywhere but to higher health care
spending. (Plans may still want to be a low-cost plan --but
all have an interest in more dollars going into the health
care sector in general).
The Jackson Hole answer invokes pleas for the toughest kinds
of government action: cut benefits or subsidies, slow
technological growth, raise taxes. It is interesting how a
plan that so fears government intervention can expect
government to wisely and continuously make such tough
decisions.
3
3.
CHOICE: By HSA standards the proposal leaves much to be
desired. But Jackson Hole advocates are determined to
encourage the growth of managed care systems. They want the
market, and nothing else, to protect the consumer's right to
choose.
4.
FEARS OF GOVERNMENT REGULATION: Increasingly over the past
year, Jackson Hole proponents have become fearful of too
much government intervention in the marketplace. Some have
suggested they believe the Administration's ultimate goal is
to create a single payer system.
This fear of government intervention leads to an ultimate
paradox in Managed Competition II. While coming close to
advocating an individual mandate, the paper lists as a
"disadvantage" of such an approach the fact that all
individuals might demand access to the alliance. The
result of such a demand --which, they admit, Congress
couldn't resist-- would be increasing numbers in the
alliance and greater consumer pressures for cost control,
leading to more regulation and a single payer system.
In short, the better the alliance works, the more it is to
be feared.
4
TO Jennyer- deaft R- also
JACKSON HOLE GROUP
Paul M. Ellwood, M.D.
has responded Ira
President
Hillary Rodham Clinton
Office of the First Lady
White House, 214 E. Wing
Washington, DC 20500
March 7, 1994
Dear Mrs. Clinton,
Ever since our September 15, 1993 meeting we have been searching for the bipartisan
bicameral middle ground that will bring Universal Coverage, of the type that you would find
acceptable. I think we are getting very close.
I have enclosed a copy of the latest draft of Managed Competition II, which we expect will
go through one more revision in response to comments before we circulate it on or about
March 16. If you or your staff have any suggestions, of course they would be invaluable.
Sincerely
Paul M. Ellwood, M.D.
cc:
Roger Altman
Ira Magaziner
Donna Shalala
Mailing Address: P.O. Box 350 Teton Village, WY 83025
Fed-Ex/UPS: 6700 North Ellen Creek Road Jackson, WY 83001
307-739-1176 Fax: 307-739-1177
MCA MAR 9 1994
MANAGED COMPETITION II
FAX REPLY FORM
PLEASE REPLY BEFORE 3/14/94
FAX NUMBER (307) 739-1177
Universal Coverage
1) 2000 would be set as a target date for universal coverage.
Agree
Disagree
2) Universal coverage would be defined as 97% of Americans insured with standard benefits
or traditional Medicare.
Agree
Disagree
3) A decision regarding mandating coverage would be deferred until more is know about the
residual uninsured population-2000. No decisions on individual and employer mandates
versus other forms of compulsory coverage would be made now.
Agree
Disagree
4) If universal coverage has not been achieved by 2000. Congress would commit itself to act
in every subsequent year by either increasing low-income and Medicare funding and/or
passing some form of mandated coverage.
Agree
Disagree
Comments:
Low-income Assistance
1) Low Income Subsidy Program, Part 1 (LISP 1): A subsidy program for the current
categorically needy (those receiving AFDC and SSI benefits) acute care portion of the
Medicaid program would be created to end Medicaid and merge it into the managed
competition system.
Agree
Disagree
2) Initially, LISP 1 would be pooled separately, and the state would negotiate actuarially
sound capitation rates for coverage in AHPs for this population.
Agree
Disagree
3) To avoid government imposed cost-shifting, AHPs would not be compelled to participate in
the LISP 1 program.
Agree
Disagree
3) Low Income Subsidies Program. Part 2 (LISP 2): A subsidy program for individuals
below 200% of poverty, and ineligible for LISP 1, would be created.
Agree
Disagree
4) LISP 2 eligible individuals below 100% of poverty would receive total payment vouchers;
for individuals between 100% and 200% of poverty, subsidies would be graduated based on
income.
Agree
Disagree
5) LISP 2 vouchers would be used through the appropriate sponsor, their large employer or
the HPPC.
Agree
Disagree
Comments:
Medicare
1) Medicare would make a defined contribution toward AHP premiums. The defined
contribution would be set at the national per capita average Medicare expenditures, adjusted
for cost of living and health status, but not medical prices.
Agree
Disagree
2) Newly eligible Medicare recipients must continue to purchase health care from AHPs.
Agree
Disagree
3) Present Medicare recipients would retain their FFS option.
Agree
Disagree
4) The current regional AAPCC reimbursement program would be phased out.
Agree
Disagree
5) AHPs serving Medicare beneficiaries would be required to offer the same standard benefits
package available to the general population.
Agree
Disagree
6)Reject above, AAPCC should be maintained with additional adjustment for health status.
Agree
Disagree
Comments:
Balanced Health Security Budget
1) Medicare and LISP expenditures would be financed through a balanced health security
budget.
Agree
Disagree
2) Congress would set a balanced health security budget every year.
Agree
Disagree
3) The NHB would set a standard benefits package to keep the health security budget in
balance.
Agree
Disagree
Comments:
Competing HPPCs
1) Multiple competing HPPCs would be allowed within a single health market region.
Agree
Disagree
2) HPPCs would not negotiate premiums, they would compete only on their administrative
efficiency and customer service.
Agree
Disagree
3) HPPCs would still be the sole sponsors for employers with less than 100 employees and
individuals in that tax preferential treatment for this population would be conditional upon
purchasing coverage through a licensed HPPC.
Agree
Disagree
Comments:
POS Option
1) All sponsors would be required to offer at least one AHP with an out-of-plan provider
option.
Agree
Disagree
Comments:
Defined Contribution for Large Employers
1) Large employers that pay for some portion of health coverage would be required to make a
defined (flat dollar amount) contribution towards health coverage, regardless of plan chosen
by employee, and the tax deduction and exclusion would be limited to the weighted average
premium.
Agree
Disagree
Comments:
Medisave
1) Individuals who chose an AHP priced below the weighted average premium would be
allowed to deposit the difference into a tax-free Medisave account.
Agree
Disagree
Comments:
MANAGED COMPETITION II
A DRAFT Proposal
February 1994
INTRODUCTION
Health care reform is stalling over a number of issues with the resulting danger that either
ineffectual or even no legislation will pass. The Jackson Hole Group, the originators of
managed competition, view this as unacceptable, and remain committed to comprehensive
reform of the health system including universal coverage. Having come this close to achieving
health care security for the American people, the task is now to craft a reasonable, affordable
compromise out of the thoughtful proposals that face Congress in 1994.
