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Richard W. Porter Subject Files
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This is not a textual record. This is used as an
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Record Group/Collection:
George H.W. Bush Presidential Records
Collection/Office of Origin: Cabinet Affairs, White House Office of
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Porter, Richard, Files
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Folder Title:
Mandated Employer Provided Health Insurance [binder] [4]
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15
16
2
AS.
A20 THURSDAY. APRIL 13. 1989
THE WASHINGTON POST
Expanded Health Insurance Proposed
Kennedy Bill Would Require All Employers to Provide Coverage
By Spencer Rich
Kennedy, chairman of the Senate
ers won committee approval by a
Washington Post Staff Writer
Labor Committee, said he hopes for
10-to-6 vote. But business groups
committee approval "by early sum-
fiercely opposed the measure, fear-
Sen. Edward M. Kennedy (D-
mer."
ing vast increases in their costs, and
Mass.) and other liberal Democrats
Under the Kennedy proposal, all
it went no further.
yesterday launched a campaign to
employers would have to provide a
The National Federation of In-
require all employers to provide
basic minimum package of health
dependent Business yesterday said
health insurance to their workers.
insurance to employees normally
it opposes the new version of the
Kennedy's bill, expanding previ-
working at least 17½ hours a week.
measure. Frederick J. Krebs of the
ous proposais. also would create a
The package would include medi-
the U.S. Chamber of Commerce
new government program, akin to
cally necessary hospital care, doc-
said, "Health-care costs are out of
Medicaid, to provide insurance for
tor care and a $3,000 annual "cat-
control-so being forced to provide
nearly 15 million Americans who
astrophic" limit on out-of-pocket
these benefits is like being told to
still would be uncovered after the
outlays per family for covered ben-
jump on a runaway train."
employer-mandated insurance went
efits. The employer would have to
Bush, during the presidential
into into effect and who would not
pay 80 percent of the premiums.
campaign, said he opposed mandat-
be eligible for existing public pro-
Kennedy said this provision
ing employer coverage.
grams such as Medicare or Med-
would provide new coverage for 23
Conceding this opposition, Ken-
icaid. This provision would be
million people in families where a
nedy said public opinion has deci-
phased in from 1990 to 2000, start-
full-time worker does not get health
sively changed over the years, and
ing with 6 million people below the
insurance through the job. He said
"the American people have made up
poverty line, who would receive it
the cost of this insurance would be
their minds" that everyone should
free.
$1,619 for each covered worker
be covered by health insurance in
The bill will be the centerpiece of
and family, but since the worker
some form.
efforts by a coalition of labor, lib-
would pay 20 percent, it would cost
He said the bill includes special
eral, religious and social welfare
the employer only $1,295.
provisions and subsidies to ease the
organizations to guarantee health
He said total costs of premiums,
added cost burdens for small busi-
insurance to everyone in the coun-
including improving the benefits in
nesses.
try who does not already have it
existing employer-provided insur-
through the job or government pro-
ance up to the minimum level of the
grams. Kennedy has long been the
required package, would be $33
legislative leader of this coalition.
billion. But he said savings on ex-
The bill drew more than 100 en-
isting hospital charity care, conver-
dorsements yesterday from these
sion of high-cost individual policies
groups and from major health or-
to employer-based group policies
ganizations such as the American
and other such provisions would
Hospital Association. the Federa-
reduce the net to $18 billion.
tion of American Health Systems
In the last Congress, a Kennedy
and the American Society of Inter-
bill mandating coverage by employ-
nal Medicine.
"Today we renew the effort to
bring essential health care to all our
citizens
Thirty-seven million
Americans have no health insurance
at all, either public or private," said
Kennedy, who was joined by Sen.
Paul Simon (D-III.), Rep. Henry
© 1989 The Washington Post Company. Reproduced by the Library of Congress,
Waxman (D-Calif.) and Rep. William
Congressional Research Service with permission of copyright claimant.
Ford (D-Mich.).
Waxman, chairman of the House
Energy and Commerce health sub-
ommittee, described the situation
so many people lacking coverage
as "a national disgrace" that contrib-
utes to "desperate problems with
infant mortality and AIDS
in-
adequate levels of prenatal care and
immunizations" and other problems.
IP421H
AS
"The British Love Their National Health Service," Washington Post, March 15, 1988,
Health Section, pp. 16-19
the service and criticism of Thatcher's
stewardship.
the NHS appropriation in this year's bud-
get, but even members of her own party
have protested that it is not enough.
In recent weeks, Thatcher's critics have
This year marks the 40th birthday of the
focused many of their demands on her gov-
NHS, the proudest achievement of Britain's
By Karen DeYoung
ernment's 1988-89 budget, whose details
Washington Pas: Foreign Service
postwar social reforms. Virtually all of Eu-
are scheduled to be released today.
rope, and much of the rest of the world,
In mid-February, a group of senior Con-
LONDON
now has some sort of socialized medicine.
servative members of Parliament, including
or many Britons, the story of tiny Da-
But the NHS, a crad e-to-grave program
two former Thatcher cabinet ministers,
F
vid Barber confirmed what they al-
whose services are free to its users, re-
called for an increase in the proposed
ready feared: The National Health
mains one of the most comprehensive and
appropriation for the National Health
extensively used systems of state owned
Service.
Service, on which 90 percent of the
and operated health care in the industrial-
Early this month, the bipartisan and Con-
nation depends for its medical care, was
overstretched, out of money and on the
ized West. Its cost. which is paid out of gen-
servative-dominated Social Services Com-
eral taxation, will be about $40 billion this
verge of collapse.
year.
David Barber was born last fall with a
With a staff of more than 1 million, the
hole in his heart. Surgery to repair the in-
NHS is believed to be Europe's largest sin-
fant's heart was scheduled and postponed
gle employer.
Virtually all of
five times during his first few weeks of life,
In England alone, the service owns more
because nursing shortages at Birmingham
than 2,000 hospitals staffed with govern-
Europe has
Children's Hospital meant that no post-op-
ment-salaried physicians. It contracts for
some sort of
erative bed was available for him.
the full-time services of more than 25,000
Following extensive media coverage of
socialized
general practitioners and 14,000 dentists.
his plight and public and political outrage
Such a widely used service is the inevi-
medicine. But
that forced direct intervention by Prime
table target of frequent complaints, and ev-
the British
Minister Margaret Thatcher, he finally got
ery postwar government has had to con-
this operation in late November. Eleven
NHS, a cradle-
front a health care "crisis."
days later, on Dec. 5, David Barber died.
But now for the first time in the health
to-grave program
The hospital and his physicians deplored
program's history, opinion polls show that
whose services
the delay, even while insisting that the re-
Britons consider NHS the most urgent
peated postponement of surgery had noth-
problem facing the nation. The charge,
are free, is one
ing to do with his death.
across a wide political spectrum, is that
of the most
Yet the Barber case marked the begin-
Thatcher is more interested in saving mon-
comprehensive.
ning of an unprecedented and still rising
ey than saving lives.
tide of public concern over the future of
Thatcher has agreed to add $2 billion to
© 1988 The Washington Post Company. Reproduced by the Library of Congress,
Congressional Research Service with permission of copyright claimant.
To Thatcher, the NHS is highly ineffi-
mittee in the House of Commons put its
cient. It combines unlimited demand, ever-
own figure on the level of need, asking for
escalating costs and a lack of cost-control
an additional $1.8 billion for the NHS hos-
incentives to create a bottomless pit of pub-
pital service fund alone.
David Barber was one of nearly 700,000
lic expenditure. In the face of relentless
On March 5, about 50,000 trade union-
Britons on waiting lists for non-emergency
attacks from the opposition Labor Party,
ists and health care workers, according to
surgery, many of them in line for a year or
she points out that her government this
press accounts, marched in London and oth-
more. Hospital occupancy rates in some
year spent more than three times what La-
er cities in demonstrations pegged to the
areas are more than 90 percent, yet thou-
bor spent on the NHS in its last administra-
budget announcement. Yesterday many
sands of beds have been taken out of ser-
tion in 1979, and that nursing salaries have
nurses at hospitals throughout Britain
vice and entire wards shut down either be-
risen 30 percent over that same period.
staged rallies and marches in a last minute
cause they lack funds or nurses-or both.
Thatcher repeatedly notes that waiting lists
attempt to pressure the government to in-
Tens of thousands of nurses have left the
for hospital care are by no means a new
crease NHS funding.
NHS, which pays nurses an average salary
phenomenon here.
But government officials have said that
lower than that of a rookie police officer or
Britain has far more hospital beds per
despite a massive budget surplus and plans
a bus conductor.
patient than the United States, and the av-
to cut income tax rates, no more NHS funds
Many of the nurses have emigrated to
will be made available.
erage length of hospital stay is more than
Australia, New Zealand and the United
The storm over Britain's national health
twice as long. Thatcher has charged NHS
States. Picket lines of striking nurses have
doctors with restrictive practices and con-
system goes beyond medical care to basic
become a common sight outside NHS hos-
differences in political philosophy.
spiring to limit their working hours to take
pitals since early this year.
Many believe that Thatcher's aim is far
private, paying patients Oil the side as a sup-
The three presidents of the Royal Col-
more ambitious than merely making the
plement to their health service salaries,
leges of Physicians, Surgeons and Obste-
NHS more efficient in its use of resources.
averaging about $50,000 a year. She has
tricians have warned the government that
It is widely felt among politicians and health
accused NHS hospitals of inefficiency and
hospitals have "almost reached the breaking
care professionals that she has purposefully
expects them to pay for budget overruns
point."
underfunded the system to create chaos and
and nursing salary shortfalls by finding new
There is general agreement between the
fear that will open the door to wider public
ways of making money outside their state
government and its critics that the health
allocation.
acceptance of a private health care system
service needs more money if it is to contin-
that is more in keeping with her overall goal
Many have done so, putting services tra-
ue to exist in its present form. Where they
of "eradicating socialism" and getting the
ditionally provided by public employees. like
part company is over whether it should.
government out of all but the business of
The political line is drawn between those
catering and cleaning, up for competitive
governing.
bids by private contracting firms. Some hos-
who want the national health program to
Meanwhile, the evidence that something
pitals have opened flower shops and news-
basically remain as it is and those who ad-
is deeply wrong with the NHS comes with
stands in their lobbies and begun taking
vocate a major overhaul of services to per-
each day's news, a seemingly endless litany
photographs of newborn babies to sell to
mit more private free-market medical prac-
of endangered lives, despairing hospital ad-
their parents.
tice in Britain.
ministrators and angry staff.
These measures are merely "scraping at
the surface" of their funding problems, one
hospital administrator said. But they're
easier than cutting back on services.
Administrators said they are not opposed
to changes in NHS financing, and there is
See BRITAIN Paso 18
BRITAIN, From Page 17
egalitarian, and Britons of all political per-
suasions consider it the most sacred of na-
about 2,000 patients on his or her list and
widespread agreement that the rigid, highly
tional budgetary cows.
frequently sees as many as 40 to 50 pa-
centralized structure of the health service,
Britons often cite the U.S. health care
tients each day for an average of about
which leaves some hospitals nearly empty
while others are full to bursting is a major
system as the inevitable result of privatized
$35,000 in annual income.
medical care, and it is popularly believed
The general practitioner is the door
part of the problem.
that those without the right credit cards or
through which patients must pass for any
But Thatcher's solution of restricting
non-emergency specialist or hospital treat-
insurance policies are virtually left to die in
funds does not address the bureaucratic
ment. It is this doctor's referral that deter-
American streets.
problems of the NHS and instead hurts
mines what further care a patient will re-
Unlike most other public health systems
patients.
ceive, and where.
in Europe, the NHS uses only state-owned
Once a referral is made, the hospital or
Government officials deny the charge
facilities. Virtually all physicians in the
specialist is obligated to provide treat-
that Thatcher is out to privatize the NHS,
country are government-employed, even
ment-wł en the time and bed are available.
while acknowledging that the current crisis
those who accept private patients on their
is "not unhelpful" in promoting needed
own time. Other systems allow private in-
Advancing medical technology, resulting in
change, as one Thatcher aide put it.
surance to pay for state-provided care, or
new procedures, and Britain's steadily ag-
state insurance to pay for private treat-
ing population have meant that more and
In early February, Thatcher announced
an internal, "all options considered" review
ment. Many are funded through payroll de-
more people are asking for more and more
care, and the waiting list has grown accord-
of the NHS, which is expected to be com-
ductions and employer contributions. But
ingly. Much of the current list is made up of
pleted before the end of the year. "The
although Britons have a small "national
tens of thousands of elderly Britons waiting
prime minister thinks there has been a fun-
health" contribution deducted from their
for hip replacement and hernia operations.
damental change in the politics of health,"
pay, 85 percent of the NHS budget comes
Despite NHS' problems, however, the
the aide said. "People are now ready for
directly from general tax revenues, appro-
legions of its defenders maintain that it pro-
some kind of change, still undefined, which
priated by the government.
vides the most cost-efficient public health
gives them a better service."
There is no means test that assesses a
service in the world. According to Social
It seems clear that the change Thatcher
person's ability to pay for services, and no
Democrat David Owen, a physician who has
has in mind is that people who can afford it
limit on care. The ruling principle of the
served as minister of both health and for-
should pay for their health care. She already
NHS, as described by its founders, is that it
eign affairs in previous governments, the
has proposed highly controversial charges
provides a "comprehensive health service
NHS "is not in massive crisis. It is simply
for vision tests and preventive dental exam-
for everybody in this country" that "shall
being skimped of resources."
inations, which are now free.
not depend on whether they can pay for [it],
Britain spends only 5.9 percent of its an-
Privatization has met with wide approval
or on any other factor irrelevant to the real
nual gross national product on health care,
here when applied to things like the sale to
need."
less than any Western European country
the private sector of formerly state-owned
Every Briton is automatically issued an
except for Greece, Portugal and Spain, and
automobile factories and oil companies. But
NHS card and number at birth. Throughout
little more than half of combined public and
with the NHS, Thatcher may be pushing the
his or her life, the person is registered with
private expenditure in the United States.
concept of privatization too far.
a local general practitioner under govern-
To refuse to spend more, Thatcher's crit-
According to a Galiup poll last month, 67
ment contract. The doctor is paid an annual
ics charge, is both niggardly and insulting to
percent of Britons would be willing to pay
fee for each patient on his registration
the citizens of a country that claims to have
higher taxes if the money went to the NHS.
list-currently set at $13.50 for patients
Europe's highest economic growth rate and
In three separate opinion polls published the
under 64-no matter how often he sees the
most substantial cash reserves. "We already
first week in March, an overwhelming ma-
patient. The doctor receives an additional
get pretty good value for money," Owen
jority expressed concern about the NHS,
flat, yearly fee per practice. Additional mon-
said. What Thatcher proposes amounts to
and most-nearly three quarters in one
ey can be earned for performing more than
"wantonly giving up something good for
poll-said they thought the government
a minimum quota of special services, which
something that is no better."
should use some of its spare cash to help
are being encouraged by the government,
the national medical system.
such as cervical smears to screen for
The health service is the one thing that
cancer.
makes this class-divided society feel warmly
The average general practitioner has
NATIONAL HEALTH: THE COST
12%
PERCENTAGE OF
PUBLIC FUNDS
GROSS DOMESTIC PRODUCT
PRIVATE FUNDS
10
SPENT ON HEALTH CARE
8
6
4
2
O
U.S.
SWEDEN
FRANCE
W.
GERMANY
ITALY
JAPAN
U.K.
SPAIN
GREECE
GREECE
PORTUGAL
PER CAPITA EXPENDITURE
SPAIN
FOR HEALTH CARE
U.K.
IN U.S. DOLLARS
IRELAND
Includes public and private funds
JAPAN
ITALY
FINLAND
BELGIUM
AUSTRIA
DENMARK
LUXEMBOURG
NORWAY
NETHERLANDS
W. GERMANY
FRANCE
CANADA
U.S.
0
200
400
600
800
1,000
$1,200
SOURCE: Organization for Economic Cooperation and Development
-THE WASHINGTON POST
One of Britain's Best Hospitals Still Struggles Financially
BRIGHTON, England
lunch on expenses. You try to [get] a
By most indicators, the southeast is
The Royal Sussex has done its part in
S
ince 1983, the Royal Sussex County
lunch out of the NHS
it's
the best-off part of Britain, with more
cost-cutting plans. Competitive bidding for
Hospital here has maintained an
embarrassing."
investment, more jobs and higher salaries
services saved about $126 million over the
exchange program with George
The 460-bed Royal Sussex is typical of
in private industry. But South East
past three years. Part of the parking lot was
Washington University Hospital in
Britain's National Health Service general
Thames is one of the worst off of the 14
sold to a flower shop franchise, and the
Washington. Every year, a handful of
hospitals. Its hodge-podge of buildings,
NHS regional authorities. Its surgical
hospital makes about $54,000 a year by
health professionals from each institution
connected by uncovered walkways and
crosses the Atlantic to spend a few weeks
waiting list, about 44,000 people, is one
renting out its radiation testing services to
alleys, ranges from a Victorian edifice
looking at how the other side lives and
of the highest in the country, with at least
people like dentists.
built in honor of that queen's 1887
works.
half of London district patients waiting
But although the hospital budget has
Jubilee, to a 20-year-old high rise. Both
At George Washington University,
more than one year.
gone up from $27 million in 1982-83 to
Royal Sussex staffers say, they can learn
are in crumbling condition.
District General Manager David
nearly $40 million last year, the number of
about medical computer technology and
Inside, the fresh paint and carpets in
renovated rooms contrast with cavernous
Bowden notes that Brighton has one of
patients treated over that same period grew
advanced treatment of acutely ill patients.
from 14,000 to 21,000, with salaries and
wards where exposed pipes and beds
the best records for productivity in
They study the American work ethic and
medical expenses also rising.
what one veteran of the program
divided by faded flowered curtains
recent years, treating 25 percent more
In November, despite a surgical waiting
provide an atmosphere that hovers
patients in 1987 than in 1984 and
described as "an atmosphere of relaxed
list of 800, the hospital decided to close a
somewhere between threadbare
reducing costs last year by $3.6 million in
informality" masking a "ruthless,
12-bed ward and limit access to another.
cutthroat" system that brings
hominess and Bedlam.
a $108 million budget.
"Systems in other countries have
performance results.
The Royal Sussex is the main hospital
"In any commercial setting, we would
financing directly related to the number
But the thing that really stands out for
serving the Brighton District, one of 15
be regarded as a very successful
of patients treated," Forrer said. "If that
Britons is the amount of money in the
geographical divisions under the South
business," Bowden said. "Yet we receive
were the case, we clearly wouldn't be in
U.S. system. "Their hospital is out of this
East Thames Regional Health Authority
no more money
If we had the ful.
trouble. If we were profit-making, we
world," said one about GW. "And they
that extends from inner-city London to
funding of pay awards to the staff there
would be in pretty good health."
offer to take us out to Dominique's for
this city on the English Channel.
would be no talk of crisis."
- Karen DeYoung
IP421H
THE NEW ENGLAND JOURNAL OF MEDICINE
March 2, 1989
571
AS
SPECIAL ARTICLE
CONTROLLING HEALTH EXPENDITURES - THE CANADIAN REALITY
ROBERT G. EVANS. PH.D., JONATHAN LOMAS, M.A., MORRIS L. BARER, M.B.A., PH.D.,
ROBERTA J. LABELLE, M.A., CATHERINE FOOKS, M.A., GREGORY L. STODDART, PH.D.,
GEOFFREY M. ANDERSON, M.D., PH.D., DAVID FEENY, PH.D., AMIRAM GAFNI, PH.D.,
GEORGE W. TORRANCE, PH.D., AND WILLIAM G. THOLL
Abstract Canada and the United States have conducted
The combination of cost control with universal, com-
a large-scale social experiment on the effects of alterna-
prehensive coverage has surprised some American ob-
tive ways of funding expenditures for health care. Two
servers, who have questioned its reality, its sustainabil-
very similar societies, with (until recently) very similar sys-
ity, or both. We present a comparison of the Canadian
tems of providing health care, have adopted radically dif-
and American data on expenditures, identifying the sec-
ferent systems of reimbursement. The results of this ex-
tors in which the experience of the two nations diverges
periment are of increasing interest to Americans, because
most, and describing the processes of control. In any
the Canadian approach has avoided or solved several of
system, cost control involves conflict between provid-
the more intractable problems facing the United States. In
ers and payers. Political processes focus this conflict,
particular, overall health expenditures have been con-
whereas market processes diffuse it. But the stylized
strained to a stable share of national income, and univer-
political combat in Canada may result in less intrusion on
sality of coverage (without user charges) eliminates the
the professional autonomy of the individual physician than
problems of uncompensated care, individual burdens of
is occurring in the United States. (N Engl J Med 1989;
catastrophic illness, and uninsured populations.
320:571-7.)
AMERICAN appears to in the Canadian health care
regulatory efforts of the 1970s. 5,6 The one major suc-
be on the rise, as evidenced in
cess in this field, prospective payment and diagnosis-
a recent three-part article by Iglehart¹⁻³ in the Journal.
related groups, is virtually a pure type of regulatory
Such interest has been intermittent in the past, de-
intervention, despite its being occasionally clothed in
pending in part on the position of national health in-
market rhetoric. At the same time, the proportion of
surance on the U.S. political agenda. In the early
the American population with no insurance coverage
1970s, the most recent period during which national
or grossly inadequate coverage is believed to be both
health insurance seemed imminent, Americans paid
large and growing, 7,8 and there is increasing uneasi-
considerable attention to the structure, logic, and his-
ness about the effect of market forces in health care on
tory of the Canadian system.⁴ At the time, that system
the interests of both patients and providers. 9-11 In this
had just been established in its entirety. Although its
context, the radically different Canadian approach to
origins and organization were documented, there had
funding may deserve a second look - not as a pana-
been little experience with universal, public coverage,
cea, but as evidence that perhaps things could be dif-
and data were not yet available on its performance.
ferent. By now that system has generated nearly two
Universal hospital coverage was a decade or more old
decades of experience that can be compared with the
(in Saskatchewan, a quarter century), but the exten-
American record.
sion of insurance to cover physicians' services was
To an American audience, the most striking feature
very new. Then the moment passed, national health
of the Canadian experience may be the association of
insurance moved off the American agenda, and after a
universal coverage with substantially lower expendi-
variety of attempts to regulate the health care system
tures for health services. Despite (or, as many Canadi-
at arm's length, competition and the marketplace be-
ans would argue, because of) universal access on equal
came the dominant ideas of the 1980s. In this context
terms and conditions, overall costs in Canada have
the Canadian experience was of little relevance.
risen more or less in line with the growth of national
So far, however, market forces, at least as applied in
income, rather than eating up a steadily increasing
practice, have been even less successful in containing
share of it, as in the United States.
the growth of health care expenditures than were the
Before 1971, when the Canadian funding system
was more similar to the American one, health care
costs consumed a share of national income that was
From the Health Policy Research Unit. Division of Health Services Research
and Development. University of British Columbia (R.G.E., M.L.B., G.M.A.);
virtually identical in both countries and was rising
the Centre for Health Economics and Policy Analysis. Department of Clinical
steadily. In 1971 it reached 7.4 percent in Canada, as
Epidemiology and Biostatistics. McMaster University (J.L., R.J.L.. C.F.,
G.L.S., D.F., A.G., G.W.T.); and Health and Welfare Canada and the Canadian
compared with 7.6 percent in the United States. After
Health Economics Research Association (W.G.T.). Address reprint requests to
1971, however, the Canadian share remained stable,
Dr. Evans at the Health Policy Research Unit, Division of Health Services
whereas in the United States it continued to rise. 5,12-14
Research and Development, University of British Columbia, Vancouver, BC
V6T 1Y2. Canada.
By 1981 their spending shares were 7.7 and 9.2 per-
Supported by grants from the Woodward and Vancouver Foundations, the
cent, respectively. In the 1982 recession, the share of
British Columbia Ministry of Health. and the Ontario Ministry of Health. and by
grants to Dr. Evans (National Health Scientist). Dr. Barer (National Health Re-
expenditures for health care rose sharply in both coun-
search Scholar), and Mr. Lomas (Ontario Career Scientist).
tries, to 8.6 and 10.2 percent. 12,14 In both systems,
©
1989 , by the Massachusetts Medical Society.
Reproduced with permission by the Library of Congress,
Congressional Research Service with permission of copyright claimant.
572
THE NEW ENGLAND JOURNAL OF MEDICINE
March 2, 1989
health care escaped the effects of the recession - an
Table 1. Average Annual Percentage Increases in
interesting and unstudied observation. But the Cana-
Gross National Product (GNP), 1970 to 1984.*
dian share stabilized at its new level; preliminary esti-
UNITED
mates for 1987 show it still at 8.6 percent. In contrast,
MEASURES OF GNP
CANADA
STATES
DIFFERENCE
the United States share continued to rise. Estimates
percent
for 1987 are in excess of 11 percent. 5,15
Current dollars
12.1
9.8
2.0
The large and growing gap between the United
Constant dollars
3.4
2.7
0.7
States and Canada drives home the point that, for
Constant dollars per capita
2.2
1.7
0.4
good or ill, the form of funding adopted by Canada
*Data for the United States are from the Health Care Financing Adminis-
does permit a society to control its overall outlays on
tration⁵ and the Bureau of Economic Analysis¹⁷: data for Canada are from
health care. Furthermore, it is unnecessary to impose
the Department of Finance. 18,19
+Differences in annual growth rates must be calculated geometrically,
financial barriers to access in the process. In this pa-
not by subtraction (d = (1 + r₁)/(1 + r2) - 1]. Rates have been rounded
per we sketch some of the basic institutional and sta-
after calculation.
tistical facts of that process, and their implications for
physicians in particular.
in Canada. Spending in nominal dollars did rise some-
Cost control, although successful in general, can be
what faster in Canada, by 0.7 percent per year. But
a bruising political process, producing much sound
when account is taken of the more rapid rate of gener-
and fury. External observers who relv on newspaper
al inflation in Canada and the slightly faster rate of
reports may not always get a clear picture, either of
population growth, health spending in constant dol-
the critical issues in dispute or of the distinction be-
lars per capita rose more slowly in Canada, by 1.6
tween facts and rhetoric. Further confusion arises
percent per year.
from casual interpretations of the comparative data,
To put this more concretely, in 1985 Americans
such as that by Feder et al. 16 Looking at the period
spent an average of $1,710 each on health care.⁵ If
from 1970 to 1984, they noted that health spending in
their rate of cost escalation since 1971, in real terms,
Canada rose faster than in the United States, but that
had been the same as that in Canada, they would have
the gross national product (GNP) rose faster still.
spent only $1,362, or 20 percent less. Preliminary esti-
They concluded that the apparent success of the Ca-
mates for 1987 show Americans spending just under
nadian system with cost control was illusory, and that
$2,000 each for health care. Detailed Canadian data
the stability of the share of the GNP applied to health
are not yet available, but the spending gap is clearly
care was simply the result of rapid economic growth.
continuing to widen. One may estimate conservatively
A more detailed look at the data shows this conclusion
that if the Canadian rates of escalation in real cost
to be incorrect.
since 1971 had prevailed in the United States, health
spending would by 1987 be about $450 less, on aver-
NATIONAL INCOME AND HEALTH EXPENDITURES IN
age, for every person in the country, or at least $100
CANADA AND THE UNITED STATES
billion less in all.
Table 1 provides the relevant data for Canada and
THE PROCESS OF COST CONTROL IN CANADA
the United States over the period referred to by Feder
et al. The Canadian GNP does in fact outpace the
How such control has been achieved, and with what
American by 2 percent per year. But after adjustment
effects, continues to form a major part of the agenda
for the more rapid rate of inflation in Canada, our
for research in health services in Canada. 20 As Igle-
advantage shrinks to 0.7 percent. When adjusted fur-
hart pointed out,² virtually the entire difference be-
ther for the slightly faster growth of the Canadian
tween Canada and the United States in the share of
population, the difference in real per capita growth
GNP that is spent on health is accounted for by three
rates is less than half a percent per year respectable
components: insurance overhead, or costs of prepay-
enough over the long term, but not enough to account
ment and administration; payments to hospitals; and
for the divergence in the shares of the GNP spent on
payments for physicians' services. In 1985, these three
health. The oversight of confusing nominal with real
items took up 0.59, 4.18, and 2.07 percent, respective-
rates of GNP growth leads Feder et al. to their errone-
ly, of the U.S. GNP, and 0.11, 3.48, and 1.35 percent
ous conclusion.
of the Canadian GNP.
The relevant base year for examining the effect of
Relative to the expenditures that might have been
national health insurance on health spending is not
generated by a system comparable to Canada's, in
1970, however, but 1971. Quebec, the second-largest
1985 Americans spent about $20 billion more for in-
province, with about a quarter of the Canadian popu-
surance and prepayment costs, and just under $30
lation, adopted its health plan in October 1970, and
billion more for each of physicians' services and hospi-
New Brunswick began its plan on January 1, 1971.
tal costs.
Correspondingly there was a substantial jump, from
Administration and Prepayment Expenses
7.1 to 7.4 percent, in the share of the GNP applied to
health care for all of Canada.
In relative terms, the most extraordinary difference
Table 2 shows the annual rates of increase in total
between Canadian and American spending is in the
health spending in Canada and the United States
area of administration and prepayment expenses. In
since the completion of universal Medicare coverage
1985 the overhead component of health insurance - -
Vol. 320 No. 9
CONTROLLING HEALTH EXPENDITURES IN CANADA EVANS ET AL.
573
Table 2. Average Annual Percentage Increases in Total Expendi-
Woolhandler²³ calculate that in the United States,
tures for Health Care, 1971 to 1985.*
the provider-borne overheads for hospitals, nursing
homes, and doctors' offices (the accounting costs of
MEASURES OF HEALTH
EXPENDITURES
CANADA
UNITED STATES
DIFFERENCE
complying with the requirements for documentation
by a multiplicity of insurers, as well as coping with the
percent
determination of eligibility, direct billing of patients,
Current dollars
13.1
12.3
0.7
and collections) amounted to $62.1 billion in 1983.
Constant dollars
4.3
5.8
-1.4
They estimate that shifting to a national health insur-
Constant dollars per capita
3.1
4.8
-1.6
ance system could save $21.4 billion in the administra-
*Data for the United States are from the Health Care Financing Administration. Gibson et
tive costs of hospitals and physicians' offices. This
al., 14 and the Department of Commerce17: data for Canada are from Health and Welfare
Canada 12.13 and the Department of Finance. 18.19
would be 6 percent of total health care costs, or 0.63
+Differences in annual growth rates must be calculated geometrically. not by subtraction
percent of the GNP in 1983 - leading to the startling
(d = (1 - r₁)/(1 - rg) - 11. Rates have been rounded after calculation.
conclusion that the costs of running the American
These constant-dollar measures are not real output measures for the health sector: they have
not been adjusted by price indexes specific to the health sector. Rather. they are adjusted for
payment system itself, independent of the costs of
changes in the general level of prices. economy-wide. as reflected in price indexes based on
patient care, may account for more than half the
gross national expenditures. and they therefore reflect the increase in generalized purchasing
power that is absorbed by the health care sector. in the form of either increased resource inputs
difference in cost between the Canadian and the
or health sector-specific inflation.
U.S. systems.
For the Canadian physician. differences in the costs
the share of premiums that goes not to the reimburse-
of insurance administration show up as a lower over-
ment of physicians. hospitals. and other providers.
head for practice. The problems of determining insur-
but to paying for the handling of the flow of paper and
ance status and managing the collections process dis-
dollars cost Americans $95 each, out of their over-
appear, along with the problem of uncollectable
all $1,710. Canadians spent $21 - and those were
accounts. The costs of compliance with the require-
Canadian dollars. Indeed, Canadians spent less per
ments of the health care reimbursement system also
capita to administer universal comprehensive cover-
show up outside the area of health expenditures as it is
age than Americans spent to administer Medicare and
normally defined, particularly in the budgets of the
Medicaid alone (about $26 U.S. per capita⁵).
social welfare services, and to no inconsiderable de-
A universal, tax-financed system can simply be
gree in the monetary and nonmonetary costs borne by
much less costly to administer, at all levels, and the
individual patients and their families. Furthermore,
Canadian system is. On the revenue side, once a tax
the considerable research, legal, and regulatory efforts
system is in place, as it is in all modern societies -
required to put the complex and varied reporting and
with income tax, sales tax, and everything else - the
compliance requirements in place are not without
additional cost of raising more funds is minimal.
cost, but will be counted as outside the health care
(Some Canadian provinces continue to collect premi-
system.
ums, which are taxes in all but name. They are related
There is private insurance for some forms of health
to family size, but not to risk status; they cover only a
care in Canada. But for hospital and medical care,
portion of the total plan outlays; they are compulsory
such coverage is prohibited for services that are in-
for most of the population; and most important, cover-
cluded in the public plans. The original intent was
age is not conditional on payment.)
quite explicit - to prevent private firms from skim-
On the expense side, all the costs of determin-
ming off the good risks, supporting the development
ing coverage and eligibility are avoided - everyone
of multiclass service, or both. But the restriction also
is eligible, and for the same benefits. Patients drop
has the very important effect of making provincial
out of the payment system entirely, and reimburse-
governments to all intents and purposes the sole
ment takes place between the public insurer and
funders of hospital and medical care, and of creating a
the provider. There are no marketing expenses. no
bilateral bargaining situation as the foundation for
costs of estimating risk status in order to set dif-
cost control in these sectors.
ferential premiums or decide whom to cover. and
no allocations for shareholder profits: the process
The Effect on Hospitals
of claims payment, although not free of costs, is
In Canada, controlling hospital costs is a two-part
greatly simplified and much cheaper. In this area
process. Operating budgets are approved. and funded
it is obvious that the public sector is more efficient
almost entirely. by the Ministry of Health in each
and less costly than the private sector,²¹ a fact that
province. but they include no allowance for capital
was recognized early on in Canada. The 1964 Royal
expenditures. New facilities. equipment. major ren-
Commission on Health Services, which drew up the
ovations. and the like are funded from a variety of
blueprint for Canada's universal system. described
sources. but they require the approval of the same
the private administration of insurance as "an un-
provincial agency. which generally also contributes
economic use of
limited
22
resources.
This
"un-
the major share of financing. This process of central-
economic use" accounts for nearly one quarter of
ized approval prohibits hospitals from accessing pri-
the difference in cost for health insurance between
vate capital markets. and has historically limited their
Canada and the United States.
efforts to support expansions of capacity from commu-
Nor is that the end of the story. Himmelstein and
nity sources. So far. it has been relatively successful in
574
THE NEW ENGLAND JOURNAL OF MEDICINE
March 2. 1989
limiting such expansion,24 but somewhat less success-
public resources - including their own incomes. 33
ful in managing the diffusion of major equipment. 25,26
Furthermore, there are reasons for the noticeable
Centralized control over operating costs is more
recent increase in such rhetoric. Increases in the
complete. Annual global budgets are negotiated be-
supply of physicians per capita. in the face of a
tween ministries and individual hospitals. Although
relatively constant supply of beds, have resulted in
political pressures have often forced governments
steady reductions in the number of short-term hospi-
to pick up the deficits of hospitals that are unable
tal beds available to each physician since 1971. 27 As
or unwilling to stay within these budgets, this pro-
bed availability and operating budgets have under-
cess has resulted in a significantly less rapid rise in
gone increasing scrutiny, hospital administrators re-
hospital expenditures in Canada than in the United
sponded first (in the mid-1970s) by rationalizing ad-
States.
27,28
ministrative operations, and more recently by joining
The more rapid rate of escalation of hospital costs
physicians in stepped-up rhetoric and pressure about
in the United States since 1971 has been shown to
underfunding.
34
result from major differences in the growth in hospital
The difficulty for health policy and funding is that,
costs per patient day at constant hospital input prices,
since the boy always cries wolf (and must do so, given
or intensity of servicing. 27-30 This measure increases
the political system of funding), one does not know if
in response to increases in the number of nursing
the wolf is really there. The political dramatics should
hours or drugs, or in the use of operating rooms, mag
not mislead external observers into believing that the
netic resonance imaging, and other such complex
wolf is always at hand. What varies most between the
technology, per day of inpatient care. In the case of
two nations in the method of establishing total hospi-
particular technologies that are embodied in specifi-
tal expenditures is the centralized, overtly political
cally countable items like machines, capacities availa-
process in Canada, in contrast to the largely decentral-
ble per capita have tended to increase less rapidly in
ized, institution-centered, and only implicitly political
Canada. On the other hand, changes in the intensity
process in the United States. The Canadian controls
of servicing in hospitals also include relative increases
on hospital expenditures impinge on individual physi-
in internal administrative costs. Therefore, some por-
cians by limiting the complementary resources that
tion of the apparent relative increase in servicing in-
are available to them. In this way, the environment of
tensity simply reflects the increasing administrative
medical practice is changed, and practice patterns
intensity of the American hospital system.
change in response. But individual physicians are not
But the different trends in servicing intensity also
subject to any substantial direct intervention by hospi-
reflect quite different patterns in the use of beds in
tal management or third parties. In this sense, Cana-
acute care hospitals. In Canada, a growing share of
dian physicians are actually much more autonomous
such beds has been occupied by patients over 65 years
than their American counterparts.
of age, whose stays exceed 60 days and whose daily
care requirements are well below average. These pa-
The Effect on Physicians
tients prevent physicians from using the beds in ques-
From 1971 to 1985, the share of the American GNP
tion to treat short-term patients. 31
going to physicians has risen by over 40 percent. By
Thus, Canada can have higher rates of hospitaliza-
contrast, Canadian physicians had an increase of only
tion and greater average lengths of stay than the Unit-
10 percent. The stories that U.S. physicians hear
ed States, yet also have lower per capita hospital ex-
about disaffected Canadian physicians, outmigration,
penditures. 32 Even if such expenditures, in terms of
underfunding, and occasional strikes correspond to an
the cost of hospital care, are less different than is usu-
underlying reality of less generous funding. Despite
ally believed (because so much of the U.S. expendi-
the rhetoric, however, there has been no mass bailout
ture is for administrative activity), it does appear that
of physicians from Canada. The supply of physicians
the resulting mix of hospital activities favors intensive,
per capita has risen throughout the period, is currently
high-technology services in the United States and
growing at between 1.5 and 2 percent per year, and is
long-term, chronic care in Canada. Nor should this
projected to continue its growth for the foreseeable
come as a surprise, given the history of cost and proce-
future. 35 At the end of 1985 there were about 490
dural reimbursement in the United States, and of
people per physician in Canada - very similar to the
global budget-constrained funding in Canada. Which
U.S. ratio. As in the United States, the policy concern
is preferable, in terms of value for money or benefits to
is with surpluses, not shortages. 36 There may be some
patients, is harder to say. Possibly, each system gener-
loss of superstars to the United States, but that is hard
ates its own forms of overuse and underuse.
to document - individual anecdotes do not make a
One product that is clearly generated by the Cana-
trend. In any case, there is always some leakage of
dian system, structured as it is to place the sole re-
stars in any field from countries with small popula-
sponsibility for control of hospital resources on the
tions to populous neighbors (the Gretzky effect).
provincial governments, is intense, continuing public
The main explanation for the difference in outlays
debate. The rhetoric of underfunding, shortages, ex-
to physicians is that real fees have increased much
cessive waiting lists, and so on is an important part of
faster in the United States than in Canada. 27,37 This
the process by which providers negotiate their share of
difference, in turn, has resulted from the effect of uni-
Vol. 320 No. 9
CONTROLLING HEALTH EXPENDITURES IN CANADA -- EVANS ET AL.
575
versal public coverage on the process of fee determina-
U.S. experience with fee freezes in the early 1970s
tion. Increases in the general levels of fees and rules of
clearly demonstrated that increased billing occurred
payment are negotiated periodically between provin-
as a response. +2.43 Billing activity per physician has
cial medical associations and Ministries of Health.
risen faster in Canada than in the United States since
Over the long term, this complex negotiation process
1971, in a manner consistent with this concern, al-
has had a major impact on the overall rate of escala-
though in Canada fee controls have clearly moderated
tion of fees. 37 Ironically, for a society that believes in
the rate of escalation of expenditures for physicians'
the influence of competitive markets, the increasing
services, not just that of fees. Until recently, the pro-
supply of physicians in the United States seems to be
vincial governments have been willing to accept an
associated with an acceleration in fee increases. In
additional rise in expenditures (increases in physi-
1986, the rise in fees relative to the overall Consumer
cians' productivity or more creative billing, depending
Price Index was one of the largest on record. 5
on one's point of view) over and above increases in
Two other related issues have been particularly
fees and numbers of physicians. Nationally, this has
contentious for Canadian physicians - billing at rates
averaged 1 to 2 percent per year since 1971. 37
above those reimbursed by the provincial plans ("ex-
The exception was Quebec, where over a four-year
tra billing") and the growth in the use of services per
period of unchanged fees (1971 to 1975) the increase
physician. Since 1971 these factors have become in-
became so large as to create a fiscal problem. 37.44
creasingly prominent in the political negotiating proc-
Starting in 1976, Quebec introduced modifications to
ess, although the first one may at last have been
the reimbursement process that limited its liability for
pushed off center stage.
increases in services, billings, or both (per practitioner
With the passage of the Canada Health Act in
and in the aggregate) that exceeded preset target lev-
1984, 38 the right to "extra bill" was removed in all
els. From a billing standpoint, 26 office-based diag-
provinces in which such billing had previously oc-
nostic and therapeutic procedures were bundled into
curred. This act, passed unanimously by the House of
the office visit. These procedures had been billable
Commons, was a response to public perceptions that
separately, in addition to the basic visit fee, and dur-
extra billing was undermining the fundamental princi-
ing the early 1970s their number and cost per office
ple of universal access on uniform terms and condi-
visit had risen rapidly. Their consolidation into the
tions. The termination of extra billing was met with
office-visit fee removed one of the principal mecha-
intense opposition from physicians in some provinces,
nisms by which Quebec physicians had been able to
however, culminating in a lengthy strike in Ontar-
stem some of the erosion in their real incomes during
io. 2,39 Physicians argued that the threat of widespread
the period of unchanged fees. 37
extra billing was a safety valve, protecting them
In addition, there are ceilings on the quarterly gross
against overly aggressive bargaining by the Ministries
billings of individual practitioners, above which phy-
of Health and helping to push up public reimburse-
sicians are reimbursed at only 25 percent of the
ment rates. Although relatively few physicians en-
allowable fee. For the profession as a whole, negotiat-
gaged in extra billing, the majority strongly supported
ed fee increases are implemented in steps, conditional
the option. They were unable to mobilize any sizable
on the rate of increase in use. If the rate of use per
public support, however.
physician (i.e., average gross receipts) rises faster than
The extreme distress among physicians in Ontario
a predetermined percentage, subsequent fee increases
appears to have been based largely on symbolic con-
are scaled down or eliminated.
siderations. The right of ultimate access to the pa-
None of these measures impinge directly on the
tient's economic resources seems to have had a mean-
autonomy of individual physicians in their practices,
ing difficult for nonphysicians to understand. In fact,
however. Specific clinical decisions are not reviewed
no change has occurred in the prevailing pattern of
by the reimbursement agency, nor are therapeutic
private, fee-for-service practice with reimbursement at
protocols established. If the aggregated bill for all
uniform, negotiated rates. But Canadian physicians
clinical decisions exceeds the limits, then fees to either
do have real concerns about the future, which have
the individual or the group as a whole will be scaled
been linked to the extra-billing issue.
down, but physicians remain free to determine their
Once governments have achieved control over fee
own practice patterns.
levels by ensuring that the public reimbursement rates
Committees to review patterns of practice have ex-
represent payment in full, it is feared that the next step
isted for years in each province, under various names.
in cost control will be to restrict the amount or type of
But they were established to monitor a very small
care provided, or at least the number and mix of serv-
number of practitioners whose patterns deviated radi-
ices for which reimbursement will be made. This is
cally from those of their peers, and to look for fraud or
particularly likely if physicians increase their delivery
incompetence. Such committees have neither the
of services to compensate for the loss of extra billing,
mandate nor the resources to go beyond statistical
for a stagnant fee structure, or both.
outliers in their investigations; even in this role, a re-
The latter possibility has been an important consid-
cent commentary suggests that they are not very ag-
eration in recent American discussions of physicians'
gressive or effective.⁴⁵
reimbursement under Medicare. 40,41 Analyses of the
Since 1985, British Columbia, Alberta, Saskatch-
576
THE NEW ENGLAND JOURNAL OF MEDICINE
March 2, 1989
ewan, Manitoba, and Ontario have all negotiated con-
conflicts as more severe and as arising from the pres-
tracts setting limits on aggregate billings. British Co-
ence of a universal public-payment system. That sys-
lumbia attempted to go further, by restricting the
tem serves to focus and channel such conflicts and to
numbers of new physicians entitled to reimbursement
bring them into the headlines, but it has also afforded
by the provincial plan and controlling their locations
Canadian physicians a greater degree of professional
of practice. 46 This policy, however, was successfully
autonomy.
challenged on constitutional grounds. It was sustained
Whatever the liabilities of such an overt and at
at the provincial court, but overturned on appeal, and
times rancorous process, the Canadian approach has
leave to appeal further was denied by the Supreme
controlled health care costs more effectively. In the
Court of Canada.
end, this may be the root of the sense of unease among
The absence of intrusion by any of these measures
Canadian physicians, who face a problem common to
into the autonomy of individual practice contrasts
physicians in every country with a rapidly rising sup-
markedly with the situation in the United States,
ply, including the United States. In such circum-
where managed care systems and prospective pay-
stances, every community of physicians must struggle
ment, designed to alter individual physicians' care of
for an ever-increasing share of national income or ac-
individual patients, have become the principal tools
cept falling personal incomes. In the process, they
for the control of expenditures for physicians' services.
must urge on the rest of society the benefits of buy-
In the absence of a centralized bargaining mechanism
ing the additional services that the additional num-
between physicians and payers - a single-source pay-
bers of physicians make possible (some would say
er - there is no way to limit the overall levels of
inevitable) - and of doing so at fees that will sustain
billings. Hence the leap from constraints on capacity
their own incomes. Whether such benefits are real or
(as by a certificate of need) straight to the level of
illusory is important from the standpoint of health
minute scrutiny of the behavior of individual physi-
policy, but irrelevant to the needs of the medical
cians or the treatment of specific diseases.
community.