Perhaps nothing threatens to undermine reform more than the unpredictability of costs and of
the effectiveness of cost containment efforts. Estimating costs with even the most elaborate
cost-estimation models produces point estimates that are very unreliable, particularly as one
extrapolates into the future. Their principal value is in defining the relationship between
variables. Other areas of uncertainty include the ability of different mandates to achieve
universal coverage, the unpredictable effects of price controls or global budgets and whether it
is possible to enforce them, the lack of capacity that may result from a continued shortage of
primary care practitioners or delays in accountable health plan (AHP) formation, how
employers will use savings, the effects of increased consumer involvement in the decision-
making processes, and any savings that may be achieved by reducing the amount of
ineffective care.
With these and other factors in mind, this document presents a revised version of the original
managed competition proposals that takes into account the inherent uncertainties of reform
and builds on the lessons learned since the proposals were first introduced. The document
proposes a commonsensical approach to government health care financing that is always in
balance, and a rational stepwise approach to universal coverage. Whatever reform measures
are adopted it is imperative that they add to the reforms already underway in the private
sector and in states, by strengthening incentives to reduce costs and improve quality, and that
DRAFT: Managed Competition II, March 7, 1994.
1
they extend reforms to the small and non-group markets and public programs including
Medicare.
MANAGED COMPETITION II
Prior to introducing the modifications under consideration to the original managed competition
proposals, it is worth while revisiting the core elements of the managed competition model
that remain unchanged. These are presented in Table 1.
DRAFT: Managed Competition II, March 7, 1994.
2
ACCOUNTABLE HEALTH PLANS (AHPs) "The Providers"
AHPs are the engines of reform and would shift the emphasis in health care from disease and
intervention to prevention and wellness. AHPs are organizations that:
Both finance and deliver the full range of a nationally defined package of health
benefits.
Are accountable to the public for satisfaction of their members and the effect of their
services on members' health.
Comply with established solvency and underwriting standards, including community
rating and guaranteed issue and renewal provisions.
Adhere to uniform data reporting requirements as established by a National Health
Board.
SPONSORS "The Health Plan Store"
Large employers. government. and HPPCs would all act as sponsors that facilitate individual choice of
health plan. In general the role of the sponsor is to:
Arrange for individuals to selects AHPs.
Minimize the incentives and ability of AHPs to select good risks.
Set rules to assure equitable coverage of all members of the sponsored group.
STANDARD BENEFITS "The Universal Entitlement"
A standard benefit package would:
Facilitate side-by-side comparison of AHPs (increasing elasticity of demand), and
promote efficiency through standardized claim forms and issuing requirements.
Provide a rational vehicle for defining services to be made universally available to all
Americans and put private and government programs on the same footing.
Be continuously amended by the NHB and approved by Congress through a process
insulated from inordinate political interference.
Be based on scientific documentation of efficacy, including cost-effectiveness.
THE NATIONAL HEALTH BOARD (NHB) "The Referee"
The NHB would be an independent federal agency to guide, oversee, and facilitate a transition to a new
health system. NHB powers and responsibility would be explicitly limited in legislation to:
Recommending a standard benefits package to Congress,
Balancing the "health security budget" (see below),
Coordinating a standardized data reporting system.
Setting standards for and registering AHPs and HPPCs.
Disseminating information and making recommendations on risk adjustment,
DRAFT: Managed Competition II. March 7. 1994.
3
Three years of circulation and application of the original managed competition proposals have
led to a wealth of experience and feedback, leading to consideration of the following policy
changes.
COST CONSCIOUSNESS OF CONSUMERS
Consumers will be cost and quality conscious only to the extent that they are responsible for
the difference in cost between plans and informed about differences in quality. Many have
questioned the logic of a limit on tax-free health benefits. especially those that enjoy rich tax
free benefits packages. but a tax cap remains the best way to instill cost-consciousness. control
government expenditures, and raise revenue for low-income subsidies without increasing
marginal tax rates. A revised tax code would include:
Equalizing tax treatment of health expenditures for employers and individuals,
including expanding tax preferential treatment for individuals.
Making preferential tax treatment and government subsidization contingent upon
purchasing coverage through the appropriate sponsor (i.e., large employer or HPPC).
Capping tax deductions and exclusions at the level of the weighted-average price AHP
in the area (instead of at the level of the low-cost AHP). Consumers would be free to
spend additional after-tax dollars on health care.
Allowing those who choose an AHP priced below the tax cap to keep the difference in
a tax-free health spending account (Medisave) to be used to defray the costs of
copayments, deductibles, and benefits not included in the standard benefits package
and/or an individual retirement account. Alternatively, to save the costs of
administering tax-free spending accounts, individuals could simply submit receipts and
deduct expenses against their taxable income for tax purposes.
DRAFT: Managed Competition II, March 7, 1994.
4
We anticipate that because of a revised tax code, most employers would limit their
contribution to health coverage for employees, regardless of plan chosen, to the tax-preferred
amount. However, some employers with union contracts that require they pay the full price
of any health plan an employee chooses may still find this difficult. Therefore a requirement
that employers contribute a fixed dollar amount, regardless of plan selected by employee, may
be necessary at some point to ensure full employee cost-consciousness.
HEALTH PLAN PURCHASING COOPERATIVES (HPPCs)
As introduced in the original managed competition proposals. HPPCs in a reformed system
would act as sponsors for individuals and small employers, giving them the ability to pool
risk, achieve economies of scale, and drive the competitive process through informed
individual choice. It is important to stress that the JHG believes that HPPCs should not be
regulatory or price setting agencies. HPPCs would not negotiate, or limit choice of AHPs,
rather they would offer an informed set of choices so that individuals could weigh personal
priorities in health plan selection. HPPCs that negotiate (i.e., refuse to offer plans whose
prices are too high) would not only limit individual choice in health care, they would also
threaten to undermine a functioning and competitive market by concentrating too much
purchasing power in a single entity.
While many private sector initiatives are proving effective in holding down health costs,
especially purchasing efforts of large employers, the problems associated with the small group
and individual markets appear to be worsening. The need for HPPCs has not gone away.
However, the original managed competition design of a single exclusive HPPC per geographic
area has two weaknesses when examined in light of public concerns and the reality of
implementation obstacles. First, monopoly HPPCs do not structurally prevent HPPCs from
becoming regulators. Secondly, monopoly HPPCs leave some consumers with no choice in
purchasing alternatives, and thus no protection from inefficiency. These concerns have led us
to propose a system of competing HPPCs. To borrow an analogy, we believe it is preferable
DRAFT: Managed Competition II, March 7, 1994.
5
to have the U.S. Postal Service serving the country with competition from Federal Express
and other private carriers, rather than to have a non-competitive mail delivery system. States
would be charged to make certain there is a "post office" but alternatives would be allowed
provided they met specific standards outlined below.
HPPCs would still be the exclusive sponsors for the small group and individual markets in
that tax preferential treatment of health expenditures would be conditioned upon purchasing
coverage through a licensed HPPC. This competing HPPC structure would require special
measures to ensure that the market is not undermined by adverse risk selection. Private sector
organizations or associations could become licensed as HPPCs if they met criteria designed to
ensure that all HPPCs open enroll. offer all AHPs. and conform to other HPPC standards
including a requirement to cover entire HPPC regions and a prohibition against conflict of
interest. AHPs would offer the same base community rate to all HPPCs in designated
regions. HPPCs would compete only on their administrative overhead (the cost of which
would be added to premiums) and their customer service. Competing HPPCs that negotiated
premiums would undermine community rating in the small group market. In a system of
competing HPPCs, states would have to take on the additional responsibilities of dividing
their territory into HPPC regions, and coordinating risk adjustment and standardized data
collection. Designed this way, competing HPPCs can still achieve the original HPPC goals,
and should satisfy those that contend there is a need for significant reform of this market.
CHOICE
The original managed competition proposals did not limit what type of health care delivery
organizations would compete in a reformed market. However, the public has clearly
expressed that they value choice of physician and for this reason all sponsors should be
required to offer at least one AHP with an out-of-plan option, which allows enrollees to use
non-AHP providers at increased cost. A requirement for sponsors to offer at least one POS
plan would best balance the public's priorities of more accountable, longitudinal health care
DRAFT: Managed Competition II, March 7, 1994.
6
with the desire to maintain patient choice of physician. Experience is that only 5-10% of
individuals with an out-of-network option exercise it, but the option is probably important to
many more.
BALANCED HEALTH SECURITY BUDGET
The original managed competition proposals did not examine closely the financing aspects of
attaining universal coverage, believing that public finance was an issue best left to individuals
with expertise in this area. As various financing schemes have been proposed in legislation, it
has become clear that the financing of health reform has implications for how structural
aspects will interact. A managed-competition approach to structural reform requires a
managed-competition approach to financing.
The establishment of a balanced health security budget would instill fiscal discipline into the
health care system by guaranteeing that federal coverage costs do not grow faster than
revenue, that private health security costs do not grow faster than the economy, and by
promoting an honest and explicit debate regarding federal health care expenditures. One can
think of it as a ledger that continuously matches revenues to expenses. Federal health
spending covered by the balanced health security budget would include Medicare, LISP 1 and
2 (see below), and possibly the Federal Employee Health Benefits Program (FEHBP).
Under such a system, government health expenditures would be disbursed on a pay-as-you-go
basis, and the health system would move toward universal coverage in carefully monitored
stages. Legislators would agree either to raise enough money to pay for the standard benefits
for the covered population or limit the scope of the health security benefits package or the
subsidies available to individuals to help pay for them. Such an approach would ensure that
the health security system is not undermined by excessive cost-shifting or open-ended
entitlements.
DRAFT: Managed Competition II, March 7, 1994.
7
To enforce the balanced health security budget, the NHB would be charged by Congress to
continuously match available revenues to health priorities based on effectiveness, cost, and
public values. If the rate of growth in expenditures exceeds the rate of increase in the budget,
the NHB would either adjust the benefits package (the benefits package would be voted on in
a manner similar to the military base closing procedure), slow the expansion in low-income
subsidies or convey other recommendations to the Congress for keeping the budget in balance.
If Congress failed to accept these recommendations it would have to appropriate more money.
While it might be preferable to have an explicitly earmarked health tax as the funding source
for the balanced health security budget, ultimately what matters is that Congress keeps the
budget in balance, and that we focus the debate on the most explicit. reliable. and equitable
sources of federal health care funding.
GETTING TO UNIVERSAL COVERAGE
The public is convinced of the need for universal coverage. We believe a requirement that
everybody contribute to the cost of their health care through a system based on efficient,
progressive taxes to finance those unable to pay for themselves, is still the best way to
achieve universal coverage. However, given that it will take time to build strong health plans,
to evaluate progress, to accumulate savings from managed competition. and to allow
individuals to avail themselves of the reformed system, it is appropriate to first set up a
universal access system by helping people who need it most (i.e., poorest of poor individuals
through subsidies, plus individuals and small employers through purchasing cooperatives and
insurance reform). A functioning universal access system should allow a smooth transition to
universal coverage by 2000 if Congress passes legislation in 1994.
Under any health insurance system, it may be impossible to ensure every single citizen is
actually covered by an AHP, therefore a definition of universal coverage should reflect this
reality, much as the definition of full employment falls short of 100% employment. A
reasonable working definition would be that universal coverage is attained when it can be
DRAFT: Managed Competition II, March 7, 1994.
8
verified that 97% of the population have coverage. As reform proceeds, this percentage could
be adjusted to reflect the point at which the additional cost of bringing individuals into the
health security system through government actions such as a mandate or increased outreach is
too great for the public to accept. At some point it makes sense to adopt a policy that
promotes uniquely targeted care for the residual uncovered, rather than devoting limited
resources to the difficult and expensive task of pulling every last individual into the private
system.
If universal coverage, as defined by Congress, has not been achieved by 2000, Congress
would have to act in every subsequent year by increasing Low Income Subsidy Program
(LISP. see below) funding or passing a mandate until it is achieved. A requirement to take
action in every year after 2000 should ensure that legislation attains universal coverage within
a reasonable time frame.
Given that many lessons will be learned as experience with a reformed system is accumulated,
reform should defer a decision on implementing a mandate until after 2000. By then broad
low-income subsidies would be at or near full phase-in, competing AHPs would be
functioning, group purchasing for all and health insurance reforms would have been in place
for some time, and the residual uninsured population would likely be much less significant in
number, and much different in character from the presently uninsured population. Only with
good information regarding the number and percentage of uninsured by employment status
and wealth can an informed decision be made regarding what type of compulsion, if required,
would best lead to universal coverage. For example, if primarily low-income, unemployed
individuals are uninsured it is unlikely that any form of mandate would be effective, instead
changes to the LISP program would be required. On the other hand. if wealthy, non-working
individuals were uninsured, a free-rider tax would probably be the most effective way of
getting to universal coverage. Finally, if large numbers of employed individuals were
uninsured, an employer mandate might be more appropriate. If universal coverage is not
attained by 2000, and in a subsequent year a mandate is deemed the effective policy response,
the two alternatives discussed in the appendix should be considered first.
DRAFT: Managed Competition II, March 7. 1994.
9
Universal coverage will require that public programs are folded into a managed competition
system and that a true universal access system is created in the interim. To facilitate this
public spending would primarily be directed at three programs: LISP 1, LISP 2. and
Medicare.