Thus, many Americans already feel the threats to
The rest of society, or at least a sector of it, attempts
clinical freedom that Canadian physicians fear for the
to resist this expansion under the banner of cost con-
future. Whether such fears actually materialize will
trol. When such resistance is organized collectively
probably depend in large part on whether the provin-
through public insurance, it is relatively successful.
cial governments can continue to contain overall ex-
When it is disorganized and fragmented, an inconsis-
penditures. What is disturbing, however, is that the
tent and contradictory mix of strategies, as in the
current aggregate approaches to control of the use of
United States, it has SO far been unsuccessful. Again,
services leave unexplored the cost-effectiveness, and
that observation is logically independent of whether
even the efficacy, of the actual services provided. Such
the lack of success in the United States reflects waste,
concerns, if left unaddressed by the profession itself,
or whether the Canadian success leads to "under-
may become the catalysts for more detailed scrutiny of
funding."
the use of services within the fee-negotiation process in
In such an environment the pressure on physicians
Canada. To date, we see little evidence of this, but a
can only grow. To the extent that they resist such
decade ago there was little sign of the now widespread
pressures successfully and continue to expand their
practice of bargaining over aggregate use along with
share of the national income, as in the United States,
fees. The context of policy decisions changes more
the public and private responses to cost escalation will
slowly in Canada than in the United States, but it does
become increasingly radical. Major institutional
move forward.
changes are already transforming the American health
care system to an extent much greater than has been
Orchestrated Outrage versus Diffuse Distress
the case in the more conservative Canadian environ-
Thus, the major difference between the two coun-
ment. Fears and anecdotes about the erosion of profes-
tries with respect to health expenditures lies in the
sional autonomy, and even of incomes, are becoming
degree of centralization of the cost-control process.
increasingly widespread. In the United States, corpo-
In the United States the battles are fought in a
rate competitors or employers may turn out to be more
myriad of private struggles between physicians and
ruthless than public regulators.
their employers, or their hospitals (or their competi-
Such are the costs of economic success. The Ca-
tors). When the struggle becomes public, as in the
nadian environment is more stable and predictable
call by Minnesota physicians for unionization, it
precisely because its cost-control processes work rel-
takes the form of a series of isolated and localized
atively well. But in Canada, whatever has happened
incidents. The general pattern is obscured. In Can-
or may happen can be blamed on government and
ada, by contrast, the struggle over shares of income
on the evils of "socialized medicine." Anxiety and
between physicians and the rest of the society is
dissatisfaction are easily, if not always accurately,
played out as large-scale public theater, with all
focused and channeled collectively through the proc-
the rhetorical threats and flourishes that political
ess of public negotiation. In the United States, it
clashes require. 48 Physicians in Canada, and perhaps
is harder for individual practitioners to find the vil-
also in the United States, may perceive the Canadian
lains, and still harder to identify an effective response.
Vol. 320 No. 9
CONTROLLING HEALTH EXPENDITURES IN CANADA - EVANS ET AL.
577
At the same time, it is easier to misinterpret the ex-
26. Deber RB, Leatt P. Technology acquisition in Ontario hospitals: you can
perience of other countries with more visible bargain-
lead a hospital to policy, but can you make it stick? In: Home JM. ed.
Proceedings of the Third Canadian Conference on Health Economics. Win-
ing processes.
nipeg: University of Manitoba, 1987:259-77.
27. Barer ML. Evans RG. Riding north on a south-bound horse? Expenditures.
We are indebted to Sidney Lee. Theodore R. Marmor, and Uwe
prices, utilization and incomes in the Canadian health care system. In: Evans
E. Reinhardt for helpful discussions.
RG. Stoddart GL. eds. Medicare at maturity: achievements. lessons and
challenges. Calgary: University of Calgary Press, 1986:53-163.
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IP421H
AS
[EXCERPT]
[COMMITTEE PRINT]
INSURING THE UNINSURED: OPTIONS AND
ANALYSIS
PREPARED FOR THE
SUBCOMMITTEE ON LABOR-MANAGEMENT
RELATIONS
AND THE
SUBCOMMITTEE ON LABOR STANDARDS
OF THE
COMMITTEE ON EDUCATION AND LABOR
AND THE
SUBCOMMITTEE ON HEALTH AND THE
ENVIRONMENT
OF THE
COMMITTEE ON ENERGY AND COMMERCE
HOUSE OF REPRESENTATIVES
AND THE
SPECIAL COMMITTEE ON AGING
UNITED STATES SENATE
BY THE
Congressional Research Service
Library of Congress
OCTOBER 1988
Education and Labor Serial No. 100-DD
Energy and Commerce Serial No. 100-BB
Special Committee on Aging Serial No. 100-0
U.S. GOVERNMENT PRINTING OFFICE
90-441 If
WASHINGTON : 1988
For Sale by the Superintendent of Documents, Congressional Sales Office
U.S. Government Printing Office, Washington, D.C. 20402
Reproduced by the Library of Congress, Congressional Research Service.
CHAPTER 3.-NATIONAL HEALTH INSURANCE
I. INTRODUCTION
In the 1970s, substantial legislative activity at the Federal level
was directed at the creation of a national health insurance pro-
gram. While the legislation took a variety of forms, the general
thrust of the proposals was to make basic health insurance avail-
able to all Americans, so that access to health care would not be
contingent upon a person's ability to pay. Although the specifics of
the proposals varied, they shared a common goal of establishing
universal entitlement to insurance for Americans of all ages.
In today's political and budgetary environment, such comprehen-
sive proposals are receiving less attention. The emphasis is on en-
couraging or mandating more extensive access to private employer
coverage, expanding the Medicaid program, and creating Federal
or State pools to provide health insurance to specific populations
such as the medically uninsurable. Consequently, expanded access
to insurance coverage may result from a series of political decisions
in which responsibility for financing coverage is spread among
health care consumers, employers and the public sector. Under
such a piecemeal or incremental strategy, it is possible to envision
a point at which most Americans will be able to obtain access to
health insurance at a price they can afford, although the scope,
quality and cost of that coverage and the program(s) through which
it is obtained may vary significantly. The U.S. could, in effect,
achieve national health insurance by an aggregation of public and
private sources of coverage at both the State and Federal levels.
This uniquely American approach has been described as "slouching
toward national health insurance." 54
In the absence of significant change in the economic and political
climate, this incremental approach to coverage seems likely to con-
tinue. It is also apparent that many lawmakers believe that access
to coverage can be expanded in this country only in a step-by-step
fashion. Thus, increasingly the incremental strategy is being ex-
plicitly articulated in government as well as academic circles. It is
also reflected in a variety of congressional proposals that provide
for Federal program changes and new initiatives that stop short of
comprehensive system reform.
For example, a new study by Anderson, Lave, Russe and
Neuman 55 proposes a five-part plan that could be implemented
gradually, and that would draw on State and Federal authority, to
increase access to health insurance:
54 Morone, James, and Andrew Dunham. Slouching Toward National Health Insurance: The
New Health Care Politics. Yale Journal of Regulation, 2:2. 1985.
55 Anderson, Gerard, Judith Lave, Catherine Russe and Patricia Neuman. No Free Lunch.
Baltimore, MD, Johns Hopkins University Press, forthcoming.
(41)
42
treat all employer contributions for health insurance as tax-
able income;
offer all families a uniform refundable tax credit adjusted for
family size;
offer government subsidies to poor and near-poor persons for
the purchase of health insurance;
require all States to make health insurance available to all
persons, including the uninsurable (States would retain their
flexibility to design and finance individual programs, but the
Federal Government would define the minimum level of bene-
fits and maximum copayments); and
eliminate the existing adjustments under Medicare and Medic-
aid for hospitals serving a disproportionate share of low-income
patients. (Eventually all subsidies to public hospitals could be
eliminated.) 56
Numerous examples of this strategy exist in pending legislation,
although it is a question of definition as to whether these proposals
are most appropriately characterized as "national health insurance
through aggregation" or a "mixed public/private scheme which re-
sults in national health insurance." If the criterion for the former
is one of providing gap-fillers rather than universal coverage, then
most of the current bills would fall under this category. They
would include recent initiatives such as: (a) those to increase cover-
age under the Medicaid program by severing the connection be-
tween Medicaid and welfare eligibility (S. 1139 in the 100th Con-
gress); (b) the Access to Health Care proposals of the 99th Congress
(S. 2402, S. 2403, and H.R. 4742), which would have provided for in-
creased coverage through requirements on employers to provide
continued benefits to laid-off workers and their dependents, and on
the States to create programs to finance indigent care; and (c) the
various employer mandate bills introduced in the 100th Congress
(S. 1265/H.R. 2508, H.R. 4951), which would fill the major gaps in
coverage of the working uninsured but leave the remaining unin-
sured population uncovered.
While approaches of this nature are more politically feasible
than the national health insurance proposals of the 1970s, they
may not help to reduce the administrative waste, cost shifting and
inflationary features that many people believe characterize the
current patchwork system. 57 For example, under a piecemeal ap-
proach, there is likely to be duplication of administrative agencies
and the accompanying red tape associated with operating pro-
grams. Also probable is duplication of effort in the areas of quality
assurance, such as licensure, certification and peer review. At the
same time, there are likely to be vast variations in such adminis-
trative functions as eligibility determinations, billing, and report-
ing of information. These factors not only add to the cost of cover-
56 At full implementation of the tax credit and subsidy, Anderson et al. estimate that the
maximum expenditures for these proposals would be $28 billion in FY 1989. Much would depend
on the generosity of the subsidy, a component of this plan that would be subject to political
negotiation. Some of this expenditure would eventually be offset by savings from reducing subsi-
dies for uncompensated care.
57 For an analysis of the administrative costs of the existing system, see Himmelstein, David,
and Steffie Woolhandler. Cost Without Benefit. Administrative Waste in U.S. Health Care. New
England Journal of Medicine, vol. 314, no. 7, Feb. 13, 1986.
43
age but also to difficulties and confusion for providers and consum-
ers who must navigate through the maze of different eligibility cri-
teria, benefit packages, and reimbursement rules. Also made more
complicated is the task of coordination of benefits among the vari-
ous sources of coverage. The more complex the design for providing
coverage, be it multiple layers of government, mixed sources of fi-
nancing, and/or the lack of uniform eligibility standards, the
higher the likely costs for administration.
Coupled with administrative waste is the more general problem
of rising health care costs. In the absence of a centralized budget
and coordinated cost controls that typify comprehensive approach-
es to reform, inflation in health care prices may continue to be a
significant problem. The U.S. cost containment experience so far
suggests that efforts to constrain expenditures by applying re-
straints on one part of the health care system tend to lead to bal-
looning costs in other parts.
On the other hand, the piecemeal or incrementalist approach
may be the most appropriate for the U.S. Given the size and com-
plexity of our current system of financing and delivering health
services, small steps with room for adjustment may make more
sense than sweeping system-wide reforms. After all, the national
health insurance systems in Europe and Great Britain did not
spring forth overnight but instead evolved over many years. In
Great Britain, for example, the National Health Service was cre-
ated in 1948, but it followed on the heels of a medical insurance
program begun in 1911 for much of the nation's workforce.
There are other possible arguments for an incremental and plu-
ralistic approach. A system that builds upon private insurance pre-
serves freedom of choice for consumers and autonomy for provid-
ers. Pluralism can also encourage innovation, encouraging program
improvements and new solutions that might not be found in a cen-
tralized, more static system.
Nevertheless, it is possible that lawmakers may decide that uni-
versal coverage is most effectively and efficiently achieved through
a comprehensive approach. Such an approach could take at least
one of three basic forms: social insurance, the creation of a nation-
al health service, or a public-private mix. The following pages pro-
vide illustrations of each of these approaches.
II. MODELS OF NATIONAL HEALTH INSURANCE
A. SOCIAL INSURANCE MODEL
This model is characterized by compulsory universal coverage,
generally within the framework of Social Security, and financed by
employer and individual contributions to nonprofit insurance
funds. Typically, these proposals provide for a mixture of public
and private ownership of the factors of production such as hospi-
tals, physicians and ancillary services. 58 They therefore differ from
national health service models, in which the direct delivery of care
becomes a function of government.
58 Schieber, George J. Financing and Delivering Health Care. Social Policy Studies No. 4,
OECD, 1987. p. 24.
44
Many of the prominent national health insurance proposals of
the 1970s were of this nature. For example, the Health Security
Act, introduced by Senator Edward Kennedy and Representative
James Corman in the 94th Congress (S. 3, H.R. 21) would have es-
tablished a universal national health insurance program financed
by a Federal payroll tax on employers and employees, a tax on un-
earned income, and Federal general revenues. Providers would
have had to meet specified standards of participation (e.g., to
accept Federal payment as payment-in-full and not charge patients
for covered services). Hospitals would have been paid on a reasona-
ble cost basis from a predetermined budget. Physicians, dentists
and other professionals would have been paid on a fee-for-service,
capitation, or salary basis. The bill included provisions designed to
reorganize the delivery of health services, improve health planning,
and increase the supply of health care personnel and facilities. 59
A more recent example of a social insurance proposal is the U.S.
Health Program Act, introduced by Representative Edward Roybal
(H.R. 200 in the 100th Congress). The bill would replace Medicare
and Medicaid with a comprehensive national health insurance pro-
gram covering all U.S. citizens and legal aliens. Everyone would
have access to a basic health benefits package (similar to the Med-
icaid "categorically needy" package), and would be protected from
the cost of catastrophic illness, once beneficiaries paid up to $500
per year (indexed for future years) for health care, skilled nursing
home and home health costs, and $1,000 (indexed) for nonskilled,
long-term care costs. The bill would provide for subsidization of the
cost of coverage for low-inccme beneficiaries. The program would
be financed by a tax on employers, beneficiary cost sharing, an in-
crease in the excise tax on cigarettes, State revenues, and a sur-
charge on corporate and personal income taxes. The program
would be administered by an independent agency in the executive
branch.
B. NATIONAL HEALTH SERVICE MODEL
Far less common are proposals that are modelled after Britain's
National Health Service. These are characterized by universal cov-
erage, Federal financing derived from progressive taxes, and na-
tional ownership and/or control of the factors of production. 60
An example of this approach is legislation sponsored by Repre-
sentative Ronald Dellums that was first introduced in 1977 and has
been introduced in each successive Congress. In the 100th Congress,
the U.S. Health Service Act (H.R. 2402) would establish a Health
Service that would provide free medical, dental, and mental health
care and additional supplemental services to all individuals while
within the U.S. and its territories. The program would be adminis-
tered by a four-tiered system of national, regional, district and com-
munity health boards, all comprised of two-thirds health care users
and one-third health care workers. It would be financed by a spe-
cial health service tax on individuals and employers and by general
59 Waldman, Saul. National Health Insurance Proposals. Provisions of Bills Introduced in the
94th Congress as of February 1976. Department of Health, Education and Welfare, Social Securi-
ty Administration, HEW Publication No. (SSA) 76-11920.
60 Ibid.
45
Federal revenues. H.R. 2402 also provides that, in health facilities
established by the Service, health services would be provided by
salaried health workers. 61
C. MIXED PUBLIC/PRIVATE MODEL
Similar to the incrementalist approach described above, mixed
public/ private proposals rely largely on employer-based or individ-
ual purchase of private health insurance coverage financed by em-
ployer and individual contributions. Ownership of the factors of
production remains unchanged from the current system.
Many proposals illustrate this approach. For example, the Nixon-
Ford Catastrophic Health Insurance Plan (93rd Congress, H.R.
12684) provided for a three-pronged strategy to achieve full cover-
age of the population: (1) mandated employer-provided insurance,
(2) a federally-assisted plan for the low-income and high medical
risk populations, and (3) an improved Medicare program for the
aged. In the same Congress, Senator Paul Fannin introduced the
National Health Standards Act (S. 3353). Endorsed by the U.S.
Chamber of Commerce, this bill would have established a two-part
program to require all employers to make available a comprehen-
sive health care package to their employees, and to provide compa-
rable protection for low-income persons as a replacement for the
Medicaid program. Under the provision mandating employer pro-
vided coverage, the bill specified a minimum benefit package and
provided for "benefit value equivalency." The legislation also pro-
vided for the establishment of insurance pools to provide coverage
for the self-employed and small employers. A second pool, in each
State, was to pay all or part of the cost of the premiums for the
poor and near poor from general revenues.
The Carter Administration's National Health Plan (introduced
by Senator Abraham Ribicoff in 1979 as S. 1812) had two major
components to achieve coverage: a public plan (known as "Health-
care") providing coverage to the aged, disabled, the poor, and the
near poor, and offering catastrophic coverage to those individuals
and firms unable to obtain such insurance in the private sector;
and a program requiring employers to provide to their full-time
employees, their spouses, and dependents health benefits meeting
uniform Federal standards. 62 Employers would have been able to
satisfy the mandate to provide coverage by buying Healthcare cov-
erage for employees and their families. The States would have con-
tinued to help finance care for the low- income population by con-
tributing to the Healthcare Trust Fund. 63 This Fund would also
have subsidized employers whose premium payments attributable
to the mandated minimum benefit coverage exceeded 5 percent of
the employer's payroll. The subsidy would have been set at the dif-
ference between those payments and 5 percent of payroll.
61 For a discussion of the genesis of this proposal. see Rodberg, Leonard S. Anatomy of A
National Health Program, Reconsidering the Dellums Bill After 10 Years. Health/PAC Bulletin,
Winter 1987. pp. 12-16.
62 Feder, Judith, John Holahan and Theodore Marmor, eds. National Health Insurance: Con-
flicting Goals and Policy Choices. Washington, The Urban Institute, 1980. Appendix.
63 For a short critical analysis of the Carter proposal. see Enthoven, Alain C. Health Plan,
The Only Practical Solution to the Cost of Medical Care. Reading, Mass., Addison-Wesley, 1980.
p. 168-170.
46
S. 1812 would also have imposed requirements on insurers. Quali-
fied non-employer plans would have been required to set premiums
for groups of 10 to 50 individuals on a community-rated basis. In
addition, a Health Reinsurance Fund would have been established
in the Department of the Treasury. The Secretary would have been
required to make reinsurance available to certified administrators
of qualified plans and to HMOs, to cover 80 percent of expenses at-
tributable to any individual that exceeded $25,000 annually (for a
prescribed basic benefit package) and to cover other specified
needs.
A more recent proposal is the Comprehensive Health Care Im-
provement Act of 1987 introduced by Representative Martin Sabo
(H.R. 3766 in the 100th Congress). The bill would require all em-
ployers to offer coverage to their employees who work at least 17.5
hours per weck, and to eligible employees' dependents. States are
required to establish statewide pools of all health insurance compa-
nies that would in turn provide coverage to persons without em-
ployer-based coverage. These pools would be required to provide re-
insurance for all insurers, self-insurers, HMOs, and other such en-
tities. Businesses could also buy or offer insurance from the State
pools. Through a new title to the Social Security Act, H.R. 3766
would also establish an optional Federal-State program to help low-
income people buy health insurance. The bill would leave the
design of the program to the State, but the Federal Government
would contribute half of the funds needed to fund the program up
to a specified maximum. The legislation would also create an op-
tional State-Federal catastrophic health insurance program.
More incremental solutions to the problem of the uninsured are
analyzed in the following chapters. In the next chapter, options to
increase coverage through public programs such as Medicare and
Medicaid are discussed.
IP421H
AS
Washington Post, March 3, 1990, PP. Al, A4
Hill Group
HEALTH CARE, From A1
Backs Broad
"Pete" Stark (D-Calif.), chairman of
the law creating the panel directed
the House Ways and Means sub-
it to make "specific recommenda-
committee on health. He voted
tions" on financing and "consider"
Health Plan
against both parts of the plan.
the amount of federal funds necces-
"It does not get down to the bot-
sary and "the sources of those
tom line," said Rep. Willis D.
funds."
Gradison Jr. (R-Ohio). "On that
In general terms, the panel
$66 Billion Tax Cost
point, we have made no useful rec-
agreed that "the final tax package
ommendation whatsoever."
ought to be progressive," taxpayers
Is Left Unresolved
But Sen. Jay D. "Jay" Rockefeller
of all ages should contribute and
IV (D-W.Va.), the commission
revenues would need to grow 8 per-
cent to 9 percent a year. In addition
chairman, called the proposal a
By Kenneth J. Cooper
to federal costs of $42.8 billion for
"blueprint" and suggested it was the
Washington Post Staff Writer
long-term care and $23.4 billion for
role of the tax-writing committees
covering the uninsured, businesses
A bipartisan congressional com-
of Congress to decide on financing.
would absorb an estimated $20 bil-
mission yesterday endorsed a com-
He said the panel had made a break-
lion in costs.
prehensive plan for providing health
through by estimating the cost of
coverage for 31 million uninsured
Under the long-term care pro-
the health care expansions. "This
Americans and long-term care for
posal, state and federal govern-
commission has laid out a plan, and
the elderly and disabled. The ex-
ments would finance a nursing
it can work," Rockefeller said.
pansive plan, which would require
home program that would provide
$66 billion in new federal funding,
Sen. Edward M. Kennedy (D-
social insurance for a three-month
came under immediate attack for
Mass.), another member, denied it
stay and would not require resi-
failing to specify how the govern-
was the commission's role to recom-
dents to be impoverished before
ment would raise the money.
mend a financing mechanism. "We're
becoming eligible, as has tradition-
The commission was established
not the [Senate] Finance Committee
ally happened under Medicaid. An
to devise solutions to two major
or the [House] Ways and Means
individual could keep $30,000 in
problems of the nation's health care
Committee," Kennedy said.
assets and a couple, $60,000. Pri-
system: providing coverage to un-
Rep. Dan Rostenkowski (D-III.),
vate insurance would fill gaps in the
insured people, who often delay
the Ways and Means chairman, crit-
nursing home program. In-home
treatment until they must seek free
icized the panel for producing what
care would be provided to severely
care in hospital emergency rooms,
he called incomplete recommenda-
disabled persons through the social
and providing long-term care to the
insurance.
tions, saying "when the question of
elderly with chronic diseases and
To cover uninsured persons,
the disabled of all ages, groups of
financing arose, it ducked. That sort
most of whom are employed, large
people often bankrupted by the cost
of evasion is unacceptable in today's
businesses would be required to
of nursing home care.
budget climate."
offer specific health benefits to
The panel's work, which began a
Congress established the U.S.
their workers or pay into a public
year ago, was intended to produce a
Bipartisan Commission on Compre-
health plan. The same mandate
report that would frame the issues
hensive Health Care in the 1988
would apply to businesses with few-
for Congress, which avoided action
legislation that created "catastroph-
er than 100 employees if 80 per-
on them when it voted to expand
ic" health coverage under Medi-
cent of the uninsured in their ranks
Medicare in 1988.
care, benefits that were repealed
were not voluntarily covered. Small
Several members said the 15-
last year. The panel is commonly
businesses would receive tax cred-
member commission, by failing to
called "the Pepper Commission"
its and subsidies.
agree on financing methods, had not
after the late Rep. Claude Pepper of
The public health plan would re-
fulfilled its mandate and would have
Florida, its first chairman and a
place Medicaid, the state-federal
little practical impact on congres-
sional deliberations. The part of the
tireless advocate for the elderly. At
program for the poor. The unem-
plan covering the uninsured was
Pepper's insistence, the panel was
approved on an 8-to-7 vote, while
established as a way to ensure Con-
the long-term care section was ac-
gress would return to the issues of
cepted 11 to 4.
long-term care and the uninsured.
"It won't work. There's no fi-
A fact sheet distributed on com-
nancing, no way to pay for it. It's
mission letterhead yesterday said
dead," declared Rep. Fortney H.
See HEALTH CARE, A4, CoL 1
Copyright 1990 The Washington Post Company.
Reproduced by the Library of Congress, Congressional
Research Service with permission of copyright claimant.
P. A4 (continued)
ployed could buy coverage in the
benefits. The Health Insurance As-
plan or would be subsidized.
sociation of America complained
A range of reactions to the com-
that costly health coverage would
mission's proposals came from busi-
go to "middle and upper income
ness, health and elderly groups as
Americans who are able to pay for
well as public officials.
that coverage themselves."
Health and Human Services Sec-
Reviews from groups represent-
retary Louis W. Sullivan, whom
ing the elderly were mixed. Fam-
President Bush has asked to study
ilies United for Senior Action em-
the same issues, said disagreement
braced the proposal. The National
among panel members "reflects the
Council of Senior Citizens criticized
simple fact that there is no consen-
the lack of a financing plan. And the
sus in our country today on how to
American Association of Retired
achieve the kind of health care sys-
Persons, battered by some mem-
tem we want."
bers for backing the catastrophic
The U.S. Chamber of Commerce
coverage law, said it would withhold
reiterated its traditional opposition
judgment until its board meets later
to government mandates on health
this month.
COMMISSION RECOMMENDATIONS
UNIVERSAL HEALTH CARE COVERAGE
Businesses with more than 100 employees would provide
private health insurance (for a specific benefit package) or
contribute to a public plan for all employees and non-working
dependents.
Businesses with 100 or fewer employees would be encouraged
to provide health insurance for employees and non-working
dependents. Tax credits for some small employers would be
available.
The public plan would cover employees and dependents that
contribute and non-working individuals who buy in or are
subsidized. The plan would replace Medicaid for the specified
services and would pay providers according to Medicare rules.
The minimum benefit package would include primary and
preventive care, physician and hospital care and other services.
Services are subject to cost-sharing, with subsidies for low-income
people and limits on out-of-pocket spending.
LONG-TERM CARE
The commission plan would establish a Nursing Home Program
for nursing home care that would provide financial protection and
ensure that no one faces impoverishment.
Nursing home patients would be entitled to social insurance for
the first three months of nursing home care. Such "front-end"
insurance would allow people who have short stays to return home
with resources intact.
Severely disabled persons would be eligible for social insurance
for home and community-based care.
The federal government would finance the home and
community-based care program and the "front end" nursing home
care. The federal and state governments would share in financing
the Nursing Home Program.
Private long-term care insurance would fill gaps not covered by
the plan, subject to government oversight.
SOURCE: U.S. Bipartisan Commission on Comprehensive Health Care
THE WASHINGTON POST
IP421H
AS
"The Disgrace of American Health Care," Washington Post. January 24, 1989, Health Section,
pp. 12-16
By Victor Cohn
Washington Post Staff Writer
doctors and encouraging price competition between them.
ost Americans are healthy, but too many
Both strategies have failed so far. In 1965, health care con-
are not.
sumed 5.9 percent of the gross national product; in 1988,
M
Most Americans get good medical
the figure rose to 11.3 percent.
care, but too many do not.
To be sure, the combination of regulation-in the form of
Most Americans can pay for their med-
strict preset payment limits for Medicare patients in hos-
ical care, but too many cannot.
pitals-and competition has moderated the rise in hospital
George Bush has been president for
costs. But the amount and cost of other kinds of care have
only four days, and his words, "kinder and
gone through the ceiling, and expenditures for non-hospital
gentler," already have become overused.
procedures have skyrocketed. One example is outpatient
But this country badly needs kinder, gen-
surgery for persons who used to be admitted to the hospital
tler, better, better distributed, more af-
for care.
fordable health care.
In 1984, the government put a so-called "freeze" on doc-
Now Bush and his team have their opportunity to shape
tors' Medicare fees. But the amount of care given Medicare
the American medical future. No one can expect them to
patients-especially by surgeons, radiologists, cardiologists
and gastroenterologists using new, often-beneficial but
costly methods increased so fast that physicians' total
PATIENT'S ADVOCATE
Medicare charges have risen 12 to 15 percent yearly, de-
fying the freeze.
solve all the problems in the next four years, but they could
If nothing is done, Medicare and Medicaid will continue
begin. And they and many others could conduct a dialogue
to be the main villains in the federal budget deficit, with
on the great fixes that are needed.
Medicare expenditures growing at about 14 percent yearly,
What needs fixing?
and Medicaid by around 9 percent. hobbling all other efforts
Some medical leaders are fond of saying that America has
to improve medical services for those who are now left out.
"the world's best medical care." A former Nixon adminis-
The upshot of probable Bush and congressional efforts
tration health official recently put it more accurately. He
this year?
said American medicine is the world's best "at its best."
There is virtually no likelihood that medical inflation will
be tamed in the near future. The Bush administration, like
And at its worst? The facts are almost tiresomely
Reagan's, will push medical price competition-between
familiar.
hospitals, between doctors. between health plans-as a way
Thirty-seven million Americans have no health insur-
to control costs. And it will rely just as heavily on regulation.
ance; one third are children or teen-agers, and most of the
Hospitals will continue to bear the immediate brunt. Last
rest are the working poor. Medicaid is serving a decreasing
month, a Department of Health and Human Services com-
portion 01 the poor-no more than two-fifths altogether.
mission said that a majority of the nation's 6,000 hospitals
The nation's infant mortality rate is among the developed
lost money in 1988. Eighty-one hospitals closed last year,
world's highest. The health of many blacks and Hispanics is
and a 1928 survey indicated that hundreds could close in
abysmal.
the next five years. Many are indeed under-used, but many
of the closings could leave big-city neighborhoods and rural
Even among Americans who get medical care at its
areas without nearby care.
"best," there is much bad care. Those needed to give much
Meanwhile, virtually every hospital is trying to trim its
of the care-nurses, medical technicians and therapists of
budget by treating the average patient with less staff than it
many kinds-are in alarmingly short supply.
once did. Yet the fact is that the fewer patients who do get
© 1989 The Washington Post Company. Reproduced by the Library of Congress,
Congressional Research Service with permission of copyright claimant.
Public hospitals are jammed, underfinanced and under-
admitted to hospitals under strict new reviews are sicker
supplied, and faced with treating thousands of patients a
and require more care. The new and sometimes lifesaving
year transferred to them by other hospitals that want pa-
technologies are more complicated and expensive. And in
tients who can pay. In 1986, nearly 39 million Americans
the Catch-22 of medical cost control. many hospitals have
had trouble getting health care. Nearly half blamed the
been forced to hire more people per patient to give them
cost. Even citizens with health insurance are finding their
more technologically advanced care. In 1972, hospitals
premiums going up and up, while their coverage diminishes.
needed 50 nurses for every 100 patients. By 1986, the de-
Medical costs are not just going up, they are "out of con-
sirable ratio had become 91 nurses for 100 patients.
trol," in the words of many medical leaders, economists,
What's more, while many under-used hospitals are clos-
officials and business people trying to control them.
ing wards, some hospitals are being overwhelmed. New
York City hospitals are suffering what they call "gridlock,"
Hospital Squeeze
with beds in the corridors. The main causes: cutbacks in
Society, not the health system, is to blame for many of
hospital beds in the 1970s and early 1980s because of ap-
these ills. But the medical system could help alleviate
parent oversupply, followed by three new, unexpected and
them-if it were in better shape.
related epidemics-AIDS, drug abuse and increasing vio-
lence.
Instead, it is in a state of "free-floating anxiety," said Dr.
In many city hospitals, including D.C. General, up to a
Robert Brook and Jacqueline Kosecoff of the University of
third of all babies are born to mothers who use drugs. Of-
California at Los Angeles. Uwe Reinhardt, a moderate
ten. they need weeks of complicated and costly care. AIDS
Princeton University economist, said a system under which
fills some wards. Violence crowds emergency rooms, and
hospitals turn away sick people because they can't pay, and
gunshots cost the nation more than a billion dollars in med-
doctors post signs saying "pay now," is one that "disgraces
ical care last year. Taxpayers paid 85 percent of the bill.
America."
The cost of treating AIDS may top $6 billion this year. By
In all of this, the hardest nut to crack is runaway medical
1991 it could reach $16 billion.
inflation. The Nixon, Carter and Reagan administrations
have tried both clamping down regulations on hospitals and
Can-Do Doctors
In the struggle to tame the cost spiral, the sums paid doc-
tors will be a prime target. Doctors' fees may not get hit
really heavily in this Congress, but the issue will remain
high on its agenda. Other strategies being discussed: com-
petitive bidding by hospitals to become regional centers for
some costly medical procedures. which might reduce both
Rationing Medical Services
the number of high-priced operations and the number of
physicians performing them: nationwide or regional uniform
For all patients, there will be more "managed care." This
fee schedules for physicians: and-because volume of care
may be given by prepaid plans (HMOs, IPAs, PPOs) that
is far more inflationary than individual fees-a system of
provide care for so much a month, but in one way or anoth-
nationwide or regional budgets for all payments to doctors,
er keep a lid on surgery, hospital stays and specialist visits.
Or it may be care covered by conventional health insurance
a sort of medical Gramm-Rudman, saying, "Here's the pot
but using "pre-admission review" of hospital stays, in-hos-
this year. You divide it."
pital "utilization review," "certification" of expensive tests
A possible starting point for physician fee reform: the
or treatments and "mandatory second opinions" to control
costs.
"RVS" or "relative value scale," a 1988 proposal by a Har-
This means there will be fewer opportunities for pa-
vard study group that doctors be paid according to the time
tients-and their doctors-to do as they please. More than
(and other resources) they put in, whether questioning or
half of all Americans in group insurance plans are now under
advising patients or installing a pacemaker. Doctors are
at least some such restrictions. This can be good and bad:
now paid far more for operations and other procedures than
good when it eliminates unnecessary expense and harmful
for talk, slighting patients and encouraging overuse of the
care but bad when it dictates skimpy or inexpert care.
most lucrative tests and treatments.
Which is which? The Health Care Financing Administra-
The Harvard group's goal was a way to equalize pay-
tion (HCFA, the Medicare-Medicaid agency), the American
ments to doctors, cutting some, increasing others. But such
Medical Association and groups of cardiologists and anes-
guidelines could as easily be used to cut the fattest pay-
ments, while leaving others more or less where they are.
thesiologists have all started to try to establish what really
Given the ever higher cost of ever higher-tech care and
works and what doesn't in medical treatment. The result
the increasing volume of patients in need of services, the
will be "standards" or "parameters" or "protocols" as guides
cost of the nation's medical care is certain to remain stub-
to better treatment.
bornly high. Doctors may justifiably be blamed for overus-
This is long overdue. To do it right may require a nation-
ing some new and old technologies. Many of these are al-
wide computerized network linking thousands of hospitals
most certainly overpriced. But there may never be any way
and doctors' offices to update the outcomes of treatments
to put a really cheap price tag on heart operations, drugs
on millions of patients, with the results guiding future treat-
that cost millions to develop or new imaging techniques like
ments. HCFA's Dr. William Roper last year promised a be-
CAT scans and MRIs. A case in point: there were 350,000
ginning of such an effort. Who will now lead HCFA, and
laser cataract operations in 1978; in 1987, there were 1.4
whether or how well this will be done, is not yet known. But
million at a total cost of $4 billion.
nothing could be more important to patients' fates at the
Americans like this kind of care. It didn't always exist.
hands of the medical system.
When I was 12, I watched my grandmother die of the "drop-
There will also, inevitably, be rationing of medical care.
sy"-edema-a body filled with fluids as a result of congestive
It already exists. Count the staff and look at the equipment
heart failure. Her doctor came from a nearby corner and prob-
in almost any large public hospital. Visit D.C. General. Just
ably charged $5 a visit. The family called him "Dr. Alarmist"
walk up and down the corridors. Then compare what you
because he could only shake his head and do nothing.
see with what you would see at Georgetown University
Today a cardiologist would prescribe expensive drugs to
Hospital or Johns Hopkins.
clear the fluids and keep her heart pumping. My grand-
"The poor can no longer expect the same standards of
mother might have enjoyed several more years of life.
care as the middle class," said Bruce Vladek, president of
Patients avoided Dr. Alarmist. Now they seek out doc-
New York City's United Hospital Fund. "For example, in-
tors who can do something.
digent patients at a New York City public hospital will be
moved to an eight-to-20-bed ward two days after surgery.
For most Americans, medical insurance makes this pos-
They'd better hope that a family member shows up to assist
sible. Between 1983 and 1985, there was an 18.7 percent
in nursing."
increase in Medicare outlays for doctors' services in five
There is also covert rationing-rationing called some-
studied states-Washington, Indiana, South Carolina and
thing else. Take the "transfers" of indigent patients from
the Dakotas. A rising number of services rendered caused
the emergency rooms of community hospitals to beds in
31 percent of the increase (doctors did more); fee increases
hard-pressed public hospitals. "People want to cry 'dump-
caused 21 percent (doctors charged more), and an increase
ing,' but this is one of the realities of tightening reimburse-
in Medicare eligibles and claimants, 40 percent (more peo-
ment" by insurers and government, said Thomas Chapman,
ple showed up in doctors' offices).
president of Greater Southeast Hospital here.
The last reason underscores the fact that use of medical
"Sooner or later," said Victor Fuchs, a Stanford econo-
services will continue to increase, if only because the num-
mist, "the only way to cut health care spending significantly
ber of Americans over age 65 is increasing by a rapid 2.5
percent to 3 percent a year, and the most rapidly growing
segment of the aged are the "frail elderly," generally those
75 and older.
X PATIENT STAYS AT COMMUNITY HOSPITALS
Reform Measures
IN MILLIONS
If harsh medical rationing is not to become the everyday
norm, and if doctors are to be free to practice good med-
280
icine, answers must be found that go well beyond the days
of the Bush administration.
The most likely immediate strategy: "filling the gaps"
(the phrase of Gail Wilensky, director of Project HOPE's
Inpatient days
Center for Health Affairs) by expanding Medicaid; estab-
lishing statewide or industrywide risk pools, often subsi-
260
dized, by which small employers or employees with low in-
comes can afford health insurance; mandating employer-
provided insurance, as does Massachusetts; voting tax in-
centives to individuals and employers to help them buy cov-
erage. Several such state experiments are already under
way.
240
The use of the tax system either to raise money or sub-
sidize health coverage, or both, is being looked at ever
more closely by members of Congress. "We're looking for
money, we're looking for ways to help the uninsured, one
congressional source explained.
Among possibilities here, savory and unsavory:
220
Making higher-income Medicare beneficiaries pay out of
pocket for a greater share of their medical bills, or pay
taxes on all or part of their medical benefits, either as they
Outpatient visits
receive them or as a tax on their estates.
Using the tax proceeds to help give tax credits to small
businesses for covering their employees, and providing
200
health insurance or Medicaid to more people with marginal
1983
1984
1985
1986
1987
incomes.
SOURCE: American Hospital Association. Hospital Statistics. 1982-1988
What of long-term care, the long stays in nursing homes,
at an average current bill of nearly $2,000 a month?
The Heritage Foundation advocates removing long-term
AGENDA. From Page 13
care for those whose funds have been depleted from the
Medicaid program, its present funding source, to a new
is to reduce the quantity of service rendered to patients."
federal-state program. As a first step, there would be tax
The most likely such patients, according to many predic-
incentives to encourage younger people who can afford
tions: the aged, the poor, the terminally ill.
them to buy long-term insurance policies. Later, such cov-
Doctors are worried about this and all other measures
erage would be mandatory, with financial assistance to low-
that control what they do, or tell them what they can't do.
income earners-the last as part of a program to offer tax
Many are outright unhappy and are telling their sons and
incentives to individuals, generally, to buy health insurance,
daughters not to go into medicine. Medical school applica-
rather than depending on their employers. In this founda-
tions are declining.
tion's view, such a move would relieve business of an
Rationing "drives a wedge between patient and doctor"
onerous burden.
and breaks the doctor's implied contract to do everything
The American Medical Association last month urged two
possible, said Dr. Arthur Feinberg, chairman of the board of
remedies: a combination of federal, state and private-sector
governors of the American College of Physicians.
initiatives to expand Medicaid for the medically indigent, as
"Many physicians already feel pressured to provide some
well as a complete replacement of Medicare. The associ-
less-than-optimal care to patients-pressures brought by
ation proposed using the Medicare tax to finance a national
hospital administrators
by PROs [peer review organ-
voucher system, through which insurers would provide pol-
izations] or private peer review," said Dr. Joseph Boyle,
icies that cover both lifetime medical care and skilled nurs-
executive vice president of the American Society of Inter-
ing home care.
nal Medicine.
There are also far more aggressive ideas.
Nurses complain too. In a recent poll, 74 percent told RN
A recent issue of Health Affairs, the Project HOPE jour-
magazine that nurses have no time for a caring attitude; 65
nal, said of Stanford economist Alain Enthoven: "More than
percent said hospital staffs are short-handed; 63 percent
any other individual. [he] has devoted his intellectual ener-
said patients are discharged too soon.
gies to transforming the rhetoric of health care competition
When so many doctors and nurses worry, it seems logical
into the reality of a policy agenda for action." Enthoven con-
for patients to start worrying too.
tended that managed competition, which he first advocated
HOW THE GOVERNMENT HAS 'CONTROLLED' MEDICAL COSTS
Other federal spending* 5.3%
PERCENT OF GROSS NATIONAL PRODUCT SPENT
Other state and
Charities 1.3%
11.6%
local payments
11.4
4.5%
11.2
D
uring years of high inflation-dubbed the era of
"health-care cost explosion"-medical costs as
Out of pocket
a share of GNP actually remained relatively level.
payments by
11.0
But as Princeton economist Uwe Reinhardt points
Medicaid 10.8%
patients 29.1%
out, since 1980 in the so-called "age of shrinking
10.8
resources"-when inflation was brought under
Medicare 18.0%
control-this share has soared despite "strict"
Private health
government controls.
10.6
insurance 31.0%
10.4
10.2
WHO PAYS THE BILL
10.0
Drugs and
medical
9.8
supplies
Eyeglasses and other
7.5%
9.6
health care aids 2.0% Other services** 3.7%
Clinics
9.4
in the
workplace
Nursing
9.2
3.0%
homes
9.5%
9.0
Hospitals 43.9%
8.8
Dentists
7,4%
8.6
8.4
Doctors 23.1%
8.2
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988(est.)
WHO GETS THE MONEY
*Includes military and veterans' health care
**Chiropractic medicine, home health care and private-duty nursing
in the 1970s, has failed to control costs because key ele-
ments have been missing.
From Jeffrey Merrill and Alan Cohen of the Robert Wood
He calls now for "universal coverage under managed com-
Johnson Foundation: "Not only do the traditional liberal in-
petition": medical care given by a variety of health plans that
terests of the early 1970s still advocate some form of na-
would compete for contracts either with employers-who
tional health insurance, but they have been joined by some
would be required to cover employees-or with state-level
strange bedfellows: business coalitions, groups of physi-
"public sponsors" who would cover part-time workers and
cians and other providers and even the insurance industry
others without coverage. Employers would pay 80 percent
seeking new financing mechanisms."
of the cost of their employees' plans, employees 20 percent
From Willis Goldbeck, president of the Washington Busi-
for a basic package, more if they wanted more coverage.
ness Group on Health: "There has been a growing willing-
Employers would have to pay an average 8 percent pay-
ness among big business people to consider a government
roll tax on the wages of all uncovered employees. Everyone
role on a level never seen before in this country. There
not covered through employment would contribute through
might very well be support for the government being re-
income tax. Those with incomes below the poverty level
sponsible for everybody other than full-time workers and
would continue to be covered by Medicaid. The elderly
for companies having the option of paying taxes into a gov-
would continue on Medicare.
ernment pool or providing a minimum health benefit."
From Lester Thurow, dean of the Massachusetts Insti-
Complicated? Yes, but no more so than the current
American pluralistic system.
tute of Technology's Sloan School of Management: "[There
"What is clear," Enthoven wrote, "is that continuing on
is] the sense that business is going to become the force for
some sort of nationalizing of the responsibility [to provide
the present path will produce results that are increasingly
medical coverage]."
unsatisfactory: more and more people lacking coverage,
In recent polls, 75 percent of respondents have said they
expenditures rising to intolerable levels (15 percent of the
favor the concept of national health insurance; 75 percent
gross national product and beyond), and little confidence
also have said they would be willing to pay higher taxes for
that the money is being well spent
long-term health care for the elderly.
"The only proved method for bringing the growth in total
If the country should fall into a deep recession or depres-
expenditures into line with the gross national product is for
sion, with doctors and hospitals stuck with unpaid bills and
government to take over most of health care financing [as
hard-hit businesses unable to pay health insurance premi-
in Britain and Canada] and place it under firm global budg-
ums, the call from all might become: "Take over, govern-
ets
Even in that case, there is no assurance that stabil-
ment."
ity
would not be achieved at the cost of many delays or
What is clear is that there has been no true national
denials of care
It seems reasonable to give comprehen-
health policy in this country, no overall strategy to attack
sive reform of incentives a serious try before something
the problems of the uncovered and the uncared-for, as well
more alien and drastic is considered."
as to address the issues of medical quality and medical un-
Something more "alien and drastic?" In the same issue of
certainty that hobble the most conscientious doctors and
the New England Journal of Medicine in which Enthoven
result in grave waste of dollars and lives.
wrote, a group called Physicians for a National Health Pro-
The Department of Health and Human Services, where
gram, founded mainly by doctors at medical schools and
some officials have tried to develop at least some elements
large medical centers, advocated a different national health
of a coordinated policy, has itself been constrained by a bud-
program: a single national health insurance plan replacing
get-bound Office of Management and Budget, understand-
private insurance, Medicare and Medicaid and covering
ably looking askance at any new spending.
everyone, financed entirely by taxes, with a set-not a pen-
The problems of health care will not be solved without
ny more-appropriation each year to pay the bills, and
new sources of financing. Sooner or later, the "T" word-
state and regional boards negotiating with doctors, hospi-
taxes-will have to pass somebody's lips, or even present
tals and others to decide compensation.
programs like Medicare and Medicaid, incomplete as they
Something alien? This plan is not hugely different from a
are, will deteriorate.
Canadian plan that is not perfect-it denies or delays some
There is wide agreement that the time has come to plan
medical advances-but assures everyone access to care
now, not just for the 1980s but for years ahead, to heai the
and has kept health costs below ours.
wounds of American health care.
Almost overnight, national health insurance has become a
subject of wide discussion in the publications of American
business and health.
For Washington Policymakers, a Host of Problems
The nation's pressing health problems are now on the
tion, deficit reduction, deficit reduction." Any increased
further cuts-in some heavily used services that many
political agenda of President Bush and the 101st Con-
expenditures may depend on deficit reduction and on
observers consider overpriced, including heart surgery,
gress. What is likely to be accomplished this year?
some signal, however muffled, from the Bush lips on new
cataract surgery, radiology, anesthesiology, EKGs and
taxes.
The Bush Administration
colonoscopy, the exploration of the colon to look for can-
Congress will inevitably do some squeezing of Medi-
cer.
A starting point for Bush's people is the budget that
care payments to doctors and hospitals, though probably
Stark also will be pushing for a law to limit doctors'
President Reagan delivered on Jan. 9 for the fiscal year
not to the Reagan budget's extent. Any Medicaid cuts
investments in profit-making medical equipment or other
that starts in October.
are probably "dead on arrival," in the unsubtle words of
endeavors where they give the care. This is a complex
Reagan proposed cutting $5.6 billion from projected
Chairman Leon Panetta (D-Calif.) of the House Budget
issue. Every doctor who collects a fee has a conflict of
Committee.
Medicare outlays-what outlays would be if continued at
interest, for the more he or she does, the more the profit.
current levels-by reducing payments to hospitals and
Rep. Fortney (Pete) Stark (D-Calif.), chairman of the
But doctors' investments have been on the increase,
House Ways and Means health subcommittee, wants to
doctors. He proposed cutting $1.4 billion from projected
there are stories of cases of resulting overuse, and Stark
Medicaid grants to the states for care of some 22 million
tie payments for hospital building or equipment to hos-
wants to get a vote on a bill.
poor people. The cuts, said Reagan Administration bud-
pital occupancy, now only 60 to 75 percent in many hos-
Sen. Edward Kennedy (D-Mass.), chairman of the Sen-
get officials, would not affect care. But Dr. Otis Bowen,
pitals. "Why should we waste money keeping inefficient
ate Labor and Human Resources Committee, Waxman
or underutilized hospitals open?" he repeatedly asks.
Reagan secretary of Health and Human Services, called
A cut is likely, as in the Reagan budget, in payment to
and Stark are backing "mandated benefits" proposals to
it "unrealistic" to expect the states to absorb the Med-
hospitals for "education"-meaning salaries-of the in-
require employers to cover uninsured workers, just as
icaid reductions.
Massachusetts has started to do on Gov. Michael Duka-
terns and residents who give most of the
Bush's responses are not known and are in fact still
kis' in itiative. Several members have talked about tax
incomplete. He may go along with the Medicare cuts as
benefits to encourage employers to cover workers. An-
part of his proposed "flexible freeze," and also try to steer
Runaway Medicare costs are
other heavy hitter on health issues, Senate Finance Com-
more Medicare patients into "managed care" organiza-
mittee Chairman Lloyd Bentsen (D-Tex.), wants to use
tions that limit choice of doctors and otherwise seek to
likely to result in a Congress
the tax code to encourage more health insurance for care
control costs.
of children.
He is expected to reject any cuts in Medicaid. And,
that will continue cutting
Any extensive congressional action to expand coverage
according to campaign and transition-period plans, he
of the uninsured could carry a huge price tag, if the gov-
could recommend something like a $200 million fund to
hospital payments "until they
ernment as well as employers share the financial burden.
expand coverage for pregnant women and young chil-
see blood on the floor."
Watch Bush's lips.
dren, as well as another $200 million, perhaps, this year
Congress meanwhile may have to deal with a growing
or next, to begin letting low-income
Ron Kovener
backlash by unhappy seniors against the new Medicare
Healthcare Financial Management Association
adults "buy in" to Medicaid, adding their own modest con-
expansion to cover "catastrophic" hospital, doctor and
tributions.
drug bills, all to be phased in over the next four years.
As part of his campaign promise of "access to health
The cause of what Republican Senator Robert Dole
care for all Americans," he might recommend tax ben-
care in major medical centers. These hospitals have been
(Kan.) has called a "near revolt" of the elderly-an ex-
efits to encourage people to buy long-term care insur-
making too much money, it's said. If applied with a meat
aggeration, so far-is the fact that those over 65 must
ance, though most such insurance plans now go only part
axe, such cuts could mean fewer doctors at patients' bed-
bear nearly all of the cost. They will do so partly in an-
of the way toward financing the years of care that some
sides. But such are runaway Medicare bills, predicted
nual premiums and partly in an income-based income tax
of the aged ultimately need.
Ron Kovener, vice president of the Healthcare Financial
surcharge that together will reach a $1,561 maximum
Management Association, that Congress will continue
for the most affluent by 1993.
The Congress
cutting hospital payments "until they see blood on the
About 60 percent of the aged will pay only an extra
floor."
$122 a year by 1993. But all those covered will also be
There will be (read all this as reasonable prediction,
Doctors' fees will get much discussion. A Physician
required to pay considerable "deductibles" before the
not certainty) much talk this year of two subjects: ex-
Payment Review Commission is required to suggest re-
new insurance pays the rest of the bills, and some mem-
panding health coverage for the uninsured, probably by
forms td congress early this year. Key members like
bers are calling for delay or reconsideration of the 1988
mandating more employer coverage, and finding ways to
Stark and Rep. Henry Waxman, still another California
legislation.
pay for long-term care of the aged.
Democrat who heads another House health subcommit-
The 30-million-member American Association of Re-
Legislative action is at least possible on health cover-
tee, as well as Rep. Dan Rostenkowski (D-III.), House
tired Persons supported the bill, though reluctantly swal-
age, but highly unlikely on the huge expense of long-term
Ways and Means chairman, have called physician pay-
lowing the charges on the elderly. A new poll this month
care.
ment reform a priority.
indicated that two-thirds of those over 65 favor the law
However, Congress' first priority will not be health
But serious reform may not come easily, since there is
as IS. Bentsen vows that there will be no change.
care, say many
ressional sources, but "deficit reduc-
no agreed method on the horize
cept for cuts-or
- Vi
ohn
IP-421H
AS
Los Angeles Times
Thursday, January 12, 1989 / Part I 3
National Physicians'
Group Urges Broad
Federal Health Plan
By LANIE JONES. Times Staff Writer
Declaring "our health-care system is
failing," a national physicians' group
Wednesday proposed a comprehensive
federal health plan that would abolish
private insurance but still guarantee medi-
cal care for every American.
In news conferences around the country
and in an article published today in the
New England Journal of Medicine, doctors
from Physicians for a National Health
Program. a 1,200-member physicians'
group, made their case for a fundamental
change in the way medical bills are paid.
At UC Irvine Medical Center in Orange,
Dr. Howard Waitzkin, an internist and a
founding member of the group, cited recent
national surveys showing that there are
now 35 million Americans with no insur-
ance and another 20 million who are "under
insured." with coverage that does not pay
for all their medical needs.
"As practicing doctors, teachers and
researchers. we're deeply troubled that
many people can't get the most basic health
services." Waitzkin said. "That has got to
change."
© 1989 Los Angeles Times. Reproduced by the Library of Congress,
Congressional Research Service with permission of copyright claimant.
Change Needed
GARY AMBROSE / Los Angeies Times
Dr. Jerome Tobis, a UC Irvine professor
Dr. Howard Waitzkin
who chairs the medical center's ethics
committee, agreed. saying, "The health-
'As practicing doctors, teachers
care system today in America is a jungle
and correction is urgently needed."
and researchers, we re deeply
Physicians for a National Health Pro-
troubled that many people can't
gram's solution is a plan. patterned after
Canada's 20-year-old national health in-
get the most basic health services.
surance program. that proponents say
That has got to change.'
would cut bureaucracy, do away with the
"often unjust dictates of insurance compa-
nies" and save up to $50 billion annually,
billed for any medical service. Rather, all
but still allow patients to choose doctors,
medical costs would be paid directly to
clinics and hospitals.
providers through the federal program.
Instead of paying premiums to insurance
Under this program. regional or state-
companies, individuals under the plan
wide payment boards would negotiate fees
would be taxed. paying an amount roughly
with doctors. Also. the boards would se'
equivalent to their premium into a new
budgets for hospitals. group practices and
national health program. Most employers
health maintenance organizations. a prac-
could expect to pay slightly less than they
tice that would "eliminate billing." accord-
are now paying for health insurance bene-
ing to the Physicians for a National Health
fits. proponents said.
Program article
As Waitzkin and the medical journal
In addition. regional planning boards
article described it, patients would not be
Please see PHYSICIANS, Page 26
Continued from Page 3
early 1900s.
article, as well as another plan for
composed of "expert and communi-
According to figures from the
national health insurance in today's
ty representatives" would decided
California Medical Assn., 22% of all
issue.
whether a hospital or clinic could
Californians have no medical in-
The second paper in the journal,
make capital outlays for new diag-
surance. In the Los Angeles-Long
written by Alain Enthoven and
nostic equipment. That decision
Beach area, 27% of residents are
Richard Kronick of Stanford Uni-
would be based on need and quali-
uninsured; 26% of San Diego Coun-
versity Business School, proposed a
ty," and "for-profit investment
ty's residents have no insurance,
less drastic plan for universal
would be barred." the journal arti-
and 23% of Orange County resi-
health insurance. Their program
cle says.
dents have no insurance.
would retain private insurance but
Waitzkin and other Physicians
"What we hope is to spark
require employers to provide COV-
for a National Health Program
debate." said Dr. Isaac Taylor,
erage for their workers. Those not
doctors said they would like to see
retired dean of the University of
covered at work would contribute
demonstration projects in several
North Carolina Medical School,
through taxes, and poor people's
states, including California, before
who kicked off the group's press
coverage would be totally subsi-
the plan is enacted across the
conference in Boston on Wednes-
dized by the government.
country. But they also hoped that
day morning.
The authors argued that a com-
their proposal, which currently has
That was the hope too of Dr.
plete government takeover of
no congressional sponsor, would
Arnold S. Relman, editor in chief of
health-care financing, such as the
add new life to the controversy
the New England Journal of Medi-
other group suggested, "would
over national health insurance that
cine, who published the Physicians
has raged on and off again since the
represent far too radical a change
for a National Health Program
to be politically feasible in this
country."
director of public affairs for Health
Relman did not endorse either
health plan in which high-tech
Insurance Assn. of America, a
plan. But in what amounted to a
medical supplies are rationed, with
Washington lobby that represents
call to arms to doctors, his editorial
some clinics getting scanning ma-
350 national health insurance com-
in the same edition referred to "our
chines but others only allowed to
panies.
have X-rays.
disastrously inadequate health-
"I think there's certainly prob-
"I don't think the American
care financing system.
lems with the [health] system.
"Now is the time for our profes-
consumer will stand for that," he
Certainly people are not covered,"
said.
sion to make common cause with
Schoeni continued. "But the vast
the government and with the major
Like Schoeni, Plested argued
majority of people have health
against "dismantling" the whole
private payers in seeking solutions
care, and everybody has access to
medical system.
to a pressing social problem that is
emergency care. You may be able
not going to solve itself," he said.
to fix the pieces that are wrong
Consumer Advocate
without having to redo the whole
Washington Lobby
But one consumer advocate, Dr.
system," he said.
Early reaction to the Physicians
Sidney Wolfe, director of the Pub-
Dr. William G. Plested III, a
for a National Health Program plan
lic Citizen Health Research Group
Santa Monica thoracic surgeon who
ranged from quiet interest to flat
in Washington, disagreed.
is president-elect of the California
rejection. Officials representing the
"Those who say, 'It ain't broke;
Medical Assn., agreed that there is
multibillion-dollar insurance in-
don't fix it,' are wrong," Wolfe said.
a "crisis" in health care because of
"Our country is in a worldwide
dustry suggested that such a plan
the large number of Americans
was absurd.
scandal with its failure to act. It's
who are uninsured.
the only industrialized country
"We do not believe the American
However, Plested also ques-
outside South Africa that does not
public wants a monolithic health-
tioned whether U.S. consumers
care system," said Pat Schoeni,
would accept a Canadian-style
Fiease see PHYSICIANS, Page 27
contributions. Under the plan com-
munity boards would select area
Continued from Page 26
health insurance for their workers,
health-care providers, Miller said.
have national health insurance."
Kennedy spokesman Paul Donovan
Also in the House, Rep. Henry
Wolfe said he agrees with "many
said. But unlike the Physicians for
Waxman (D-Los Angeles) plans to
elements" of the Physicians for a
a National Health Program propos-
reintroduce a measure, like the
National Health Program plan, but
al, the federal government would
Kennedy bill in the Senate, that
"the point is we have to get a
play no role in the Kennedy plan.
would require all employers, re-
national health plan.
"There's no political support" for
gardless of size, to enroll their
"Anyone who says we don't need
national health insurance, Donovan
workers in a health-care plan. It
said.
national health insurance is just off
would also prescribe minimum
the wall," he said.
health benefits for all employees.
Revised Form
Though Physicians for a Nation-
In California, Assemblyman Dan
al Health Program has no congres-
However, in the House, Rep.
Hauser (D-Arcata) plans to rein-
sional sponsor for its national
Ronald V. Dellums (D-Berkeley)
troduce a bill he first proposed in
health plan, Waitzkin said, some
plans to reintroduce legislation to
1987 that would set up a California
elements of the plan are contained
establish a national health service,
health insurance plan. The propos-
ú-pending national and California
Dellums' aide Max Miller said.
al, which died in committee last
legislation.
Under the bill, which has been
year, would not eliminate private
Ih Congress, Sen. Edward M.
pending in revised form since 1977,
insurance, Hauser said, but would
Kennedy (D-Mass.) will continue
health care would be funded out of
require all employers to pay at
to push legislation that would re-
general revenues, progressive tax-
least 50% of a worker's health
quire all employers to provide
ation of individuals and employer
insurance costs.
IP421H
AS
Panel Unveils Plan to Pay
For Coverage for Uninsured
By LEAH R. YOUNG
limits on employee cost-sharing
Medicine, said the commission's
Journal of Commerce Staff
"and a rigid tax structure that ig-
proposal differs from recent sug-
WASHINGTON A citizens'
nores the immense variations in
gestions in his publication for fed-
commission of health-care experts
the cost of health care around the
eral financing of care for the unin-
recommended enactment of new
country."
sured because it includes
taxes on employers and employees
Uwe E. Reinhardt of Princeton
evaluations of technical advances,
to pay the costs of insuring 37 mil-
University, a member of the com-
how physicians practice and the
lion uninsured Americans.
mission well known for his studies
role of medical malpractice.
The National Leadership Com-
of medical economics, said the re-
The commission is saying, Dr.
mission on Health Care, which in-
port envisions a 9.68% tax on com-
Relman explained: "You can't just
cludes three former presidents,
pensation paid up to the Social Se-
tinker with the financing. You have
Jimmy Carter. Gerald Ford and
curity tax limit, currently $45,000,
to look at the system as a whole."
Richard M. Nixon as honorary co-
for employers who do not provide
Attorney Morris B. Abram with
chairmen. revealed its findings
health benefits.
Paul. Weise, Rifkind, Wharton &
Monday prior to briefing members
Another 2% would be paid by
Garrison, a former chairman of the
of Congress later in the day.
uncovered employees to insure that
president's Bioethics Medical Advi-
The commission wants Congress
those who can pay for benefits do
sory Commission. stressed that the
to enact two sets of taxes. A
not receive them without cost.
report is urging widespread
so-called Y premium to be paid by
The commission estimated that
changes in state medical malprac-
every employer and every worker
employers with average wages that
tice rules.
not below the poverty line and an
exceed 250% of the poverty level
The commission wants states to
X tax to be paid 75% by employers
will choose to purchase private
adhere to minimum criteria estab-
who do not provide health insur-
health insurance for their workers
ance benefits and 25% by employ-
rather than pay the tax and have
lishing who qualifies as an expert
witness.
Journal of Commerce, January 31, 1989, p. 11A
ees without benefits.
them covered by the insurance
Judges should be required to
Those workers will be covered
pool.
along with other uninsured through
Part-time employees working
hold juries to a finding of negli-
less than 35 hours weekly could be
gence that demands "a clear depar-
a new Universal Access Program.
ture from a recognized standard of
The program was described to
covered by private insurance or
treatment" and not just a differ-
reporters by the commission's co-
employers could pay the tax for
ence in professional opinion about
chairmen, Robert D. Ray, a former
these workers, proportional to
treatment, the commission said.
Republican governor of Iowa and
hours worked.
Punitive damages should be per-
president of Life Investors Insur-
Additionally, all those with in-
mitted only where there is "con-
ance Co. of America, and Paul G.
comes above 150% of poverty and
vincing evidence of grave derelic-
Rogers. a former Democratic con-
all employers would pay an addi-
tion of professional responsibility
gressman from Florida, now an at-
tional tax to cover the costs of
or reckless departure from gener-
torney with Hogan & Hartson here.
providing benefits to the poor. This
ally accepted standards of care"
Gov. Ray explained that states
tax. Mr. Reinhardt said, is project-
and they should be awarded to the
would be required to form units to
ed to total 0.68% of adjusted gross
state, not the victim.
handle the pool of money in the
income up to $45,000.
The commission also supports
1989 Journal of Commerce, Inc. Reproduced by the Library of Congress,
Congressional Research Service with permission of copyright claimant.
Universal Access Program.
States are supposed to use the
some regulation of contingency
While there are $50 billion in
purchasing power of the state fund
fees for attorneys and use of dis-
new costs. Mr. Rogers explained
created from the federal tax to win
pute resolution forums that keep
that research into use of medical
health-care cost controls and ex-
medical malpractice cases out of
technology and medical practices
tend benefits won to private insur-
the courts.
is expected to create "potential
ers.
Strong dissents were also regis-
savings" that could "far offset" the
Mr. Garber of Equitable pro-
tered by J. Bruce Johnston, execu-
new costs.
tested that. to keep expenses less
tive vice president of USX Corp.,
But commission member Harry
than revenues. states will follow
and W.E. Burdick. vice president of
D. Garber. vice chairman of Equi-
the Medicaid pattern and provide
International Business Machines
table Life Assurance Society of the
low reimbursements to those who
Corp., both members of the com-
United States. quickly dissented.
provide medical care to the poor.
mission.
He argued that "the proposed
As with Medicaid, he said, there
Mr. Johnston stated that "USX
plans will produce a significant
will be cost-shifting to the private
could never support these propos-
movement of persons from employ-
sector.
als or anything like them."
er-sponsored plans and other pri-
Accordingly, he argued that
He insisted that the "report's
vate insurance arrangements to the
state agencies cannot represent all
fundamental failure to deal hard-
government pools."
payers of medical bills because of
headedly with cost containment fa-
That is so, he said, because the
"an unresolvable conflict of inter-
tally flaws its remaining wish-list."
plan calls for federal minimum
est to the state agencies."
Mr. Burdick also argued that
standards for covered health-care
One of the commission's advis-
"the report contains no real solu-
services for all plans, complicated
ers, Dr. Arnold Relman, M.D., edi-
tions to the cost escalation problem
mandates for dependent coverage,
tor of the New England Journal of
facing us today."
Order Code IB87168
CRS Issue Brief
Mandated Employer Provided Health Insurance
Updated June 1, 1990
by
Beth C. Fuchs
Education and Public Welfare Division
CRS
Congressional Research Service
The Library of Congress
CONTENTS
SUMMARY
ISSUE DEFINITION
BACKGROUND AND ANALYSIS
Uninsured Population
Working Uninsured
Move Toward Mandated Health Benefits
Issues Related to Mandating Employer-Provided Health Insurance
Question of Employer Responsibility
Mandated Employer-Provided Insurance and Competitiveness
Small Employers and Mandated Employer-Provided Health Insurance
Underinsurance and Catastrophic Coverage
History of Federal Employer Mandates
Title X of COBRA
Medicare Working Aged and Working Disabled Secondary Payer
Requirements
Bowen Catastrophic Proposal
Types of Mandated Coverage Proposals
Defining the Application, Nature and Scope of Mandated Health
Benefits
Defining Population to be Covered and Duration of Coverage
Defining the Liability of Employers and Employees
LEGISLATION
CONGRESSIONAL HEARINGS, REPORTS, AND DOCUMENTS
FOR ADDITIONAL READING
IB87168
06-01-90
Mandated Employer Provided Health Insurance
SUMMARY
Between 31 and 37 million Americans under the age of 65 lack health insurance.
Recent estimates have drawn special attention to the working uninsured: over 80%
of the uninsured are employed or live in families of workers.
The increased number of uninsured has occurred when changes in
reimbursement policy by private insurers and the Federal Government have made
it harder for hospitals to shift the costs of treating the uninsured to privately insured
patients. Consequently, access to health care for persons lacking insurance is a
growing concern. These developments have led to new congressional interest in the
problems of the medically uninsured. Faced with substantial Federal budget deficits
and diminished interest in Government-financed solutions, Congress has begun to
look to employers as a potential source of expanding access to health insurance
coverage.
Under one approach gaining some support in Congress, the Federal Government
would mandate that employers provide health insurance coverage and/or specific
health benefits to their employees and to their employees' families. There is,
however, substantial controversy over this approach. Proponents argue that
providing health insurance is an employer's responsibility. They say that the costs
of providing care to uninsured workers are being shifted by health care providers to
those employers who provide and pay for health insurance. Opponents of mandated
employer-provided insurance argue that it is not an employer's responsibility to
provide health insurance. They say that many employers, especially smaller ones,
cannot afford to offer insurance. Opponents also argue that the added costs of health
insurance would reduce employers' ability to compete, harming the overall national
economy.
As a result of past actions by Congress, employers who offer health insurance
have to conform to specific requirements affecting the nature of their health
insurance plans and the entitlement to those plans. Most larger employers have to
offer their employees the option of becoming members of federally qualified Health
Maintenance Organizations. Also, employers are prohibited from discriminating in
employee benefit plans on the basis of disabilities arising on account of pregnancy.
Certain employers have to offer Medicare-eligible workers and their spouses the
option to elect the employer's health plan as their primary source of insurance.
Finally, certain employers required to make available continued health insurance
coverage to qualified employees and their families who would otherwise lose coverage
as a result of specific events.
In the 101st Congress, bills have been introduced to expand access to health
insurance by mandating that employers provide basic health insurance. One such
bill, the "Basic Benefits for All Americans Act of 1989" (S. 768) has been voted out
of Committee and is awaiting action by the Senate. Other proposals, placing new
requirements on employers, may also be considered.
IB87168
06-01-90
ISSUE DEFINITION
Most Americans have health insurance coverage through private group plans
offered by their employer or through the two major Federal Government financed
programs, Medicare and Medicaid. A much smaller number of Americans purchase
individual policies through the private health insurance market. However, between
31 and 37 million Americans have no health insurance coverage. Moreover, the
percentage of uninsured Americans has been climbing, increasing by some estimates
by as much as 20% for the under age 65 population between 1979 and 1986. Recent
U.S. Census Bureau estimates have drawn special attention to the working
uninsured: over 80% of the uninsured are employed or live in families of workers.
For these Americans, employment or connection to employment through a working
family member has failed to result in coverage under a health insurance plan.
The increased uninsured population has occurred when changes in the
reimbursement policies of private insurers and the Federal Government have made
it more difficult for hospitals to shift the costs of treating the uninsured to privately
insured patients. Consequently, there is growing congressional concern about
decreased access to health care for persons lacking insurance. In search of a solution
that will not result in major Federal spending, Congress has turned to employers as
a potential source of expanding access to health insurance coverage. In past years,
Congress has mandated that employers who offer health insurance to their workers
must meet specific requirements affecting the nature of their health insurance plans
and the entitlement to those plans. In the 101st Congress, legislation is being
considered to mandate that employers provide basic health insurance to their
employees and to require that employers provide specific health benefits in their
insurance plans. The Pepper Commission has also recommended a "job-based"
approach to increasing access to health insurance that includes a mandate on larger
employers to provide health insurance or contribute a portion of payroll toward the
cost of covering employees and dependents in a public insurance plan. (The Pepper
Commission proposal is described in more detail in CRS Issue Brief 90005, Health
Insurance, Janet Kline, Coordinator.) These proposals are stimulating substantial
congressional debate.
BACKGROUND AND ANALYSIS
Uninsured Population
In 1987, between 31 and 37 million Americans did not have any health
insurance. [Variations in estimates of the uninsured are explained by the different
questions and methods of sampling used in the surveys.] Estimates from the March
1988 Current Population Survey (CPS) of the U.S. Census Bureau place the number
at 31.3 million; estimates from the National Medical Expenditure Survey of the
National Center for Health Research place the number at 37 million. In the late
1970s, between 13% and 14.5% of the under-65 population were uninsured. This
number increased to 17.7% in 1984 and fell back to 17.5% in 1986. Estimates vary,
and some studies report that the number of medically uninsured peaked during the
economic recession of the early 1980s, and is now on a downward trend.
CRS-2
IB87168
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The effects on an individual of not having health insurance are not well
documented. What is known is that the uninsured are less likely to use health
services and are more likely to be in poorer health than the insured population. The
1986 National Access Survey (done for the Robert Wood Johnson Foundation) reports,
for example, that the uninsured had approximately 40% fewer ambulatory visits and
19% fewer hospitalizations than the insured. Of those individuals surveyed who had
chronic illnesses, 20% of the uninsured failed to see a physician or other provider
over the course of a year, compared to 17% of the insured.
While data on the health consequences of lacking insurance are scarce, several
studies do provide information on who make up the uninsured population. They
indicate that low-income households are more likely to lack health insurance than
those with middle or high incomes. They also indicate that the vast majority of
uninsured are employed or live in families where the head of the household is
employed. Most recent studies using Census Bureau data report that at least 80%
of the uninsured live in families where someone is employed.
Working Uninsured
Largely as a result of labor union pressures for better employee benefits, and
Federal tax incentives that allow employers to deduct the costs of providing health
benefits to their employees, employer-related health insurance became increasingly
commonplace after World War II. Today, after paid vacations, it is the most common
fringe benefit offered by employers. For the nine out of ten Americans with private
group insurance, that insurance is provided in the employment setting. As a result
(and in contrast to other western nations where health and pension benefits are
provided through public programs), workers in the United States have grown to rely
on employer-provided benefits for these basic protections. However, as the following
statistics reveal, not all employers offer health benefits and, when offered, not all
employees accept them.
Some analysts argue that the decline in coverage is due to the shifting of our
economy from jobs that carry health insurance to ones that do not. It is true that
while civilian, nonagricultural jobs increased by about 7% between 1982 and 1985,
the number of jobs with health insurance provided by an employer increased by less
than 5%. However, more important may be changing demographics. For example,
there appears to be an increase in the number of young adults without health
insurance living in households in which the parents have insurance. In addition,
dependent coverage has declined.
EBRI's May 1988 analysis of CPS data on the working uninsured reveal that
in 1986, 18.1 million workers reported no coverage from an employer plan. Of that
number, 10.9 million were the head of a family (meaning the family member with the
greatest earnings or an individual without a family). Another 7.2 million were other
family workers and not the head of the household. The majority of uncovered
workers were low wage earners. In 1986, 74% of all uninsured workers earned less
than $10,000; 93% earned less than $20,000. About 35% of all uninsured workers
earned, on average, less than the Federal minimum wage in 1986; 50% of all
uninsured workers earned less than 125% of the minimum wage. Most of these
individuals worked full-time.
CRS-3
IB87168
06-01-90
It is also useful to look at the working uninsured according to their primary
source of employment. According to EBRI, workers in certain employment sectors
are much more likely to lack health insurance coverage than the average American
worker under age 65. These include workers in agriculture; retail trade; services
(business, repair, entertainment and personal); and construction. Also included in
this category are the self-employed. Workers in other employment sectors (including
manufacturing, finance, transportation, and wholesale trade) lack insurance coverage
only one-third to one-half as often as workers in the above employment sectors.
Move Toward Mandated Health Benefits
Since the early years of this century, national health insurance has been a hotly
debated issue in the United States. While in the late 1960s and 1970s, the debate
revolved around whether to enact a program of universal national health coverage,
in the 1980s the emphasis has been on incremental expansions of health insurance
coverage. Proposals have focused on expanding coverage for specific segments of the
population (such as laid-off workers, low-income elderly, and children) and for people
who, because of a major pre-existing health condition, are unable to obtain health
insurance through the private market. Faced with substantial Federal budget deficits
and an apparent diminished interest in Government-financed solutions, Congress has
begun to look to employers as a potential source of expanding access to health
insurance coverage.
One approach gaining some support in Congress falls under the general heading
of employer mandates. Under this approach, the Federal Government would mandate
that employers (private employers as well as State and local governments) provide
insurance coverage and/or specific health benefits to their employees and, in some
cases, also to their employees' families. This approach is consistent with the current
reality that in the United States, health insurance for all but the old, disabled, and
very poor, is primarily obtained through an employer's group plan.
In the 99th Congress, legislation was enacted that required certain employers
to offer continued health insurance coverage to their employees who would otherwise
lose coverage for certain reasons. Also, certain employers were required to offer their
Medicare-eligible disabled workers primary coverage under the employers' health
insurance plans. In the 100th Congress, legislation was considered to mandate that
employers provide basic and/or catastrophic health insurance coverage. These
proposals are being considered again in the 101st Congress.
Issues Related to Mandating
Employer-Provided Health Insurance
The debate over mandating that employers provide health insurance raises
philosophical issues such as the nature of an employer's obligation to his or her
employees, and whether it is appropriate for the Federal government to require that
employers offer insurance. In addition, it raises questions about the potential
economic effects of mandates on employers as well as on the health of the national
economy.
CRS-4
IB87168
06-01-90
Question of Employer Responsibility
Proponents of mandatory employer-provided health insurance argue that
employers have a basic obligation to ensure that their employees have access to
health insurance just as they have an obligation to provide a liveable wage. They
assert that a minimum health benefits law should be established in the same manner
as the Federal Government has established a minimum wage law. They say that it
will ultimately lower the Nation's health bill because more people will have access
to health care. In addition, they argue that requiring employers to provide coverage
is in keeping with the Nation's heavy reliance on employment-related insurance.
They further assert that relying on private rather than government-provided
insurance builds upon our Nation's tradition of leaving health insurance to the
competitive market place.
Proponents also argue that this approach will increase equity across employers
and taxpayers. Currently, health insurance premiums are priced to include not only
the direct cost of providing health care services to the employer's workers, but also
other costs borne by the providers of health care for uninsured or underinsured
individuals, a substantial portion of which are uninsured workers. Employers who
are paying for health care coverage for their employees are thus subsidizing those
employers who are not paying for coverage.
Finally, proponents argue that employers who provide health benefits are also
subsidizing other employers by insuring many of the latter's workers through family
coverage. According to a CRS analysis (based on March 1987 CPS data), 23.6
million working Americans receive coverage through employers for whom they are not
directly working. Moreover, individuals who are not offered insurance by their
employers are paying some of the $37 billion in taxes that are used to subsidize
(through tax expenditures) health insurance for other, generally higher-paid workers.
The opponents of mandatory employer-provided health insurance counter by
arguing that employers have no inherent obligation to provide health benefits. They
assert that the individual has a responsibility to purchase insurance in the private
market. For those individuals who cannot afford to pay for health insurance, then
the public sector should provide a minimum level of health care. Moreover,
opponents argue that an employer's decision to provide insurance or to provide a
specific set of health benefits should not be dictated by the Government. Rather, it
is labor-management negotiations or free-market competition among insurers vying
for employers' business that should determine whether employers provide insurance
and if so what health services should be covered under the policy. Such reliance on
the marketplace will also ensure greater efficiencies in the supply and demand of
health coverage and services, thus helping to hold down costs.
There are also those who reject mandates because they would, in their view,
undermine the voluntary nature of employer-provided health insurance. They argue
that the majority of employers already provide coverage; it is a benefit that these
employers have privately chosen to provide in a form that is most appropriate to
their own employees. Some employers who already insure their employees argue
that a Federal law mandating that employers provide insurance (particularly if that
law were to require a basic minimum level of benefits) would result in higher
employee benefit costs and new administrative burdens.
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Critics of mandated employer-provided coverage also argue that such a policy
might increase the costs of labor to the point where companies, especially smaller
ones, would reduce their labor force or reduce wages. Health insurance is a relatively
expensive benefit. The Small Business Administration (SBA) reports average
employer health care costs totalled $1,500 (roughly 75 cents per hour) per worker in
1986. For the 35% of uninsured workers who are paid less than the minimum wage
($3.35 in 1987), the added hourly cost of a health insurance benefit could be
prohibitive, even if the employee were required to pay a share of the premium.
Although a mandated insurance package might be less comprehensive and therefore
less expensive than the average policy cited by the SBA, it could still produce
reductions in the employment of low wage workers as employers attempt to adjust
to higher labor costs.
Mandated Employer-Provided Insurance and Competitiveness
In addition to the debate about employer responsibility, there is a different set
of issues relating to the potential effects of mandating benefits on employers' ability
to compete in domestic and world markets. Much of the analyses of these effects is
speculative; however, the basic arguments tend to be articulated as follows.
Opponents of mandated employer-provided health coverage say that mandated
insurance would drive up the cost of doing business and reduce the ability of firms
to compete, both in the domestic and world markets. Industries that compete against
foreign manufacturers (especially those from certain Third World nations) are
competing against employers who do not as a rule provide health and other fringe
benefits. This helps foreign manufacturers to hold their prices down. Small
employers, especially, believe that mandating health insurance coverage might cause
them to lose whatever competitive edge they may have since they would have to
offset the cost of the new benefits by raising their prices. While many smaller firms
do not directly engage in international trade, some proportion of them are suppliers
to large companies that do compete internationally. Higher costs for a supplier affect
the costs of the purchasing firms: if health insurance coverage were required, small
employers might pass the cost of the coverage onto their clients. This reasoning is
also extended to domestic competition.
Proponents of mandated benefits dismiss the competitiveness argument as invalid
or not compelling. In their eyes, it is not a real issue because the companies that are
struggling to maintain their competitive edge (such as the auto manufacturers) are
the very companies that already provide health insurance. The majority of the
working uninsured are not found in the transportation and manufacturing industries
but in the service and retail trade industries, which are comparatively unaffected by
foreign competition. It is these latter industries that have experienced the most
growth since 1979: the services industry is projected by the Bureau of Labor
Statistics to increase from about 21% of total U.S. jobs in 1979 to over 26% in 1995;
the retail trade industry is projected to increase from 22% to 23% over the same
period. Manufacturing and transportation, which have traditionally covered most of
their workers, are predicted to decline. These statistics noted, mandated benefits
proponents conclude that there are more critical variables, such as exchange rates,
undermining American competitiveness than the cost to American firms of their
employee benefit packages.
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Small Employers and Mandated Employer-Provided Health Insurance
It is often assumed that smaller employers are less likely to offer health benefits
because of the high costs of premiums, administrative burdens and the perception
that workers prefer cash wages to benefits. Estimates place the costs of insurance
for small employers at anywhere from 10% to 40% higher than for large employers.
The SBA reports that very small firms that do not offer health benefits spend about
7% of payroll on fringe benefits. Those which do offer coverage spend 10%.
According to the SBA, in 1986, 46% of firms with fewer than 10 workers offered
health benefits, compared to 78% with 10 to 24 workers, 92% of firms with 25 to
99, 98% of firms with 100 to 499, and 100% of firms with 500 or more workers. 84%
of all workers who worked for employers without health plans worked in firms with
less than 25 employees.
Based on surveys and other studies, the SBA has concluded that smaller
employers tend not to offer health insurance because they (1) face higher per worker
premiums since the risk for insurers is spread over fewer persons; (2) do not benefit
to the same extent as larger firms from the tax advantages associated with offering
health insurance; (3) experience higher fixed costs in choosing and administering a
health plan; (4) have relatively higher worker turnover rates and a greater use of
part-time and seasonal employees which increase their administrative fees relative to
the fees charged for larger firms; and (5) tend to have narrower profit margins from
which to pay relatively higher premiums.
Associations representing small employers use such findings to argue that forcing
small employers to offer health insurance will result in higher prices, lower wages,
more business failures and fewer jobs. They contend that small firms simply cannot
spend more of their receipts on employee benefits.
Another argument used against mandated coverage for small employers is that
low-wage workers prefer to receive cash benefits or are already covered indirectly
through a family member's insurance policy, and should not be forced to accept
reduced earnings. However, an SBA survey of employers found that 14% of eligible
workers in small firms (less that 10 employees) which offer coverage turn it down,
compared to the 13% average across all firms.
Many proponents of mandated coverage agree that small employers might be
adversely affected if they were required to offer (as well as pay some portion of)
health insurance. They suggest, however, that potential problems for small employers
could be reduced through mechanisms designed to lower both the costs and the
administrative burdens of offering health insurance. These mechanisms are generally
designed to pool large numbers of small employers in one large group, enabling them
to obtain health insurance at lower costs. For example, the Council of Smaller
Enterprises (COSE) in Cleveland, Ohio, arranges with a number of insurance
companies group health insurance for about 8300 firms, which in turn provide
insurance to more than 120,000 employees. COSE is able to negotiate less expensive
policies than would otherwise be available to these employers if they sought the
insurance on their own.
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Such pooling mechanisms have been employed with mixed success. Observers
say that they are not as effective for the smallest employers, which are still subject
to medical underwriting. They also tend not to attract those employers who have
never offered coverage. In addition, their effectiveness in holding down premium
rates is limited by the volatility of the small group insurance market. However these
problems largely could be eliminated if employers were required to participate in the
pool.
Underinsurance and Catastrophic Coverage
Some analysts advocate that an appropriate compromise between the two
extremes of doing nothing and mandating that all employers offer health insurance
is to require that all employers offer coverage under a catastrophic illness policy.
These policies provide coverage for only very large medical expenses after the
beneficiary has paid a large deductible; the premium cost of such coverage is,
however, generally lower than for more comprehensive policies. A catastrophic illness
policy would ensure protection of individuals against the devastating financial
burdens of a major illness but would be less costly for employers to offer. On the
other hand, such an approach would not address the need of the medically uninsured
for basic health services.
History of Federal Employer Mandates
The Federal Government has traditionally left the regulation of insurance to the
states. According to Blue Cross and Blue Shield Association, there are over 680
State-mandated benefit laws governing health insurance. They include specific
services (e.g., maternity coverage and newborn care), the services of specific providers
(e.g., dentists and chiropractors), as well as requirements that plans provide for
continuation and conversion options. The States vary in the numbers and types of
mandates. Some observers in the business and insurance communities contend that
these mandated benefit laws are largely responsible for the high costs of health
insurance. Advocates of State mandates say that they increase access to needed
health services and encourage greater freedom of choice of providers, which in turn
promotes competition and lowers health care costs.
While the business of insurance has been left largely to the States to regulate,
employee welfare benefit plans are governed by the Employee Retirement Income
Security Act (ERISA), a Federal law enacted in 1974. (Hawaii is an exception.
ERISA was amended to allow Hawaii to continue its law requiring employers to
provide health insurance coverage.) Included under employee welfare benefit plans
are self-insured health plans, where the employer assumes the risk for paying claims,
instead of paying premiums to an insurance company which in turn assumes the risk.
Thus, while traditionally insured companies are affected by State mandates,
self-insured companies are regulated by ERISA. ERISA regulates such aspects of
welfare benefit plans as plan disclosure, but until recently, employers under ERISA
were relatively free to structure plans as they desired or, if their employees were
represented by a union, through the collective bargaining process. As discussed
below, this changed with the enactment of Title X of the Consolidated Omnibus
Budget Reconciliation Act (COBRA, P.L. 99-272).
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In the 1970s, changes were made in Federal law to mandate that employers
offering health insurance meet specific requirements. For example, the Health
Maintenance Organization Act of 1973 (P.L. 93-222) requires that certain employers
with 25 or more employees offer a health maintenance organization (HMO) option
in their health plan if a qualified HMO exists in their area. In 1978, Congress
amended the Civil Rights Act to extend the prohibition against sex discrimination in
employment to include discrimination on the basis of pregnancy, child birth, or
related medical conditions (P.L. 95-555). As a result, larger employer health plans
must treat women affected by these conditions similarly to other employees, based on
their ability or inability to work.
Federal proposals mandating employers to provide coverage date back to the
Nixon Administration. More recently, the Carter Administration developed legislation
to require employers to provide basic health insurance as an employee benefit. The
Carter proposal would have also expanded Federal programs to include those who
remain uncovered under employer plans. It was criticized by representatives of small
business who argued that requiring them to provide insurance would add significantly
to their labor costs and threaten their viability. It also fell victim to the absence of
consensus among other health policy actors.
Federal mandates on employers who provide health coverage have continued into
the 1980s. In addition, new efforts have been made to broaden the scope of the
mandates to those employers who do not already offer health insurance.
Title X of COBRA
The passage of Title X of the Consolidated Omnibus Budget Reconciliation Act
(COBRA) in April 1986, marked a major departure in Federal law and regulation of
employers' welfare benefit plans. It was the first time that the Federal Government
mandated a specific benefit in employee welfare benefit plans. While COBRA does
not mandate that employers provide health insurance, it does require that employers
with 20 or more employees who do provide health benefits offer qualified employees
and their families the option of continued health insurance at group rates when faced
with loss of their coverage because of certain qualifying events. The qualifying
events include termination or reduction in hours of employment, death, divorce,
eligibility for Medicare, or the end of a child's dependency under a parent's health
insurance policy. When a covered employee experiences termination or reduction of
hours of employment, then the coverage of the employee and any qualified
beneficiaries must continue for 18 months. For all the other qualifying events, the
coverage for the qualified beneficiaries must be continued for 36 months. The
employer's health plan may require the employee or beneficiary to pay the premium
for the continuation coverage, but the premium may not exceed 102% of the
otherwise applicable premium for that period. (See also CRS Issue Brief 87182,
Private Health Insurance Continuation Coverage, by Beth C. Fuchs.)