Low Income Subsidy Program, Part 1 (LISP 1): A subsidy program for the current
categorically needy (those receiving AFDC and SSI benefits) acute care portion of the
Medicaid program
Perhaps the greatest and most consistent challenge faced by state governments in recent years
has been the dramatic increase in and unpredictability of costs in their Medicaid programs.
While more states, like the private sector. now look to managed care as a means of tackling
the cost and quality problem. still little over 10% of Medicaid beneficiaries are in true
managed care programs like HMOs. This process needs to be accelerated if financial
discipline is to be instilled and predictability of costs and accountability for quality is to be
realized where neither have existed for some time.
States would be responsible for the administration of their respective LISP 1 programs, which
would be fully funded in the first year of reform and designed as follows:
The AFDC and SSI population would be maintained, at least initially, as a separate
risk pool that is covered by AHPs (except where adequate AHP contracts cannot be
negotiated).
Each state, or contracted sponsor acting on behalf of the state, would base capitation
rates for the LISP 1 population on actuarially sound estimates of the average
reasonable costs across AHPs of delivering a standard benefit package adjusted to the
special needs of this population. To avoid state imposed cost-shifting, AHPs would
DRAFT: Managed Competition II. March 7. 1994.
10
not be compelled to participate in the program. and there would be room for
negotiation around this rate.
The federal and state governments would jointly contribute 100% of the price of
benefits for LISP 1 beneficiaries. However, because states would be required to
maintain their current level of financial commitment to Medicaid and uncompensated
care (current expenditures would be trended forward according to LISP 1 experience),
they would be relatively more at risk for their AFDC and SSI populations.
Using a voucher, the LISP 1 eligible population could choose from among
participating plans through their own LISP 1 HPPC at the time of annual open
enrollment. For individuals who fail to select a health plan. the LISP 1 HPPC would
choose one for them.
Once the LISP 1 population had experience in managed care programs and their risk
could be predicted with relative accuracy, they would move to the general HPPCs,
where government would pay a competitive community rate on their behalf. The
phase out of LISP 1 would be a logical part of ending welfare as we know it.
Additional benefits that were not part of the standard benefits package available to the
general population would be added on as wrap-around benefits funded jointly by states
and the federal government and provided by AHPs.
While costs for LISP 1 beneficiaries should be mitigated so coverage is within their
reach, they like everyone else will be paying some portion of the cost of their care to
instill some degree of cost-consciousness.
The rationale for initially maintaining the AFDC and SSI population as a separate risk pool
rather than pooling them with the HPPC population stems from the belief that the former
population may be above average risk. A separate risk pool would ensure explicit financing of
the program and minimal cost-shifting. However, because of the potentially limited choice of
DRAFT: Managed Competition II, March 7, 1994.
11
plans, it would move into the general HPPC and AHP programs as soon as costs and unique
needs are understood. If the below poverty population is higher risk, then everyone should
bear the additional costs, not just the HPPC-eligible population (i.e., individuals and small
employers).
Low Income Subsidies Program, Part 2 (LISP 2): A subsidy program for individuals
below 200% of poverty, and ineligible for LISP 1
According to the Employee Benefits Research Institute (EBRI) analysis of the March 1993
Current Population Survey (CPS), the below poverty uninsured population number some 10.8
million individuals or 28.1% of the uninsured, while the 100%-200% of poverty uninsured
population represents an additional 32.5% of the uninsured, or 12.5 million individuals. In
addition to the implicit subsidy available to everyone through preferential tax treatment of
benefits up to the weighted average cost plan in a region, further subsidies need to be made
available to this population to offer meaningful access to the health system. Though LISP 2
eligible individuals would receive subsidies in the form of vouchers, they would purchase
their coverage through their local HPPC or large employer, depending upon employment
status, thus minimizing the government's role in the program. For some LISP 2 eligible
employees these funds may make it affordable to join their employer plan. LISP 2 funding
would be phased in as funds accrue to the government (see table 2). The initial targets could
be that LISP 2 eligible individuals below 100% of poverty would receive vouchers for 100%
of the cost of the low-cost plan and subsidies for LISP 2 beneficiaries between 100% and
200% of poverty would phase out on a sliding scale.
DRAFT: Managed Competition II, March 7, 1994.
12
The phase-in could be structured as follows:
Year 1
Financing Goal:
Up to X% of poverty eligible for LISP 2.
Participation Goal:
Y% of eligible individuals should be covered.
Year 2
Financing Goal:
Up to X+% of poverty eligible for LISP 2.
Participation Goal:
Y+% of eligible individuals should be covered.
Year 3
Financing Goal:
Up to X+% of poverty eligible for LISP 2.
Participation Goal:
Y++% of eligible individuals should be covered.
Year 4
Financing Goal:
Full LISP 2 targets should be met.
Participation Goal: Y+++% of eligible individuals should be covered.
Table 2: Expansion of LISP 2 program.
Prior to the beginning of each year, the NHB would determine LISP 2 eligibility by
reconciling the revenue made available by Congress. through the balanced health security
budget, with the predicted participation rate. Expected failure to meet the eligibility target, as
expressed in the financing goal, might trigger reduction in the benefits package upon the
recommendation of the NHB, reduced eligibility for subsidization. or increased taxes upon
approval of the Congress. Reduced eligibility for subsidies would be the default fallback
written into the law, since it could be automatically calculated.
At the end of each year, participation in LISP 2 would be compared to the participation goal
set forth for the year. Failure to meet this goal might result from insufficient subsidies
(except for those fully subsidized), a complex or inefficient subsidization mechanism,
inadequate outreach. or the fact that individuals simply chose not to purchase coverage-free
riders. Possible policy solutions would include increased subsidization, a new subsidization
DRAFT: Managed Competition II. March 7, 1994.
13
mechanism, or increased outreach and education. Although the subjective nature of these
failures would prohibit automatically triggered responses, legislation could require the
adoption of one of the preceding policies if goals were consistently missed. Policy will
require evaluation of the tradeoff between devoting additional resources to expanding
outreach and education activities and to increasing premium assistance levels.
State experimentation in subsidy levels, eligibility criteria, and phase-in strategy of LISP 2
would be encouraged to close in on an optimal LISP 2 design more quickly. For example, at
some level, subsidies at only a percentage of their targeted level may provide meaningful
access to health care, thereby making phase-in of the level of subsidization an appropriate
policy. This would have the desirable effect of increasing the eligible population, minimizing
the risk to the federal government of overshooting on spending, as well as ensuring a sliding
scale phase down of subsidies to prevent a marginal tax rate cliff. Creating a true universal
access system will require flexibility in and the ability to improve upon the design of the
subsidy program to meet coverage targets: the full and partial subsidization points may need
to be adjusted to achieve satisfactory access and a gradual enough benefit reduction rate.