In the Tax Reform Act of 1986 (P.L. 99-514), Congress included a number of
technical corrections to Title X of COBRA. In the Omnibus Budget Reconciliation
Act of 1986 (P.L. 99-509), Title X was expanded to require continuation coverage for
retirees in cases where the employer files for bankruptcy. The Technical and
Miscellaneous Revenue Act of 1988 (P.L. 100-647) made major changes in the
penalties, and the Omnibus Budget Reconciliation Act of 1989 (P.L. 101-239) extended
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continuation of coverage from 18 to 29 months for certain disabled workers and their
families. (See CRS Issue Brief 87182.)
Medicare Working Aged and Working Disabled Secondary Payer
Requirements
A different type of employer mandate was legislated through changes in the
Medicare program and amendments to the Age Discrimination in Employment Act of
1967. Prior to 1982, employers generally used Medicare coverage as the basic health
insurance for their Medicare-eligible employees supplemented by an employer-provided
policy which filled in gaps in the Medicare coverage. This tended to ensure that
health care costs for their older workers were confined to supplemental as opposed
to basic health care coverage. In 1982, as part of the Tax Equity and Fiscal
Responsibility Act (TEFRA, P.L. 97-248), Congress adopted a proposal by the Reagan
Administration to require that private employers with 20 or more employees offer
their employees and their employees' spouses, age 65-69, their health insurance plan,
which would be the primary payer for all claims. This provision was adopted to
reduce Medicare expenditures by shifting the health care costs of older workers onto
employers. The "working aged" or "secondary payer" requirement was expanded
through subsequent laws. The Deficit Reduction Act of 1984 (DEFRA, P.L. 98-369)
expanded the spousal coverage to include all beneficiaries 65-69 with working spouses
under age 65. COBRA, (P.L. 99-272) made Medicare benefits secondary to those
payable under employer group plans for employed individuals age 65 or over, and the
spouses age 65 or older, of any employed individual regardless of age. OBRA of 1986
(P.L. 99-509) included a Reagan Administration proposal requiring employers with
100 employees or more to offer their disabled workers and their spouses the option
of coverage under their employers' health plan as the primary insurance policy.
Bowen Catastrophic Proposal
In November 1986, Otis Bowen, Secretary of Health and Human Services,
released a report to President Reagan on catastrophic illness expenses. This report
was in response to the President's directive in his Feb. 6, 1986, State of the Union
address that the Secretary report to him with recommendations on "how the private
sector and Government can work together to address the problems of affordable
insurance for those whose life savings would otherwise be threatened when
catastrophic illness strikes."
While the Bowen report discussed options to encourage employers to provide
catastrophic coverage, it recommended that States require that such coverage be
offered in all employment-related plans. It specified that employers should not be
required to finance such coverage, and also recommended the extension of full tax
deductions for health insurance to the self-employed and unincorporated businesses
(currently at 25%) as long as coverage is included for catastrophic expenses.
Although the Reagan Administration promoted Secretary Bowen's proposals for
restructuring Medicare to cover catastrophic illness expenses, it did not endorse the
recommendations in the Secretary's report for mandating catastrophic illness
insurance under employer-provided health benefit plans. Some of these options were
incorporated in legislation introduced in the 100th Congress, such as H.R. 2300
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(Gradison), which would have denied the tax deduction for employer-provided health
insurance to employers who failed to provide catastrophic coverage.
Types of Mandated Coverage Proposals
A variety of approaches to mandating coverage are incorporated in legislation
that has been introduced in recent years. While most are aimed at expanding access
to basic health insurance by mandating that employers provide health coverage,
others seek also to define the nature of the benefits to be offered. There are also
proposals that require employers to provide their existing benefit packages to
employees, laid-off employees, retirees and/or dependents who experience a change in
job or family status. Finally, other proposals require employers who already offer
insurance to offer specific benefits, such as well-baby care.
Defining the Application, Nature and Scope of Mandated Health Benefits
One of the controversies in providing for any Federal mandate is whether or not
it should apply to all employers, and if not, where the limits should be drawn. The
Medicare working aged and COBRA Title X provisions exempt employers with fewer
than 20 employees, although the Medicare working disabled provisions enacted in
OBRA of 1986 (P.L. 99-509) apply to only those employers with 100 or more
employees. Congress has been wary of applying mandates to smaller employers
largely because of concerns that they are not as easily absorbed by such firms and
could create economic hardships. Congress has also excluded the Federal Government
and religious organizations from certain provisions.
The debate over mandated benefits is influenced by concerns about the lack of
coverage as well as about concerns that working Americans are not adequately
protected against the costs of a catastrophic illness. Consequently, there are
proposals to require that employers provide basic hospital and medical insurance as
well as those that would mandate only catastrophic illness protection. A more
complex issue is whether the mandate should specify the nature of health benefits
to be offered by employers. Again, the proposals vary in their approach. Some, such
as the Kennedy-Waxman proposal in the 101st Congress (S. 786, H.R. 1845), require
a minimum level of benefits in the health insurance package. However, an actuarial
equivalency provision allows employers to offer different mixes of benefits and
employee cost-sharing requirements. Other bills have left the nature of the benefit
package unspecified. There have also been narrowly defined proposals that mandate
that employers who already provide health insurance include within their benefit
package specific services, such as coverage for pediatric preventive health care. (See
S. 968 and H.R. 1449, in the 100th Congress.)
Defining the Population to be Covered and the Duration of Coverage
Whichever approach is pursued, it is necessary to define the beneficiaries who
would receive the mandated health coverage. The employer's responsibility could be
limited to active full time employees, or expanded to include any or all of the
following: part-time employees, seasonal employees, retired employees, spouses,
widowed and/or divorced spouses, dependent family members, and employees who
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have terminated their employment, either voluntarily or involuntarily. Title X of
COBRA and its subsequent amendments provide an example of a broad definition of
beneficiaries.
In the same vein, some proposals are directed at ensuring that employers offer
health benefits beyond the point at which the employee (and his/her dependents) has
an immediate connection with the employer. In the past, Congress has considered
proposals to require that employers pay for the continued group coverage of laid-off
employees for a defined period of time. In this case, the benefit package may or may
not be defined. Such continuation of coverage mandates may extend to laid-off or
otherwise terminated employees, retirees of the firm and dependent spouses and
dependents of such employees.
Defining the Liability of Employers and Employees
The proposals to mandate employer-provided insurance also generally define the
limits of the employer's financial obligation to pay for those benefits. In Title X of
COBRA, Congress authorized employers to require the employee to pay for the
continued health coverage, plus a small fee to cover the employer's administrative
costs. In other proposals, the focus is to keep the employee's costs for coverage low
by requiring employers to pay a large portion of the premium. The
Kennedy-Waxman plan in the 101st Congress (S. 768, H.R. 1845), for example,
requires that the employer pay 80% of the employee's insurance premium (and 100%
for low-income employees) which in turn is deductible from the employer's taxes as
a cost of doing business. H.R. 2563, in the 101st Congress, prohibits employers from
reducing their premium shares for certain part-time workers.
LEGISLATION
H.R. 43 (Clay)
Requires that certain contracts between the U.S. and private contractors contain
provisions requiring the contractor to provide certain pension and health benefits to
its employees. Introduced Jan. 3, 1989; referred to Committee on Education and
Labor.
H.R. 1845 (Waxman)
Basic Health Benefits for All Americans Act. Amends the Public Health Service
Act, Fair Labor Standards Act, Title XIX of the Social Security Act, and Employee
Retirement Income Security Act to require that employers enroll employees in a
health plan that covers specified health services and provides protection against
catastrophic illness expenses. Also requires that State Medicaid programs provide
health benefits on a phased-in basis to people in poverty and near poverty, and to
all other individuals not covered by employer plans. Requirements for employer-based
plans similar to S. 768 (see below). Introduced Apr. 12, 1989; referred to Committees
on Education and Labor and on Energy and Commerce.
H.R. 2563 (Schroeder)
Part-time Temporary Workers Protection Act of 1989. Amends the Employee
Retirement Income Security Act to prohibit a reduction in employer-provided
premiums for employees solely because the employee works less than full-time with
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less than 30 hours per week, allows employer to reduce the premium contribution to
not less than a ratable portion of the premium ordinarily provided in the case of an
employee who completes 30 hours of service per week. Introduced June 6, 1989;
referred to Committee on Education and Labor.
H.R. 4070 (Grandy)
Universal Health Benefits Empowerment and partnership Act of 1990. Amends
ERISA, the Internal Revenue Code, and the Public Health Service Act to provide for
universal and more affordable coverage under group, State, or alternative health
benefit systems. Requires employers to offer coverage for eligible individuals under
basic group health plans or group health payroll deduction plans. Introduced Feb.
22, 1990; referred to Committees on Education and Labor, Ways and Means, and
Energy and Commerce.
S. 768 (Kennedy)
Basic Health Benefits for All Americans Act. Amends the Public Health Service
Act, the Fair Labor Standards Act, and ERISA to require that employers enroll
employees in a plan that covers specified health services and provides protection
against catastrophic illness expenses. Also requires that States establish programs
to provide health benefits on a phased-in basis to people in poverty and near poverty,
and to all other individuals not covered by employer plans. Failure of an employer
to provide insurance would result in eligibility loss for grants, contracts, loans or loan
guarantees under the Public Health Service Act or civil penalties under the Fair
Labor Standards Act. Provides that an individual may sue in Federal court for
injunctive relief. Under employer plans, limits the deductible to $250 per person
($500 per family) and copayments to 20% of the cost of any service (excluding certain
services for which copayments are prohibited and other services for which different
copayments are specified). Except part-time employees, limits the employee's share
of the premium to 20% of the cost of coverage, and requires the employer to cover
the full cost of at least one health plan for low wage workers. Provides that
employers may provide benefits that are equivalent on an actuarial basis to those
specified, and that new employers with 10 or fewer employees may provide a
"tailored" plan, i.e., a plan that has one-half the actuarial value of benefits of a health
benefit plan. Certain part-time employees may waive enrollment in the employer's
plan, but the employer must pay what he/she otherwise would have paid for the
employee's health plan to the State or Federal entity providing coverage to
non-working persons. Employers without a plan meeting the minimum benefit
standards are required to join regional insurance pools to be established by the
Secretary of Health and Human Services that provide health benefits at community
rates. Provides for a Federal subsidy for small businesses where compliance costs
exceed 5% of gross revenues. Provides for Federal and State financing of the State
programs, and specifies benefit package and cost-sharing. Introduced Apr. 12, 1989;
referred to Committee on Labor and Human Resources. Hearings held May 1 and
June 23, 1989. On July 12, 1989, the Committee voted to report an amended version
of S. 768 to the Senate.
CONGRESSIONAL HEARINGS, REPORTS, AND DOCUMENTS
U.S. Congress. House. Committee on Education and Labor. Subcommittee on
Labor-Management Relations. Access to health insurance. Hearing, 100th
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Congress, 2d session. June 9, 1988. Washington, U.S. Govt. Print. Off., 1988.
Serial no. 100-94.
The Growing Crisis in Health Care: The Basic Health Benefits for All Americans
Act (H.R. 1845) and other National Health Care Policy Options. Hearings, 101st
Congress, 1st session. Oct. 11 and 12, 1989. Washington. Washington, U.S.
Govt. Print. Off., 1990. Serial no. 101-64.
U.S. Congress. House. Committee on Energy and Commerce. Subcommittee on
Health. Minimum Health Benefits for All Workers Act of 1987 and related bills.
Hearing, 100th Congress, 2d session. Apr. 14-15, 1988. Washington, U.S. Govt.
Print. Off., 1988.
Serial no. 100-174
U.S. Congress. House. Committee on Small Business. The health insurance
problem. Hearings, 100th Congress, 1st session. May 6, June 16, 18, 1987.
Washington, U.S. Govt. Print. Off., 1987.
Serial no. 100-7
Health insurances pooling arrangements for small business. Hearing, 101st
Congress, 1st session., July 25, 1989. Washington, U.S. Govt. Print. Off., 1988.
Serial no. 101-18.
U.S. Congress. House. Committee on Ways and Means. Subcommittee on Health.
Insurance protection for catastrophic health expenses for individuals under age
65. Hearing, 100th Congress, 1st session. May 12, 1987. Washington, U.S.
Govt. Print. Off., 1988.
Serial no. 100-37
The Employee Health Benefits Improvement Act of 1988. Hearings, 100th
Congress, 2d session. Aug. 9 and Sept. 22, 1988. Washington, U.S. Govt. Print.
Off., 1989.
Serial no. 100-81
U.S. Congress. Senate. Committee on Finance. Hearing on the uninsured.
Hearing, 101st Congress, 1st session. July 19, 1989. Washington. Unpublished.
S.Hrg. 100-758, Part 2
U.S. Congress. Senate. Committee on Labor and Human Resources. Essential
health care: reviewing access to minimum essential health care. Hearing, 100th
Congress, 1st session. May 19, 1987. Washington, U.S. Govt. Print. Off., 1987.
S.Hrg. 100-267
Minimum Health Benefits for All Workers Act of 1987. Hearing, 100th Congress,
1st session. June 24, 1987, Nov. 4, 1987. Washington, U.S. Govt. Print. Off.,
1987.
S.Hrg. 100-376, Parts 1 and 2
Minimum Health Benefits for All Workers Act; report. May 25, 1988. (100th
Congress, 2d session. Senate. Report no. 100-360)
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Basic Health Benefits for All Americans. Hearings, 101st Congress, 1st session.
May 1, and June 23, 1989. Washington, U.S. Govt. Print. Off., 1989.
S.Hrg. 101-267
U.S. Congress. Senate. Committee on Small Business. To examine the cost and
availability of health care benefits for small businesses and proposals for
federally mandated health benefits. Hearing, 100th Congress, 1st session. Apr.
23, 1987. U.S. Govt. Print. Off., 1987.
S.Hrg. 100-144
FOR ADDITIONAL READING
Pepper Commission (U.S. Bipartisan Commission on Comprehensive Health Care),
Recommendations to the Congress. 101st Congress, 2d session. Washington,
U.S. Govt. Print. Off., Mar. 2, 1990.
U.S. Library of Congress. Congressional Research Service. Private health insurance
continuation coverage, by Beth C. Fuchs. [Washington]. (Updated regularly)
CRS Issue Brief 87182
Health insurance, by Janet Kline, Coordinator. [Washington]. (Updated
regularly.)
CRS Issue Brief 90005
Health insurance and the uninsured: background data and analysis. Prepared
for the Subcommittee on Labor - Management Relations and the Subcommittee
on Labor Standards of the House Committee on Education and Labor, and the
Subcommittee on Health and the Environment of the House Committee on
Energy and Commerce, and the Senate Special Committee on Aging, by the
Health Insurance Team. [Washington] May 1988.
CRS Report 88-537 EPW
Insuring the Uninsured: Options and Analysis, by the Health Insurance Team.
[Washington] Oct. 1988.
Education and Labor Serial no. 100-DD
Energy and Commerce Serial no. 100-BB
Special Committee on Aging Serial no. 100-O
Cost and Effects of Extending Health Insurance Coverage, by the Health
Insurance Team. [Washington] Oct. 1988.
Education and Labor Serial no. 100-EE
Energy and Commerce Serial no. 100-CC
Special Committee on Aging Serial no. 100-P
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90-64 EPW
CRS Report for Congress
Controlling Health Care Costs
Mark Merlis
Specialist in Social Legislation
Education and Public Welfare Division
January 26, 1990
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CONTROLLING HEALTH CARE COSTS
SUMMARY
Inflation in the medical sector has outpaced inflation in the rest of the
economy for many years. There are concerns that continued growth in health
care costs could impede efforts to improve access to health care and could
eventually erode the access that already exists. While efforts to control
medical spending have been a central issue in health policy at least since the
early 1970s, these concerns have given the issue a new urgency.
Most proposals to limit health care spending have relied on one of four
basic approaches. The first is to change the behavior of consumers by holding
them directly responsible for a larger portion of the costs of their own care.
Increases in required deductible and coinsurance payments by enrollees in
health plans can reduce overall costs. However, they may have a
disproportionate impact on low-income persons, deterring even necessary care,
and may not affect the treatment decisions of providers, who control much of
total health spending.
The second major approach is to change provider behavior through direct
modification of medical practice, or by controlling the overall supply of medical
resources. Insurers have had some success in controlling inpatient hospital
services through external review systems, but savings have been largely offset
by a growth in outpatient services. These have proved harder to manage, in
part because there is little agreement about what constitutes appropriate care.
There are hopes that further research on the effectiveness of medical
treatments can provide a basis for limiting unnecessary care. If reductions in
utilization are to achieve their full savings potential, however, they may need
to be accompanied by controls on the overall supply of medical resources.
Supply controls through local health planning systems were attempted in the
1970s, but encountered political barriers and had limited success.
The third cost control approach is to change provider behavior through
reimbursement systems that provide incentives for greater efficiency. Several
States, as well as Canada and other nations, have adopted payment systems
that fix in advance the resources a provider can consume in treating an
individual patient or an entire patient population. These systems may
encourage more cost-effective treatment, but may also delay the introduction
of new medical technologies or otherwise compromise quality. Their long-
term potential for cost savings may rest on the willingness of the public to
accept trade-offs between cost and other priorities.
The last major approach is to encourage consumers to choose from among
multiple health plans that compete on the basis of their ability to develop
structured and efficient delivery systems. Health maintenance organizations
(HMOs) and other managed care systems have shown some ability to control
costs, using utilization controls, financial incentives for providers, and other
methods. The ability of these programs to achieve their full savings potential
may be limited by the reluctance of higher-cost patients to accept the
restrictions on choice of providers imposed by HMOs.
CONTENTS
INTRODUCTION
1
COST SHARING
3
CHANGING MEDICAL PRACTICE
5
External Utilization Controls
5
Modifying Practice Styles
8
SUPPLY CONTROLS
11
REIMBURSEMENT REFORM
16
COMPETITION
20
Health Maintenance Organizations
22
Competition and Consumer Choice
26
CONTROLLING HEALTH CARE COSTS
INTRODUCTION
The United States spends more per capita, and a greater proportion of
its gross domestic product (GDP), on medical care than any other
industrialized nation. U.S. health expenditures in 1987 reached $500 billion,
11.1 percent of GDP, as compared to 8.6 percent in Canada, 6.8 percent in
Japan, and 6.1 percent in the United Kingdom. Despite its higher
expenditures, the United States performs no better than other industrialized
nations, and worse than many, on such measures of health care outcomes as
life expectancy or infant mortality rates. These international comparisons
have led many observers to conclude that our medical care system is much
less efficient than those elsewhere, spending more for less.
Not everyone would agree. Gross measures of health status may reflect,
not the relative efficiency of our medical care system, but other differences
between the United States and other countries. Life expectancy, for example,
may be tied to diet or environment, while infant mortality rates may in part
reflect such factors as the rate of teenage pregnancy. Other aspects of quality
may not be captured by these measures at all. For example, Americans (or at
least insured Americans) may have greater access to advances in medical
technology than persons in other countries or may be less likely to have to
wait for non-emergency treatment. Assessing the efficiency of the American
system depends in part on how one defines quality, a problem that will be
considered further at the end of this report.
Whatever the relative quality of American medical care, there are
concerns about the rate at which health expenditures are increasing.
Inflation in the medical sector has outpaced inflation in the rest of the
economy for many years. National health expenditures rose an average of 13
percent a year from 1970 through 1981. The rate of growth declined over the
next several years, chiefly because of a decline in inpatient hospital
admissions. Between 1984 and 1985 total costs rose just 7.9 percent, the
lowest annual rate of increase since the enactment of Medicare and Medicaid
in 1965 (though still greater than the growth in GDP). This moderation in
expenditure growth proved short-lived. Costs rose 9.8 percent in 1987, and
employers and insurers have reported dramatic cost increases over the next
¹Schieber, George J., and Jean-Pierre Poullier. International Health Care
Expenditure Trends: 1987. Health Affairs, V. 8, no. 3, fall 1989. p. 169-177.
(Hereafter cited as International Health Care Expenditure Trends: 1987.)
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2 years. For example, one recent survey has found that employers' average
cost per employee for health benefits rose 19 percent in 1988.²
The return of double-digit medical care inflation after a temporary respite
has led to concerns that continued growth in medical care costs could impede
efforts to improve access to health care and could eventually erode the access
that already exists. Many employers have already reduced their contribution
to employees' insurance expenses, while the costs of public insurance
programs are consuming an increasing share of State and Federal budgets.
Proposals to extend coverage to the uninsured have raised concerns that any
expansion of the insured population might lend a further impetus to medical
care inflation, as did the enactment of Medicare and Medicaid in 1965. While
the issue of health care costs and ways of controlling them has been a central
one in health policy at least since the early 1970s, these recent developments
have given the issue a new urgency.
This report examines policy options for controlling the increase in health
care costs by modifying the way medical care is delivered or financed. Most
proposals have relied on one of four basic approaches:
Changing the behavior of consumers by holding them directly
responsible for a larger portion of the costs of their own care;
Changing provider behavior through direct modification of medical
practice, or by controlling the overall supply of medical resources;
Changing provider behavior through reimbursement systems that
provide incentives for greater efficiency;
Changing the behavior of both providers and consumers by
encouraging consumers to choose from among multiple health plans
that compete on the basis of their ability to develop structured and
efficient delivery systems.
The remainder of this report provides an overview of the concepts
underlying these basic approaches and the evidence available about their
ability to achieve savings and their potential impact on access and quality of
care. The greatest attention is devoted to the last of the four strategies,
competition, because this approach has dominated policy discussion in recent
years.
The report does not consider changes outside the health care delivery
system that could directly or indirectly affect medical care expenditures. For
example, the incidence of illness or injury might be reduced through public
health or health education measures, stronger environmental controls, or
²Geisel, Jerry. Health Benefit Tab Rises 19% to New High. Business
Insurance, Dec. 11, 1989. p. 1.
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improved safety regulation. Changes in the civil litigation system (i.e.,
malpractice reform) could reduce the practice of "defensive medicine" that is
alleged to result in the performance of unnecessary tests or procedures. Such
measures might well play an important role in any comprehensive initiative
to control medical care spending. They are omitted in order to allow this
report to focus more directly on the medical care system itself and on
proposals to change the way consumers and providers behave within that
system.
COST SHARING
Proposals to hold consumers responsible for more of the costs of their
own medical care begin with the premise that comprehensive insurance
coverage, largely funded by employers or government, has distorted the health
care market by freeing consumers of any need to consider the utility or price
of the services they are consuming. While not all observers share the view
that growth in health care costs is driven by consumer choices, there are
increasing calls for measures to encourage consumers to become more
conscious of the price and utility of the medical services they use.
There are two broad ways of doing so. The first is to require consumers
to pay a higher share of the premiums for their health care coverage, thus
giving them an incentive to choose the most efficiently operated plan. This
approach is the subject of the final section of this memorandum. The second
method, considered in this section, is to make consumers pay more of the
direct costs of the services they use by increasing the deductibles or
coinsurance payments required under their insurance plans.
Increases in enrollee cost-sharing responsibility can reduce overall medical
expenditures only if they deter some enrollees from obtaining care.
Otherwise, they merely shift expenses from the insurer to the consumer.³
The major study of the impact of cost-sharing on health care utilization and
costs was the Health Insurance Experiment (HIE) conducted between 1974
and 1982 by the RAND Corporation, under contract to the Health Care
Financing Administration. The HIE randomly assigned 7,700 enrollees to a
variety of health insurance plans, including a plan that included no cost-
sharing (the "free" plan) and plans requiring coinsurance payments ranging
from 25 to 95 percent (subject to overall limits on out-of-pocket expenditures).
³Deductibles have other behavioral effects that may also produce cost
savings. Enrollees whose costs during a year exceed the deductible by only a
small margin may not go to the trouble of filing a claim. Other enrollees
who are careless in record-keeping may be unable to document all of their out-
of-pocket expenditures and may therefore spend more than the nominal
deductible before the insurance takes over.
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The key findings of the HIE were these:⁴
Cost-sharing reduced the probability that individuals would seek care
for any particular medical condition. The strongest deterrent effects
occurred among the poor, especially poor children. They were at
least 40 percent less likely to obtain care for a given condition than
children in the free plan.
Cost-sharing deterred enrollees from obtaining both "appropriate" and
"inappropriate" medical care. Low-income enrollees in the cost-
sharing plans were less likely to seek care for conditions for which
medical care is highly effective, as well as for conditions for which
medical care is rarely effective. Those in the cost-sharing plans had
worse outcomes for specific conditions (such as hypertension) that
can be improved by medical treatment.
While cost-sharing prevented enrollees from initiating an episode of
medical care, it did not change the course of treatment once an
individual had entered the medical care system. Within any given
episode of care, the cost-sharing enrollees received the same services
and medications as other patients.
These findings raise several important concerns about the utility of cost-
sharing as an approach for reducing medical expenditures. First, as would be
expected, its impact is greatest on enrollees with the least income. This effect
might be modified by developing cost-sharing requirements that varied by
income. Such a system might be administratively cumbersome for employers
or insurers. It might also defeat its own purpose, since cost-sharing may not
reduce utilization unless it is financially burdensome. (The HIE enrollees in
the least burdensome cost-sharing plan actually incurred slightly higher costs
than those in the free plan.)
Second, cost-sharing may deter necessary as well as unnecessary care.
The goal of making consumers more prudent in their use of health services
may demand a degree of sophistication about the value of different services
that not all enrollees possess. There have been attempts to develop more
carefully targeted cost-sharing systems, to control only inappropriate
utilization or to channel utilization in particular ways. For example, a higher
coinsurance amount may be imposed for emergency room visits, in order to
prevent enrollees from using the emergency room for non-urgent care; this
approach is common in health maintenance organizations (HMOs) and has
4This summary is drawn from Lohr, Kathleen, et al. Use of Medical Care
in the RAND Health Insurance Experiment: Diagnosis and Service-Specific
Analyses in a Randomized Controlled Trial. Medical Care, V. 24, no. 9,
(Supplement) Sept. 1986. p. S74-S77; and Brook, Robert H., et al. Does Free
Care Improve Adults' Health?: Results From a Randomized Controlled Trial.
New England Journal of Medicine, V. 309, no. 23, Dec. 8, 1983. p. 1426-34.
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been adopted by some State Medicaid plans. It is not certain, however, that
even such narrower measures will deter only unnecessary care.
Finally, and perhaps most important from the perspective of cost
reduction, cost-sharing may not modify the course of care once treatment has
begun, presumably because the decision-making has generally shifted from the
patient to the physician. This finding of the HIE is partly a result of the
design of the experiment. Regardless of the level of cost-sharing required,
each plan had an out-of-pocket limit, a point beyond which the insurer
assumed full responsibility for all further expenses. In the absence of such
a limit, enrollees might have been more likely to decline the services ordered
by their physicians. At the same time, however, the most severely ill would
have been subject to catastrophic financial losses.
Most medical care costs are incurred by a small minority of patients. A
cost-sharing system without catastrophic limits will leave that minority
unprotected, while a system with limits on out-of-pocket expenses may have
a minimal effect on the total costs of care once treatment has been initiated.
The problem of controlling the costs of ongoing treatment is the subject of
the next section.
CHANGING MEDICAL PRACTICE
Because most medical care purchasing decisions are made by physicians
and other providers, rather than by the patients themselves, savings might be
achieved if unnecessary services could be eliminated through external review
of those decisions or through efforts to modify the providers' own decision-
making.
External Utilization Controls
The term "utilization controls" embraces a variety of external constraints
imposed by a payer on the volume or nature of services furnished or ordered
by providers.⁶ These include:
⁵In 1978, 10 percent of U.S. families accounted for 67 percent of total
health expenditures. U.S. Congress. Congressional Budget Office.
Catastrophic Medical Expenses: Patterns in the Non-Elderly, Non-Poor
Population. Washington, U.S. Govt. Print. Off., Dec. 1982. p. xviii.
⁶These techniques are sometimes referred to by health insurers as
"managed care." Others restrict the term "managed care" to the more
aggressive interventions in the health care system represented by HMOs or
similar entities. This is the sense in which the term will be used later in this
report.
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Pre-admission certification for elective inpatient stays;
Concurrent review, under which patients already admitted to the
hospital are monitored to ensure the appropriateness of their
continued stay;
Voluntary or mandatory second opinions before elective surgery;
Case management, under which the payer or the payer's agent
attempts to assume control of the overall delivery of services to an
individual high-cost patient;
Various approaches for shifting the locus of care from high-cost to
low-cost settings. These include requirements that certain surgical
procedures be performed on an outpatient basis, or that diagnostic
tests ordinarily required for inpatients be conducted before the
patient is admitted to the hospital.
Utilization controls, especially pre-admission certification and concurrent
review, have become a standard feature of health insurance plans during the
1980s. They are now used in the Medicare program, in 29 State Medicaid
programs (as of 1987), and in 72 percent of employer-sponsored health plans
(as of 1988), up from 59 percent just a year earlier.⁷ Despite the rapid
adoption of utilization control systems by both public and private payers, they
have received little systematic study, and evidence that they actually reduce
spending is limited. Pre-admission review has the strongest track record; one
controlled study found that it produced net savings for an average employee
group of 7.3 percent, with even higher savings for groups that had very high
utilization before the programs were initiated.⁸ The evidence on some of the
other approaches is less clear. For example, some studies have suggested that
voluntary second surgical opinion programs may not deter enough
unnecessary surgery to offset the costs of the second opinions themselves;
mandatory programs appear to be more successful.9
Lindsey, Phoebe A. Medicaid Utilization Control Programs: Results of
a 1987 Study. Health Care Financing Review, V. 10, no. 4, summer 1989.
p. 79-92; and Gabel, Jon, et al. Employer-Sponsored Health Insurance in
America. Health Affairs, V. 8, no. 2, summer 1989. p. 116-128.
⁸Feldstein, Paul, Thomas Wickizer, and John Wheeler. Private Cost
Containment: The Effects of Utilization Review Programs on Health Care
Use and Expenditures. New England Journal of Medicine, V. 318, no. 20, May
19, 1988. p. 1310-14.
9For a review of the literature, see Ermann, Danny. Hospital Utilization
Review: Past Experience, Future Directions. Journal of Health Politics,
Policy and Law, V. 13, no. 4, winter 1988. p. 683-704.
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There are also concerns that even the most successful utilization control
approaches focus only on inpatient care and may merely shift the site in
which care is delivered without fundamentally changing medical practice. 10 If
a reduction in inpatient admissions is followed by an increase in outpatient
services, savings may be only temporary; soon costs may begin to rise again
as rapidly as before. One observer has argued that, because technologies that
were once available only in hospitals are now widely diffused in the
community, the hospital is no longer the appropriate focus of cost-
containment efforts. At the same time, however, utilization controls for
ambulatory services have been slow to develop. In part, this is because most
ambulatory services have relatively small prices. The administrative costs of
reviewing each service may outweigh any potential savings.¹¹ Some insurers
have begun to require prior authorization for the most costly outpatient
services, such as CAT scans or other major diagnostic procedures. Whether
such measures are actually producing savings is not yet known.
Utilization controls face another barrier that may be even more
important than administrative costs: the subjective nature of medical
practice. Each patient is somehow unique, and external reviewers may have
difficulty overriding the clinical judgments of individual practitioners in
specific cases. This may be especially true when there is little consensus
about the most appropriate treatment for a given condition, a problem to be
discussed in the next section. In any event, some observers have contended
that a persistent physician who is prepared to appeal a denial of
authorization will often prevail. (The relative leverage of the individual
practitioner may have been enhanced by recent legal decisions subjecting
external utilization control agents to malpractice liability for denials of
necessary care.) In consequence, utilization review may function as a delaying
tactic rather than an absolute control, achieving savings only because some
physicians will not take the trouble to protest the reviewers' decisions. The
result has been termed "rationing by inconvenience."12 Such savings as are
achieved may diminish over time as physicians become more skillful in dealing
with the system.
For this reason, some analysts have suggested that savings over a longer
term may depend on the extent to which providers "sign on" to the concept
¹⁰For a discussion of this issue, see Institute of Medicine. Controlling
Costs and Changing Patient Care? The Role of Utilization Management.
Washington, 1989.
¹Goldsmith, Jeff C. Competition's Impact: A Report from the Front.
Health Affairs, V. 7, no. 3, summer 1988. p. 162-173.
¹²Grumet, Gerald W. Health Care Rationing Through Inconvenience: The
Third Party's Secret Weapon. New England Journal of Medicine, V. 321, no.
9, Aug. 31, 1989. p. 607-11.
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of eliminating unnecessary services. In this view, real utilization control will
require voluntary changes in the way physicians practice medicine.
Modifying Practice Styles
Beginning in the 1970s, studies by Wennberg and others showed that
there was substantial geographic variation in the rate of use of specific
medical or surgical procedures. For example, the rate of tonsillectomies in
one area of New England was six times higher than the lowest rate in the
region. 13 While some of the variations uncovered in "small area analysis"
might be attributable to differences in the incidence of illness in different
populations, this explanation appeared to be insufficient to account for all the
variation; some other factors had to be at work. One hypothesis was that
physicians in different areas had different "practice styles." Each community
had its own medical culture, its own characteristic way of diagnosing or
treating particular diseases or conditions. Physicians adopted the practice
style of their community in the absence of firm and objective information
about which treatment approach was actually superior.
Other explanations have been offered for small area variations in medical
practice; these will be discussed further below. However, the practice style
hypothesis has won many supporters and has led to proposals for controlling
medical care costs by (a) improving knowledge of the relative efficacy of
different medical treatments and (b) disseminating this knowledge to
practitioners in the expectation that they will modify their practice styles
accordingly. The Omnibus Budget Reconciliation Act of 1989 (P.L. 101-239)
establishes a new program within the Department of Health and Human
Services for research on the effectiveness of medical treatments and the
development of practice guidelines. Not all of the proponents of this
initiative view it as a cost-containment measure. Some view it chiefly as a
possible way of improving quality of care, and therefore worth pursuing
whether or not any cost savings result. The following discussion, however,
considers only the potential of medical practice research to reduce costs.
To have a significant impact, guidelines will need to address areas of
practice on which there is real disagreement among physicians. There have
been some efforts in the past to codify elements of medical practice on which
there already existed a consensus. However, if most physicians already agree
on the best treatments, promulgating that agreement in the form of
guidelines may not have a measurable impact on medical practice. (This
appears to have been the case, for example, with a 1984 consensus report on
¹³Wennberg, John, and Alan Gittelsohn. Variations in Medical Care
Among Small Areas. Scientific American, V. 246, Apr. 1982. p. 120-134.
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the treatment of high blood pressure.¹⁴) For this reason, the treatment
research initiative will focus on conditions for which there is found to be a
wide variation in current practice. Because the Nation is just beginning to
devote significant resources to research on the outcomes of alternative medical
treatments, it may take time for researchers to reach agreement in cases
where practice variation is the result of real scientific uncertainty. The full
potential savings from this strategy might therefore be realized only over the
long term.
Assuming that future research can resolve disagreements over appropriate
treatments, there would remain the task of inducing physicians to modify
their practices voluntarily on the basis of the new findings. Some success in
changing practices has been reported when physicians have been introduced
to guidelines through structured face-to-face educational programs conducted
by respected peers. 15 Some other efforts that relied only on printed materials
to communicate practice recommendations have had disappointing results.
Providers could be aware of and even approve the recommendations without
making significant changes in practice. It is possible that some physicians
may encounter barriers in implementing even guidelines with which they
nominally agree. These may include concerns about malpractice liability, lack
of the substitute skills or the special equipment needed to follow the
guidelines, economic incentives, or pressure from patients. 16 These barriers
might be overcome with more vigorous educational efforts. Still,
countervailing economic and professional pressures may limit the willingness
or ability of physicians to comply voluntarily with treatment guidelines.
One alternative is to use the results of outcomes research as the basis for
mandatory, rather than voluntary, guidelines--that is, as a way of
strengthening or broadening current utilization control programs. Proposals
to do so have met strong opposition from the medical community, on the
grounds that medicine cannot be reduced to a "cookbook" and that to compel
physicians to comply with fixed practice rules would stifle innovation. In
¹⁴Hill, Martha N., David M. Levine, and Paul K. Whelton. Awareness,
Use, and Impact of the 1984 Joint National Committee Consensus Report on
High Blood Pressure. American Journal of Public Health, V. 78, no. 9, Sept.
1988. p. 1190-94.
¹⁵See Chassin, Mark R. Standards of Care in Medicine. Inquiry, V. 25,
no. 4, winter 1988. p. 437-453.
¹⁶Lomas, Jonathan, et al. Do Practice Guidelines Guide Practice? The
Effect of a Consensus Statement on the Practice of Physicians. New England
Journal of Medicine, V. 321, no. 19, Nov. 9, 1989. p. 1306-11; and Kosecoff,
Jacqueline, et al. Effects of the National Institutes of Health Consensus
Development Program on Physician Practice. Journal of the American Medical
Association, V. 258, no. 19, Nov. 20, 1987. p. 2708-13.
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addition, there would remain the problem of achieving sufficient savings to
offset the administrative costs of review systems.
Another option is to replace service-by-service utilization review with
general comparisons of each physician's practice patterns to those of his or
her peers. Physicians who, over time, consistently furnished or ordered more
of certain services than others in the peer group would be targeted for closer
scrutiny, to determine whether patterns of inappropriate utilization existed.
Physicians found to be outliers might be the focus of special educational
efforts in the hopes of inducing voluntary change. Continued noncompliance
might trigger requirements that individual services receive prior authorization
or could even lead to exclusion from participation in a given public or private
insurance program.
How much could be saved if all inappropriate services were eliminated?
Some studies have found very high rates of unnecessary care. For example,
Chassin et al., in a thirteen-site study, found that 17 percent of all coronary
angiographies were unnecessary; for other procedures, the rate of
inappropriate use was as high as 32 percent. They also found, however, that
the unnecessary care explained only a small fraction of variations in
utilization across geographic areas. If none of the inappropriate
angiographies had been performed, the area with the highest use of this
procedure would still have had more than twice the number of angiographies
as the lowest-use area. The authors suggest that other factors must play a
part in this difference: disease incidence, differences in the point at which
primary care physicians decide to refer patients to specialists, or cultural or
social differences in the stage at which patients sought care.¹⁷ Another multi-
site study has found that, while practice style may explain differences in
utilization of certain specific procedures, it does not explain overall differences
in per capita use of medical care in different areas. At the aggregate level,
standard socioeconomic factors could explain much of the difference in use
and intensity of services.¹⁸
These preliminary studies suggest that there could be underutilization of
services in some areas, while there is overutilization of the same services in
other areas. Treatment research could pinpoint, not only cases in which
unnecessary services could be eliminated, but also cases in which patients
have had insufficient access (whether physical or financial) to necessary care.
It is for this reason that some proponents of outcomes research have
emphasized its potential impact on quality, rather than its potential for cost
"Chassin, Mark R., et al. Does Inappropriate Use Explain Geographic
Variations in the Use of Health Care Services? Journal of the American
Medical Association, V. 258, no. 18, Nov. 13, 1987. p. 2533-2537.
¹⁸Folland, Sherman, and Milan Stano. Sources of Small Area Variations
in the Use of Medical Care. Journal of Health Economics, V. 8, no. 1, Mar.
1989. p. 85-107.
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savings. Precisely because there is uncertainty about the relative efficacy of
many treatments, it may be too early to say whether optimal medical
treatment would involve more or fewer services than are currently furnished.
SUPPLY CONTROLS
If utilization controls or practice guidelines succeed in limiting
unnecessary care, the full potential savings from any reduction in the number
of services delivered may be realized only if there is a proportionate reduction
in the resources used to provide those services. For example, changes in
medical practice in the late 1970s and early 1980s led to a decline in
inpatient hospital admissions without a corresponding reduction in hospital
capacity. The result in many areas has been underutilized facilities spreading
their fixed costs across a declining number of patients; while there are fewer
patients, the cost for each patient rises because the unused capacity must still
be paid for.
In addition, the existence of excess capacity may generate continuing
pressures to find some new way of using that capacity and restoring
utilization to its previous levels. 19 The view that the use of medical services
could rise to fill any underused resources led to what was perhaps the
dominant approach to cost containment in the 1970s: health planning, the
regulation of facility construction and other capital expenditures.
In 1964, New York became the first State to establish a certificate-of-
need (CON) program, under which proposals to build a new facility or expand
an existing one had to be approved by a government agency. Other States
followed, and a 1972 amendment to the Social Security Act provided that
facilities in those States proceeding with construction without obtaining a
CON could be denied Medicare and Medicaid reimbursement for their capital
expenditures. Finally, the Health Planning and Resources Development Act
in 1974 required all States to establish similar programs. This requirement
was repealed in 1986, along with all Federal support for State health
planning programs. States may continue to operate programs on their own;
39 States and the District of Columbia still do so. However, Medicare
reimbursement is no longer contingent on State approval of capital
¹⁹The view that hospital admissions rise in proportion to hospital bed
capacity was originally advanced by Milton Roemer, in Bed Supply and
Hospital Utilization: A Natural Experiment. Hospitals, V. 35, no. 21, Nov.
1, 1961. p. 36-42; Some more recent studies have concluded that the relation
between supply and utilization may not be as straightforward as "Roemer's
law" would suggest. Brewer, W. Ross, and Mary Anne Freedman. Causes and
Implications of Variation in Hospital Utilization. Journal of Public Health
Policy, V. 3, no. 4, Dec. 1982. p. 445-454.
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expenditures, and a number of States have now limited their reviews to
nursing home construction.20
Several factors contributed to the reversal of policy on health planning.
In part, it fell victim to the general preference for market as opposed to
regulatory solutions during the early 1980s. From a Federal perspective, the
adoption in 1983 of Medicare's prospective payment system (PPS) for
inpatient hospital services was expected to offer a different way of limiting
health care resources; this approach is discussed further in the next section. 21
Underlying this shift, however, were claims that health planning had been
tried and had failed, largely because of conflicting political pressures. In
many areas, the oversupply of facilities was such that savings would have
required, not just limits on new construction, but closure or consolidation of
existing facilities. Few States were able to overcome the political resistance
to such closures. Attempts to limit duplication of services or the spread of
new technologies often faced similar barriers; attempts to plan for the
rational distribution of resources on a regional basis had to confront
providers' fears of losing to competitors and individual communities' desires
for the most up-to-date facilities. 22
CON programs did have some successes, particularly in constraining the
growth in nursing home beds. Because State Medicaid programs are the
major source of payment for nursing home care, States had a strong motive
to overcome the political barriers to supply constraint. In at least some
States, the CON process was explicitly seen as a Medicaid cost-containment
measure; the determination of the number of nursing home beds needed was
related to the maximum number of patients the State was prepared to cover. 23
Even in this case, however, any savings were achieved by holding growth in
bed supply below the rate of growth in the aged population. States generally
did not close down existing capacity.
²⁰American Hospital Association. State Issues Forum. State Health
Planning Report. Chicago, July 1989.
²¹The inclusion of capital expenditures in PPS payments has been
repeatedly postponed. Hospitals are instead paid for Medicare capital expenses
on a reasonable cost basis, subject to a fixed percentage discount (15 percent
beginning Jan. 1, 1990).
²²For an overview of the barriers to health planning, see Brown, Lawrence
D. Common Sense Meets Implementation: Certificate-of-Need Regulation in
the States. Journal of Health Politics, Policy and Law, V. 8, no. 3, fall 1983.
p. 480-494. (Hereafter cited as Common Sense Meets Implementation.)
²³Feder, Judith, and William Scanlon. Regulating the Bed Supply in
Nursing Homes. Milbank Quarterly, V. 58, no. 1, 1980. p. 54-88.
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Recent concern about the rate of medical care cost increases has led to
some calls for a revival of health planning, and it is conceivable that these
concerns might eventually be sufficient to overcome the political barriers faced
by health planners in the past. However, not all of the problems with health
planning are political ones. Effective planning may require a fuller
understanding of the workings of the health care system than is currently
available. That system is a dynamic one, and decisions that seemed sensible
in the late 1970s have sometimes had unpredictable effects. For example,
most planning programs focussed on institutional services in hospitals and
nursing homes, because these were the major sources of expenditure, and did
little to control the capital expenditures of community-based physicians or
clinics. The resulting growth in the availability of high-technology facilities
outside hospitals is one of the reasons that recent reductions in inpatient
utilization have been offset by increased outpatient costs. (Some States are
now applying uniform rules across settings.)
Moreover, a community's needs may change unpredictably. New York
was more successful than most States in controlling inpatient bed supply; it
was one of the few States in which hospital closures occurred on a planned
basis. While the number of community hospital beds nationally dropped 1.1
percent between 1977 and 1987, the number in New York dropped 9.9
percent. 24 New demands on these facilities in the 1980s, such as the
appearance of AIDS (acquired immune deficiency syndrome) and the rise in
drug-related problems, have led to serious overcrowding in some New York
hospitals. The reported crisis in New York illustrates one of the potential
constraints on the planning process. On the one hand, it may be necessary
to maintain enough excess capacity to meet unforeseen needs or random
fluctuations in demand. On the other hand, this excess capacity is costly to
maintain and may itself generate demand. If the supply of a given kind of
service is sufficient that no one ever has to stand in line for it, then the
savings from health planning may be limited.