The present Medicaid program creates substantial disincentives for going back to work, since
beneficiaries completely lose coverage once they cross the eligibility threshold. Combined
with the loss of other welfare benefits such as the earned income tax credit, food stamps, and
housing subsidies, this threshold represents a disincentive to earn more. While any phase-out
of health care subsidies would be an improvement over the current system. the pressing need
to tackle welfare reform in conjunction with, or very soon after, health care reform is
apparent. To increase incentives for work, the threat of higher health insurance costs
associated with moving to a higher income bracket should be as small as possible. Minimizing
this risk would necessitate a gradual phase-out of subsidies. Up until now this expanded
entitlement has been regarded as too expensive. Ultimately, we are being asked to decide
how much we are willing to pay in taxes for health care on behalf of those who cannot pay
themselves.
DRAFT: Managed Competition II, March 7, 1994.
14
Medicare.
The Medicare program ultimately should be structured the same as the rest of the health care
delivery system. Medicare recipients should have the opportunity to receive the same
standard benefits and provider choice as all other Americans. The standard AHP benefit will
most likely be more comprehensive than current Medicare benefits, potentially eliminating the
need for Medigap policies. Beneficiaries ought to have the opportunity to join AHPs, and the
same motivation to save money and pursue prevention and health maintenance measures as
the general population. This reform cannot be immediate, however, since many beneficiaries,
particularly those with serious health problems, value the present program. Cost cutting
measures as proposed by Congress and implemented by HCFA would continue to be utilized
to control tradition Medicare expenditures. Medicare would start to be integrated into a
managed competition environment as follows:
The Medicare population would be maintained as a separate higher risk and cost group.
Medicare beneficiaries would be eligible to join AHPs which must offer the full standard
benefits package. Regional Medicare HPPCs would, at the time of an annual open
enrollment period, allow present Medicare beneficiaries to choose between traditional
HCFA administered Medicare, with the present Medicare benefits. and competing AHPs
offering the standard package. Beneficiaries would have a greater choice of AHPs than
present law permits, including AHPs that offer an out-of-plan provider option.
For beneficiaries who chose an AHP, the federal government would make a defined
contribution toward premiums. The defined contribution would be set as a function of the
nation-wide average per capita expenditures for the Medicare program. This average
would be adjusted by a regional index that reflected general differences in the cost of
living and the health status of beneficiaries, but not differences in the cost of medical care.
Beneficiaries who choose an AHP would be responsible for paying the difference between
the government contribution and the cost of their plan of choice. Present employer
sponsored retiree health benefits that pay for wrap-around coverage could be redirected
DRAFT: Managed Competition II, March 7. 1994.
15
toward the difference between the government's defined contribution and an AHP's
premium. Equally, employers and retirees might agree to reconfigurating retiree health
benefits into a defined contribution such that those who join AHPs get the savings from
their actions.
Beneficiaries that age into the Medicare program would be required to continue purchasing
coverage from AHPs.
The price of AHPs available to Medicare beneficiaries would be based on a health status
adjusted, market-determined community rate across the Medicare population within a
Medicare HPPC region. AHPs could offer their services at whatever competitive price
they thought would attract Medicare beneficiaries.
Eligible low income beneficiaries would continue to receive premium and cost-sharing
assistance.
The present red tape that impedes HMOs from participation in the Medicare risk
contracting program would be aggressively reduced. There would be a significant shift in
public policy that supports the development of Medicare-oriented AHPs and encourages
them to serve beneficiaries.
As AHPs find ways to improve efficiency, they should be able to offer rates that are at or
below the defined contribution set by government, even though they offer the richer standard
benefits package. The opportunity to obtain more benefits at no additional, or only slightly
higher cost, as well as continuity of care through primary care physicians, the reduced
paperwork, and the obviated need to purchase a Medigap policy, should motivate Medicare
beneficiaries to join AHPs. However, present Medicare beneficiaries who place more value on
the fee-for-service alternative would retain the opportunity to stay in the current system. The
reliance on nationwide based AHP capitation rates should serve to eliminate the geographic
inequities in the distribution of Medicare reimbursement.
DRAFT: Managed Competition II, March 7, 1994.
16
If AHPs succeed in lowering their costs below fee-for-service Medicare program costs, the
federal government could save significant amounts of money as Medicare beneficiaries choose
to enroll in AHPs.
DRAFT: Managed Competition II, March 7, 1994.
17
Appendix: Discussion of mandates
Combination of individual and employer mandates
Employer Mandate for Large Employers
All employers with more than 100 employees would have to offer a choice of AHPs
offering the standard health benefits package to employees, and their dependents, who
work more than 30 hours a week and would be required to make a defined contribution of
a minimum of [50-80]% of the price of the low cost plan to the health care premiums of
their employees. To minimize employment effects. the mandated contribution requirement
would be phased in over a period of time. A prorated contribution would be required for
part-time workers who worked more than 1,000 hours per year and a payroll tax of X%
would be paid for workers who work less than 1,001 hours per annum.
To assuage effects on employers near the HPPC threshold size, there would be a gradation
of their financial obligation in accordance with firm size (i.e., firm size 100-125, 20%;
126-150, 40%; 151-175, 60%; greater than 175, 80%.). These employers would not be
relieved of their obligation to offer standard health care benefits. If the gradation was used
in combination with a phase-in, the obligation for all firms would be phased in equitably.
Individual Mandate for Individuals and Small Employers
Part-time workers working less than 1,001 hours per annum for an employer with more
than 100 employees and all individuals not employed or those employed by firms with
less than 100 employees would be obliged to purchase coverage through their local HPPC.
At the direction of their employees, small employers would be required to make a monthly
payroll deduction and send the amount to the appropriate HPPC.
DRAFT: Managed Competition II, March 7. 1994.
A combination of employer and individual mandates best builds upon the current
employment-based system, and would ensure that the 99% of companies above the 100-person
threshold which currently offer coverage to their employees would continue to do so.
To the extent that large businesses compete with small businesses in the same industry,
employee compensation packages would differ, but since there would be a mandate in both
sectors, total compensation in any individual firm should not be different. However, if
employees do not recognize the trade off between wages and benefits, small employers would
have a hiring advantage. A combination of employer and individual mandates would increase
the incentives for firms to game the threshold by engaging in such actions as hiring temporary
personnel and splitting companies into separate entities. However, this may be mitigated by
phasing in the percentage requirement with firm size.
Low income is the major determinant in access to health insurance, not size of firm in which
one is employed. Therefore, for a combination approach to be equitable and efficient, the
subsidization formula used would have to be consistent across mandate environments, and tied
to income level not employment status, as in the LISP program. Individuals eligible for LISP
subsidization would use their vouchers either through their large employer or the HPPC to
defray the cost of coverage.
If, on the other hand, subsidies under the employer mandate were targeted at employers, as
opposed to individuals, the employer mandate portion of the combined mandate would
represent an inequitable and inefficient financing mechanism. Firm subsidies based on average
payroll are inefficient because they subsidize high as well as low income individuals. For
firms with high average payroll but some low income employees, subsidies would be
insufficient, and employers would be forced to pick up the burden for government programs
or lay off workers. For firms with low average payroll but some high income employees, the
subsidies may be too generous, and the government would bear unnecessary costs.
DRAFT: Managed Competition II, March 7, 1994.
19
The most expedient, efficient, and politically viable way to enforce the individual portion of
the mandate would be through a free-rider tax. Individuals choosing not to purchase coverage
would be required to pay a tax. Advantages of a free-rider tax are that it could be progressive
and enforced by the IRS. The free-rider tax would be equal to a fixed amount plus a penalty
that would be directly proportional to income. While such an enforcement strategy would not
perfectly attain universal coverage, it would go a long way towards ending the free-rider
problem while minimizing societal and economic dislocation.
Many legislative proposals, including the Administration's, have embraced employer mandates
and subsidies targeted at firms because they allow the government to shift some of the burden
of public programs onto employers and create the perception that no one is paying the price.
While fiscally attractive to the government. this type of mandate perpetuates cost-shifting, and
it is the kind of mandate that will cause the most economic dislocation because it effectively
raises the minimum wage in many firms. To the extent that employers were unable to take the
additional costs of health premiums out of wages, an employer mandate would cause some
unemployment, especially in firms not currently offering coverage and in firms with low wage
workers.
Individual Mandate
All individuals would be required to purchase coverage as of the date of implementation,
or pay a free-rider tax.
All employers, while not required to finance coverage, would be required to offer
coverage, either through the HPPC if they have fewer than 100 employees, or directly for
large employers.
Voucher eligibility and preferential tax treatment would be contingent upon purchasing
coverage through the appropriate sponsor.
DRAFT: Managed Competition II, March 7. 1994.
20
Adoption of an individual mandate has an inherent logic to it if one pursues a program of
universal access first. Since individuals are already targeted for low income subsidies to make
them more explicit, efficient, and equitable, it makes sense to target a mandate at individuals
as well. An individual mandate could be easily and quickly implemented without disrupting
present purchasing arrangements. It would satisfy those who believe the ultimate obligation
to purchase health care should be on the individual, not employer, and that health care
coverage should be divorced from employment status.
The greatest potential disadvantage of an individual mandate is the risk that companies that
are currently active, value-based health purchasers will cease these activities, and will perform
the minimum duties necessary to fulfill the obligation to offer coverage. It is not possible to
predict the extent of this behavior. However, business leaders suggest that competitive forces
in the labor market may be a strong enough force for maintaining an active employer role,
especially if there is a stipulation that predicates tax preferred treatment of health expenditures
on purchasing through the appropriate sponsor (the large employer for its employees). In
addition, in a mandated environment, employees will value health purchasing that maximizes
the wage portion of their compensation and secures quality health care. Employees of large
firms (with no access to HPPCs) will look to their employers for purchasing expertise, since
most employers purchase coverage for employees today. If large employers prove to be
inefficient purchasers, it would be possible for employees to pressure their employers to go to
secondary purchasers such as purchasing coalitions, to purchase coverage.
Another potential serious disadvantage of an individual mandate is that upon passage, all
individuals might demand access to HPPCs. It is unlikely that Congress would have the
political will to deny this. If the public then demanded that HPPCs exercise greater control
over the cost of health care, the result could be slow, but steady, progression toward a great
majority of the population in the HPPC-leading to regulation and possibly a single payer
system. To some extent, competing HPPCs should mitigate this danger.
DRAFT: Managed Competition II, March 7, 1994.
21
05/10/94
10:35
002
MANAGED COMPETITION UNDER HSA
HSA would slow the growth rate of health costs through market,
management, and administrative reforms aimed at enhancing
competition.
Let me explain how the reformed system would work:
For the first year the National Health Board (NHB) would
calculate premium targets for each alliance. Such targets would
reflect the cost for services in the benefits package and be based
on health costs in the alliance area. Each year the NHB would
update the targets using a health care inflation factor.
In a given year, plans submit premium bids to alliances. If the
weighted average premium for all of an alliance's plans exceeds
that year's target, as calculated by the NHB, the over-target
plans may resubmit lower bids. If the alliance's average still
exceeds the target, payments to plans over the target would be
reduced according to a formula set in the HSA. These plans
would have to make comparable reductions in their providers'
payments.
05/10/94
10:35
003
MANAGED COMPETITION UNDER HSA (CONTINUED):
The increase in the cap from year to year is based on the
Consumer Price Index plus changes in an alliance's population.
An additional cushion of 1.5 percentage points would be
allowed in 1996, dropping to 1.0 in 1997, 0.5 in 1998 and no
cushion in 1999 and 2000. NHB would recommend to Congress
a method to determine future premium caps. If Congress does
not act, HSA provides default future caps based upon increases
in GDP and population.
Some people have equated this process with price controls.
But I must stress that there is an important distinction between price
controls and HSA premium caps. Price controls involve government
regulation of the prices of products in the economy. Such controls are
difficult to implement and regulate, requiring considerable
government resources and bureaucracies that interfere with private
sector decision making and limit efforts to improve efficiency.
05/10/94
10:36
004
MANAGED COMPETITION UNDER HSA (CONTINUED):
In contrast, premium caps do not involve micro regulation. They are,
in essence, budgetary limitations within which private health plans
must operate similar to budgets under which many private and public
entities operate today. Within these overall budgets, the health plan
has the freedom to manage its operations to provide quality care and
control costs in a variety of ways, including through more efficient
administration, more reasonable provider reimbursement, and more
flexibility to determine the best allocation of resources.
An illustration of price controls is the Medicare fee schedule, which
sets specific payment levels for each service. In contrast, a budget
concept is more akin to a capitated payment level which allows more
flexibility in payment for individual services as long as the total
payments stay within an overall budget.
05/10/94
10:36
005
PREVENTING AN UNDESERVED WINDFALL:
IMPORTANCE OF SETTING THE INITIAL PREMIUM
The savings from moderating health costs should accrue to the federal
government, businesses and families, not to the health industry as an
undeserved windfall.
Critical to this effort is establishing a mechanism under which the
health industry does not get paid twice for uncompensated care --
that is, for the care of the currently uninsured.
Universal coverage will bring the currently uninsured into the health
system and fully compensate the health care industry for their care.