The fullest potential savings from health planning would require a more
controversial step: limiting the supply of health resources to the point at
which patients may have to wait for some period to obtain needed but non-
emergency services. The result is "queueing," the delays in surgery or high-
cost diagnostic procedures that are alleged to occur to some extent in Canada
and to a greater extent in the United Kingdom. The degree to which
queueing actually occurs in either country's health system has often been
debated by those who favor or oppose adoption of a similar system here.
Some people say that essential care may be unavailable, while others argue
that resource limits merely oblige providers to set priorities and avoid
unnecessary services.
²⁴American Hospital Association. Hospital Statistics, 1978 and 1988
editions.
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Whatever the extent to which resources have been limited elsewhere,
rationing of supply in the United States might raise concerns that are not
as significant in countries where the entire population participates in a single
insurance program. In those countries, everyone is in the same queue, and
one's place in line is chiefly determined by the urgency or duration of one's
need. (There are exceptions: one can step out of line in the United Kingdom
by finding a private provider, and there are anecdotal accounts that some
Canadians with sufficient resources may seek care in the United States.)
When queueing has occurred in the United States, however, places in line
may have been determined by financial resources.
The facilities in New York reporting the greatest overcrowding have been
those serving the poor and the uninsured. Similar effects may have resulted
from health planning's major success, the control of nursing home bed supply.
Because Medicaid payment is generally less than that available from private
patients, nursing homes in areas with limited bed supply and high occupancy
rates have an incentive to accept a private-pay patient when a vacancy occurs,
while Medicaid beneficiaries may be unable to find a place. In 28 States,
Medicaid administrators report that beneficiaries awaiting hospital discharge
had difficulty finding a nursing home bed. While supply constraints are not
the only factors limiting access to care for low-income Americans, they may
exacerbate existing problems. The acceptability of health planning as a cost
control strategy may, then, depend in part on the extent to which supply
limitations are accompanied by efforts to make distribution of limited
resources more equitable.
One other issue should be raised in the context of a discussion of health
resources: the debate over the possible oversupply of physicians and the
potential consequences of physician supply on health care costs. In 1980, the
Graduate Medical Education National Advisory Committee (GMENAC)
reported that the United States would have a surplus of 150,000 physicians
by the year 2000. 26 The extent of the potential surplus has since been the
subject of continuing debate. There are questions about the extent to which
technology and the aging of the population could increase demand, or the
adoption of utilization controls or managed care could decrease it. The
²⁵For a fuller discussion of this problem, see U.S. Library of Congress.
Congressional Research Service. Medicaid Source Book: Background Data
and Analysis. Report prepared for the House Committee on Energy and
Commerce. Washington, Nov. 1988. (Committee print 100-AA) p. 467-83.
(Hereafter cited as Congressional Research Service, Medicaid Source Book.)
26 Graduate Medical Education National Advisory Committee. Report to
the Secretary, U.S. Department of Health and Human Services. Washington,
1980.
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number of medical school admissions could decline, or physicians might spend
more of their time on administrative activities and less on patient care.27
Even less clear than the extent of the future surplus is its possible effect
on medical costs. Observations that per capita use of physician services
increases in geographic areas with a high ratio of physicians to population
have led to the hypothesis of "physician-induced demand." Just as excess
hospital bed capacity may generate more hospital stays, this theory holds that
a surplus of physicians all attempting to maintain their incomes would lead
--in the absence of any controls--to excess delivery of services. Repeated
efforts to demonstrate this have been inconclusive.² It is not clear that
physicians actually modify their medical practice in order to maintain a
"target income." Still, if the projected surplus does in fact appear, there
might be greater pressures on physicians to increase the number of services
they furnish to each patient. Some people believe that it may eventually be
necessary to consider reducing the supply of physicians (or curtailing their
working hours).
This has actually been attempted in one Canadian province, British
Columbia. A physician who wants to participate in the health program that
covers all citizens of the province must have a billing account, and since 1985
the number of accounts has been limited (limits vary by specialty and
geographic area). A physician who fails to obtain a billing number cannot
earn a living as a physician. Critics of the system contend, however, that
British Columbia is merely exporting its physician surplus to other provinces
or to the United States.²⁹ Given the political problems health planners in the
United States have experienced in trying to close hospitals, it seems unlikely
that British Columbia's efforts could be reproduced here, with government
regulators telling new medical school graduates to find some other profession.
However, there are proposals to achieve the same goal through private means.
Some of the more ambitious "managed care" agendas discussed in the final
²⁷For contrasting views on these issues, see Schwartz, William B., Frank
A. Sloan, and Daniel N. Mendelson. Why There Will Be Little or No
Physician Surplus between Now and the Year 2000. New England Journal
of Medicine, V. 318, no. 14, Apr. 7, 1988. p. 892-897; Schloss, Ernest P.
Beyond GMENAC--Another Physician Shortage from 2010 to 2030? New
England Journal of Medicine, V. 318, no. 14, Apr. 7, 1988. p. 920-922.
2⁸See Rossiter, Louis F., and Gail R. Wilensky. A Reexamination of the
Use of Physician Services: The Role of Physician-Initiated Demand. Inquiry,
V. 20, no. 2, summer 1983. p. 162-72; Langwell, Kathryn M., and Lyle M.
Nelson. Physician Payment Systems: A Review of History, Alternatives and
Evidence. Medical Care Review, V. 43, no. 1, spring 1986. p. 5-58.
²⁹Barer, Morris L. Regulating Physician Supply: The Evolution of
British Columbia's Bill 41. Journal of Health Politics, Policy, and Law. V. 13,
no. 1, spring 1988. p. 1-25.
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section of this report contemplate enrollment of the entire population in
health maintenance organizations (HMOs) or other structured delivery
systems that would match their resources to the needs of the enrolled
population; this approach would potentially reduce employment opportunities
for physicians.³⁰
REIMBURSEMENT REFORM
Proposals for reimbursement reform begin with the premise that
traditional payment systems, under which providers receive their full costs or
charges for whatever services they choose to furnish, encourage inefficiency
and the delivery of unnecessary care.
The simplest type of reform is for payers to set fixed prices for defined
units of service, such as a day of inpatient care or a physician office visit.
However, this approach may not reduce costs if providers are able to modify
the volume or nature of the services they provide to make up for the lost
revenue on individual services. For this reason, the focus of reimbursement
reform proposals is on developing pricing mechanisms that give providers
incentives to control both volume and unit cost.
This is generally accomplished by redefining the commodity the insurer
is purchasing. Instead of paying for individual units of service, the insurer
makes one payment for an episode of care (as in Medicare's prospective
payment system, PPS), for overall treatment of a patient during a given time
period (capitation), or for treatment of an entire population (as in Canada's
global budgeting system for hospitals). These approaches may be seen as
aligned on an ascending scale depending on the degree of aggregation of the
unit being purchased, with per-case payment at the low end and payment for
an entire patient population at the other. In all cases, however, the aim is
to define in advance the total amount of resources the provider may consume
in furnishing treatment to a patient or group of patients.
Per-case payment and capitation give the provider an incentive to
perform more efficiently in treating individual patients, either reducing the
cost of producing each unit of service or reducing the number of units
furnished to each patient. These approaches may therefore be seen as
alternatives to external utilization controls. Global budgeting defines the
total resources available for treating all patients, and may be seen as an
³⁰For example, Alain Enthoven has characterized the "buy right" scheme
advanced by Walter McClure as requiring that "good-quality, efficient doctors
prosper while others are induced to retire." Enthoven, Alain C. Managed
Competition in Health Care and the Unfinished Agenda. Health Care
Financing Review, 1986 Annual Supplement. p. 105-119.
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alternative to health planning.³¹ Reimbursement controls have the same goals
as direct regulation of medical practice and supply, but shift the responsibility
for decision-making from the third-party payer or the government to the
actual providers of care. In order to live within the established rates or
budgets, the providers must be self-regulating; they must make the same sorts
of treatment and resource allocation decisions that would otherwise have been
imposed externally.
As the Medicare program has demonstrated, it is possible for a single
payer with sufficient market power to adopt such reimbursement changes on
its own. 32 The effects of this unilateral approach in a pluralistic system are
uncertain. While some providers may be driven to improve their efficiency,
others may instead respond to shortfalls in reimbursement from one payer by
raising charges to other groups, those without the market power to dictate
prices. The possibility of "cost-shifting" may mean that savings for one
purchaser are not translated into real reductions in total system expenditures.
In a sufficiently competitive market, the providers' ability to engage in
this "cost-shifting" may be limited. A hospital may face, not only payment
limits under Medicare and Medicaid, but pressure from private insurers or
employer groups to grant price discounts in order to be assured of an
adequate market share. Characteristics other than efficiency may determine
a provider's success in the face of these competing demands. For example, a
suburban non-teaching hospital with few uninsured patients may be at a
relative advantage as compared to a center city teaching facility with a heavy
uncompensated care load. Individual purchasers who reduce their costs by
favoring the suburban hospital may leave the society to find some other
means of subsidizing essential facilities that are handicapped in price
competition.
A system in which multiple payers negotiate individually with providers
may, then, lead either to cost-shifting or to a situation in which price
concerns override other societal goals, such as medical education and charity
³¹In practice, the Canadian system uses both global budgeting and health
planning. However, some of the rate regulation systems in the United States
have explicitly superseded the health planning system. A facility that has
obtained a certificate of need for expansion may proceed only if the rate
commission approves the necessary increase in capital costs. For a discussion
of the interplay of planning and rate regulation, see Brown, Common Sense
Meets Implementation.
³²As the Medicaid experience has shown, adoption of payment restraints
by a payer with too small a market share may reduce acess for the payer's
enrollees. For example, low reimbursement rates are the major reason
physicians decline to participate in the Medicaid program. See Congressional
Research Service, Medicaid Source Book, p. 448-454.
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care. For this reason, some people argue that real efficiency can be achieved
only if all payers are paying under the same rules.
Uniform ratesetting is common in other industrialized nations, both those
with single-payer health insurance systems (as in Canada) and those where
many different entities provide insurance (as in West Germany). The
experience in the United States is limited to experiments in a few States
beginning in the 1970s. Federal waivers of Medicare and Medicaid rules made
it possible for those two payers to participate in the programs on a
demonstration basis, while State laws compelled participation by private
insurers and individual payers, resulting in an "all-payer" system. Medicaid
law now permits any State to include Medicaid in such a system, and
Medicare may be included if the State can show that its system controls costs
as effectively as PPS. However, full "all-payer" systems continue only in
Maryland and in part of New York State. Several other States operate
"partial-payer" systems that include all payers except Medicare. 33 These
systems have generally used the price aggregation approaches described above.
That is, they. either establish a rate for total treatment of a case (as under
PPS) or they establish a total budget for a hospital during a year, setting
prices for the hospital in such a way as to achieve a target revenue amount.
It has been shown that, in 6 States with ratesetting systems, annual
increases in cost per admission were consistently 3 to 4 percentage points
below the national average from 1976 to 1984. During the same period,
however, other States saw a drop in admissions per capita, while admissions
in the ratesetting States were stable. As a result, the difference in growth in
per capita rates of spending was not so striking: per capita costs rose at an
annual rate of 11.5 percent a year in the ratesetting States and 13 percent a
year in other States. 34 In addition, the ratesetting States had much higher
costs at the outset than most other States. Some observers have questioned
whether ratesetting could have achieved comparable savings in areas where
costs were lower to begin with.³⁵
Evidence from other countries with universal ratesetting systems suggests
that greater savings may be possible. In Canada, where the provinces
establish global budgets for each hospital, hospital expenditures per capita
³⁹Maine's system takes hospitals' Medicare revenues into account when
determining what the hospitals may charge other payers, thus achieving
overall budgetary control without direct Medicare participation. This approach
has recently survived a legal challenge by hospitals.
³⁴Schramm, Carl J., Steven C. Renn, and Brian Biles. New Perspectives
on State Rate-Setting. Health Affairs, V. 5, no. 3, fall 1986. p. 22-33.
³⁵Eby, Charles L., and Donald R. Cohodes. What Do We Know About
Rate-Setting? Journal of Health Politics, Policy, and Law, V. 10, no. 2,
summer 1985. p. 299-327.
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were one-third lower than in the United States in 1985. (Similar systems in
other industrial nations have been less successful.)³⁶ As admission rates are
not markedly lower, there is considerable uncertainty about the sources of the
difference. Some of the saving may be in administrative costs, simply because
the hospitals do not need to meet the paperwork requirements of multiple
payers. The rest of the difference is often attributed to differences in the
intensity of the services furnished to each patient. Whether these differences
reflect "underservice" in Canada or "overservice" in the United States is the
subject of continuing debate. 37
In a sense, the statistical evidence may be beside the point. An all-payer
system could in theory fix its prices at any level, with the potential
consequence of reduced access or quality if the prices are set too low. The
available data may thus be taken as indicating, not the savings that could
hypothetically be achieved, but the savings that were politically feasible in
specific States during a specific period. Continuing pressure by consumers
and providers for the adoption of new medical technologies may limit the
ability of ratesetting systems to restrain expenditure growth over the long
term. Even in Canada, overall medical expenditures outpaced inflation by 2.9
percent a year in the period 1980-87, almost the same as the 3.0 percent
annual rate observed in the United States in the same years. 38 The ultimate
efficacy of reimbursement controls may depend, in the same way that the
success of health planning depends, on the political will to constrain health
care consumption.
That political will might in turn depend on perceptions of the impact of
reimbursement controls on the quality of care. The effect of Medicare's
prospective payment system, for example, has been argued continuously since
its implementation in 1983. One of the immediate responses of hospitals to
the incentives of the new system was to shorten the average length of stay in
the hospital for each Medicare patient (although average length of stay had
already been dropping for several years). Opponents of the new system have
contended that patients were being discharged "quicker and sicker,"
transferred to their own homes or to nursing homes at a stage in their
recovery when they still required hospital-level care. Because of a lack of
satisfactory measures of medical care outcomes for large populations, evidence
on this issue remains largely anecdotal. Still, the possibility that there has
been a deterioration in quality of care for at least some Medicare patients
³⁶Organisation for Economic Co-Operation and Development. Financing
and Delivering Health Care: A Comparative Analysis of OECD Countries.
Paris, 1987. (OECD Social Policy Studies No. 4.) p. 63.
³⁷For a variety of views on this subject, see the series of articles on
Canada's hospital system in Health Affairs, V. 7, no. 5, winter 1988.
³⁸Schieber and Poullier, International Health Care Expenditure Trends:
1987.
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since the implementation of PPS cannot be ruled out. The hospitals
themselves argue that current payment levels are insufficient to maintain
adequate quality. At the same time, the Administration and the Prospective
Payment Assessment Commission (the independent commission that reviews
PPS) have argued that hospitals are still not operating at peak efficiency and
that further payment restraint is needed to provide continued incentives for
cost reduction. 39
This debate illustrates one potential dilemma in the strategy of achieving
savings by relying on the political process to limit the financial resources
available to providers. On the one hand, legislators driven by budgetary
concerns may continue to ratchet down spending limits until they have clear
evidence that quality has been seriously affected. On the other hand,
provider or constituent pressure may lead them to relax those limits before
the providers have done everything possible to improve their efficiency.
Because no one knows the ideal amount to spend on medical care, some
people say that this process can never achieve equilibrium and that cost
control efforts should instead depend on the process through which other
sectors of the economy achieve "correct" spending levels: the free market.
Proposals for encouraging competition in health care represent the last of the
strategies to be reviewed in this report.
COMPETITION
The idea of reducing health care costs by promoting competition in the
health care marketplace was first advanced in the 1970s. Some analysts,
arguing that such initiatives as rate regulation, health planning, and
utilization review had been compromised by political interference, contended
that the free market was better equipped to control costs than Government
was. By the early 1980s, this view had wide currency and had become the
official policy of the Reagan Administration. Since then, there has been a
continuing debate between advocates of competition and those who favored
further regulatory interventions by Government. The debate has been
complicated by a lack of agreement over what "competition" consists of. What
is the health care market? Who are the purchasers, and what are they
buying?
In a simple market, hospitals and physicians would compete directly for
the individual consumer's dollar. The consumer would pick the best values
just as he or she does when buying any other commodity. As was suggested
³⁹U.S. Prospective Payment Assessment Commission. Report and
Recommendations to the Secretary, U.S. Department of Health and Human
Services. Washington, U.S. Govt. Print. Off., Mar. 1989; For a recent review
of hospital cost responses to PPS, see Sheingold, Steven H. The First Three
Years of PPS: Impact on Medicare Costs. Health Affairs, V. 8, no. 3, fall
1989. p. 191-204.
CRS-21
in the discussion of cost-sharing, it is not clear that consumers are capable of
making such evaluations; moreover, many purchasing decisions are made by
physicians on their patients' behalf, rather than directly by consumers.
Finally, because few people can afford the costs of care for a major illness,
most of the consumer's dollar is spent on health insurance, not on medical
care itself. As was suggested earlier, this is true even when the insurance
plan imposes cost-sharing requirements on enrollees, because most health care
costs are incurred by a relatively small number of high-cost cases. For this
reason, most proponents of competition are really talking about price
competition among insurers, and only indirectly among providers.
If the insurer is--as traditional health insurance plans were--a passive
payer for services obtained by policyholders, there is little room for serious
price competition. The only element of cost that the insurer can control is its
own administrative cost. Competition, if any, may turn on such non-price
factors as reputation or the insurer's ability to screen out high-risk
applicants.⁴⁰
Competition among insurers can result in real cost savings only if the
insurers have some influence on the costs of health care itself. In this model,
insurers compete to offer lower prices by acting as prudent purchasers,
proxies for the rational consumer. The insurers are selling a new product, no
longer simply insurance, but "insured health care." To some extent, this new
insurance market has already arrived. As was suggested earlier, most
insurance plans, both public and private, have adopted some utilization
control measures. Very few insurers are still passive bill-payers.
Once all insurers have adopted these basic cost control measures, further
competition would presumably require more aggressive interventions by
insurers in the health care system. Proponents of competition contemplate a
marketplace in which insurers develop structured delivery systems, with the
highest profits going to those whose networks are most efficient. The
prototype for these systems is the HMO. More recently, some insurers have
been experimenting with hybrid programs, such as "point-of-service plans,"
that are less structured and provide somewhat greater flexibility to enrollees.
40Alain Enthoven has summarized the alternatives to price competition:
"[S]election of preferred risks, market segmentation, product differentiation
that raises the costs of comparing products, discontinuity in coverage, refusal
to insure certain individuals or exclusion of coverage for treatment of
preexisting medical conditions, biased information regarding coverage and
quality, and erection of entry barriers [that is, to new competitors]."
Enthoven, Alain C. Managed Competition of Alternative Delivery Systems.
Journal of Health Politics, Policy and Law, V. 13, no. 2, p. 305-321.
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Health Maintenance Organizations
A health maintenance organization (HMO) is a form of health insurer;
like any other insurer, it accepts financial responsibility for a defined set of
health care benefits in return for a fixed monthly per capita premium.
Unlike other insurers, HMOs directly provide or arrange for health care
services, through affiliated physicians, hospitals, and other providers. The
enrollees covered by the HMO agree to obtain all services, except emergency
and out-of-area care, from or with the authorization of the HMO or its
affiliated providers. The HMO has no liability to pay for unauthorized non-
urgent care obtained outside the organization. Ordinarily, the enrollee's point
of entry into the system is through a single primary care provider, who
functions as a "gatekeeper," determining when a patient may see a specialist
or be admitted to the hospital. The HMO exerts further administrative
controls on use of services through authorization mechanisms and/or
treatment protocols. HMOs also use a variety of other cost-saving techniques,
such as negotiated discounts with providers and payment mechanisms that
place individual providers at risk for the costs of the services they furnish or
order.
The particular cost-saving techniques adopted by HMOs and other
"managed care" plans are not fundamentally different from the regulatory
approaches described in the preceding sections. An HMO imposes external
utilization review on its participating providers and may develop practice
guidelines or protocols. Staff or group practice model HMOs (those that
employ physicians on a full-time basis) impose supply constraints, limiting
available resources to those needed by their membership. Individual practice
associations (IPAs, whose physicians practice in their own offices and see a
mix of HMO and non-HMO patients) use payment methods that create
financial incentives to control utilization, such as capitation or expenditure
targets.
One additional cost-saving approach that was once unique to HMOs is
"gatekeeping." Under a gatekeeping approach, a patient receives all non-
emergency care from, or with the authorization of, a single primary care
provider. The provider thus functions as a "gatekeeper," preventing the
enrollee from independently accessing specialists or other services and
presumably managing the overall care of the patient. The extent to which
gatekeeping produces savings over and above those provided by the other
cost-saving techniques adopted by HMOs is uncertain. The results of one
experiment, the SAFECO health plan operated by United HealthCare in the
early 1980s, suggest that gatekeeping alone has little effect on overall cost.
While primary care providers reduced the number of referrals to specialists,
they were unable to control the behavior of the specialists once a referral had
occurred. There was no meaningful reduction in hospital admissions, 70
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percent of which were controlled by the specialists.⁴ Greater success has
been reported by some State Medicaid programs, which have established
"primary care case management" programs for segments of their covered
populations. Gatekeeping reduced such inappropriate behaviors as the use of
emergency rooms for primary care. However, the utilization patterns
addressed by these programs may be characteristic of Medicaid beneficiaries
in the inner city and not of other groups; it is not clear that equivalent
savings could be achieved with a general population. There is some evidence
that most patients' care is already "managed" by their primary care
physicians, at least to the extent that it is managed under formal gatekeeping
arrangements.⁴²
Aside from the uncertain effects of gatekeeping, managed care depends on
the same kinds of interventions in medical care practice, supply, and financing
that might otherwise be attempted on a regulatory basis. The difference is
that, instead of relying on the political process to make decisions about the
allocation of health care resources, managed care privatizes these decisions.
The choice among alternative cost control methods--and the stringency with
which these methods will be applied--will be made by the free market. The
fundamental contention of proponents of the competitive approach is that
the market can impose discipline on the health care system that cannot be
imposed through external regulation.
This contention rests on two key assumptions: first, that buyers will, all
other things being equal, select the most cost-effective plan; second, that
managed care offers greater cost-saving potential than the various regulatory
controls described earlier.
One critical factor has made it difficult to generalize about the efficacy
of HMOs as a cost-saving approach: the problem of "biased selection" in
systems that allow a choice between a conventional health insurance plan and
an HMO. Numerous studies of such "dual choice" employer group plans have
shown that the members of the group choosing the HMO option used fewer
health services before their enrollment than persons who chose an
conventional plan. Similar patterns have been observed in Medicare HMO
⁴¹Moore, Stephen, Diane Martin, and William Richardson. Does the
Primary-Care Gatekeeper Control the Costs of Health Care? Lessons from the
SAFECO Experience. New England Journal of Medicine, V. 309, no. 22, Dec.
1, 1983. p. 1400-1404; For the extent to which specialty referrals may
determine overall costs, see Glenn, John K., Frank H. Lawler, and Mark S.
Hoerl. Physician Referrals in a Competitive Environment: An Estimate of
the Economic Impact of a Referral. Journal of the American Medical
Association, V. 258, no. 14, Oct. 9, 1987. p. 1920-23.
⁴²Dietrich, A.J., et al. Do Primary Physicians Actually Manage Their
Patients' Fee-for-Service Care? Journal of the American Medical Association,
V. 259, no. 21, June 3, 1988. p. 3145-49.
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enrollment. 43 This does not necessarily mean that HMO enrollees were
healthier. Studies using self-reported condition and similar limited measures
of health status have found no difference between HMO and indemnity
enrollees. It may be, then, that HMO enrollees are simply less prone to seek
health services, regardless of their condition. 44
In groups that have no HMO option but do offer a choice between high-
and low-option plans the common selection pattern is for the higher users of
services to choose the more comprehensive plan.46 In most group health
programs offering a choice between HMOs and conventional plans, the HMO
options offer more comprehensive coverage, with less enrollee cost-sharing,
than even a high-option conventional plan. That higher users of services still
prefer the conventional plan suggests that non-financial aspects of HMOs
affect the decision, such as limited choice of providers, bureaucratic
constraints on treatment, or waiting time for non-urgent care. There is
stronger evidence of biased selection for staff and group model HMOs, the
most restrictive, than for IPAs, which are less likely to disrupt enrollees'
traditional ways of obtaining medical care.
Possible solutions to the problem of selection bias will be discussed
further below. One immediate consequence, however, is that the differences
between the populations in HMOs and conventional plans have made it
difficult to determine whether HMOs are actually more efficient than other
insurers. Only one major study has corrected adequately for this problem.
In a second component of the RAND Health Insurance Experiment (HIE)
cited earlier, enrollees were randomly assigned to the Group Health
Cooperative of Puget Sound and an equally comprehensive conventional plan;
neither plan required cost-sharing. This arrangement allowed comparisons of
efficiency with identical benefits and populations with comparable health
needs. The results strongly confirmed the cost-saving potential of the HMO.
The HMO enrollees had 40 percent fewer hospital admissions; their use of
ambulatory services was about the same as that of the conventional enrollees.
Overall, costs for the HMO group were estimated to be 28 percent lower than
⁴³For a review of the evidence, see U.S. General Accounting Office.
Medicare: Increase in HMO Reimbursement Would Eliminate Potential
Savings. Report to the Chairman, Subcommittee on Health, House Committee
on Ways and Means. Washington, Nov. 1989. [GAO/HRD-90-38]
⁴⁴Hellinger, Fred J. Selection Bias in Health Maintenance Organizations:
Analysis of Recent Evidence. Health Care Financing Review, V. 9, no. 2,
winter 1987. p. 55-63.
⁴⁵Broyles, Robert W., and Michael D. Rosko. The Demand for Health
Insurance and Health Care: A Review of the Empirical Literature. Medical
Care Review, V. 45, no. 2, fall 1988. p. 291-338.
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for the control group. There were no perceived effects on quality; measures
of health outcomes were generally the same for both groups.⁴
While the HIE findings are persuasive, two factors may limit the general
applicability of the results. First, the study was conducted in the late 1970s;
the comparison plan was the passive bill-payer prevalent in the insurance
industry in that period, with no utilization control mechanisms. The more
recent adoption by conventional plans of some of the cost-control measures
once associated only with HMOs may mean that the difference in efficiency
between the two types of plan has narrowed.
Second, the HMO used in the Health Insurance Experiment was a highly
structured group-practice plan with many years of operating experience.
Much of the growth in the industry in recent years has involved a different
type of HMO, the individual practice association (IPA), which contracts with
independent physicians who see a mix of HMO enrollees and other kinds of
patients. There is evidence that these more loosely structured HMOs have
not achieved savings comparable to those observed in the HIE. 48 Physicians
may not modify their styles of practice in treating HMO enrollees if those
enrollees constitute only a small share of their practice. In addition, some
people believe that HMOs cannot impose cost-consciousness on practitioners
who have not "signed on" to the concept of more efficient and less resource-
intensive practice. Because so little is still known about the relative efficacy
of different medical practices, external utilization controls may not be able to
override individual physicians' judgment in many cases. The greater success
of the "closed panel" plan, whose physicians treat HMO enrollees exclusively,
has been attributed by some observers to the possibility that these plans
attract physicians who are temperamentally more prone to conservative
medical practice.
Because closed panel plans maintain their own medical facilities, they
require greater start-up funding than IPAs. Federal funds were available to
develop such plans in the 1970s, but new plans must now rely on private
⁴⁶Manning, Willard G., et al. A Controlled Trial of the Effect of a Prepaid
Group Practice on Use of Services. New England Journal of Medicine, V. 310,
no. 23, June 7, 1984. p. 1505-10.
⁴⁷Ware, John E., Jr., et al. Comparison of Health Outcomes at a Health
Maintenance Organisation With Those of Fee-for-Service Care. Lancet, May
3, 1986. p. 1017-22. One group, low-income HMO enrollees with existing
health problems, had poorer outcomes, possibly because of difficulty dealing
with the HMO's internal bureaucracy.
⁴⁸For the most recent findings, see Hillman, Alan, Mark Pauly, and Joseph
Kerstein. How Do Financial Incentives Affect Physicians' Clinical Decisions
and the Financial Performance of Health Maintenance Organizations? New
England Journal of Medicine, V. 321, no. 2, July 13, 1989. p. 86-92.
CRS-26
investment. Investors have favored IPAs, not only because they require less
capital, but also because the wider selection of physicians makes them more
attractive to consumers. This attraction may, however, be purchased at the
price of reduced efficiency.
Finally, while some types of HMOs or similar organizations may be able
to reduce costs relative to conventional plans, it is not clear that they have
so far reduced growth in health care costs. Data from 1961 through 1981
suggest that HMOs may instead achieve a one-time saving, after which costs
rise at the same rate as those for other insurance programs. One explanation
that has been offered is that providers in HMOs are as likely as other
providers to use new medical technologies.⁴⁹ More recent data suggest that
HMO premium increases have continued to resemble those of conventional
insurance plans. The average HMO premium increase during 1988 was 17.2
percent, very close to the 19 percent increase for all employer coverage cited
at the beginning of this report. 50
That HMO cost increases have paralleled those of other insurers does not
necessarily mean that HMOs have reached the limit of their cost-saving
potential. Because competition among health insurers was relatively limited
until recent years, many HMOs may not have faced the market pressures that
could induce them to achieve greater savings. The next section reviews
proposals to strengthen competition.
Competition and Consumer Choice
The competitive strategy depends on the willingness of consumers to
choose the most cost-effective plans. As was suggested earlier, the consumers
most likely to incur high costs may be least likely to choose the most efficient
option. The problem of biased selection might persist even if conventional
insurance plans were to disappear and consumers were able to choose only
among managed care options. (Some industry analysts believe this will occur
in the near future, chiefly because employers will refuse to offer conventional
plans.) It is possible that the most costly patients, given a choice among
competing managed care plans, would choose the plan that was least
restrictive and potentially least able to achieve cost savings. The most
efficient plans might continue to enroll the healthiest patients, for whom only
limited savings are possible.
⁴⁹Newhouse, Joseph P., et al. Are Fee-for-Service Costs Increasing Faster
Than HMO Costs? Medical Care, V. 23, no. 8, Aug. 1985. p. 960-66.
⁵ InterStudy. The Bottom Line: HMO Premiums and Profitability, 1988-
1989. Excelsior, Minn., 1989. Staff and group model HMOs generally had
lower increases, possibly confirming their greater efficiency. However, these
HMOs also tend to be older than IPAs; age of the HMO was also a
determinant of the rate of increase.
CRS-27
Some people believe that biased selection is largely attributable to the
fact that consumers are economically sheltered from the cost of their choice
of plan, because most of the premium is paid by the employer. Various
schemes have been advanced to make the employee more cost-conscious. For
example, the employer's contribution might be tied to the cost of the least
expensive offering, with the employee bearing the full cost of the difference
between that plan and other more expensive options.
However, selection bias can occur even when the choice of the more
expensive plan has real financial consequences for the enrollee. Under the
Federal Employees Health Benefits Program (FEHBP), the monthly employee
share of premium costs in 1990 ranges from $20.54 in the least expensive
high-option HMO to $234.07 in the most costly high-option conventional plan,
a difference of $213.53 per month.⁵¹ Under one possible fixed contribution
scheme, the Federal share of both plans would be set equal to the full cost of
the HMO ($82.16); the employee share would then be zero for the HMO and
$265.29 for the conventional plan. If some Federal employees or annuitants
are already willing to pay 11 times as much as others in order to obtain the
conventional plan, it is not clear that even this change would cause all of
them to shift. to the HMO. For at least some subset of enrollees, the
preference for unrestricted coverage is apparently sufficient to override even
strong financial incentives.
One possible solution to the problem of enrollee self-selection is to
abandon multiple choices and oblige all members of a covered group to enter
a single plan, one selected by the employer or other buyer from among
competing plans. Assuming that employers disregarded their own personal
plan preferences and chose the least costly option, this approach would
theoretically lead to competition among plans on the basis of efficiency.
However, both employers and HMOs have been hesitant to enter into
arrangements under which enrollees are unwillingly locked into a highly
restrictive plan. For this reason, there have evolved arrangements even less
restrictive than IPAs, known as open-ended or point-of-service plans.
The predecessor of these plans is the preferred provider organization
(PPO). PPOs negotiate discounted rates with certain providers. Enrollees
are given a financial incentive, in the form of reduced deductible or
coinsurance requirements, to obtain care from providers participating in the
PPO network. However, payment will be made under the plan for services
furnished by any provider. PPOs thus differ from HMOs, which deny
payment altogether for unauthorized non-emergent care provided by providers
outside the HMO network. While some PPOs have adopted managed care
techniques, such as the use of gatekeepers, most of the savings from a PPO
⁵¹The conventional plan is national, while HMOs are offered only in
specific locations. The comparison presented here applies only in one area
(Tampa, Florida) and represents the extreme of variation in the FEHBP
system.
CRS-28
are expected to result from encouraging enrollees to use the participating
providers.
The newer, open-ended plans are hybrids, combining some features of
HMOs and PPOs. Typically, the plan operates a structured health care
system comparable to that of an IPA-model HMO. Enrollees are expected to
access the system through a primary care gatekeeper and obtain services from
other network providers upon referral by the gatekeeper. Like an HMO, the
plan also imposes external utilization controls and negotiates price discounts
with providers. As in a PPO, enrollees are free to use non-network providers
for covered services, but must pay higher cost-sharing amounts if they choose
to do so. Enrollees are also subject to higher cost-sharing if they use
specialists within the network without the authorization of the gatekeeper.
Open-ended plans have been adopted by some employers as the single
plan available to their workers, replacing systems in which the workers had
a choice between conventional and HMO options. Their attraction has been
that they overcome the possible selection bias in dual choice systems by
enrolling all employees in an HMO-like program. At the same time, they can
reduce the employee resistance that would probably greet a proposal for
universal HMO enrollment, because they offer employees the safety valve of
being able to choose non-plan providers.
Officials of some major insurers that have experimented with open-ended
plans in multiple markets report that the plans appear to be reducing the
rate of health care cost increases, relative to the increases for their
conventional offerings in the same markets. 52 Because these plans began
operations only very recently, the data required for an objective evaluation
are not yet available. Even PPOs, which have existed for a decade, have
never been the subject of a controlled study. Some preliminary findings,
however, suggest that the safety valve that makes PPOs attractive is
potentially a serious weakness, one which may carry over to the newer hybrid
plans.
One recent study of a PPO found that enrollees used the PPO's
providers for preventive care and minor illnesses, but went outside the
network about half the time for specialty care, major surgery, and
hospitalization without surgery.53 One study found a similar pattern among
PPO enrollees who were actually employees of one of the providers in the
⁵²Personal communication with officials of Prudential and CIGNA.
⁵³Wouters, Annemarie, and James Hester. Patient Choice of Providers in
a Preferred Provider Organization. Medical Care, V. 26, no. 3, Mar. 1988.
p. 240-255. The results may not be fully representative, because the PPO
studied was somewhat skewed towards primary care providers.
CRS-29
PPO network. 54 While these findings are not definitive, they suggest a
dilemma that may be common to both PPOs and the newer types of managed
care plans. If the price for going out of plan is not punitive, enrollees may
obtain much of their care outside the network; if the price is set high enough
to deter outside utilization, the plan may lose its relative attractiveness.
Both solutions to the biased selection problem, higher premiums for the
non-HMO plan or higher cost-sharing for using non-HMO providers, may
then face the same potential barrier: the highest-risk enrollees, those for
whom the greatest potential savings presumably exist, may be willing to pay
much more out-of-pocket to retain free choice of providers and avoid
bureaucratic restrictions. While the problem might be overcome by making
the cost of unrestricted health care prohibitive, this solution may be
foreclosed by the potential strain on labor relations (or, in the case of public
programs, political resistance).
One other solution that has been proposed is to go to the roots of
consumer resistance to managed care, the concern about quality. Some
analysts argue that, because consumers have little information about the
relative quality of different medical care providers, they must rely on "signals"
of quality sent out by various providers, such as the use of elaborate
technology or aggressive medical treatment styles.⁵⁵ If the persons with the
highest expectation of requiring medical services will accept financial sacrifices
to avoid managed care programs, this may be because they cannot evaluate
the care offered by such programs and wish to remain free to seek out the
providers who more actively signal quality. This preference might be
overcome if consumers had reliable data on the actual quality of the care
furnished by different providers or provider systems such as HMOs.
This view has led to such proposals as the "buy right" plan advanced by
Walter McClure of the Center for Policy Studies in Minnesota. Under this
plan, a community would collect and make available to consumers uniform
data on patient outcomes from all providers. Consumers would then be in a
position to determine whether the higher cost providers were actually
furnishing superior care and could thus make rational purchasing decisions.
The proposal assumes that the community can agree on objective measures of
quality. Past efforts to develop uniform bases of comparison have been
controversial. For example, the annual release by the Health Care Financing
Administration of mortality data for Medicare beneficiaries in hospitals has
been criticized on the grounds that numerous factors other than relative
⁵⁴Diehr, Paula, et al. Use of a Preferred Provider by Employees of the
554. Preferred Provider. Health Services Research, V. 23, no. 4, Oct. 1988. p. 537-
⁵⁵For an elaboration of this theory, see Robinson, James C. Hospital
Quality Competition and the Economics of Imperfect Information. Milbank
Quarterly, V. 66, no. 3, 1988. p. 465-81.
CRS-30
proficiency can affect the death rates of hospital patients. Highly specialized
facilities may be treating the most seriously ill patients; facilities serving a
low-income population may find that more of their patients have delayed
medical treatment beyond the point at which they could be helped. Full
implementation of the "buy right" strategy might have to wait until research
can provide acceptable standardized outcome measures.
Assuming that those measures can be developed, how would competition
then work? Consumers would be fully informed about the relative price and
quality of competing health plans, and would thus be equipped to make
medical care purchasing decisions in the same way that they decide about
other purchases. Proponents of competition argue that the power of the
market would then compel all providers to make steady improvements in both
quality and efficiency. However, if the health care market could be induced
to evolve in the same way as other markets, it is not necessarily the case that
the end product would be a single class of providers uniformly striving to
achieve the same goals. The health care market could instead be segmented
in the way that the markets for other goods and services are; there might be
economy and luxury health plans just as there are economy and luxury
automobiles. Improving the information available to health care consumers
might mean only that buyers would be better able to distinguish between the
two, not that the distinction would cease to exist. Whether Americans are
prepared to accept the same price/quality tradeoffs in buying medical care
that they do in buying other products is an open question.
May 4, 1990, P. A7
THE WASHINGTON POST
plus extra medical price inflation-accounted
Spending for Health Care
for two-thirds of the increase.
Experts say medical costs rose beyond the
general 1988 inflation rate of 4.2 percent
Takes Record Bite of GNP
because medical care is a service with a large
personal labor component, and many service
industries cannot offset increased labor costs
through technical innovations.
Costs Outpace Economy, Despite Control Measures
Another tenth of the rise resulted from
population increase, and the remainder came
from such factors as greater use of technol-
tion of national income, continues to grow
By Spencer Rich
ogy and a larger number of services per pa-
Washington Post Staff Writer
rapidly, Sullivan said.
tient, the report said. Total spending on doc-
Health spending constituted 5.3 percent
tors rose 13.1 percent in 1988, while spend-
National spending on health care moved
of gross national product in 1960 and rose
ing for hospital services rose 9.3 percent.
sharply upward in 1988, reaching $539.9
to its new record despite widespread efforts
Federal, state and local governments pay
billion, a record 11.1 percent of the U.S.
by the government and private insurers to
about two-fifths of health costs, private
gross national product, Secretary of Health
restrain burgeoning costs, the report
health insurance about a third, and patients
and Human Services Louis W. Sullivan an-
showed. By contrast, defense outlays in
pay the rest.
nounced yesterday.
1988 were 6.1 percent of GNP.
In 1983 Congress moved to curb hospital
"The trends shown in this report are not
Control of health costs is considered by
costs and last year approved legislation to
cause for celebration," Sullivan said. "Health
many experts to be the number one health
impose a national target each year for pay-
expenditures have been growing faster than
problem in the United States. Such costs are
ments Medicare will make to doctors, a pol-
the national economy for many years. This
expected to bankrupt Medicare by the year
icy aimed at curbing unjustified increases in
wth will strain the ability of the American
2003, and businesses and individuals are fac-
the volume of services. If outlays in any
le to pay for quality health care."
ing steeply rising premiums for health insur-
year exceed the target, fees to doctors in
For more than a generation, health
ance. Many businesses are cutting back
subsequent years can be frozen or reduced
spending has been increasing far faster than
health insurance for their workers or forcing
to recapture the excess.
the general cost of living. Yesterday's re-
them to pay a larger share of the costs.
The new policy does not directly affect
port shows that total health spending by all
The 1988 health outlays amounted to
private businesses and insurers, but if suc-
public and private sources, already the high-
$2,124 per person, 10.4 percent more than
cessful it is expected to be a model for sim-
est of any developed country as a propor-
in 1987. General inflation in the economy-
ilar curbs in the non-government sector.
Copyright 1990 The Washington Post Company. Reproduced
by the Library of Congress, Congressional Research Service
with permission of copyright claimant.
HHS NEWS
U.S. DEPARTMENT OF HEALTH AND HUMAN SERVICES
Contact: Bob Hardy
202-245-6145
FOR IMMEDIATE RELEASE
Thursday, May 3, 1990
The nation's spending on health increased 10.4 percent in
1988, resuming a double-digit growth rate after a period of more
moderate increases, according to a report released today by HHS
Secretary Louis W. Sullivan, M.D.
The growth rate of national health expenditures was 15
percent in 1980 and increased at an average annual rate of 11
percent from 1980 through 1985. The annual rate of growth slowed
to 7.2 percent in 1986 and was 8.5 percent in 1987.
National health spending of $539.9 billion in 1988 was 117
percent greater than the sum spent in 1980. Health spending in
1988 translates into $2,124 for each person, a 100-percent
increase in per-capita spending since 1980.
National health expenditures in 1988 accounted for 11.1
percent of the gross national product, up from 9.1 percent in
1980, 7.3 percent in 1970 and 5.3 percent in 1960.
"The trends shown in this report are not cause for
celebration," Secretary Sullivan said. "Health expenditures have
been growing faster than the national economy for many years.
This growth will strain the ability of the American people to
pay for quality health care.
"Government and business leaders, public and private
institutions, health care professionals and consumers must work
- More -
Reproduced by Library of Congress, Congressional Research Service.
- 2 -
together on the problem of making quality health care affordable
and available to every American," Secretary Sullivan said.
Personal health expenditures, the major component of
national health spending, increased 10 percent in 1988. The
general rate of inflation in the economy was responsible for
only 43 percent of the 1988 increase in personal health
expenditures, medical price inflation added 24 percent,
population changes contributed 10 percent and other factors
accounted for 23 percent of the increase. "Other factors"
include elements such as utilization of technology and volume
and intensity of health care services.
National expenditures for physician services increased 13.1
percent in 1988, while spending for hospital services grew at a
rate of 9.3 percent.
Programs of the federal, state and local governments
accounted for 41 percent of personal health care expenditures in
1988. Federal outlays, mainly for the Medicare and Medicaid
programs, were 30 percent of personal health spending, while the
states and local governments financed 11 percent.
Private health insurance financed 32 percent of personal
health care expenditures in 1988, and direct patient payments
accounted for 24 percent.
The national health expenditures report for 1988, prepared
by the Health Care Financing Administration, includes revisions
of estimates previously published for prior years. The revisions
were produced by using new methodology, new data sources and new
categories for more accurate estimating of trends.
# # #
THE NATION'S HEALTH DOLLAR IN 1988
Where H came from
Private health
Medicare 17c
insurance 32c
Medicaid 10c
Other private 5e
Other government
Direct patient
programs 15c
payments 21c
where It went
Hospital care 39c
Other spending
12c
Nursing
home care 8¢
Other personal
Physicians' services 19c
health care 22¢
NOTES: Other private includes Industrial inplant health services, philanthropy,
and privately financed construction. Other personal health care includes dental.
other professional services, home health, drugs, and durable medical
equipment. Other spending is for program administration and the net cost of
private health Insurance. government public health, research, and construction.
SOURCE: Health Care Financing Administration, Office of the Actuary: Data
from the Office of National Cost Estimates.