This is different from the current system in which the uncompensated
care of the uninsured is passed on to people with private insurance in
the form of higher premiums. Today, uninsured people pay only 21
percent of their health costs. The remaining burden is passed on to
people with private insurance, whose premiums are significantly higher
than they would be were it not for the cost shifting due to
uncompensated care.
05/10/94
10:36
5
006
PREVENTING AN UNDESERVED WINDFALL (CONTINUED):
Under health care reform, all Americans will have health insurance
and the health care industry will be directly compensated for all
individuals. Thus, private insurance premiums will no longer need to
be inflated to cover the shortfall from the uninsured.
o
If premiums continue to be inflated, the health industry would be paid
twice for the currently uninsured, conferring a huge windfall on the
health care industry.
Premium levels must reflect the new reality that insurers will be
directly compensated for the care of all the currently uninsured and
the uncompensated care surcharge built into the current premium will
be taken out. If not, businesses and families will be out billions of
dollars in higher premium payments. That would be a huge and
undeserved windfall to insurers and providers.
05/10/94
10:37
5
007
PREVENTING AN UNDESERVED WINDFALL (CONTINUED):
The HSA provides full compensation to insurers for the currently
uninsured, while maintaining the current treatment of costs for
Medicaid. Therefore, there are no losses for the health industry when
the premium for the first year is set at the HSA level. And in fact,
CBO corroborated that HSA's initial premium level would allow
providers to receive the same payments, on average, that they do
today.
0
The bottom line is that providers and insurers are held harmless,
while keeping costs to families, businesses and the federal government
at a reasonable level.
Absent a mechanism which effectively deals with uncompensated care,
there is no guarantee that premiums will be constrained in the first
year. Competitive forces may work to avoid a windfall to the health
industry for uncompensated care. But they may not. Instead the
health industry might keep the windfall, resulting in higher initial
premiums, and huge cost to businesses, families and the government.
05/10/94 10:37
5.
008
PREVENTING AN UNDESERVED WINDFALL (CONTINUED):
o
In fact, the Health Insurance Association of America and Hewitt &
Associates estimate that, absent constraint, insurers would set
premiums higher than the initial premium in the HSA.
Now, I happen to believe that managed competition will work to
contain health care costs. However, any legislation considered in the
Senate is governed by CBO scoring, and CBO will not score
significant savings from managed competition alone. CBO will only
score the full anticipated savings if we have a back-up in place, like
premium caps.
As you all know, CBO scoring is important because there is a 60 vote
point of order against any bill which CBO determines is not deficit
neutral over ten years. In fact, if we brought the HSA to the floor
today it would have a 60 vote point of order against it because CBO
estimates it would increase federal costs by $126 billion over ten years.
That is why many of the options I've discussed reduce costs relative to
HSA.
05/10/94
10:37
0
009
PREVENTING AN UNDESERVED WINDFALL (CONTINUED):
Without premium caps, CBO would estimate that federal costs of the
HSA would increase substantially. It would be extremely difficult to
offset these substantial costs, virtually guaranteeing that the bill would
increase the deficit and have a 60 vote point of order against it.
The HSA's premium caps give maximum latitude to competition,
while at the same time ensuring that CBO will give us maximum
credit for the savings associated with health care reform.
05/10/94 10:38
$
010
IMPORTANCE OF SETTING THE INITIAL PREMIUM
AN EXAMPLE
Now I'd like to outline the implications -- using private actuarial
estimates -- of a premium cap structure in which the initial premium
is not constrained, but subsequent growth is controlled by the HSA
caps. The only difference between this example and the HSA is that
HSA constrains the initial premium, and this alternative does not.
The results of an unconstrained initial premium are dramatic. Under
this example, total costs relative to HSA could increase significantly
between 1996 and 2004, transferring as much as $600 billion from
businesses and families to the health industry. Federal costs over that
period could also increase substantially due to higher premium levels.
[NOTE: The Administration has asked that you not include in your
presentation an estimate of federal cost increases under this example.
If you are specifically asked, however, they recommend that you use a
range of between $130 billion to $450 billion over the 1996-2004
period, with the exact costs dependent upon how much of the windfall
the health industry keeps.]
05/10/94 10:38
5
011
AN EXAMPLE (CONTINUED):
These amounts represent windfalls that would be shared between
providers and insurance companies. They would be the real winners
from universal coverage; significantly increasing their profits at the
expense of business, families and government.
o
Further delaying implementation of the annual cap constraint could
worsen the financial impact on government, families and business,
transferring even more windfall to the health industry.
05/10/94
10:38
5
012
ALLOWING HIGHER GROWTH RATES AFTER
THE FIRST YEAR
You can see why it is important to set the premium at an appropriate
level in the first year.
However, if an appropriate baseline is set, one could consider allowing
greater growth rates thereafter than those in HSA. Such changes are
not as prohibitively expensive as proposals which would leave the
initial premium unconstrained.
o
To illustrate this point, let me briefly present two options that we
discussed at the retreat: (1) Allowing growth rates each year that are
1 percentage point higher than HSA; and (2) Allowing growth rates in
1999 and 2000 that are 1 percentage point higher than the HSA.
The first option higher growth rates each year responds to
concerns that growth rates in the HSA are generally too low. Relative
to HSA, it could increase the federal cost of subsidies by $27 billion
between 1996 and 2000, and by $74 billion between 1996 and 2004.
Businesses and families could also pay substantially more than under
HSA.
05/10/94
10:38
0.
013
HIGHER GROWTH RATES AFTER FIRST YEAR (CONTINUED):
The second option allowing a 1 percentage point higher growth rate
in 1999 and 2000 responds to concerns that it is too constraining to
allow health care costs to grow only at the inflation rate by the end of
the decade. Relative to HSA, it could increase the federal cost of
subsidies by about $6 billion between 1996 and 2000, and by $16
billion between 1996 and 2004. And as in the previous option, costs
to businesses and families could also increase relative to HSA.
I do not want to minimize the magnitude of cost increases under
either of these options. Even allowing higher growth rates in only
1999 and 2000 could erode some of the deficit reduction we would
achieve under the models I have already presented to you.
But in contrast to the financial risk we would be taking by failing to
set an appropriate premium level in the first year of reform, the cost
of permitting somewhat higher growth rates after the first year may be
more manageable.
05/10/94 10:39
5
014
FEDERAL COSTS OF RELAXING HSA GROWTH RATES
($ billions)
1996-2000 1996-2004
Increased Costs Relative to HSA:
Growth rate 1% higher than HSA every year
$27
$74
Growth rate 1% higher than HSA in 1999 & 2000
$6
$16
Administration estimates based on CBO premium estimates.
05/10/94
10:39
5
015
CONCLUSION
Slowing health care costs is a fundamental goal of health care reform.