Table 1
National health expenditures aggregate, per capita, percent distribution,
and percent change, by source of funds: Calendar years 1960-88
Item
1960
1965
1970
1975
1980
1985
1986
1987
1988
Amounts
National health expenditures (billions)
$27.1
$41.6
$74.4
$132.9
$249.1
$420.1
$450.5
$488.8
$539.9
Private
20.5
31.3
46.7
77.8
143.9
245.2
259.8
280.5
312.4
Public
6.7
10.3
27.7
55.1
105.2
174.9
190.7
208.3
227.5
Federal
2.9
4.8
17.7
36.4
72.0
123.4
132.8
144.0
157.8
State and local
3.7
5.5
9.9
18.7
33.2
51.5
57.9
64.3
69.6
U.S. population (millions)
190.1
204.0
214.8
224.7
235.2
247.1
249.5
251.8
254.2
Gross national product (billions)
$515
$705
$1,015
$1,598
$2,732
$4,015
$4,232
$4,524
$4,881
Per capita amounts
National health expenditures
$143
$204
$346
$592
$1,059
$1,700
$1,806
$1,941
$2,124
Private
108
154
217
346
612
992
1,041
1,114
1,229
Public
35
50
129
245
447
708
765
827
895
Federal
15
24
83
162
306
500
532
572
621
State and local
20
27
46
83
141
208
232
256
274
Percent distribution
National health expenditures
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
Private
75.5
75.3
62.8
58.5
57.8
58.4
57.7
57.4
9
Public
24.5
24.7
37.2
41.5
42.2
41.6
42.3
42.6
.1
Federal
10.7
11.6
23.9
27.4
28.9
29.4
29.5
29.5
29.2
State and local
13.8
13.2
13.3
14.1
13.3
12.2
12.9
13.2
12.9
Percent of gross national product
National health expenditures
5.3
5.9
7.3
8.3
9.1
10.5
10.6
10.8
11.1
Average annual percent change from previous year shown
National health expenditures
8.9
12.3
12.3
13.4
11.0
7.2
8.5
10.4
Private
8.9
8.3
10.7
13.1
11.2
6.0
8.0
11.4
Public
9.1
21.9
14.8
13.8
10.7
9.1
9.2
9.2
Federal
10.6
29.8
15.5
14.6
11.4
7.6
8.4
9.6
State and local
7.9
12.6
13.5
12.1
9.2
12.5
11.1
8.2
U.S. population
1.4
1.0
0.9
0.9
1.0
1.0
1.0
0.9
GNP
6.5
7.6
9.5
11.3
8.0
5.4
6.9
7.9
1 July 1 social security area population estimates.
SOURCE: Health Care Financing Administration, Office of the Actuary: Data from the Office of National Cost Estimates.
Table 2. National health expenditures In 1988, by type of expenditure and source of funds
Private
Government
Total
Consumer
All
All
State
sources
private
Out of
Private
and
Year and type of expenditure
funds
Total
Pocket
Insurance
Other
Total
Federal
local
Amount in billions
National health expenditures
$539.9
$312.4
$288.1
$113.2
$174.9
$24.3
$227.5
$157.8
$69.6
Health services and supplies
520.5
304.6
288.1
113.2
174.9
16.5
215.9
149.0
66.9
Personal health care
478.3
284.3
268.4
113.2
155.2
15.9
194.0
143.2
50.8
Hospital care
211.8
96.6
86.3
11.3
75.0
10.3
115.2
86.7
28.5
Physicians' services
105.1
70.0
69.9
19.9
50.0
0.0
35.2
28.7
6.4
Dentists' services
29.4
28.7
28.7
16.3
12.4
--
0.7
0.4
0.3
Other professional services
22.5
18.0
15.4
7.1
8.3
2.6
4.5
3.4
1.0
Home health care
4.4
1.1
0.8
0.5
0.3
0.3
3.3
2.6
0.7
Drugs and other medical nondurables
41.9
37.3
37.3
29.6
7.7
- -
4.6
2.2
2.4
Vision products and other medical durables
10.8
8.6
8.6
7.6
1.0
- -
2.3
2.0
0.2
Nursing home care
43.1
22.1
21.3
20.8
0.5
0.8
20.9
12.5
8.4
Other personal health care
9.3
1.9
- -
- -
--
1.9
7.4
4.7
2.7
Program administration and net cost of
private health insurance
26.3
20.3
19.7
: -
19.7
0.5
6.1
3.9
2.2
Government public health activities
15.9
- -
:-
--
--
:-
15.9
1.9
14.0
Research and construction
19.4
7.8
-
-
-
7.8
11.5
8.8
2.7
Noncommercial research
9.9
0.7
-
.
0.7
9.1
7.9
1.2
Construction
9.5
7.1
-
7.1
2.4
0.9
1.5
NOTES: Research and development expenditures of drug companies and other manufacturers and providers of medical
equipment are excluded from noncommercial research, being implicitly included in the value of the good or service
being produced. "Other private funds" include funding through philanthropy and nonpatient revenues, business
spending for industrial inplant health services, and privately financed construction.
SOURCE: Health Care financing Administration, Office of the Actuary: Data from the Office of National Cost Estimates.
Table 3. Sources of funds for personal health care in 1988
Total
Other
Other
Personal
profes-
Home
Drugs
Vision
Nursing
personal
health
Hospital
Physicians'
Dentists'
sional
health
and non-
products &
home
health
Source of payment
care
care
services
services
services
care
durables
durables
care
care
Amount In billions
Total personal health care
$478.3
$211.8
$105.1
$29.4
$22.5
$4.4
$41.9
$10.8
$43.1
$9.3
Direct patient payments
113.2
11.3
19.9
16.3
7.1
0.5
29.6
7.6
20.8
:-
Third-party payments
365.1
200.5
85.2
13.1
15.4
3.9
12.3
3.2
22.2
9.3
Private health Insurance
155.2
75.0
50.0
12.4
8.3
0.3
7.7
1.0
0.5
:-
Other private
15.9
10.3
0.0
--
2.6
0.3
--
--
0.8
1.9
Government
194.0
115.2
35.2
0.7
4.5
3.3
4.6
2.3
20.9
7.4
Federal
143.2
86.7
28.7
0.4
3.4
2.6
2.2
2.0
12.5
4.7
Medicare
89.7
58.3
24.9
---
2.1
1.8
--
1.9
0.8
: -
Medicaid
29.4
11.2
2.2
0.3
0.8
0.8
2.1
: -
10.8
1.2
24.1
17.1
1.7
0.1
0.6
--
0.1
0.1
1.0
3.5
Other programs
State and local
50.8
28.5
6.4
0.3
1.0
0.7
2.4
0.2
8.4
2.7
Medicaid
22.9
8.9
1.6
0.3
0.6
0.7
1.5
--
8.4
0.9
Other programs
27.9
19.5
4.9
0.1
0.5
0.0
0.8
0.2
0.1
1.8
EXHIBIT: Total Medicaid
52.3
20.2
3.8
0.6
1.4
1.5
3.6
--
19.1
2.1
Percentage distribution
Total personal health care
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
Direct patient payments
23.7
5.3
18.9
55.4
31.6
11.6
70.7
70.3
48.4
- -
76.3
94.7
81.1
44.6
68.4
88.4
29.3
29.7
51.6
100.0
Third-party payments
Private health insurance
32.4
35.4
47.6
42.1
36.9
7.0
18.4
8.8
1.1
- -
Other private
3.3
4.9
0.0
--
11.6
6.8
: -
: .
1.9
20.0
Government
40.6
54.4
33.4
2.5
19.8
74.6
10.9
20.9
48.6
80.0
Federal
29.9
40.9
27.3
1.4
15.2
58.7
5.3
18.7
29.0
50.7
Medicare
18.8
27.5
23.6
:-
9.2
40.8
:-
17.3
1.9
Medicaid
6.2
5.3
2.1
1.2
3.4
17.8
5.0
:-
25.0
13.0
Other programs
5.0
8.1
1.6
0.2
2.5
: .
0.2
1.4
2.2
37.7
State and local
10.6
13.4
6.1
1.1
4.6
15.9
5.7
2.2
19.6
29.3
Medicaid
4.8
4.2
1.5
0.9
2.6
15.5
3.7
19.4
10.0
Other programs
5.8
9.2
4.6
0.2
2.0
0.4
2.0
2.2
0.1
19.4
EXHIBIT: Total Medicaid
10.9
9.5
3.6
2.1
6.0
33.3
8.7
44.4
22.9
NOTES: 0 denotes less than $50 million. Medicaid expenditures exclude Part B. premium payments to Medicare by States under "buy in"
eements to cover premiums for eligible Medicaid recipients.
SOURCE
ealth Care Financing Administration, Office of the Actuary:
D
om the Office of National Cost Estimates
Order Code IB77066
CRS Issue Brief
Health Care Expenditures and Prices
Updated June 19, 1990
by
Kathleen M. King
Education and Public Welfare Division
CRS
Congressional Research Service The Library of Congress
CONTENTS
SUMMARY
ISSUE DEFINITION
BACKGROUND AND ANALYSIS
National Health Expenditures
Price of Health Care, as Measured by the CPI
Hospital Expenses
Hospital Utilization
FOR ADDITIONAL READING
IB77066
06-19-90
Health Care Expenditures and Prices
SUMMARY
National spending for health care services topped $500 billion for the first time
in 1987, which represented a 9.8% increase over 1986 expenditures. Real spending
on health care continues to increase. Adjusted for inflation, 1987 expenditures were
6.1% higher than 1986 expenditures. At least since the inception of Medicare and
Medicaid in 1965, health care spending has grown faster than growth in the Gross
National Product (GNP), and shows no signs of abating. In 1987, the latest year for
which data are available, health care spending consumed 11.1% of the GNP, compared
to 10.7% in 1986 and only 5.9% in 1965. Health care prices, as measured by the
medical care component of the Consumer Price Index (CPI), are also increasing faster
than the overall rate of inflation.
IB77066
06-19-90
ISSUE DEFINITION
National health expenditures have increased every year for decades. At least
since the passage of Medicare and Medicaid in the mid 1960s, the rate of growth in
health care spending has outstripped growth in the Gross National Product. Medical
care prices have also been rising rapidly. These growth factors concern congressional
policymakers because the Federal Government funds approximately 30% of all health
care spending. Rapidly escalating health care prices also erode the Government's
purchasing power and jeopardize its ability to extend coverage to underserved
populations or finance additional health care services.
BACKGROUND AND ANALYSIS
National Health Expenditures
National health expenditures have increased for decades, both in aggregate terms
and on a per capita basis as a percent of the Gross National Product (GNP). The
growth in national health care expenditures is shown in TABLE 1. During the
1970s, national health expenditures grew at an average annual rate of 12.7%. In
both 1980 and 1981, national health expenditures grew over 15% annually. Beginning
in 1982 and continuing through 1985, growth rates declined significantly. The 1985
7.9% growth rate was the lowest recorded since the 1965 enactment of Medicare and
Medicaid. This relatively low rate of growth was probably due to many factors,
including a low rate of inflation in the economy in general, increasing pressure to
contain health care cost in both the public and private sectors and changing patterns
of demand for services, in particular a decline in the use of inpatient hospital
services.
Rate of increase inched back up again in 1986 and 1987, but are still in single
digits. In 1987, the most recent year for which data are available, the rate of growth
was 9.8%.
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TABLE 1
Aggregate and Per Capita National Health Expenditures,
and Percent of Gross National Product, Selected Years, 1965-1987
Calendar
Total Amt.
Average annual
Per capita
Percent
year
($ billions)
% increase
amount
of GNP
1965
41.9
9.3
205
5.9
1970
75.0
12.3
349
7.4
1975
132.7
12.1
590
8.3
1976
150.8
13.6
665
8.9
1978
189.7
12.2
822
8.4
1979
214.7
13.2
921
8.6
1980
248.1
15.6
1,054
9.1
1981
287.0
15.7
1,207
9.4
1982
323.6
12.8
1,348
10.2
1983
357.2
10.4
1,473
10.5
1984
388.5
8.8
1,587
10.3
1985
419.0
7.9
1,696
10.4
1986
455.7
8.7
1,827
10.7
1987
500.3
9.8
1,987
11.1
Source: Division of National Cost Estimates, Office of the Actuary,
Health Care Financing Administration.
National expenditures for hospital care and for physicians' services exceed
expenditures for all other health services. Hospital care expenditures are the largest
component of the Nation's health spending (representing 39% of total health
spending in 1987), and increased annually at "double-digit" rates between 1971
through 1982. The rate of increase fell sharply in 1984, partly in response to
Medicare's implementation of a prospective payment system for inpatient hospital
services. Rates have risen moderately since 1984, but are still below the growth rates
of the 1970s and early 1980s. By 1987, annual expenditures reached $194.7 billion.
Physicians' services, which represented 20% of national health expenditures in 1987,
increased twelvefold from 1965 to 1987. Since 1965, rates of increase in physicians'
services have been in double digits for all but 3 years: 1972, 1984, and 1985.
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TABLE 2
National Health Expenditures and Average Annual Percent
Change From Previous Year Shown for Hospital Care and Physicians'
Services, selected years 1965-1987
(dollars in billions)
Hospital care
Physicians' services
Amount % increase
Amount % increase
1965
14.0
NA
8.5
NA
1970
28.0
14.9
14.3
11.1
1971
31.0
10.7
15.9
11.1
1972
35.2
13.5
17.2
8.2
1973
38.9
10.5
19.1
11.0
1974
45.0
15.7
21.2
11.0
1975
52.4
16.4
24.9
17.5
1976
60.9
16.2
27.6
10.8
1977
68.1
11.8
31.9
15.6
1978
76.2
11.9
35.8
12.2
1979
87.0
14.2
40.2
12.4
1980
101.6
16.8
46.8
16.4
1981
117.9
16.0
54.8
16.9
1982
134.7
14.4
61.8
12.8
1983
148.8
10.5
68.4
10.7
1984
156.3
5.0
75.4
9.1
1985
167.2
7.0
82.8
9.8
1986
179.6
7.4
92.0
11.1
1987
194.7
8.4
102.7
11.6
Source: Division of National Cost Estimates, Office of the Actuary,
Health Care Financing Administration
~
Unlike other goods and services for which the consumer pays the provider
directly, health care payments are often made by other entities including private
health insurance and public programs which act as insurers. The following table
shows the major sources of national health expenditures including private sources,
such as private health insurance and direct consumer payments, and public sources,
such as the Medicare and Medicaid programs and other Federal, State and local
governmental sources of funds. In 1940, the percentage allocation of national health
expenditures from private and public funding sources was 80% private and 20%
public. After the implementation of Medicare and Medicaid in the mid-60s, the rate
of increase in public spending for health care increased sharply and then levelled
off in the early 1970s to approximately 40% of total spending. The percentage of
Federal funds spent on health care has increased very gradually. By 1987, Federal
spending accounted for nearly 30% of all health care expenditures.
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TABLE 3
National Health Expenditures by Major Source
of Funds, Selected Years, 1965-1987
(dollars in billions)
Private Expenditures
Public Expenditures
Total
Federal
State/local
1965
30.9
11.0
5.5
5.5
1970
47.2
27.8
17.7
10.1
1971
51.8
31.7
20.3
11.4
1972
58.5
35.4
22.9
12.5
1973
64.0
39.4
25.2
14.2
1974
68.8
47.6
31.0
16.6
1975
76.3
56.4
37.1
19.3
1976
87.9
62.8
42.6
20.3
1977
100.1
70.1
47.4
22.7
1978
110.1
79.9
53.8
26.1
1979
124.2
90.9
61.0
29.8
1980
142.2
105.3
71.0
34.3
1981
164.2
121.7
83.5
38.1
1982
186.1
135.1
93.2
41.9
1983
207.0
148.1
102.7
45.4
1984
231.3
159.7
111.6
48.1
1985
246.6
176.0
124.5
51.5
1986
268.5
189.7
134.7
55.0
1987
293.0
207.3
144.7
62.7
Source: Division of National Cost Estimates, Office of the Actuary,
Health Care Financing Administration
The Price of Health Care, as Measured by the CPI
Over the past 20 years, increases in the prices of health care services, as
measured by various components of the Consumer Price Index (CPI), have generally
exceeded price increases in the rest of the economy. There are two exceptions to this
pattern: during the Economic Stabilization Program (August 1971 through April
1974 for health), and during 1979 and 1980 when the overall level of inflation was
at its highest point in 20 years.
Since 1982, figures suggest that inflation in the medical care sector has abated
somewhat, and followed the downward trend of the overall CPI between 1982 and
1985. However, in spite of these drops, inflation in the overall medical care sector
is still approximately twice the rate of inflation in the rest of the economy. Also,
since the beginning of 1985, the inflation rate for hospital services has been steadily
increasing.
CRS-5
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TABLE 4 shows the trends in the CPI and in selected components of CPI since
1965.
TABLE 4
Percent Change in Selected Components of CPI,
1965-1988
CPI, all
Medical
CPI
items less
care
Hospital
Physicians'
all items
medical care
Total
room
services
1965
1.7
1.5
2.5
5.6
3.6
1966
2.9
3.0
4.4
10.0
5.8
1967
2.9
2.4
7.1
19.8
7.1
1968
4.2
4.1
6.1
13.6
5.6
1969
5.4
5.4
6.9
13.4
6.9
1970
5.9
5.8
6.3
12.9
7.5
1971
4.3
4.1
6.5
12.2
6.9
1972
3.3
3.3
3.2
6.6
3.1
1973
6.2
6.4
3.9
4.7
3.3
1974
11.0
11.1
9.3
10.7
9.2
1975
9.1
8.9
12.0
17.2
12.3
1976
5.8
5.5
9.5
13.8
11.3
1977
6.5
6.2
9.6
11.5
9.3
1978
7.7
7.6
8.4
11.0
8.3
1979
11.3
11.4
9.3
11.4
9.2
1980
13.5
13.6
10.9
13.1
10.6
1981
10.4
10.3
10.8
14.8
11.0
1982
6.1
5.9
11.6
15.7
9.4
1983
3.2
2.9
8.7
11.3
7.7
1984
4.3
4.1
6.2
8.3
7.0
1985
3.8
3.6
6.7
4.8
6.9
1986
1.9
1.5
7.5
6.0
7.2
1987
3.7
3.5
6.6
7.2
7.3
1988
4.1
3.9
6.5
9.3
7.2
1989
4.8
4.6
7.7
10.3
7.4
Sources: U.S. Dept. of Labor, Bureau of Labor Statistics, Consumer
Price Index, various publications.
CRS-6
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Hospital Expenses
The American Hospital Association (AHA) compiles detailed measures of expenses
of the Nation's community hospitals, which are defined as all non-Federal short-term
general and other special hospitals (excluding after 1971 hospital units of
institutions) whose facilities and services are available to the public. TABLE 5
shows historical expense data for community hospitals from the AHA's National
Hospital Panel Survey. The Survey is a monthly survey of a randomly selected
sample of about 1,800 of the approximately 5,800 community hospitals.
The total expenses of community hospitals, including expenses for both inpatient
and outpatient care, were $177.7 billion in 1988, an increase of 196% over the
preceding 10 years. The average cost of a day of hospital care was $632 in 1988,
representing a 10-year increase of 211%. The increase in hospital inpatient costs per
admission, or "cost per case" over the past 10 years was 186%, rising to $4,194 in
1983.
TABLE 5 displays, for measures of hospital expense, data for the years 1965 to
1988. The rate of growth in hospital expenses exceeded the rate of inflation as
measured by the CPI in most years. In general, changes in the rate of growth in
hospital expenses have followed changes in inflation. For example, the medical care
component of the CPI and the rates of growth in the adjusted expenses per inpatient
day and per admission were all relatively low during the Economic Stabilization
Program (August 1971 through April 1974). Also, the rates of increase of all four
measures of community hospital expenses followed the CPI downward since from
1981 to 1986. A short-term downward trend in the growth rate of hospital expenses
which is not reflected in the CPI indexes is evident in the 1976 to 1979 interval.
Some analysts have argued that this was due perhaps in part to the initiation in
1978 of a "voluntary effort" to reduce health care costs initiated by the American
Hospital Association and other health organizations.
There are a variety of factors other than overall inflation which contribute to
aggregate changes in hospital expenses. These factors include: population growth,
factors such as aging of the population which affect admission rates, inflation over
and above general inflation in the prices of goods and services purchased by the
hospitals (input factor prices), and changes in the type and mix (intensity) of services
rendered due to such factors as changes in the use of technology or treatment
patterns. Arnett et al. (Health Care Financing Review, spring 1986) estimated that
over 51% of the overall growth in inpatient hospital expenses between 1974 and 1984
was due to overall inflation, approximately 7.3% to population growth, 16.6% to
excess inflation in hospital prices, and 33.4% to intensity of services per day. The
recent decline in the number of inpatient days per capita has exerted downward
pressure on inpatient hospital expenses. This decline held the growth in these
expenses between 1974 and 1984 to 8.5% below what otherwise would have occurred.
CRS-7
IB77066
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TABLE 5
Selected Community Hospital Expenses Data,
Totals and Percentage Increases, 1965-1988
(dollars in billions)
Adjusted*
Adjusted
expenses per
expenses per
Inpatient
Year
Total expenses
inpatient day
admission
expenses
Amt.
% Chg.
Amt.
% Chg.
Amt.
% Chg.
Amt.
% Chg.
1965
$9.220
8.6
$41
7.5
$315
8.1
$8.414
8.7
1966
10.497
13.8
46
12.2
356
13.0
9.611
14.2
1967
12.624
20.3
53
15.2
425
19.4
11.551
20.2
1968
14.720
16.6
59
11.3
482
13.4
13.371
15.8
1969
17.247
17.2
68
15.2
551
14.3
15.635
16.9
1970
20.261
17.5
78
14.7
608
10.3
18.328
17.2
1971
22.496
11.0
87
11.5
670
10.2
20.269
10.6
1972
25.223
12.1
96
10.3
729
8.8
22.622
11.6
1973
28.248
12.0
105
9.4
784
7.5
25.173
11.3
1974
32.759
16.0
118
12.4
873
11.4
29.077
15.5
1975
38.492
17.5
138
16.9
1,017
16.5
33.971
16.8
1976
45.842
19.1
158
14.5
1,168
14.8
40.321
18.7
1977
53.006
15.6
181
14.5
1,312
12.3
46.437
15.2
1978
59.802
12.8
203
12.2
1,466
11.7
52.131
12.3
1979
67.833
13.4
226
11.3
1,618
10.4
59.060
13.3
1980
79.340
17.0
256
13.3
1,836
13.5
68.962
16.8
1981
94.187
18.7
299
16.8
2,155
17.4
81.651
18.4
1982
109.091
15.8
348
16.4
2,489
15.5
94.346
15.5
1983
120.220
10.2
391
12.5
2,742
10.2
103.403
9.5
1984
126.028
4.6
443
13.3
2,947
7.5
107.000
3.2
1985
134.043
6.6
493
11.2
3,226
9.4
111.402
4.4
1986
146.032
8.9
535
8.6
3,527
9.3
119.281
7.1
1987
161.322
10.5
581
8.6
3,859
9.4
129.815
8.8
1988
177.770
10.2
632
8.8
4,194
8.6
140,481
8.2
*
Adjusted to account for the volume of outpatient visits.
Note:
Percentage changes may not correspond to published data
because of rounding.
Source: National Hospital Panel Survey, American Hospital Associa-
tion.
TABLE 6 shows the trends in community hospital inpatient expenses and
utilization between 1981 and 1988. Since 1981, numbers of both admissions and
inpatient days have been declining. In both cases, the largest percent declines were
in 1984 and 1985. Despite these declines in utilization, overall inpatient expenses
increased each year since 1981. While inpatient expenses recently have been growing
at a slower rate than during the period of high inflation in the early 1980s, the trend
since 1984 suggests that the rate of growth in inpatient expenses is accelerating.
CRS-8
IB77066
06-19-90
Due to declining utilization and increasing total inpatient expenses, expenses per
admission and expenses per inpatient day have both been growing rapidly over the
6-year period shown.
The trends outlined in TABLE 6 stem from a variety of factors within and
without the hospital industry. While these trends cannot be tied to any specified
factors, there are two sets of potentially contributing factors which should be noted.
First, the downward trends in the rate of growth in inpatient hospital expense during
1984 and 1985 are consistent with the decrease in inflation in the economy as a
whole during these 2 years. Second, increasing attention has been given to health
care cost containment programs in both the private and public sectors. Private sector
initiatives have included utilization review and employee incentive programs within
employer health benefit plans. Examples of changes in the public sector which might
effect the rates of change in hospital expenses and utilization are the amendments
to the Social Security Act enacted during 1982 and 1983 which set limits on Medicare
payments for inpatient care.
TABLE 6
Annual Percent Change in Selected Community Hospital Expense
and Utilization Data for 1982-1988
Inpatient
Inpatient
Inpatient
Exp. per
No. of
Exp. per
No. of
Expenses
*
Admis.
Admis.
Day
Days
1982 over 1981
15.6
15.5
0.6
16.2
-0.6
1983 over 1982
9.5
10.2
-0.5
12.4
-2.5
1984 over 1983
3.2
7.5
-4.0
13.3
-8.9
1985 over 1984
4.4
9.4
-4.6
11.1
-6.2
1986 over 1985
7.1
9.3
-2.1
8.5
-1.4
1987 over 1986
8.8
9.4
-0.6
8.6
0.2
1988 over 1987
8.2
8.6
-0.4
8.8
-0.5
*
Adjusted to account for the volume of outpatient visits.
Source:
National
Hospital
Panel
Survey,
American
Hospital
Association.
Hospital Utilization
A number of indices are reported as measures of hospital utilization:
admissions, patient days, outpatient visits and hospitals beds per 1,000 population;
average length of stay in days; and occupancy rates. The data for TABLEs 8-10 are
from the American Hospital Association's most recent Annual Survey of Hospitals,
a yearly survey of the approximately 6,900 hospitals, with responses received from
approximately 6,300 hospitals in 1987.
CRS-9
IB77066
06-19-90
Admissions, patient days, outpatient visits and hospital beds per 1,000
population provide measures of hospital utilization adjusted for changes in the size
of the population. From 1965 to 1983, admissions per 1,000 population increased by
13.1%, inpatient days per 1,000 population increased by 10.5%, outpatient visits per
1,000 population increased by 87.7%, and hospital beds per 1,000 population by
15.8%. A substantial proportion of the growth in all four measures occurred
following the enactment of the Medicare and Medicaid programs, between 1965 and
1975. The number of admissions, inpatient days and beds per 1,000 were relatively
constant between 1975 and 1982. Admissions, inpatient days, and beds per 1,000
have since declined by more than 10%. Except in 1982, the number of outpatient
visits per 1,000 population also showed little change between 1975 and 1984.
However, since 1984, the number of outpatient visits per 1,000 has begun to grow,
due in part to the shift of some care out of inpatient hospital settings.
TABLE 7
Admissions, Inpatient Days, Outpatient Visits, and Hospital Beds
Per 1,000 Population Community Hospitals Selected Years 1965-1987
Inpatient
Outpatient
Hospital
Year
Admissions
days
visits
beds
1965
137
1,062
479
3.8
1970
143
1,184
657
4.2
1975
155
1,196
885
4.4
1976
156
1,199
925
4.4
1977
156
1,187
904
4.4
1978
155
1,180
909
4.4
1979
156
1,182
885
4.4
1980
159
1,203
890
4.4
1981
159
1,214
884
4.4
1982
157
1,202
1,072
4.4
1983
155
1,173
899
4.4
1984
149
1,088
897
4.3
1985
140
994
918
4.2
1986
134
953
962
4.1
1987
130
933
1,009
3.9
Sources: Hospital utilization data (numerator) is from Hospital
Statistics, 1988 Edition, American Hospital Association; population data
(denominator) is the resident population as of July 1 of each year from
U.S. Dept. of Commerce, Bureau of the Census, Current Population Reports,
Series P-25.
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IB77066
06-19-90
The average length of stay increased in the years immediately following
enactment of the Medicare and Medicaid programs, but then declined during the
1968-1977 time period. It remained constant between 1977 and 1983 before dropping
to its lowest point in 1985.
TABLE 8
Average Length of Stay in Days -- Community Hospitals
Selected Years 1965-1987
Year
Average length of stay
1965
7.8 days
1970
8.2
1975
7.7
1976
7.7
1977
7.6
1978
7.6
1979
7.6
1980
7.6
1981
7.6
1982
7.6
1983
7.6
1984
7.3
1985
7.1
1986
7.1
1987
7.2
The occupancy rate is defined as the average percentage of beds filled
throughout the year. The occupancy rate provides a measure of the overall capacity
of the community hospital system relative to the demand for services. The occupancy
rate increased in the 1965-1970 time period, declined through 1978, and then
increased again through 1981. The occupancy rate dropped by 15% between 1981
and 1986. For the past 3 years, the overall occupancy rate has been less than 65%.
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TABLE 9
Occupancy Rate -- Community Hospitals
Selected Years 1965-1987
Year
Occupancy rate
1965
76.0
1970
78.0
1975
75.0
1976
74.6
1977
73.8
1978
73.6
1979
73.9
1980
75.6
1981
76.0
1982
75.3
1983
73.5
1984
69.0
1985
64.8
1986
64.3
1987
64.9
Source for TABLES 8 and 9 : Hospital Statistics, 1988 Edition,
American Hospital Association.
FOR ADDITIONAL READING
American Hospital Association. Hospital statistics, 1988 edition. Chicago, 1988.
245 p.
Arnett, Ross H. III, D.R. McKasick, S.T. Sonnefeld, and C.S. Cowell. Projections of
health care spending to 1990. Health care financing review, V. 7(3), spring 1986:
1-36.
U.S. Dept. of Health and Human Services. Health Care Financing
Administration. Office of the Actuary. Division of National Cost Estimates.
Health Care Financing Administration. National health expenditures, 1986-
2000. [Washington] Health Care Financing Review, Summer 1987: 1-36.
CRS-12
CRS Issue Brief
Major Planning Issue
Health Insurance
Updated June 27, 1990
by
Janet Kline, Coordinator
A
Education and Public Welfare Division
CRS
Congressional Research Service
The Library of Congress
CONTENTS
SUMMARY
ISSUE DEFINITION
BACKGROUND AND ANALYSIS
The Uninsured
Characteristics of the Uninsured
Trends in Insurance Coverage
Implications for Access
Policy Options for the Uninsured
The Underinsured
Other Health Insurance Issues
Health Care Costs and Cost Containment
Long-Term Care
Retiree Health Benefits
LEGISLATION
Contributors to Issue Brief:
Beth Fuchs
Janet Kline
Janet Lundy
Mark Merlis
Richard Price
Joan Sokolovsky
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Health Insurance
SUMMARY
Rising health care costs have created increasing pressures on public and private
health care financing programs in a time of limited resources. Over the past 10
years, health care spending has grown faster than spending in the general economy.
National health expenditures were $540 billion in 1988, over 11% of the gross
national product. While payments by public and private health insurance programs
account for a majority of payments (approximately three-fourths) for health care
services, gaps in coverage and in the availability of insurance leave many persons at
risk. Between 31 and 37 million people were uninsured in 1988. Generally, the
uninsured are young (under age 24); they are poor; and they have ties to the work
force (primarily in small firms, in industries with seasonal or temporary employment,
and in firms with a lower skilled or less unionized work force). In the last decade,
there was growth in the number and proportion of the uninsured population.
Insurance status has implications for access to health services: the uninsured use
fewer health care services and have poorer health status than the insured.
Even persons who are insured can face substantial health care costs if their
insurance does not adequately cover their medical expenses. In 1986, the Department
of Health and Human Services estimated that about 10 million persons (in addition
to the number of uninsured) had insurance that was inadequate to protect them from
risk of catastrophic illness expense. Private sector health plans and public programs
such as Medicare and Medicaid all, to some degree, leave their enrollees underinsured
because of cost-sharing requirements (i.e., enrollee deductible and coinsurance
payments), limits on payment to providers, or uncovered services. A key coverage
issue, particularly for the elderly, is that most health care plans (except Medicaid)
either do not cover, or have only limited benefits for, long-term care services,
including both nursing home care and home and community-based care.
Several issues for the future will continue to affect the numbers of uninsured
and underinsured individuals. The rising cost of health care will put increasing
pressures on public budgets, employer costs, and individuals' out-of-pocket expenses
for medical care. A continuing focus of our public and private health care systems
will be attempts to control those costs. The need for expansion of limited coverage
for long-term care services will continue to be an issue. The future of employer-
provided retiree health benefits is an issue resulting from rising employer costs for
a growing retired population and questions about future commitments and funding
for these costs.
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ISSUE DEFINITION
Gaps in public and private health benefits coverage that result in large numbers
of uninsured and underinsured individuals and families have been of concern to
Congress for many years. There are a number of reasons for this. The rising cost
of health care, which is reflected in rising health care premiums, underlies the
problem. Cost discourages some employers and individuals from obtaining health care
coverage and results in restrictive coverage definitions that exclude certain individuals
under both public and private coverage. Other reasons for coverage gaps include the
voluntary nature of insurance in this country.
Lack of health benefits coverage may result in individuals not seeking or not
being able to obtain health care services; exposure to medical care expenses that may
consume an individual or family's income and savings; shifting of costs from those
who cannot pay to others who can; or services being provided in inappropriate
settings, such as emergency rooms.
Congress is considering alternatives for more complete health insurance coverage.
However, budgetary considerations may preclude alternatives that would involve
substantial new Federal spending. Numerous bills have been introduced in the 101st
Congress to expand health insurance coverage. The generic approaches embodied in
these bills include expanding health insurance coverage through Medicaid; providing
tax incentives to provide coverage privately; mandating employers to extend health
insurance benefits to uncovered or underinsured groups; and instituting a national
health insurance system.
There is also strong congressional interest in controlling health care costs.
Rising costs affect the Federal budget (chiefly through Medicare and Medicaid) and
State budgets (through Medicaid); access to care for the uninsured; and the
competitiveness of employers who offer health benefits or the willingness of those
employers to continue to offer benefits. Proposals have been considered by Congress
that would contain health care costs or reduce Federal expenditures (for example, by
changing the tax treatment of health benefits).
Several groups have been developing recommendations to address the issues of
health care coverage, the uninsured, and health care costs. On Mar. 2, 1990, the
U.S. Bipartisan Commission on Comprehensive Health Care (the "Pepper
Commission") announced its recommendations on comprehensive health care services
for all Americans and long-term care for the elderly. Two other groups are also
examining these issues: a task force established by the Secretary of Health and
Human Services is due to report in October 1990, and the Advisory Council on
Social Security plans to issue its findings in January 1991.
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BACKGROUND AND ANALYSIS
The Uninsured
According to a Congressional Research Service analysis of the March 1989
Current Population Survey (CPS) conducted by the Census Bureau, in 1988 most
individuals (57%) obtained insurance coverage through their own or a family
member's employment. Others received coverage through public programs such as
Medicare (13%) or Medicaid (6%) and 9% received coverage from privately purchased
policies, CHAMPUS or other health plans.
An estimated 36.8 million Americans (15%) were without any form of health
insurance coverage in 1988. Other estimates, using different surveys or different
assumptions, range from 31 to 37 million uninsured. While there is disagreement on
the exact number of uninsured Americans, there is a consensus that the proportion
of the population without coverage grew during the 1980s. The following discussion
examines the characteristics of the uninsured, some possible explanations for recent
declines in coverage, and the impact of lack of coverage on access to care. This is
followed by a review of proposals for providing coverage to the uninsured.
Characteristics of the Uninsured
Age. Because most senior citizens have Medicare or other retirement health
benefits, nearly all the uninsured are under 65, with the greatest concentration
among children and young adults. Of those under age 18, nearly 1 in 5 are without
coverage; children make up one-third of the total uninsured population. However,
the rate of uninsurance peaks in the 18-24 age group; 25% of young adults are
without coverage. The uninsured in this age group are often too old to be covered
as dependents on their parents' policies. Those in poor families are no longer part
of their parents' (often mother's) household and therefore ineligible for Medicaid.
Those working may be in entry-level jobs that do not provide coverage. Some of the
younger uninsured may also fail to obtain insurance that is available to them,
because they do not foresee the need for medical care. The rate of uninsurance
declines steadily from age 25 on, chiefly because older workers are more likely to
obtain coverage through their own employment.
Employment Status. Of Americans with health insurance, two-thirds receive
coverage through their own employment or that of another family member. (Most
of the rest are covered by Medicare or Medicaid.) Among the uninsured in 1988, 84%
had at least some ties to the work force; 35% were full-time, full-year workers or the
dependents of such workers, but failed to obtain employment-based coverage. The
uninsured are concentrated in small firms, especially those with fewer than 25
employees, in industries characterized by seasonal or temporary employment, and in
those with a lower skilled or less unionized work force. The industries with the
lowest rates of insurance coverage are agriculture, personal services, entertainment
and recreation, and retail trade.
Income. The uninsured are disproportionately poor. In 1988, 41% of the
uninsured had family incomes below 100% of the Federal poverty thresholds, and
another 17% had incomes between 100% and 150% of the poverty line. Medicaid is
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the major source of coverage for the low-income population. However, the maximum
allowable income under Medicaid for most types of persons is below the poverty line.
Also, Medicaid has categorical limits: some persons, such as single adults and childless
couples who are neither aged nor disabled, cannot qualify regardless of income. As
a result, Medicaid covered only 43% of persons in poverty in 1986.
Trends in Insurance Coverage
The proportion of the population that is uninsured rose sharply during the early
and mid-1980s. In 1979, the uninsured represented 14.6% of the nonelderly
population. By 1988, the proportion of uninsured had grown to 17.0%.
This growth in the uninsured has occurred for several reasons. First, although
the proportion of the population in the work force has been growing, the percent
receiving benefits has been dropping. Some analysts attribute this trend to shifts in
employment. Many of the new jobs created in this decade have been in the service
and other nonmanufacturing industries, the least likely to provide coverage.
However, this factor accounts for only a small part of the growth in the uninsured.
Second, the proportion of the population receiving coverage through another
family member's employment has been dropping. Several factors have contributed
to this decline. As coverage of primary workers has dropped, so too has coverage of
their dependents. Also, a growing number of workers appear to be electing coverage
for themselves but not for their dependents. In 1986, workers who were themselves
covered through employment failed to cover their spouses in about 3% of the cases.
About 8% of the children of insured workers were uninsured. This reflects in part
a decline in employer contributions to the cost of dependent coverage. In 1980,
wholly-paid health care for individual and family coverage was available to 72% and
51% of employees in medium- and large-size firms. By 1988, wholly-paid individual
coverage had dropped to 51% and family coverage to 32%. Changes have also
occurred in family structure; there are more households with older children or
unrelated individuals. Such family units are less likely to meet the definitions in
insurance coverage rules.
Third, coverage from nonemployment sources declined, particularly Medicaid
coverage. Welfare and Medicaid eligibility standards failed to keep pace with
inflation; while the absolute number of people in poverty was rising, the number of
people receiving Medicaid stayed relatively flat for a decade. Recent changes in the
Medicaid program, such as initiatives to cover more pregnant women and children,
may reverse this trend. However, data on the impact of these changes are not yet
available.
Implications for Access
Insurance status has implications for access to health services. The uninsured
use fewer health care services and have poorer health status than the insured
population. The uninsured are more likely to delay seeking care; when they finally
seek care, the ailment may be more serious and costly to treat. The uninsured also
rely more on emergency rooms for basic services.
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While the uninsured use comparatively fewer services, they nevertheless
generally do receive health care. Some of the uninsured pay for these services out-
of-pocket; some receive care from clinics and facilities that receive public subsidies;
and some get it from providers who are subsidizing the care through increased
charges to their paying customers. For example, hospitals recorded about $7 billion
in free care and bad debt for 1986. Much of that uncompensated care was financed
by increased charges to patients with insurance.
A problem facing the uninsured is that the sources of subsidized care may be
dwindling. Increasing pressures on hospitals to negotiate rates and new methods of
reimbursement are making it difficult for hospitals to make up their uncompensated
care costs by raising their charges to insurers or other third-party payers. Hospitals'
reduced profit margins and constraints on public monies are also limiting the dollars
to finance uncompensated care. If these trends continue, the access problems of the
uninsured could grow more severe. One reason these trends are likely to continue
is our nation's inability to harness health care costs. It is relatively easy to provide
free care when that care is inexpensive, but more difficult to do so when that care
becomes a major cost.
Policy Options for the Uninsured
Policy responses to the uninsured are being considered at the State and local,
as well as Federal, levels of government. The following discussion focuses on the
major options being considered or likely to be considered by Congress, including
proposals to reach specific target groups and broader proposals to cover virtually all
of the population.
Public Programs. Existing Government insurance programs, such as Medicare
and Medicaid, could be expanded to reach a larger population. There are proposals
to expand Medicare, for example by eliminating the current 24-month waiting period
for benefits for the disabled or permitting early retirees to purchase Medicare
coverage. However, most legislative interest has focused on Medicaid, the Federal-
State program for certain groups of low-income persons. In recent years, Congress
has steadily expanded Medicaid eligibility for pregnant women and young children.
Most recently, the Omnibus Budget Reconciliation Act of 1989 (OBRA 89, P.L. 101-
239) requires all States to offer coverage to pregnant women and children under age
6 with family incomes below 133% of the Federal poverty line by Apr. 1, 1990. As
passed by the House, OBRA 89 would have extended coverage of pregnant women
and infants to 185% of poverty and would have covered all children in poverty
through age 17; these provisions were omitted from the conference agreement.
Similar proposals targeted to women and children include H.R. 1573, S. 339, S. 440,
S. 949, and S. 1230. S. 768 and H.R. 1845 would extend coverage to the entire low-
income population, without regard to the current categorical limits that restrict
Medicaid to certain families with children, the aged, and the disabled. H.R. 950 takes
a similar approach.
Tax System Options. Federal or State tax law might be modified in a variety
of ways to help more individuals purchase health insurance or to encourage more
employers to provide group health plans. Some options being considered to encourage
individuals to purchase coverage include: (1) allowing people who do not itemize their
tax returns to deduct health care costs in excess of some specified percent of adjusted
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gross income; (2) providing a refundable tax credit (much like the earned income tax
credit) to low-income families to subsidize the cost of health insurance (see, for
example, S. 1185 and S. 5 as passed by the Senate and S. 2032. See also H.R. 3 as
passed by the Senate Apr. 24, 1990.); and (3) creating a voucher program using the
Federal tax system to subsidize the purchase of health insurance by low-income
families. Possible options to encourage employers to purchase group coverage include:
(1) making the cost of purchasing health insurance for sole proprietors and the self-
employed 80% or 100% deductible as opposed to the current law deduction of 25%
(see, for example H.R. 694, H.R. 4122, H.R. 1846, S. 494, S. 1168, S. 1381, and S.
1507); and (2) changing/clarifying the tax treatment of prefunding mechanisms to
encourage employers to self insure.
Another approach would be to change the tax treatment of employer
contributions to their employee's health insurance. Under current law, the
employer's premium contribution is not counted as taxable income to the employee.
A cap could be placed on any employer contribution in excess of a specified amount,
such as $100 per month for an individual and $250 per month for a family. Such
a measure would produce new revenues that could be used to finance other access
options. Such a measure might also curb medical inflation by removing the existing
tax incentive for employers to provide rich benefit packages requiring little or no
employee cost-sharing. However, it could be difficult to determine where to set the
cap on the employer contribution so that it does not discourage the purchase of
necessary health benefits. In addition, regional variations in health care costs mean
that an employer contribution that purchases an excessive benefit package in one
area might buy a much less generous package in another area. Opponents of the tax
cap add that a cap could result in the elimination of important health benefits, such
as the coverage of mental health services.
Employment-Based Options. Federal initiatives could be used to provide
employment-based coverage to more persons or to improve coverage already provided
by employers. Three distinct approaches are possible: (1) Federal requirements on
existing health insurance plans to reach greater numbers of people or requirements
on existing plans to provide specific benefits (for example, H.R. 2563 requires
employers with existing plans to provide coverage to part-time workers); (2)
requirements on employers receiving Federal funds, such as State and local
governments and government grantees or contractors, to provide coverage to their
employees (see, for example, H.R. 43); and (3) a Federal mandate on employers to
provide coverage.
Legislation was enacted as part of OBRA 1989 (P.L. 101-239) to expand Federal
health insurance continuation of coverage requirements (mandated by Title X of
COBRA) to enable individuals who are determined to be Social Security disabled at
the time of termination of employment to receive a total of 29 months of continued
coverage under their employers' group plans. (See CRS Issue Brief 87182) Bills to
mandate that employers provide health insurance and expand Medicaid to pick up
those not covered under the employer mandate (H.R. 1845, S. 768) are under active
consideration. (See CRS Issue Brief 87168.)
Universal Access. Universal access proposals were more widely considered in
the 1970s than today, but renewed momentum has been gathering in and outside of
Congress for some type of universal program. The legislative proposals have
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generally taken one of three approaches: a social insurance program modelled after
that of Canada or Western European nations in which services are primarily financed
through general revenues but are furnished by independent providers; a national
health service like the English National Health Service in which the government both
finances and furnishes health care services; and a mixed public-private program in
which the government shares the financing burden with employers (for example,
through a combination of an expanded Medicaid program and mandated employer-
provided health insurance), but health services would continue to be furnished by
independent providers.
While a number of proposals are pending, S. 768 and H.R. 1845, combining an
employer mandate and a Medicaid/Federal-State program expansion, have moved
furthest along. Hearings have been held on both proposals and on July 12, 1989, the
Senate Labor and Human Resources Committee voted to report an amended version
of S. 768 to the full Senate (reported on Nov. 20).
Expanding Availability. Some individuals or employers may wish to purchase
insurance coverage but find it unaffordable or unavailable because of characteristics
of the private insurance market or other factors. The final set of options focuses on
possible interventions that might help make coverage more accessible or affordable
for potential purchasers. These include the following:
1. Regulation of insurance underwriting practices, under which certain
individuals or groups expected to incur high medical costs may be refused coverage,
receive coverage subject to exclusion of payment for "preexisting conditions," or be
required to pay higher rates than other applicants. H.R. 2649 would require States
to regulate the treatment of preexisting conditions.
2. Federal preemption of State mandated benefit laws. These laws, which
require insurance policies to include specific types of coverage regardless of whether
the purchaser desires the coverage, are alleged to increase the price of insurance.
S. 1274 includes this approach.
3. Encouraging private insurers to develop pooling mechanisms to spread the
risks of high-cost cases. H.R. 872 combines this approach with an employer mandate.
Finally, some proposals assume that the private insurance market may not be
able to reach very low-income or high-risk individuals and would have government
assume the role of selling insurance directly. One option is the development of a
Medicaid "buy-in" program, under which individuals or families whose income exceeds
Medicaid standards could obtain coverage by paying a premium which would be
reduced through public subsidies. OBRA 89 provides for demonstrations to test this
concept for low-income women and children. H.R. 2996 would provide grants to
States to develop buy-in programs, while H.R. 2218 would establish a similar program
on a national basis. States may also establish special programs to cover high-risk,
"uninsurable" individuals. S. 1274 would provide grants to States for this purpose.
Recommendations of the Pepper Commission. The U.S. Bipartisan
Commission on Comprehensive Health Care (known as the Pepper Commission) was
established by the Medicare Catastrophic Coverage Act of 1988 (P.L. 100-230) to (1)
examine shortcomings in the current health care delivery system and its financing
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mechanisms which limit or prevent access to comprehensive health care; (2) make
specific recommendations to Congress respecting Federal programs, policies, and
financing needed to assure the availability of comprehensive health care services for
all individuals in the U.S. and comprehensive long-term care services for the elderly
and disabled; and (3) consider in making its recommendations the amount of Federal
funds necessary to finance needed services, the sources of those funds, and the most
efficient and effective manner for administering programs for those services.
The Pepper Commission recommendations, released Mar. 2, 1990, had two
components: access to health care and long-term care. The net Federal cost of a
fully phased in program based on the Commission's recommendations for both
components would be $66.2 billion (in 1990 dollars). A description of the Pepper
Commission's recommendations for access to health care follows. A description of the
long-term care recommendations can be found in the "Long-Term Care" section of this
issue brief.
Employers with more than 100 employees would be required either to provide
health insurance to their employees (with a specified benefit package and paying 80%
of the premium), or to contribute to the public plan on their behalf. Smaller
employers would be encouraged to provide insurance through insurance market
reforms (such as guaranteed acceptance of all employer groups wishing to purchase
insurance); tax credits/subsidies for certain small employers; and 100% deduction for
the self-employed and unincorporated. If small employers failed to meet specified
coverage targets, they would be required to provide health insurance or contribute
to the public plan.
The public plan would cover employees and dependents that contribute, and non-
working individuals who buy in or are subsidized. The plan would be financed and
administered primarily by the Federal government; replace Medicaid for specified
services; and pay providers according to Medicare's rules. The Commission's plan
would be phased in, beginning with coverage of children and pregnant women
through the public plan.
The Underinsured
Even persons with insurance can face substantial health care costs if their
insurance does not adequately cover their medical expenses. Private sector health
plans and public programs such as Medicare and Medicaid may all, to some degree,
leave their enrollees underinsured because of uncovered services, cost-sharing
requirements (i.e., enrollee deductible and coinsurance amounts), limits on payments
to providers, or maximums on plan benefit payments.
The extent of out-of-pocket expenses for health care can be measured in absolute
dollars (such as $2,000) or as a percent of income (such as 5% or 10%). A study by
the Department of Health and Human Services (Catastrophic Illness Expenses,
November 1986) used a combination of these methods to determine the population
at risk for out-of-pocket catastrophic medical expenses. For a catastrophic threshold
that ranged from $4,400 plus 10% of income, to $2,200 plus 5% of income, the study
reported that in 1986, the incidence of catastrophic out-of-pocket expenditures ranged
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from 2.4 million to 6.2 million persons, or from 1.2% to 3.2% of those under age 65
or in families headed by a person under age 65. About 35% of poor families (those
below poverty) and about 3% of high-income families (those above 400% of poverty)
had out-of-pocket expenses exceeding 5% of income. Overall, the Department
estimated that about 10 million persons (in addition to the approximately 35 million
uninsured) had insurance that was inadequate to protect them from risk of
catastrophic illness expense.
Several features of health insurance plans determine the extent of out-of-pocket
expense for which an enrollee is at risk. First, if a health service is excluded from
coverage, an enrollee must pay the full cost of such services. Although plans
provided by large firms cover a variety of services, plans provided by some smaller
firms may not cover services such as physician office visits, outpatient prescription
drugs and mental health care. In addition, some plans may exclude coverage for
specified conditions or diseases for a new enrollee, either permanently or for a
specified period of time (these exclusions are known as preexisting condition clauses
or exclusion waivers).
For medical care expense covered by a plan, cost sharing (deductibles,
coinsurance, or copayments) are usually required. Many plans include a limit on
enrollee out-of-pocket expenses due to cost-sharing requirements. Once the enrollee
has reached the limit, the plan pays 100% for covered services. Such limits range
from $500 to $4,000 for medium-to-large firms. Nongroup enrollees are more than
twice as likely as group enrollees to be at risk for unlimited health care expenses
due to the absence of an out-of-pocket cap.
Gaps in coverage under the Medicare program have been criticized; on average,
Medicare covers less than half of the health care costs of the elderly because of its
durational limits for certain covered services, cost-sharing requirements, rules for
payments to providers, and exclusion of certain items and services from coverage.
Congress expanded Medicare's protection by passing the Medicare Catastrophic
Coverage Act of 1988. However, opposition to the financing mechanism and
opposition from beneficiaries who felt they already had comparable protection under
private plans led to repeal of the law in late 1989. In recent years, Congress has
focussed on abuses in the sale of Medigap insurance, which is private insurance
designed to fill in certain gaps in Medicare's coverage. Numerous hearings have been
held and regulatory reform bills introduced in the 101st Congress.
Most options for improving the coverage of the underinsured do so only
incidentally as a part of broader proposals to reach the uninsured. For example,
proposals to require that employers furnish a minimum package of health benefits
to all employees could widen the coverage of some employees who are already insured.
Only a few proposals are more specifically targeted at underinsurance. First, existing
insurance policies or employer health benefit plans could be required to include
catastrophic coverage provisions. Such rules would not require any individual or
employer to obtain insurance, but would specify the minimum benefits for those
choosing to do so. Second, low-income persons enrolled in plans with deductible
and/or coinsurance requirements could be assisted in meeting those requirements
through a public program. Such assistance is already available through Medicaid for
Medicare beneficiaries with incomes below the poverty line. There are proposals to
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extend this assistance to higher-income beneficiaries or have Medicaid pay enrollee
cost-sharing for the working poor enrolled in employer plans.
Other Health Insurance Issues
Several issues will affect the cost and availability of public and private health
insurance coverage in the future. These include health care costs and efforts to
control them, coverage for long-term care, and retiree health benefits.
Health Care Costs and Cost Containment
The United States spends more per capita, and a greater proportion of its gross
domestic product (GDP), on medical care than any other nation. U.S. health
expenditures in 1987 reached $489 billion, 10.8% of GDP, as compared to 8.6% in
Canada, 6.8% in Japan, and 6.1% in the United Kingdom. All of these countries have
universal health insurance coverage and perform at least as well as the United States
on standard measures of health care outcomes, such as life expectancy or infant
mortality rates. These international comparisons have led some observers to conclude
that our medical care system is much less efficient than those elsewhere. There is
also concern about the rate of growth in health care expenditures. Inflation in the
U.S. medical sector has outpaced inflation in the rest of the economy for many years,
averaging 15% a year from 1970-80. After a brief period of moderate increases in the
mid-1980s, annual increases in health care expenditures again reached the double
digit level in 1988. Costs grew 10.5% over their 1987 level, reaching $540 billion, or
11.1 percent of GNP. Continued health care inflation could affect the Federal budget
(chiefly through Medicare and Medicaid) and State budgets, could impede efforts to
expand access to care for the uninsured, and could either damage the competitiveness
of employers who offer health benefits or lead some of those employers to reduce or
eliminate benefits. For all these reasons, there is strong congressional interest in
controlling health care costs.
Most Federal efforts in health care cost containment have focused on the
Medicare program. Past initiatives have included reviews by peer review
organizations (PROs) of the appropriateness of services furnished to beneficiaries and
the 1983 enactment of the prospective payment system (PPS) for inpatient hospital
services, which provides an incentive for greater efficiency by establishing a fixed pre-
determined payment for each Medicare patient treated. OBRA 89 includes a
revamping of the way physicians are paid. The previous system set maximum
payments by comparing physicians' charges to those of their peers. The new system
sets fixed rates for each type of service and sets overall targets for physician
spending; rates in future years could be reduced if the targets were not met. The
system is designed to encourage physicians to limit the number of services provided
to patients, especially costly surgical and diagnostic procedures. OBRA 89 also
provides for an expanded research program on the effectiveness and appropriateness
of medical treatments. The program would seek to develop medical practice
guidelines in order to improve quality and reduce the incidence of unnecessary
treatments, both for Medicare beneficiaries and for other patients.
Private sector cost containment efforts have followed three main strategies.
First, enrollees in employer plans have been held directly responsible for a larger
portion of the costs of their care, through higher deductibles or coinsurance, in order
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to discourage unnecessary utilization. Second, private insurers have followed
Medicare in increasing their scrutiny of the appropriateness of services obtained by
subscribers. Third, enrollees have been encouraged to join "managed care" programs,
such as health maintenance organizations (HMOs), which attempt to control the
care furnished to members through an organized system of health care providers.
Long-Term Care
"Long-term care" refers to a wide array of medical, social, personal, supportive,
and specialized housing services needed by individuals who have lost some capacity
for self care because of a chronic illness or condition. Long-term care services include
skilled and therapeutic care for the treatment and management of chronic conditions.
These services also include assistance with basic human functions, such as bathing,
dressing, and eating, often referred to as activities of daily living (ADLs), as well as
assistance with household tasks such as cleaning, cooking, and shopping. Major
subgroups of individuals needing long-term care include the elderly and nonelderly
disabled, the developmentally disabled (primarily the mentally retarded), and the
mentally ill.
Both public program and private insurance coverage for long-term care services
is very limited. Recent congressional action on catastrophic health insurance for the
elderly brought new attention to the uncovered liability many persons face for long-
term care services not covered by Medicare or private insurance. These services
include both nursing home care and home and community-based care.
Expenditures for long-term care services, particularly nursing home care, strain
private resources as well as the budgets of public programs. In 1988, total national
nursing home expenditures of $43.1 billion were financed about equally by private
resources and by public programs. Nearly all private spending for nursing home care
was paid directly by the consumer out of pocket. With the average annual cost of
nursing home care about $25,000, paying for such care can represent a catastrophic
expense beyond the financial reach of most persons. Moreover, private insurance to
cover the costs of both nursing home care and community-based services is very
limited. For example, in 1988, private insurance covered only 1% of total spending
on nursing home care.
The Medicare program covers principally acute health care services and was
never expected to provide protection for long-term care. Coverage of nursing home
care, for instance, is limited to short-term stays in certain kinds of nursing homes,
referred to as skilled nursing facilities, and only for those persons who can
demonstrate a need for daily skilled nursing care following a hospitalization. Many
persons who require long-term nursing home care do not need daily skilled nursing
care, and, therefore, do not qualify for Medicare's benefit. As a result of these
restrictions, Medicare paid for less than 2% of the nation's expenditures for nursing
home care in 1988.
Only one public program, Medicaid, the Federal-State health program for the
poor, covers long-term stays in nursing homes. It does so, however, only for those
persons who meet strict income and assets rules. For many persons facing the
catastrophic expenses of nursing home care, these rules require that they first apply
most of their assets and income toward the cost of their nursing home care before
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they can become eligible for Medicaid coverage. In 1988, Medicaid payments for
nursing home care amounted to 44% of total national expenditures for this care.
The great majority of Medicaid's payments for nursing home care are for persons who
are not initially poor by cash welfare standards, but who deplete their assets and
income on the cost of needed care.
Public programs provide only limited support for nonmedical home and
community-based long-term care services. The great majority of this care is provided
by relatives and friends who are not compensated for the care they provide.
Developing a strategy for providing coverage for nursing home and home and
community-based care is difficult for a number of reasons. These include uncertainty
about the costs and utilization of services, budgetary constraints, and the complex
interrelationships of Federal and State programs currently supporting long-term care.
In addition, observers differ in their views about what public and private sector
responsibilities in financing long-term care should be. Some believe that the Federal
government should assume the major role in financing long-term care for those in
need regardless of their financial circumstances. Others believe that the costs of any
public sector expansion may be prohibitive and that the private sector, through
private insurance and other risk-pooling mechanisms encouraged with tax incentives,
should take the lead. Still others believe that a combination of public and private
sector strategies is needed, including Federal benefits together with beneficiary cost-
sharing responsibilities that could be financed through the purchase of private
insurance.
Long-Term Care Legislation. A wide range of long-term care proposals,
introduced in the 100th and 101st Congresses, reflects these divergent views as to
what public and private sector responsibilities should be for financing long-term care.
Approaches range from those that would establish totally public benefits, without a
role for the private sector or specifically private insurance, to those that would rely
almost exclusively on the private sector--whether this be individuals or insurance--
to provide the additional financing needed for long-term care.
S. 2163 (Kennedy), for example, would establish, in a new title of the Public
Health Service Act, a long-term care program covering nursing home and home care
for certain chronically disabled persons of all ages regardless of financial
circumstances. Benefits would be primarily publicly financed, without deductibles or
significant copayments. This bill aims to assure that additional sources of private
financing would be unnecessary. H.R. 2263 (Pepper) takes a similar approach to
public sector financing of long-term care, but focuses coverage strictly on home and
community-based care.
At the other end of the spectrum are bills that leave to the private sector the
responsibility for providing the additional financing needed for long-term care. Some
of these bills would provide tax incentives to individuals for the care they provide
others. Other bills would provide tax incentives to individuals and employers for the
purchase of private insurance in order to encourage the growth of this fairly new
market. The cost of these approaches is limited to the revenues that would be lost
for providing tax deductions for various purposes.
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In between are bills that would establish comprehensive long-term care benefits
at the Federal level but, to a greater or lesser extent, would include with these new
benefits certain beneficiary cost-sharing responsibilities that could be paid for with
private insurance. H.R. 3140 (Waxman) and H.R. 5393 (Stark, 100th Congress)
would each establish in Medicare comprehensive nursing home and home care benefits
that would be accompanied by limited copayments and deductibles. For those below
200% of the Federal poverty level, Medicaid would share in the cost of these
copayments and deductibles. Others could purchase private long-term care insurance
to cover these costs. In this case, private insurance would function as a supplement
to Medicare benefits in the way that Medigap policies have paid for costs of acute
care benefits not covered by Medicare.
Another bill, S. 2305 (Mitchell, 100th Congress), would create a larger role for
private insurance than the Medigap model, specifically with regard to coverage of a
chronic nursing home benefit. Under this proposal, persons would be required to
incur the first 2 years of nursing home costs before a new Medicare nursing home
benefit would begin to pay. Since studies of nursing home utilization have shown
that 75% of persons entering a nursing home stay less than 1 year and 83% stay less
than 2 years, most persons would either have to rely on out-of-pocket payments for
their care or purchase private insurance to cover the costs. This benefit has been
designed to limit Federal expenditures and to encourage private insurers to develop
policies and to encourage persons to be able to afford long-term care insurance.
Pepper Commission Long-Term Care Recommendations The Pepper
Commission's proposal for long-term care includes three components: (1) a federally
financed social insurance program covering home and community-based care for
severely disabled individuals of all ages; (2) a federally financed social insurance
program covering the first 3 months of a nursing home stay; and (3) a means-tested
Federal and State financed nursing home program covering stays beyond 3 months
that would protect certain levels of income and assets of persons needing care. For
both the home and community-based care program and first 3 months of a nursing
home stay, individuals would be responsible for 20% of the costs of care, with the
Federal government subsidizing this required cost sharing for persons with incomes
below 200% of the Federal poverty level. For the nursing home program that would
cover stays longer than 3 months, individuals would be required to apply to the cost
of their care nonhousing assets above $30,000 for single persons and $60,000 for
married persons, before the program would begin to pay for care. Individuals would
also be required to contribute to the cost of their care income that remains after
certain set-asides for housing and personal needs were made. Private long-term care
insurance could fill in the gaps not covered by this plan. The Pepper Commission
has estimated the costs of these benefits to be $42.8 billion (in 1990 dollars).
Retiree Health Benefits
Many medium and large employers offer their employees post-retirement health
benefits. Employees usually qualify for these benefits after working 10 or more years
and achieving a certain age. When a worker retires, the employer's health plan may
be his or her only source of health insurance until becoming eligible for Medicare,
and an important source of additional coverage thereafter. In 1987, an estimated
10.8 million retirees and their dependents were covered by employer-sponsored retiree
health plans.
CRS-13
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06-27-90
Congress is becoming increasingly concerned about the future of
employer-financed retiree health benefits. As more and more companies seek to
reduce or terminate their plans, the danger grows that retirees will lose an important
source of privately sponsored health insurance.
Several factors are converging to make retiree health benefits more expensive
for employers, including health care inflation, unfavorable demographic trends, and
changes in Medicare payment policy. Perhaps most important is that certain
companies have accumulated a vast unfunded liability for the coverage of current and
future retirees. All but a small percentage of firms that offer retiree health benefits
pay for the benefits as they are incurred. The total unfunded liability of employers
for current and future retiree health benefits has been estimated by the GAO to be
over $400 billion. The liability question may become explosive now that the
Financial Accounting Standards Board has issued draft rules requiring companies to
recognize the aggregate costs of their retiree health plans on financial statements.
Companies with substantial commitments to pay for their retirees' health care and
insufficient funds to pay for them may be seen as poor investment risks.
Some companies have already sought to reduce their retiree health commitment
by modifying or eliminating their plans. Others have tried to eliminate their liability
through Chapter 11 reorganization under the U.S. Bankruptcy Code. The latter
approach was taken by the LTV Corporation. After filing for reorganization in 1986,
LTV terminated health and life insurance benefits for more than 78,000 retirees. The
company restored the benefits after substantial public pressure, and Congress stepped
in with a stopgap measure to further protect the LTV retirees.
The LTV case sent a warning that retiree health benefits are uncertain for
current, let alone, future retirees. The 99th Congress enacted a law to ensure that
retirees of certain companies that had filed for bankruptcy continued to receive
health benefits. In the 100th Congress, legislation was enacted to help safeguard
retiree health benefits in cases where companies file for Chapter 11 reorganization.
In the 101st Congress, House and Senate proposals were included in the Omnibus
Budget Reconciliation Act of 1989 (H.R. 3299, S. 1750) to allow employers on a
tax-favored basis to use excess pension funds to finance the health benefits of current
retirees. These were dropped in conference although a technical provision relating
to contribution limitations on 401(h) accounts was adopted.
Legislation (S. 2199, H.R. 4134) similar to the proposals dropped in conference
has been introduced in the second session of the 101st Congress. The
Administration's fiscal year 1991 budget also includes a proposal to permit the
transfer of excess pension funds to pay current retiree health benefits. The transfer
would have to occur before Jan. 1, 1993, and in a plan year beginning after Dec. 31,
1990.
Consideration may also be given to bills imposing new Federal requirements on
employers to provide for vesting and portability of retiree health benefits, as well as
new standards for plan administration.
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LEGISLATION
P.L. 101-239, H.R. 3299
Omnibus Budget Reconciliation Act of 1989. Mandates Medicaid expansion for
pregnant women and children up to age 6 with family incomes up to 133% of poverty
level by Apr. 1, 1990. Codifies current regulatory requirements regarding sufficient
payments to providers. Requires Medicare-participating hospitals to adopt and
enforce a policy to ensure compliance with requirements relating to the examination
and treatment of emergency medical conditions and women in active labor. Increases
authorization of appropriations for the Maternal and Child Health Block Grant to
$686 million per year; adds a new 12 3/4% set-aside to support infant mortality
initiatives and community-based services for children; provides for demonstration
projects to cover uninsurable children. Extends COBRA continuation coverage from
18 to 29 months for those with a disability at the time of termination of employment.
Clean bill reported by the House Budget Committee Sept. 20, 1989. Passed House
with amendments Oct. 5, 1989. Passed Senate with amendments Oct. 13, 1989.
Conference report filed Nov. 21, 1989 (H.Rept. no. 101-386); agreed to by both houses
Nov. 22, 1989. Signed into law Dec. 19, 1989.
P.L. 101-234, H.R. 3607
Medicare Catastrophic Coverage Repeal Act of 1989. Repeals the Medicare and
financing provisions of MCCA (P.L. 100-360) while retaining the Medicaid provisions.
Introduced Nov. 7, 1989; passed House Nov. 8, 1989, with provisions identical to
those included in the House-passed H.R. 3299, the Omnibus Budget Reconciliation
Act of 1989. Passed Senate amended Nov. 8, 1989, with provisions of Senate-passed
S. 1726. Conference report filed Nov. 19, 1989 (H. Rept. no. 101-378). Signed into
law Dec. 13, 1989.
S. 768 (Kennedy)
Basic Health Benefits for All Americans Act. Requires employers to enroll
employees in a plan that covers specified health services and provides protection
against catastrophic illness expenses. Requires that States establish programs with
Federal and State financing to provide health benefits on a phased-in basis to people
in poverty and near poverty, and to all other individuals not covered by employer
plans. Employers without a plan meeting the minimum benefit standards are
required to join regional insurance pools established by the Secretary of Health and
Human Services that provide health benefits at community rates. Provides for a
Federal subsidy for small businesses where compliance costs exceed 5% of gross
revenues. Introduced Apr. 12, 1989; referred to Committee on Labor and Human
Resources. Hearings held May 1, June 23, 1989. Amended version of the bill
reported Nov. 20, 1989 (S. Rept. no. 101-217).
CRS-15
Nation's Business September 1989
COVER STORY
IP223H
AS
Curbing The Hiyii
Cost Of Health Care
By Roger Thompson
GEORGE'S
TOOL RENTAL
"George"
= took Philip A. Leber Sr. 19 years to
Philip and Bertha Leber. center, along
build his family-owned tool-rental
ance company approval for hospital ad-
with their son-in-law-holding their
business into a prosperous enter-
mission and mandatory second opinions
grandson-and most of the employees
prise employing nine people. Yet his
to confirm the need for surgery.
of their tool-rental firm.
long record of entrepreneurial success
Those cost increases also spurred in-
suddenly is threatened by circum-
tense new competition in health-care de-
stances beyond his control.
livery through the growth of health-
business can survive with expenses
Leber's business is on the verge of
maintenance organizations (HMOs),
such as this."
being crushed under the weight of
which provide all health services to
While the magnitude of Leber's rate
health-insurance costs that average
members for a flat fee, and preferred-
hike is extreme, his bewilderment over
$17,372 a year per employee, perhaps
provider organizations (PPOs), in which
sharply rising health-care costs is
the highest cost per worker of any busi-
affiliated medical practitioners provide
shared by thousands of small-business
services at a discount.
ness in America.
owners who are seeing their profit mar-
These costs for seven covered em-
Those and other cost-containment
gins erode-or disappear-as health-in-
ployees and their dependents. represent
steps were credited with holding cost
surance premiums jump 20 percent to
a five-fold increase from just one year
increases for employer-sponsored medi-
150 percent.
earlier. Large medical expenses for a
cal plans to single-digit percentages
The surge in health-insurance premi-
critically ill infant in the family of one
from 1985 to 1987, prompting what
ums reflects the nation's unexpected
of Leber's employees triggered the ex-
proved to be a false sense of optimism
failure to bring rising medical costs un-
plosive rise in his firm's rates.
among employers and insurers that the
der control. Runaway price increases in
Says Leber, president of George's
explosive inflation in health-care costs
the early 1980s forced many employers
had been contained.
Tool Rental Inc. in Hatfield, Pa.: "It
and insurers to devise new methods for
seems hard to visualize how a small
But double-digit health-cost inflation
medical-care cost control, such as insur-
returned with a vengeance in 1988, driv-
Copyright © 1989 by the Chamber of Commerce of the United
States. All rights reserved.
Reproduced with permission by the Library of Congress, Congressional Research Service with
permission of copyright claimant.
19
Many small-business owners are seeing
their profit margins erode as health-
insurance premiums jump 20 percent to
150 percent. Yet there are many cost-
management strategies that small
firms can adopt to rein in these
runaway expenses.
ing annual health-care costs per em-
ployee to a record high of $2,354. an
18.6-percent increase over the previous
year, according to an annual survey
conducted by the benefit consulting
firm of A. Foster Higgins & Co. "Not
only is double-digit inflation back in
health plans," says John Erb, manag-
ing consultant in charge of the survey,
"but there also doesn't appear to be
much relief in sight."
In fact. double-digit increases are the
norm again this year, according to a
recent survey of 14 major insurers by
Noble Lowndes, an international con-
sulting firm. "By the end of the decade,
the average employer's medical bene-
fits costs will have increased to more
than 13 percent of payroll, up from less
than 5 percent of payroll in 1980," says
David L. Brenneman, a Noble Lowndes
vice president.
xperts attribute the continuing in-
E
creases in health-care costs to
several circumstances:
Expanded coverage in the
areas of mental health and substance
abuse, which now account for nearly 10
percent of medical plan costs. In many
PHOTO:
©RIC
STAR
instances, this expansion has been dic-
Employer Charles Mortensen, with son
years, says Medical Economics.
tated by state governments.
Chip, says premium boosts started
If physicians' income growth isn't fu-
Failure of HMOs and PPOs to sus-
him thinking about government
eling overall health-care inflation, the
tain their original promises of achieving
solutions to health-care needs.
rising cost of the care they provide is a
major breakthroughs on cost reduction.
major factor. Numerous studies have
A campaign to encourage use of outpa-
concluded that doctors provide signifi-
tient services in place of hospital stays
As a result, some major companies,
cant amounts of unnecessary and inef-
also fell below expectations for cutting
such as Provident Mutual, Mutual of
fective medical care, driving up overall
costs.
Omaha, Kemper, and Allstate, have
expenditures, says Theodore J. Nuss-
The high cost of advances in medi-
withdrawn from the group-health-in-
baum, a principal with the accounting
cal technology and drug therapy.
surance business.
and consulting firm of Coopers & Ly-
A substantial increase in the popu-
The physicians have been criticized
brand. "Since the system is driven by
lation most likely to incur heavy medi-
for escalating their fees and generating
physicians, they can be a major part of
cal costs-the elderly.
incomes that rank them at the top for
the problem," Nussbaum says.
Although health insurers take the
all professionals. In 1987, the typical
Doctors maintain that the torrent of
brunt of complaints about escalating
income for a physician was $116,440,
malpractice lawsuits during the 1980s
costs, they simply are passing along
according to Medical Economics maga-
has forced them to practice defensive
their losses. The industry suffered a
zine. The median incomes of some spe-
medicine by ordering more tests and
record underwriting-or pretax-loss
cialists reached nearly three times that
performing more services than they
of $5.6 billion in 1987, and its red ink
amount. (See chart on Page 24.)
might otherwise believe necessary.
amounted to $4.7 billion in 1988, accord-
On the other hand, physicians' earn-
Some studies indicate that up to 25
ing to The National Underwriter, an
ings have not kept pace with consumer
percent of doctors' procedures are done
industry publication.
price inflation in seven of the past 10
for defensive reasons, says Karen
20
Nation's Business September 1989
COVER STORY
Brigham, manager of health-care policy
for the U.S. Chamber of Commerce.
Health Insurers Post Big Losses
S inflationary pressures from a
A
variety of sources rekindle dou-
Profit/Loss As Percent Of Gross Income
ble-digit premium increases, it's
Commercial
Blue Cross/
no wonder that health-care
Companies
Blue Shield
costs have become the No. 1 concern
1977
0.4%
2.6%
for many American companies-the na-
1978
1.3%
2.3%
tion's chief providers of group medical
1979
0.2%
0.4%
insurance.
Employer-paid health insurance cov-
1980
-2.9%
-4.6%
ers an estimated 160 million Ameri-
1981
-3.9%
-3.6%
cans-workers, workers' dependents,
1982
-4.0%
-0.9%
and retirees. Employers will spend
1983
-1.8%
1.3%
more than $140 billion this year to pro-
1984
1.5%
3.3%
vide that coverage.
1985
0.8%
0.7%
The nation's total health-care bill for
1986
-3.2%
-2.0%
1989 is expected to hit a record $542
1987
-6.4%
-4.1%
billion. That represents nearly 12 per-
cent of the gross national product,
Source: Strategic Planning Associates, Best insurance Reports
which is twice the percentage of 25
years ago and is the largest share of
GNP for health care among all industri-
alized nations. At the current rates of
growth, health-care spending in the
U.S. may reach 15 percent of GNP by
National Health Expenditures
the year 2000.
As the medical-care bill grows, so
does the debate over who should pay it
Total
Percent
Per-Capita
Year
and how medical resources should be
(in billions)
Of GNP
Spending
allocated. One facet of the controversy
1965
$41.9
5.9%
$205
is how best to extend insurance cover-
1976
$105.8
8.9%
$665
age to the estimated 37 million people
1981
$287.0
9.4%
$1.207
now lacking it. (See the box on Page
26.) And as costs soar, one state-Ore-
1982
$323.6
10.2%
$1,348
gon-already has begun to ration
1983
$357.2
10.5%
$1.473
health-care dollars. (See the box on
1984
$388.5
10.3%
$1.587
Page 25.)
1985
$419.0
10.4%
$1.696
The debate also involves those who
1986
$455.7
10.7%
$1.827
believe that the return of double-digit
1987
$500.3
11.1%
$1.987
premium increases is proof that cost-
1988*
$541.7
11.5%
$2.135
containment efforts during this decade
1990**
$647.3
12.0%
$2.511
have failed and that the only alterna-
Estimated
tive now is some form of nationalized
" Projected
health care, perhaps similar to that in
Canada. (See the box on Page 22.)
But small business sees the problem
effort yet to implement aggressive
as immediate, not as a matter of debate
cost-management strategies. "I reject
Typical Premiums*
over long-term solutions. Charles Mor-
the premise that we've tried everything
tensen, president of Scandia Technolo-
we know how to do and it's failed,"
Single Coverage
gies Inc., in Clearwater, Fla., says his
Roper says. On the contrary, he main-
Family Coverage
insurance plan covering 13 of 20 em-
tains that most employer health plans
Conventional
ployees was hit with a premium in-
encourage excessive use of medical ser-
$98
crease of over 80 percent two years
vices.
ago. He changed insurers and saved
The basic problem is that employees
$209
about $1,000 a month in premiums, but
typically pay only a relatively small
IPA/HMO
he expects another big rise in premiums
portion of the cost of their health-care
$88
this year. To make matters worse, he
insurance or, in many cases, are under
$226
now fears that his current insurer may
plans fully paid by employers. This in-
go out of business. Says Mortensen:
sulates them from the full impact of
Staff/Group HMO
"I've been anti-socialist all my life, but
rising costs and leaves them largely un-
$93
if there is one area where we might
concerned about the economical use of
$203
need this kind of help, it's medicine.'
services. "If food prices were going up
Don't throw in the towel yet. advises
by 15 percent a year, you'd have pickets
PPO
William L. Roper, a White House advis-
in front of grocery stores," says Jon
$103
er on domestic policy. The assumption
Gabel, associate research director for
$232
that health-care cost containment has
the Health Insurance Association of
Monthly health-insurance premiums
failed simply isn't true, he maintains,
America, an industry research and lob-
paid in 1988 by employer. or employee,
because business hasn't made a serious
bying group. "But you don't see pickets
or partly by each.
CHARTS: SAM WARD
22
Nation's Business September 1989
COVER STORY
in front of doctors' offices" because in-
Health Care, Canadian-Style
surance covers virtually all the costs,
he adds.
espite the sharp rise in premium
I
costs, an HIAA survey found
Canadians' total outlay for health care
funds through general tax revenues.
"virtually no change in the aver-
equals about 9 percent of their nation's
Not all health needs are covered by
age [employee-paid] deductible
gross national product-lower than the
the system. Excluded are payments for
or the coinsurance rate [the percentage
nearly 12 percent of GNP paid out in
eyeglasses, dental care, outpatient pre-
of costs paid by employees]" from 1987
the U.S. And by some measures, Cana-
scription drugs, and treatment up-
to 1988. The survey found the typical
da's population is healthier than that of
grades such as private or semiprivate
individual deductible remained at $100,
the U.S. Canadians live longer, on aver-
hospital rooms. Most employers cover
with a family deductible of $300, while
age, and their infant-mortality rate is
these costs through supplemental in-
the typical coinsurance rate remained
25 percent lower.
surance plans.
at 20 percent. "Our analysis suggests
Unlike the U.S., where some 37 mil-
Since federal and provincial govern-
that employers and insurers did not re-
lion people have no health insurance,
ments are the sole payers of medical
spond to the premium increases of 1987
health insurance in Canada is universal.
bills, they set ceilings on physicians'
and 1988 as if a crisis were at hand,"
The tax-financed national system elimi-
fees and hospitals' spending. Recent ef-
the survey stated.
nates the need for deductibles and coin-
forts to restrain rising costs have
Although small firms typically pay 10
surance. And Canadian law forbids doc-
foreed provincial governments to im-
percent to 40 percent more for their
tors from charging patients more than
pose "tighter controls on the number of
health-insurance premiums than large
the fees set by provincial governments.
doctors and physician fees, hospital
companies pay, they are even less likely
Moreover, Canadians have the right
budgets, and home-care budgets," ac-
than large companies to pass any of the
to choose their physicians and hospi-
cording to the Employee Benefit Re-
costs along to employees. A 1987 Small
tals, and physicians have the right to
search Institute, a nonpartisan re-
Business Administration study found
choose where they want to establish
search organization in Washington,
that 70 percent of all firms with fewer
their practices and to charge on a fee-
D.C. In a report on the Canadian health-
than 100 employees paid all of their em-
for-service basis.
care system, the organization states:
ployees' health premium, and on aver-
Not surprisingly, at a time when U.S.
"These controls have directly resulted
age such firms paid 87 percent of fam-
health-care costs seem to be soaring
in supply shortages and queues for
ily premiums.
out of control, American interest in the
some types of health-care services, re-
Small firms also are far less likely to
Canadian system is on the rise. Says
stricting access to some types of care."
have implemented other cost-manage-
Chrysler Corp. Chairman Lee Iacocca:
To handle the increasing demand for
ment strategies widely adopted in mid-
"American industry cannot compete ef-
hospital beds, Canadian hospitals have
decade by larger employers. Among the
fectively with the rest of the world un-
had to resort to a type of rationing. In
approaches that have been tried, not all
less something is done about the great
his book Condition Critical, medical
of them effective:
imbalance between health-care costs in
journalist Nicholas Regush likens the
Preadmission certification, to ap-
the United States and national health-
rationing to the medical decision-mak-
prove medical necessity and determine
care systems in virtually every other
ing in mobile medical units like those on
length of stay before a patient enters
country."
the television show "M"A"S"H." Pa-
the hospital;
Yet health care Canadian-style may
tients are classified as emergency (situ-
Second opinions, to confirm the
not cure what ails the U.S. system. The
ation is life-threatening), or urgent (pa-
need for elective surgery;
American Medical Association de-
tient needs treatment within 24 hours),
Outpatient surgery. which does
scribes the Canadian system as "social-
or elective (patient needs treatment or
not require hospital admission:
ized medicine managed by an ever-en-
surgery for a condition that is not life-
Concurrent review, to monitor a
larging and more expensive
threatening).
hospital patient's treatment and length
bureaucracy, financed by ever-increas-
Maclean's magazine, Canada's lead-
of stay;
ing taxation, and featuring rationing,
ing newsweekly, took a rather alarmist
Discharge planning, to coordinate
shortages, health-care waiting lists,
view of the state of Canadian health
the need for follow-up care outside the
and an absence of private-sector alter-
care in a cover story earlier this year:
hospital;
natives."
"Hospitals across the country are tak-
High-cost-case management,
Canada bases its health care on the
ing beds out of service, limiting the
which determines the most cost-effec-
egalitarian ideal of providing universal
number of operations they perform,
tive treatment for those with chronic
access to basic hospital and physician
and cutting back on other services as
illnesses such as AIDS or cancer.
services. When the program was begun
governments battle to keep down
Four out of 10 small and midsized
in 1971, the Canadian government cov-
health-care costs." In an introductory
Northeastern companies surveyed this
ered 50 percent of health-care costs
column, the magazine's editor conclud-
year by the Wyatt Co., a benefits con-
through various taxes. To contain
ed, "People are dying because doctors
sulting firm, said they have not tried
costs, the government in 1977 changed
and the medical establishment cannot
any cost-containment strategies. While
its form of funding to block grants for
find the time or the available facilities
63 percent had implemented at least
each of Canada's 10 provinces. The
to save their lives."
one strategy, no single measure had
grants have not kept up with the rising
Despite these obvious flaws, recent
spread to even half of the companies.
costs of health care, however, with the
opinion polls show that Canadians are
There are several good reasons why
result that federal support dropped to
generally satisfied with their govern-
small companies lag in taking effective
38 percent in 1988.
ment health-care system. It is doubtful,
steps to contain health-care costs. It is
The provinces have been forced to
however, that many Americans would
less of an administrative headache to
pick up the slack. While they are free to
embrace a Canadian-style system with
pay full premium costs for employees,
finance health costs with any taxes
such equanimity.
and doing so may make up for fewer
they choose, they derive most of their
-Kara Finnegan
benefits overall. Failure to share costs
24
Nation's Business September 1989
COVER STORY
also may reflect the fact that many
At renewal time, Leber's insurance
& Love Ltd., located in Bethesda, Md.
small firms employ family members.
company evaluated the health status of
In addition, administrative costs are
each employee and covered dependent,
higher for small companies because of
t is also clear that smallness itself is
and it assigned premiums accordingly.
low volume. It is more expensive for an
a major handicap in holding down
Insurance brokers characterize this as
insurer to handle 10 employees in 100
costs. Small firms pay higher premi-
"medical red-lining," describing it as an
companies than 1,000 employees in one
ums per employee largely for two
attempt to discourage business from
company.
reasons: Insurers use questionnaires to
companies or groups likely to incur
Most large companies now trim ad-
assess the health status of each cov-
high medical costs.
ministrative costs, which run as high as
ered individual, a practice called medi-
Medical underwriting also leads to
30 percent of premiums, by self-insur-
cal underwriting. And insurers incur
denial of coverage for people who have
ing, essentially putting money in a bank
higher administrative costs per individ-
chronic health problems, such as heart
account and paying claims as they come
ual when handling small accounts.
disease or cancer. This makes it nearly
in. Large firms can do this because they
Medical underwriting is the practice
impossible for many small companies
spread the risks over many employees.
that drove Philip Leber's insurance
with covered individuals in need of ex-
This option is unrealistic for small com-
rates through the roof. His problems
pensive care to shop around for lower
panies, because a single major claim
began last year when the wife of one of
rates. because no insurance company
could bankrupt the health-care reserve.
his employees gave birth to a child with
will bid on a plan that includes someone
There are other, even more important
serious medical problems, causing the
with a chronic illness. "Unless you have
benefits to self-insurance. Under feder-
company's insurance carrier to pay
a healthy group, you can't move," says
al law, an employer who self-insures
claims 2½ times larger than premiums
Howard Soltoff, a partner in the insur-
need not comply with state mandates
received.
ance brokerage firm of Foster, Soltoff
for specific types of health coverage.
There are 686 such mandates nation-
Health-Insurance Premiums Increase
wide, covering ailments from AIDS to
alcoholism and drug abuse, and ser-
vices ranging from acupuncture to in-
Rates of increase for firms whose
premiums rose from 87101988
vitro fertilization. Federal employees,
by type of health care plan.
Medicare patients, and most state em-
ployees are exempt from these require-
ments, putting the burden of compli-
ance on those firms that aren't large
enough to escape through self-insur-
ance.
Conventional
20%
mallness also is a barrier when it
Managed
11%
Conventional Plan
S
comes to participation in HMOs
or PPOs. While both can pro-
IPA/HMO¹
10%
duce significant cost savings
Staff/Group HMO
10%
and represent a rapidly growing seg-
ment of the health-care market, small
PPO2
employers have only limited access to
27%
either. HMOs and PPOs have concen-
1 - independent Practice Association/Health Maintenance Organization
trated their marketing efforts- among
2 - Preferred Provider Organization
midsized and large firms.
Source: Health Insurance Association of America. Employer Survey 1988
With only limited access to HMOs
and PPOs. small employers are left
with two basic fee-for-service choices
for health plans. One is a comprehen-
Physicians' Median Earnings, 1987
sive plan in which employees pay a de-
ductible and coinsurance on all services.
All Physicians
$116,440
The other is a basic hospital/major-
Anesthesiologists
$161,670
medical plan in which deductibles and
Cardiovascular Surgeons
$271,550
coinsurance typically apply only to non-
Family Physicians
$87,120
hospital charges and to a portion of
General Practitioners
$79,910
inpatient physician and surgeon fees re-
General Surgeons
$130,500
maining after an initial plan payment.
Internists
$98,420
Under both plans, employees choose
Neurosurgeons
$236,460
their own doctors, who set their own
Obstetricians/Gynecologists
$137,860
fees.
Ophthalmologists
$167,860
Neither type of plan is structured to
Orthopedic Surgeons
$193,300
reward employers for cutting costs. A
Pediatricians
$88,490
small company that manages to hold
Plastic Surgeons
$179,170
claims to 60 percent of premiums paid
Psychiatrists
$93,750
to the insurer still could get a hefty
Radiologists
increase based on the traditional "com-
$165,910
Thoracic Surgeons
munity rating" system. Under it, premi-
$166,670
Urologists
um increases are based on the overall
$145,000
experience of an insurer-designated
Source: Medical Economics Co Inc Copyright©Medical Economics Co. Inc.
pool of similar-sized firms in the area.
Reprinted by permission from Medical Economics magazine.
CHARTS: SAM WARD
Thus, even a company with relatively
Nation's Business September 1989
25
low use of health-care services can face
The Terms You Need To Know
premium increases if others in the pool
cause significant expenditures.
harles Gorenstein's experience is
C
typical. His Falls Church, Va.,
In managing your company's health--
the use of medical services: HMOs,
law firm-Birch, Stewart, Ko-
care costs, you should be familiar with
PPOs (definition below), and conven-
lasch, and Birch-has received
these terms:
tional insurance plans that impose any
two rate hikes this year totaling 47.5
Deductible: The initial amount of ex-
of various utilization-review strategies,
percent. although health-insurance
pense for medical or health services
such as preauthorization for hospital
claims last year totaled only 57 percent
that must be paid out-of-pocket by the
care or second surgical opinions.
of premiums.
patient or the patient's family before
Multiple Employer Trust (MET): A
"They [the insurance company] are
the health plan begins payment.
group of employers, usually from small
basically trying to push us out the
Coinsurance: The percentage of costs
companies, who band together to pur-
door," Gorenstein says. He added that
that a patient pays after the deductible
chase health insurance at lower prices
he did not understand why the insurer
has been met. Total out-of-pocket ex-
than available to individual companies.
was discouraging business from his
penses for an individual patient usually
Preferred Provider Organization (PPO):
firm when "they are making money on
are capped at less than $1,000.