The HSA attempts to constrain growth by enhancing competition, but
as a backstop also includes premium caps. Such caps are also
necessary to get full credit from CBO for the savings associated with
lower health care costs.
To effectively contain costs, we must (1) set a first year premium
which does not confer a windfall onto the health industry, and (2)
moderate the growth rate of health care costs thereafter.
As I've demonstrated, failing to set the initial premium at an
appropriate level creates severe financial risks for American families,
businesses, and the federal government.
Once the initial premium is set, relaxing future growth rates could
increase costs relative to the HSA, but would not be as prohibitively
expensive as proposals which would not constrain the initial premium.
05/10/94 10:39
016
INTRODUCTION
Slowing health costs is a fundamental goal of health care reform.
HSA would constrain health care growth rates through management,
insurance market, and administrative reforms that enhance
competition.
As a backstop to competition, HSA also includes premium caps. Caps
are also critical for CBO scoring.
Cost controls must (1) ensure the initial premium level confers no
windfall on the health industry and (2) moderate the growth rate of
health care costs thereafter.
This presentation illustrates the consequences of:
not setting the initial premium at an appropriate level, and
allowing a somewhat higher premium growth rate over time
than does HSA.
05/10/94
10:40
017
MANAGED COMPETITION UNDER HSA
Under HSA's managed competition:
In the first year the National Health Board (NHB) calculates
premium targets for each alliance, reflecting cost of services in
the benefits package and health costs in the alliance area. NHB
updates targets annually based on a health care inflation factor.
If the average premium for all of an alliance's plans exceeds
target, the over-target plans may resubmit lower bids.
Ultimately, payments to over-target plans would be cut
according to an HSA formula. Over-target plans also would
have to reduce payments to their providers.
Annual cap increase is based on CPI plus changes in alliance
population. A cushion of 1.5 percentage points is also allowed
in 1996, dropping to 1.0 in 1997, 0.5 in 1998 and no cushion in
1999 and 2000.
This process differs from price controls, which are inflexible
government regulation of product prices in the economy. Such
controls are difficult to implement and regulate; interfere with private
sector decision making; and limit efficiency improvements.
Premium caps, in contrast, do not involve micro regulation. They are
budgetary limitations within which private health plans have the
freedom to manage their operations to provide quality care and
control costs in a variety of ways, including through more efficient
administration, more reasonable provider reimbursement, and more
flexibility to determine the best allocation of resources.
05/10/94 10:40
1
018
PREVENTING AN UNDESERVED WINDFALL:
IMPORTANCE OF SETTING THE INITIAL PREMIUM
Reform must include a mechanism under which the health industry
does not get paid twice for uncompensated care.
Today, uncompensated care costs of the uninsured are passed on to
those with private insurance in the form of higher premiums.
Under health care reform, all Americans will have health insurance --
the health care industry will be compensated for all individuals.
Private insurance premiums need no longer be inflated to cover the
shortfall from the uninsured.
If the uncompensated care surcharge built into the current premium is
not taken out, the health industry would get a windfall by being paid
twice for the uninsured, while businesses, families and government
would have to pay billions of dollars in higher premiums.
The HSA's initial premium holds the health industry harmless by fully
compensating insurers for the currently uninsured, and maintaining
current treatment of Medicaid costs. CBO estimates that HSA's
initial premium would give providers the same payments, on average,
that they get today.
Absent a mechanism to deal with uncompensated care, there is no
guarantee that competitive forces will constrain first year premiums.
In fact, the Health Insurance Association of America and Hewitt &
Associates estimate that, absent constraint, insurers would set
premiums higher than the initial premium in the HSA.
While many believe that managed competition will moderate health
costs, health care reform legislation is governed by CBO scoring.
CBO will not score significant savings from managed competition
alone. It will score full anticipated savings only if there is a back-up
in place, like premium caps.
CBO scoring is critical because a 60 vote point of order lies against
legislation which CBO estimates increases the deficit over ten years.
Without premium caps, CBO would substantially increase its estimate
of HSA's costs. Absent substantial cuts to offsets these additional
costs, the bill would increase the deficit and have a 60 vote point of
order against it.
05/10/94 10:41
5.
019
IMPORTANCE OF SETTING THE INITIAL PREMIUM
AN EXAMPLE
The importance of setting the initial premium is illustrated by a
premium cap structure under which the initial premium is not
constrained, but subsequent growth is controlled by the HSA caps.
Under this example, total costs relative to HSA could increase
significantly between 1996 and 2004, transferring as much as $600
billion from businesses and families to the health industry. Federal
costs over that period could also increase substantially due to higher
premium levels.
These amounts are windfalls to providers and insurance companies,
who would increase their profits at the expense of businesses, families
and government.
Further delaying implementation of the annual cap constraint could
worsen the financial impact on government, families and business,
transferring even more windfall to the health industry.
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10:41
5.
020
ALLOWING HIGHER GROWTH RATES AFTER
THE FIRST YEAR
If an appropriate initial premium is set, allowing greater-than-HSA
growth rates in subsequent years would not be as costly as proposals
which don't constrain the initial premium.
Two options presented at the retreat illustrate this:
--
Allowing annual growth rates 1 percentage point higher
than HSA; and
--
Allowing 1999 and 2000 growth rates to be 1 percentage
point higher than HSA.
The first option could increase federal subsidy costs by $27 billion
between 1996 and 2000, and by $74 billion between 1996 and 2004.
Businesses and families could also pay substantially more than under
HSA.
The second option could increase federal subsidy costs by about $6
billion between 1996 and 2000, and by $16 billion between 1996 and
2004. Costs to businesses and families could also increase relative to
HSA.
While these options could erode some of the deficit reduction possible
under other models, the risk is substantially less than an option which
fails to set an appropriate premium level in the first year of reform.
05/10/94 10:41 8
5
021
-
FEDERAL COSTS OF RELAXING HSA GROWTH RATES
($ billions)
1996-2000 1996-2004
Increased Costs Relative to HSA:
Growth rate 1% higher than HSA every year
$27
$74
Growth rate 1% higher than HSA in 1999 & 2000
$6
$16
Administration estimates based on CBO premium estimates.
05/10/94 10:42
022
CONCLUSION
Slowing health costs is a fundamental goal of health care reform.
HSA would slow growth of health care costs through enhanced
competition, with premium caps as a backstop. Caps are also
necessary for CBO scoring.
Effective cost controls must (1) set a first year premium which does
not confer a windfall onto the health industry, and (2) moderate the
growth rate of health care costs thereafter.
Failing to set the initial premium at an appropriate level has severe
financial risks for American families, businesses, and government.
Once the initial premium is set, relaxing future growth rates could
increase costs relative to the HSA, but would not be as expensive as
proposals which would not constrain the initial premium.