A hospital or a group of doctors that
us hand over fist." The health plan at
Health Maintenance Organization
contracts with an employer to provide
Gorenstein's firm covers about 75 em-
(HMO): An organization that provides
health services at a discount-usually
ployees.
health services for a set premium, re-
10 percent to 20 percent-in exchange
A newer "tier rating" system does
gardless of treatment. HMOs typically
for volume business. There are approxi-
reward companies that hold costs
operate through one of two basic mod-
mately 620 PPOs nationwide. offering
down, but it clobbers those with big
els of organization. One is a staff prac-
services to more than 36 million people.
claims. Under the tier system, increases
tice organized around a group of doc-
Self-Insurance: The employer acts as
are based on the cost of medical infla-
tors; the other is an individual practice
an insurance company, assuming the
tion plus a charge for actual experi-
association (IPA), which does not re-
full or partial risks for health-plan costs
ence. Insurers divide employers into
quire doctors to form a group. There
and paying all claims directly rather
three or more claims-experience tiers
are currently about 607 HMOs national-
than providing premiums to an insurer.
and assign premium increases based on
ly, enrolling 32 million people.
The paperwork for requesting claims
the tier. The problem is that almost ev-
Managed Care: Refers to three basic
typically is handled by a so-called third-
ery small company has a big claim
approaches to controlling the costs and
party administrator.
sooner or later, making a leap in premi-
um costs inevitable.
The question remains. What works?
A number of cost-management strat-
egies are available to small companies
willing to take a tougher approach to
Is Rationing The Answer?
the challenge of restraining health-care
costs:
Shifting costs to employees to
make them more sensitive to the wise
purchase of health services;
In 1987, the Oregon legislature voted to
ture-one that is dependent on age.
Requiring various forms of health-
stop spending Medicaid money on cost-
Studies have shown that 25 to 35 per-
care management that reviews the ap-
ly organ transplants, diverting scarce
cent of Medicare expenditures in any
propriateness and effectiveness of ser-
funds instead to help thousands of
year go to 5 to 6 percent of enrollees
vices;
poor, pregnant women obtain prenatal
who will die within a year.
Joining a well-run multiple-em-
care.
The British National Health Service
ployer trust that gives small companies
Last spring, the legislature went a
largely uses age to determine who re-
clout in the insurance marketplace;
giant step further, voting to guarantee
ceives certain types of treatment. For
Adopting a wellness program that
all poor people minimal treatment un-
example, in Britain, lifesaving kidney
encourages employees to stay healthy
der Medicaid.
dialysis is not given to people over the
and provides the resources to help them
To stretch available funds, the state
age of 55.
do so;
will rank treatment in order of impor-
As the baby-boom generation begins
Changing insurance carriers.
tance and pay only for services at the
to retire early in the next century, some
Although cost sharing with employ-
top of the list.
experts believe, health-care rationing is
ees is potentially a highly effective
Rankings will be based on a combina-
inevitable.
management strategy, it is also the
tion of cost, lifesaving potential, and
The demand for services will simply
most controversial. Most employers
degree of improvement expected in a
outstrip available resources.
don't want to be put in the position of
patient's life.
Daniel Callahan, one of the nation's
charging more or cutting back on a ben-
Although no one likes rationing
leading medical ethicists, maintains
efit that employees have come to re-
health care, Oregon's approach to set-
that an age-based standard for ration-
gard as an entitlement.
ting priorities may be a model of what
ing would be legitimate since, in any
For competitive reasons alone, boost-
is to come nationwide unless health-
event, medicine can provide only limited
ing employee health-care costs looks
care costs are brought under control.
benefits to people over 70.
like a bad idea to many employers.
Since approximately one-third of U.S.
Critics of rationing argue that the
"Frankly, if we pass these increases on
health-care expenditures are incurred
U.S. can afford to take care of the poor
to our employees, we are afraid we
by people over 65, some experts foresee
and elderly by raising taxes and allocat-
would start losing our employees to em-
a different form of rationing in the fu-
ing medical resources more efficiently.
ployers with lower health-care costs,"
26
Nation's Business September 1989
COVER STORY
says David A. Raine, president of Raine
& Son Inc., a plumbing contractor in
Hyattsville, Md. He maintains a plan
without cost to his 75 employees.
Nevertheless, studies have shown
that insulating employees from the cost
of care encourages higher use of health
services. A landmark Rand Corp. study
of health-cost management found that
participants required to pay a $100 de-
ductible used the health plan 19 percent
less than those who paid no deductible.
Those who paid a $500 deductible cut
usage 27 percent compared with those
with no deductible; and those who paid
a $1,000 deductible cut usage by 39 per-
cent. After five years of tracking the
health status of 8,000 people in the
study, no significant health differences
were found between groups that used
the most health services and those that
used the least.
To squeeze out unnecessary use of
PHOTO:
©SAL
STAR
doctors' services, many health-care con-
Fred Rohm, president of the New Castle County Chamber of Commerce in
sultants believe the individual deduct-
Newark, Del., administers a multiple-employer trust that sells health
ibles should move into the $300 to $500
insurance to more than 1,000 small-business owners like Ruth Campbell,
range over the next several years, with
who operates a clock-repair business from her home.
An Alternative To Mandates
fordable and available for small busi-
ness and ensuring that public-sector
programs meet the needs of the poor."
A bill that closely follows this ap-
proach has been introduced by Sen. Or-
rin Hatch, R-Utah, and has been en-
As health-care costs continue to soar,
Washington can dictate what every em-
dorsed by the Partnership on Health
Congress is being pressured to do
ployer should be doing," says Frederick
and Employment. Hatch's health pack-
something about providing health cov-
J. Krebs, manager of business-govern-
age would take these steps:
erage for those who do not have it now.
ment policy for the U.S. Chamber.
Pre-empt all state-mandated
The question is, what approach should
"There is a real 'inside-the-Beltway' ar-
health benefits, allowing small firms to
Congress take?
rogance about that approach."
work with insurance companies to de-
Mandating employers to provide
Small companies would be hardest hit
velop low-cost, no-frills health plans.
health insurance is one option under
by the Kennedy bill because they could
Promote the development of state
consideration. Sen. Edward M. Kenne-
least afford the stiff costs. Mandates
insurance risk pools for individuals who
dy, D-Mass. has introduced legislation
would force many small-business em-
are uninsurable.
to do just that. Business overwhelming-
ployers to shift the costs of health care
Authorize development of federal
ly opposes it. "The Kennedy approach
back to employees in the form of lower
treatment-practice guidelines for physi-
fails to recognize that the real problem
wages or reduced employment. Thus,
cians, which, if followed, would be a
with providing health care to more peo-
"employer-mandated health insurance
defense against medical malpractice.
ple is that it costs too much," says Rick
will end up hurting the very people it is
Hatch says he soon will introduce ad-
Berman, chairman of the Partnership
intended to help," says Princeton Uni-
ditional legislation to:
on Health and Employment, a rapidly
versity Prof. Uwe Reinhardt, an expert
Expand Medicaid, the federal-state
growing, Washington, D.C.-based coali-
in medical economics.
health-care program for the poor, to
tion representing nearly 1,000 compa-
But the Kennedy bill also would hurt
cover all the poor (not just the 40 per-
nies nationwide.
larger firms, as they find that their
cent now covered) and allow those just
The Partnership, spearheaded by the
health plans fall short of the specific
above the poverty level to purchase
U.S. Chamber of Commerce, has taken
benefit requirements, Berman warns.
Medicaid coverage.
a leadership role in opposing mandates
"In fact, if the Kennedy bill were en-
Give self-employed people and un-
while promoting reforms "to make the
acted, every year Congress would be
incorporated firms the same 100-per-
whole system more efficient and there-
asked to mandate broader and broader
cent tax deduction for health-care pre-
by more affordable," says Berman.
coverage."
miums now given to incorporated
"The mission of the Partnership is to
In testimony recently on behalf of
businesses.
educate the media, the Congress, and
the U.S. Chamber of Commerce, David
For more information about the Part-
the general public that the Kennedy
A. Raine, a Hyattsville, Md., plumbing
nership, including details on joining,
'political-quick-fix' approach will cause
contractor, told the Senate Labor Com-
contact Rick Berman, Chairman. Part-
more long-lasting harm than good,"
mittee that rather than mandates, "fill-
nership on Health and Employment,
says Berman. "Partnership resources
ing the gaps in coverage will require
P.O. Box 27414, Washington, D.C.
largely will be committed to that goal."
building upon the employer-sponsored
20038. The telephone number is (202)
"The Kennedy approach is that
system by making coverage more af-
463-5327.
28 -29
Nation's Business September 1989
COVER STORY
family deductibles twice to three times
in health-care delivery, also have failed
the individual rate.
lawyer with the firm of Vedder, Price,
to deliver promised cost savings. Only
Kaufman, Kammholz and Day.
Once deductibles are adjusted up-
one-third of the employers surveyed by
Many small employers who face the
ward, employers can avoid the problem
Foster Higgins in 1988 said their HMOs
group health-insurance market on their
of periodically ratcheting deductibles
were effective in controlling costs.
own end up changing insurers every
even higher. They can index the figure
While some firms have saved 30 per-
two or three years in search of lower
to adjust automatically with, for exam-
cent or more with PPOs, the discounts
rates. In an industry with roughly 1,500
ple, annual medical-cost inflation, says
offered by the medical group providing
commercial insurers, shopping for a
Nussbaum of Coopers & Lybrand. This
care typically are offset by more fre-
better buy is standard practice. With
prevents the reverse effect-shifting
quent office visits, says Jack Mahoney,
many buyers and sellers churning the
costs to the employer.
vice president of Alexander Consulting
market, however, insurers typically will
While cost sharing will slow demand
Group Inc., in Lyndhurst, N.J.
offer an attractive rate initially, then
for health services, it is unwise to focus
Despite these drawbacks, many con-
seek higher premiums at renewal time,
solutions on only that area, says Larry
sultants still view well-run HMOs and
Chapman savs. "The way to smoke out
S. Chapman, president of Corporate
PPOs as attractive alternatives to con-
the lowball deals is to negotiate a two-
Health Designs, a consulting business
ventional insurance plans for small
or three-year contract."
based in Seattle. He stresses the need
firms.
The most effective way to contain
to manage the use of health services.
health costs is to prevent illness and
In fact, "managed care" has become
ithout joining an HMO or
disease. The U.S. Centers for Disease
the fastest-growing trend in the health-
care industry. Seventy-two percent of
W
PPO, one effective way for
Control estimates that 53 percent of the
small employers to obtain
premature deaths in the country are
Americans who obtain health insurance
lower rates is to join a pur-
attributable to lifestyle circumstances
through an employer now are enrolled
chasing group known as a multiple em-
such as smoking, drug and alcohol
in a managed-care plan. compared with
ployer trust (MET). Most METs are run
abuse. diets high in fat and low in fiber,
less than 20 percent in 1984. says Gabel
by associations on behalf of their mem-
sedentary living, and failure to use
of the HIAA. For the purposes of its
bers. By pooling the needs of many
automobile seat belts.
survey, the organization defines man-
small companies, the MET can secure
A growing number of employers.
aged care as an HMO, a PPO, or a
lower rates not available to individual
though few small ones, have imple-
conventional fee-for-service plan with
companies. To date, however, very few
mented wellness programs to encour-
preadmission certification for hospital-
have been aggressive about health-care
age employees to alter behavior that
ization. The term "managed care," how-
cost containment, says Chapman.
could harm their health. Typically,
ever. usually encompasses any manda-
There are some notable exceptions,
these programs monitor cholesterol and
tory review of health-care services.
however. Fred Rohm, president of the
blood pressure, encourage smokers to
While the industry is rapidly convert-
New Castle County Chamber of Com-
quit. and promote fitness, stress man-
ing to managed care, Gabel advises in-
merce, in Newark, Del., directs a MET
agement, and weight control. Some pro-
surers and employers not to overesti-
that supplies health insurance for about
grams offer cash incentives for staying
mate the possible savings. "If it's done
1,000 small businesses, covering 3,000
healthy and not using the medical plan.
right, [managed care] certainly will be
people. The MET offers one convention-
"More and more insurance companies
better than the way business was done
al plan and two HMOs. Rates usually
seem to be interested in giving a dis-
in the past," says Gabel. "But it isn't
are comparable to those offered to
count to employers who participate in
done right in many cases."
much larger employers, thus saving
wellness programs," says Jan Peter
Gabel recalls that the insurance in-
costs for those enrolled.
Ozga, president of Ozga Operations. a
dustry was overly optimistic about pre-
John Polk, executive director of the
Falls Church, Va., health-consulting
vious managed-care initiatives. To curb
Council of Smaller Enterprises of the
firm.
unnecessary hospital admissions, many
Greater Cleveland Grewth Association,
insurers in the mid-1980s began to re-
runs the country's largest association:
hile it is clear that the eys-
quire second opinions for many types of
health plan for small employers.
surgery and to offer incentives for use
W
tem of health-care delivery
Though technically not a MET-a term
in the U.S. must change, it's
of less expensive outpatient clinics.
that implies certain legal require-
too early to tell what form
Typically, outpatient treatment re-
ments-the council negotiates the
that change will take. Private-sector so-
quired no preauthorization and no coin-
terms of group health-insurance plans
lutions to spiraling costs are available,
surance payments.
on behalf of 6,200 of its members, cov-
but as yet they have not been imple-
Second opinions, however, may cost
ering 44,000 employees and 76,000 de-
mented aggressively.
more than they save. Recent surveys
pendents. Two-thirds of those compa-
Small companies must make hard
indicate that 92 percent of all second
nies employ five or fewer workers.
choices. It's time to rethink the goals of
opinions uphold the first. In many
"The cost of our health insurance has
company-sponsored health insurance;
cases, outpatient care now rivals the
increased a total of 21.5 percent in five
it's time to design plans according to
cost of hospitalization as doctors and
years," says Polk. The average individ-
new realities of the marketplace.
hospitals shift costs to make up for the
ual premium is about $180 a month, or
Experts maintain that cost-sharing,
loss of inpatient revenue. Most consul-
$2,160 a year. "That's pretty good for a
tighter management of care and deliv-
tants now recommend preauthorization
town where health-care costs are about
ery, and effective wellness programs
for outpatient treatment and the same
twice the national average."
are the ways to go. But insurers and
coinsurance required for hospital care.
Generally, insured METs-those
businesses appear to be running out of
HMOs, once heralded as a revolution
backed by an insurance company-have
time to make these strategies work.
a better track record than self-insured
Warns Ozga: "This may be the private
METs-those not backed by an insurer.
sector's last shot before we get a na-
Under state insurance regulations, in-
tional system of health insurance." NB
sured METS "can't collapse and leave
employers holding the bag," says
George Pantos, a Washington labor
CRS
Congressional Research Service
The Library of Congress
Washington, D.C. 20540
Medicare Payment
to Hospitals and Physicians
IP 317M
In 1983 Congress approved a prospective payment system (PPS) of
reimbursing hospitals for inpatient services covered by the Medicare program.
Under PPS, Medicare pays hospitals a predetermined rate according to the
classification of a patient's diagnosis into one of approximately 470 Diagnosis
Related Groups (DRGs).
Since 1984 Congress has also focused on legislation aimed at reducing the
cost to Medicare of reimbursing physicians for services provided under the
program. The enclosed material explains the origin and operation of PPS and
physician reimbursement under Medicare as well as proposed legislative
changes in both systems.
Members of Congress who want further information on this topic may
contact CRS at 707-5700. Additional CRS Reports may be identified by
looking in the current Guide to CRS Products (for congressional use only)
under "Medicare" and in the latest Update under "Health."
Additional information can be located at a local library through use of
indexes such as the Readers' Guide to Periodical Literature, Public Affairs
Information Service Bulletin (PAIS), and various newspaper indexes.
Individuals with questions relating to specific situations under PPS and
physician reimbursement may address them to:
Health Care Financing Administration
Office of Legislation and Policy
U.S. Department of Health and Human Services
Humphrey Building, Room 341-H
200 Independence Avenue, SW.
Washington, DC 20201
We hope this information will be helpful.
Congressional Reference
Division
CRS
Congressional Research Service
The Library of Congress
Washington, D.C. 20540
Health Care Costs
IP 223H
National health expenditures have increased for decades. By 1988, the
last year for which Government figures are available, total health spending
in the United States had reached $539.9 billion, or 11.1% of the Gross
National Product. The price of medical care as measured by the Consumer
Price Index has also increased rapidly. These factors have focused increasing
congressional attention on costs in the health sector, particularly on hospital
costs.
This Info Pack includes background information on health care
expenditures and information on methods of controlling the costs of hospital
care, physicians' fees, and technological advances.
Members of Congress who want further information on this topic may
contact CRS at 7-5700. Additional CRS Reports may be identified by looking
in the current Guide to CRS Products (for congressional use only) under
"Medical Economics" and in the latest Update under "Health."
Additional information, primarily in periodicals and newspapers, may be
found at a local library through the use of such indexes as the Readers'
Guide to Periodical Literature, Public Affairs Information Service Bulletin
(PAIS), and various newspaper indexes.
We hope this information will be helpful.
Congressional Reference
Division
5/90
IP223H
AS
New York Times, December 7, 1989, PP. D1, D5
Volleyball on Health Care Costs
U.S. and Employers
Who Pays Medical Bills?
Battle Over Billions
While the Government pays
Some costs have been
for 41 percent of American
shifted to employers
health care
and private insurers.
By MILT FREUDENHEIM
What sources contributed to each
What Medicare saved by shift-
dollar spent for U.S. health care
ing to employers the bulk of
The Government and private indus-
in 1987.
the cost of medical care for
try are scrambling to make each
Medicaid
workers age 65 and over and
other pay billions of dollars in medi-
10c
cal bills for the elderly and the work-
their spouses, in billions.
ing poor.
The Government is intensifying ef-
Direct
Medicare
$2.0
forts to force private health plans to
patient.
17c
pay bills for elderly workers covered
payments
by such plans. Until the early 1980's,
the Federal Medicare program had
the primary responsibility for the
1.5
people it covers, those age 65 and
Private
older.
health
Also, both Medicare and the Medic-
insurance
aid plan for low-income people no
32c
longer fully cover medical costs in-
1.0
curred by patients under the two pro-
grams; thus, doctors and hospitals
Other Government sources,
are raising rates for private payers.
including care for the military
Cutbacks by Employers
and veterans 14c
0.5
At the same time, some employers
are cutting back health benefits for
Other private sources,
retirees and older workers eligible
85
86
'87'
'88
'89
including company health
for Medicare, leaving the cost to the
services and philanthropies 2c
0
Government. And smaller employers
are deciding not to offer health insur-
Source: Federal Health Care Financing Administration
ance, leaving their workers to fend
for themselves. Uninsured people
often end up owing money to tax-sup-
The New York Times Dec. 7. 1989
ported hospitals or are too sick to
work and thus eligible for public aid
care costs have been shifted by the
tions before Medicare kicks in.
programs.
Government to private insurers. But
"The tension is growing," said Wal-
Moving to increase the savings,
most private experts believe that the
ter B. Maher, director of Federal
Congress voted Nov. 22 to authorize
Government has had most of its suc-
health policy relations with the
computerized checking of Internal
cess in the last two years. The latest
Chrysler Corporation. "It is a symp-
Revenue and Social Security records
Government figures, which are for
tom of the absence of any type of na-
to identify workers over 65 who are
1987, show that private insurers and
tional health policy. We have all these
covered by employer health benefits.
patients themselves paid about 59
thousands of bill payers trying to
The new search is expected to shift
percent of the nation's health-care
dodge a bullet, trying to shift costs
$780 million to $900 million more in
bill in that year, about the same as
and pay less."
they had for the previous decade.
expenses to private payers, accord-
The efforts to shift the bill to other
ing to estimates by the Congressional
Public programs, including Medicare
parties have spurred complaints and
Budget Office and the Administra-
and Medicaid, paid the remaining 41
accusations, as well as a debate about
tion. The nation's total health-care
percent.
what should be done. Proposed solu-
bill is expected to exceed $600 billion
The cost shifting by the Govern-
tions include suggestions to increase.
ment takes a number of forms. Medi-
this year, up about 11 percent from
competition in the health-care mar-
1988.
care officials say the Government
ketplace; mandates that would tax
saved $1.3 billion this year by shifting
On another front, ceilings on what
businesses that do not provide bene-
to private employers doctor and hos-
Medicare and Medicaid will pay for a
fits, and a Government-controlled na-
pital bills for elderly workers and
procedure have prompted hospitals
tional health system like Canada's.
their spouses. This move was accom-
and doctors to raise charges for pa-
There are no current statistics to
plished by requiring employer health
show how much of the nation's health-
plans to fulfill their benefit obliga-
Continued on Page D5
© 1989 The New York Times. Reproduced by the Library of Congress,
Congressional Research Service with permission of copyright claimant.
Continued From First Business Page
In a similar experiment, Michigan
Blaming Each Other
tients covered by private insurance,
recently started paying insurance
premiums to maintain the private
Such concerns have given rise to
says the American Hospital Associa-
accusations and counteraccusations
tion, which represents hospitals.
health coverage of Detroit-area AIDS
But not everyone agrees that hospi-
patients, who were running out of
about which side is not living up to its
responsibilities.
tals are doing this. Guy King, chief ac-
money and would have become eligi-
ble for the state's Medicaid program.
"It's interesting that those who pro-
tuary of the Federal Health Care Fi-
fess to provide insurance are avoid-
nancing Administration, said hospi-
Michigan hopes the program will
ing it," said Bob Hungate, who
tals were generally absorbing such
allow a net saving of $4 million a year
watches health policy in Washington
costs by reducing payroll expenses
in potential Medicaid expenditures by
for the Hewlett-Packard Company.
1991.
and limiting charity care.
Medicaid and some insurers are
Increasingly tight eligibility re-
State Programs
avoiding risks by shifting costs to
quirements for Medicaid have left
State Representative David C. Hol-
other payers, he continued, adding,
more low-income people without
lister, Democrat of Lansing, who
"We don't think it's going to work in
coverage and unable to pay.
sponsored the Michigan law, said that
the long run for us to pay four times
The American Hospital Association
similar legislation was under consid-
as much as Medicaid and for small
said unpaid hospital bills amounted to
eration in Wisconsin and Colorado
employers to pay probably 50 percent
$8.3 billion last year. "Business can
and that 21 other states had inquired
more than we do."
find itself paying as much as a 20 per-
about the program.
For their part, insurers say the
cent surcharge to cover the needed
John Luehrs, director of health pro-
Government programs are ducking
cost shift," said Carol McCarthy, the
grams with the National Governors
responsibilities that they used to
hospital group's president.
Association, noted that most states
bear. "A whole new theory of public
Meeting Higher Costs
spend 15 percent of general revenues
finance has grown out of fiscal limita-
One-third of the increase in health
on Medicaid, up from 8 percent five
tions in the public budget," said Carl
insurance costs charged to employ-
years ago.
Schramm, president of the Health In-
ers this year resulted from cost-shift-
For their part, employers have
surance Association of America, an
been working to hold down expend-
insurers' trade group.
ing, mainly from Government pro-
grams, said Dr. Dan Dragalin, vice
itures by deflecting costs. A few large
He said AIDS was the first epi-
president for medical services with
companies, including Ralston Purina,
demic in which primary care was not
Boise Cascade and the Whitman Cor-
the Prudential Life Insurance Com-
provided by the states. "Even in the
poration, have eliminated company-
pany.
1950's, municipalities were opening
Many employers expect cost shift-
paid health benefits for future reti-
publicly owned or sponsored hospi-
ing to them to increase under newly
rees, replacing them with employee
tals for tuberculosis," Mr. Schramm
approved changes in the way Medi-
stock and savings programs. As a re-
said.
çare reimburses physicians. Con-
sult, when these people reach age 65,
The more than 30 million Amer-
gress has just approved a system
they will be more likely to rely on
Government programs to pay their
icans without health insurance repre-
that will pay more for doctors' con-
medical bills - Medicare and, in
sent a similar evasion of responsibil-
sultations with Medicare patients and
cases when they have drained their
ity, he said. "Congress is inclined to
less for surgery and expensive tech-
lay blame on the private sector and
nology. The employers worry that
savings, Medicaid.
attempt to shift costs into the private
specialists like surgeons and radiolo-
Plight of Small Employers
sector," he said. "But the large-num-
gists will compensate for their loss of
Many small employers have
ber of people without insurance rep-
Medicare income by raising charges
dropped or cut back their coverage in
resent a broken promise on the part
for private patients. "Those costs will
recent years as insurers raised their
of the Government. In the late 1970's,
be shifted to the private sector, too,"
rates or rejected applicants they
Medicaid was available to 76 percent
said Thomas R. Burke, a former Rea-
thought had a high risk of becoming
of the people whose incomes were
gan Administration health policy offi-
ill.
under the Federal poverty level, but
cial who is a principal with A. Foster
Because many large employers
now only 38 percent of those under the
Higgins & Company, a benefits con-
and insurers are leaning on hospitals
poverty level are eligible."
sulting firm.
to provide discounts for their groups,
Dr. Davis at Johns Hopkins said
And on the state level, legislatures
businesses that are too small to ne-
both the Government and private in-
in several states are considering pro-
grams like those in Hawaii and Mas-
gotiate such favored treatment have
surers should be required to pull their
been hit with increases of 30 percent
weight.
sachusetts, which require employers
or more in their health insurance pre-
"We're going to have to do patch-
to provide health benefits for employ-
work for some time," she said. "The
miums.
ees.
At least 15 million working people,
Federal Government should take the
Subsidy Programs
many employed by small businesses,
lead, but it is not realistic to abolish
Also, Medicaid programs for low-
have no medical insurance. The Gov-
private coverage and rely exclusively
income patients have begun to adopt
ernment has picked up the health-
on universal public coverage. For a
policies that experts say transfer
care costs of some by expanding
long time, we will have some people
some costs to other payers. At least a
Medicaid to cover more low-income
covered by public programs and
dozen states are experimenting with
mothers and their children.
some by private insurance."
subsidy programs that encourage
"As the insurance industry has got-
John J. Sweeney, president of the
small employers and low-income em-
ten more competitive, insurers have
Service Workers Employees Interna-
ployees to pay at least part of the cost
been less willing to take anybody who
tional Union, added, "The major
of private health insurance.
is going to be unprofitable," said Dr.
forces in business, government and
The programs are supposed to save
Karen Davis, a health policy econo-
unions and consumers are all coming
money for the state in the long run. If
to the point where they agree that
mist at the Johns Hopkins University
the employees or their families be-
health care is a national problem that
School of Public Health. "I am wor-
come ill, the state-subsidized insur-
has to be addressed - not just cost
ried about who falls through the
containment but access to care and
ance would help them to get care
without exhausting their savings and
cracks between public and private
the quality of care."
becoming nonpaying patients in tax-
programs."
supported hospitals or giving up their
jobs in order to become eligible for
Medicaid.
Order Code IB87180
CRS Issue Brief
Medicare: Prospective Payments for
Inpatient Hospital Services
Updated June 21, 1990
by
Celinda Franco
Education and Public Welfare Division
CRS
Congressional Research Service
.
The Library of Congress
CONTENTS
SUMMARY
ISSUE DEFINITION
BACKGROUND AND ANALYSIS
Major Features of the Prospective Payment System
PPS Payments and Updating
Additional Payment Amounts
Outliers
Indirect Medical Education Costs
Disproportionate Share Hospitals
Direct Medical Education Costs
Bad Debts of Medicare Beneficiaries
ESRD Beneficiary Discharges
Payments on a Reasonable Cost Basis
Special Treatment of Certain Facilities
Sole Community Hospitals
Cancer Hospitals
Referral Centers
Hospitals Excluded from the Prospective Payment System
Hospitals in States With Cost Control Systems
Hospitals Paid on a Reasonable Cost Basis
PPS Issues for the 101st Congress
Payment Increases
Rural Hospitals
LEGISLATION
IB87180
06-21-90
Medicare: Prospective Payments for Inpatient Hospital Services
SUMMARY
The Social Security Amendments of 1983 (P.L. 98-21) established a prospective
payment system (PPS) for making payments to hospitals for inpatient services
provided to Medicare beneficiaries. Hospitals included in this system are paid a
predetermined fixed payment rate, which varies depending on which of the
approximately 470 Diagnosis Related Groups (DRGs) the patient has been classified
into, based on diagnosis.
The DRG payment is intended to cover the cost of treating the typical case in
that DRG in a reasonably efficient hospital. The payment rates are adjusted to
allow for differences among hospitals in the types of patients treated and services
provided, through such mechanisms as an adjustment for teaching hospitals. The
payment rates are also adjusted to account for differences in local hospital market
conditions, through an area wage adjustment and different payment rates for urban
and rural hospitals.
PPS hospitals are also eligible for additional payments intended to cover certain
additional costs of maintaining a hospital (e.g., capital-related costs such as interest
expense, depreciation, etc.), operating special programs (e.g., medical education
programs) or operating in special circumstances (e.g., serving low-income patients).
Since hospitals are allowed to keep any difference between the PPS payment
and their actual costs, PPS provides incentives for hospitals to contain costs, thus
potentially reducing costs to the Medicare program. However, the PPS payment
approach has raised such issues as whether the payment levels are set too low or too
high, thus underpaying hospitals or increasing costs to the Medicare program. Of
particular concern has been the impact of PPS on rural hospitals, many of which
report financial losses from treating Medicare patients. Some analysts have also
questioned whether a system based on a fixed payment regardless of the services
provided encourages a reduction in services, possibly reducing the quality of care
provided to Medicare beneficiaries.
The Omnibus Budget Reconciliation Act of 1989 (OBRA 89), includes several
provisions affecting PPS. The Act increases reimbursement to rural hospitals and
those serving a disproportionate share of low-income patients. Costs for these
increases are offset by an across-the-board reduction in PPS payment rates and a 15%
reduction in payments for capital costs.
The President's FY1991 budget proposal includes reductions of $3.4 billion in
reimbursement for inpatient hospital services paid under PPS. The largest Part A
savings would result from two proposals: reducing payment for capital-related costs
(15% reduction for rural hospitals, 25% reduction for urban hospitals), and reducing
the indirect medical education adjustment from the current level of 7.7% to 4.05%.
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ISSUE DEFINITION
A new method of Medicare reimbursement for hospital inpatient services, known
as the prospective payment system (PPS), was established by Congress under Title
VI of the Social Security Amendments of 1983 (P.L. 98-21). This payment system
became effective for hospital cost reporting periods that began on or after Oct. 1,
1983. Under PPS, fixed hospital payment amounts are established in advance of
the provision of services. As a result, it is believed that this method provides
incentives for hospitals to contain their costs, thus potentially reducing costs to the
Medicare program. However, many have expressed concern about the system's impact
on hospitals, on the elderly, and on the practice of medicine.
BACKGROUND AND ANALYSIS
Major Features of the Prospective Payment System
PPS Payments
Medicare payment for hospital inpatient services is currently made according
to PPS, rather than the former retrospective cost-based system. Medicare-eligible
hospital inpatients are classified into one of approximately 470 diagnosis related
groups (DRGs) based on the patient's diagnosis. Hospitals are paid a predetermined
rate based on the patient's DRG classification; the rate is designed to represent the
national average cost per case for treating a patient with that diagnosis. Separate
PPS rates apply depending on whether a hospital is located in a large urban area
(over 1 million people, or 970,000 in New England), other urban area, or rural area,
as determined by the Metropolitan Statistical Area (MSA) system maintained by the
Office of Management and Budget. The rates are adjusted for area differences in
hospital wage levels. An area wage index is calculated for each MSA; a single wage
index is established for all the rural areas in each State.
The national (urban and rural) PPS payment rates were phased in over a 4-year
transition period. During the transition period, a hospital's payment rate was
composed of a blend of a hospital-specific amount and the Federal DRG payment
amount. In addition, the Federal DRG amount was based on a combination of
national and regional payment amounts (the standardized payment amounts) for each
of the nine census regions of the country. The transition was completed during
FY1988. Payments are now based on the Federal DRG amount, with no
hospital-specific component. In most areas, the Federal amount is a fully national
rate. In a few regions with historically higher costs, the Federal amounts will be
based in part on regional rates until Sept. 30, 1990. This final transition provision
is known as the regional floor.
To determine the total payment to a hospital for a particular DRG, the
applicable Federal payment amount is multiplied by the relative weight for that
particular DRG. Each of the approximately 470 DRGs has been assigned its own
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weight, which reflects the relative costliness of treating a patient in that DRG
compared to the average Medicare patient.
The Act creating PPS required the appointment of a commission of independent
experts, known as the Prospective Payment Assessment Commission (ProPAC), to
provide analysis of and advise HHS and Congress on PPS. The Commission is
required, by March 1 of each year, to report to the HHS Secretary its
recommendations for the appropriate change in Medicare hospital payments for the
following fiscal year. In addition, the Commission must recommend to the Secretary
any needed adjustments in the DRG classifications and weighting factors and report
to Congress its evaluation of any adjustments that the Secretary makes.
Updating PPS Rates
The PPS payment rates are updated each year by the use of an "update factor."
Before FY1988, the same factor was used for all hospitals. For FY1988, FY1989, and
FY1990, separate factors have applied to hospitals according to location. Hospitals
in rural areas and in large urban areas (MSAs with more than 1 million people, or
970,000 in New England) received larger increases than hospitals in smaller urban
areas. Current law would end this distinction after FY1990.
Originally, the update factors were supposed to be established by the Secretary
of HHS, taking into account the recommendations of ProPAC. The Secretary was
to consider the likely increase in the "market basket index," which measures the cost
of goods and services purchased by hospitals, but could also make upward or
downward adjustments to reflect other factors, such as improved efficiency or
adoption of new medical technologies. However, the 99th, 100th and 101st
Congresses repeatedly postponed the Secretary's authority to set the update factor
and instead set the factors for FY1986 through FY1990 directly in legislation. For
FY1991 and all subsequent years, current law provides that the update factor is to
be set equal to the market basket index, with no adjustments.
Issues in the development of the update factor for FY1991 are discussed further
below.
Additional Payment Amounts
Additional Medicare payments are made to PPS hospitals for the following:
Outliers. Additional amounts are paid for atypical cases (known as "outliers")
which have either extremely long lengths of stay or extraordinarily high costs
compared to most patients classified in the same DRG. The law requires that total
outlier payments to all hospitals represent no less than 5% and no more than 6% of
the total estimated PPS payments for the fiscal year. Outlier payments are financed
by an offsetting reduction in the Federal portion of the DRG rates, with separate
set-aside factors for urban and rural hospitals. For FY1990, the Secretary of HHS
has set the outlier pools equal to 5.1% of total payments.
Before FY1989, about 85% of outlier payments were made for "day outliers,"
cases with very long hospital stays. The remaining 15% were for "cost outliers," cases
with very high costs. In the Sept. 30, 1988, final rule, the Secretary changed the
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outlier formula to give greater emphasis to cost outlier cases. Beginning with
discharges on or after Oct. 1, 1988, cost outliers are expected to account for 60% of
all outlier payments. This shift in policy affects the distribution of outlier payments
among hospitals, rather than the aggregate total of those payments. Hospitals in
New York, Massachusetts, and some other areas are expected to receive reduced
payments; others will receive higher payments. Some of the affected hospitals argue
that their patients have very long stays because they are more severely ill or are poor
and may remain in the hospital because of problems arranging for nursing home or
home health care. Those in favor of the change argue that cases with very long
stays may or may not be especially costly, depending on the services they receive, and
that it is fairer to target the outlier payments to the highest cost cases. H.R. 1026
would limit any further shifts in emphasis from day to cost outliers.
Indirect Medical Education Costs. Additional payments are made to
compensate for the indirect costs associated with the presence of approved graduate
medical education programs (residency training). Indirect costs may be due to factors
such as extra demands placed on the hospital staff by the teaching activity, or
additional tests and procedures that may be ordered by residents. Congressional
reports indicate that these payments are also intended to account for factors not
directly related to medical education which may increase operating costs in teaching
hospitals, such as more severely ill patients or higher staff-to-patient ratios.
P.L. 99-272 (COBRA) provided for additional payments to teaching hospitals
based on a formula that increases the Federal portion of the DRG payment
approximately 8.1% from May 1, 1986, to Oct. 1, 1989. (Congress lowered the indirect
payment during the time that disproportionate share payments, see below, are made,
to preclude teaching hospitals from receiving both payments.) The payment
increases with a hospital's ratio of interns and residents to bed size on a curvilinear
or variable basis (i.e., the increase in the payment is less than proportional to the
increase in the ratio of interns and residents to bed size). OBRA 87 reduced the
adjustment to approximately 7.7%, effective for hospital discharges occurring on or
after Oct. 1, 1988, and before Oct. 1, 1995. After Oct. 1, 1995, when the
disproportionate share payment is scheduled to expire, the increase would be
approximately 8.3%.
The President's FY1991 budget proposes to reduce the adjustment factor from
7.7% to 4.05% calculated on the same curvilinear basis. The Administration estimates
savings from the adoption of this proposal would be $1.03 billion. HHS argues that
this amount more accurately reflects the estimated effect of teaching programs on a
hospital's costs. The General Accounting Office, noting that teaching hospitals have
experienced higher than average profits under the PPS, has made a similar proposal.
ProPAC has suggested that the cut might be made over a 3-year period. The Senate
passed in its FY1990 reconciliation proposal a reduction in the indirect medical
education adjustment to an average of 7.1% for each 0.1% increase in the hospital's
ratio of interns and residents. The House FY1990 reconciliation package did not
include a provision on the indirect medical education adjustment. The Senate
proposal was not included in OBRA 89.
Disproportionate Share Hospitals. P.L. 99-272 (COBRA) required additional
payments from May 1, 1986, to Oct. 1, 1989, to hospitals that serve a
disproportionate share of low-income patients. P.L. 100-647, the Technical and
CRS-4
IB87180
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Miscellaneous Revenue Act of 1988 continues such payments through Sept. 30, 1995.
A hospital's percentage of low-income patients is defined as the hospital's total
number of inpatient days attributable to Federal Supplemental Security Income
Medicare beneficiaries divided by the total number of Medicare patient days, plus the
number of Medicaid patient days divided by the total patient days.
For urban PPS hospitals with 100 or more beds and rural hospitals with 500
or more beds having a percentage of low-income patients of at least 15%, the Federal
portion of the hospital's PPS payment is increased by 2.5% plus one-half (a multiplier
of .5) the difference between 15% and the hospital's percentage of low-income
patients. For urban hospitals with less than 100 beds having a percentage of
low-income patients of at least 40%, the payment increase is 5%. For rural hospitals
having a low-income patient percentage of at least 45%, the payment increase is 4%.
For urban hospitals with 100 or more beds which demonstrate that more than 30%
of their revenues are derived from State and local government payments for indigent
care (excluding payments from Medicare and Medicaid), the payment increase is 25%.
OBRA 89 increases the Federal portion of the disproportionate share hospital's
PPS payment adjustment for urban hospitals with 100 or more beds and rural
hospitals with 500 or more beds, by 2.5% plus 60% (a multiplier of 0.6) of the
difference between 15% and the hospital's disproportionate patient percentage.
Urban hospitals with 100 or more beds and rural hospitals with 500 or more beds
that have a disproportionate patient percentage of over 20.2% receive a further
increase in the adjustment. For these hospitals with a disproportionate share
percentage of low-income patients over 20.2%, the payment adjustment is increased
by 5.62 plus 65% (a multiplier of 0.65) of the difference between 20.2% and the
hospital's percentage of low-income patients. Rural hospitals classified as rural
referral centers receive an adjustment of 4% plus 60% of the difference between 30%
and the hospital's percentage of low-income patients. Rural hospitals classified as a
SCH receive a 10% adjustment. Rural hospitals classified as rural referral centers
and as sole community hospitals (SCHs), receive the greater of a 10%
disproportionate share adjustment or an adjustment of 4% plus 60% of the difference
between 30% and the hospital's disproportionate patient percentage. The
disproportionate patient percentage required to qualify for a payment adjustment for
a rural hospital with more than 100 beds or a rural hospital classified as an SCH is
30%. Hospitals receiving an adjustment based on revenue for indigent care received
from State and local government would receive a 30% disproportionate share
adjustment in FY1990, increased from 25% in FY1989.
Direct Medical Education Costs. The direct costs of approved medical
education programs (salaries of residents and teachers and other costs for training
residents, nurses, and allied health professionals) are excluded from PPS. The direct
costs of training nurses and allied health professionals are paid on a reasonable cost
basis. P.L. 99-272 (COBRA) replaced reasonable cost reimbursement for graduate
medical education (residency training programs for physicians) with formula payments
based on each hospital's per resident costs.
The Medicare payment to each hospital is equal to the hospital's cost per
full-time equivalent (FTE) resident, times the weighted average number of FTE
residents, times the percentage of inpatient days attributable to Medicare Part A
beneficiaries. Each hospital's per FTE resident amount will be calculated using data
CRS-5
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from a base year, increased by 1% for hospital cost reporting periods beginning July
1, 1985, and updated in subsequent cost reporting periods by the change in the CPI.
The number of FTE residents will be calculated at 100% after July 1, 1986, only for
residents in their initial residency period (i.e., within the minimum number of years
of formal training necessary to satisfy specialty requirements for board eligibility plus
1 year, but not to exceed 5 years). For residents not in their initial residency period,
the weighting factor will be 75% before July 1, 1987, and 50% after that date. On
or after July 1, 1986, residents who are foreign medical graduates will not be counted
as FTE residents unless they have passed certain designated examinations.
HHS issued final regulations implementing the COBRA payment changes for
graduate medical education costs on Sept. 29, 1989. The changes are effective
retroactively to 1985. Retroactive adjustments for interim direct medical education
payments made between July 1, 1985, and the date of the final rule are estimated to
save Medicare $440 million.
The Administration's FY1991 budget proposes revising payments for the direct
costs of graduate medical education by basing the payment on a per resident payment
derived from the national average of FY1987 salaries paid to residents, updated by
the CPI. The proposal would also include a system of different weights applied to
primary care residents, nonprimary care residents, and nonprimary care residents
not in their initial residency period. Payments for primary care residents would be
weighted at 180% of the per resident amount, those for nonprimary care residents
would be weighted at 140% of the per resident amount, and those for nonprimary
care residents not in their initial residency period would be weighted at 100%. The
Administration estimates the savings from the enactment of this proposal to be $170
million.
Bad Debts of Medicare Beneficiaries. An additional payment is made to
hospitals for bad debts attributable to deductible and coinsurance amounts not paid
by Medicare beneficiaries. OBRA 87 prohibited the HHS Secretary from making
any change in the policy in effect on Aug. 1, 1987, concerning payments for bad
debts. P.L. 100-647 clarified that the prohibition applies to any changes in
requirements that hospitals document a reasonable effort to collect amounts due
before claiming bad debt.
ESRD Beneficiary Discharges. Additional payments are made to certain
hospitals for inpatient dialysis services provided to end stage renal disease (ESRD)
beneficiaries admitted for unrelated illnesses.
Payments on a Reasonable Cost Basis. Costs for certain items are excluded
from PPS and thus are not included in the PPS rates. Medicare pays for its share
of the following costs on the basis of the actual reasonable costs:
-- Capital-related costs. Capital-related costs (including depreciation,
leases and rentals, interest, and a separate return on equity payment for proprietary
hospitals) are excluded from PPS and are paid for on a reasonable cost basis (i.e., the
hospital's actual capital costs multiplied by Medicare's share of total hospital
inpatient services). The Secretary was originally authorized to develop a method for
including capital costs in PPS, but Congress repeatedly postponed this authority.
Most recently, P.L. 100-203 (OBRA 87) required the Secretary to provide payment for
CRS-6
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capital-related costs in accordance with a prospective payment system, effective for
hospital cost reporting periods beginning on or after Oct. 1, 1991, and repealed the
Secretary's authority to establish prospective payments for capital before that date.
In the interim, Medicare has been paying a reduced share of capital costs.
OBRA 87 reduced reasonable cost payments for capital-related costs by 12% for
FY1988, effective for discharges or portions of cost reporting periods occurring on or
after Jan. 1, 1988, and 15% for FY1989.
OBRA 89 extends the 15% capital-related reduction for portions of cost reporting
periods or discharges occurring beginning on Jan. 1, 1990 and continuing through the
remainder of FY1990. For the period between Oct. 1, 1989 and Dec. 31, 1989,
hospitals will receive 100% of capital costs, subject to the Gramm-Rudman-Hollings
budget sequester reduction of 2.1% of total Medicare payments. SCHs remain exempt
from capital-related payment reductions.
H.R. 712 would tie Medicare capital payments to a State health planning system.
Except in States with high hospital occupancy rates, Medicare reimbursement for
major new capital expenditures would be available only if the expenditures were
approved by a State review agency. Total capital payments in a State, relative to
Medicare payments for operating costs, could not exceed a national capital/operating
cost ratio. H.R. 1812 would determine capital payments based on a hospital's annual
occupancy rate during a cost reporting period and vary occupancy rate requirements
based on the location and size of the hospital.
The President's FY1991 proposal would extend the current 15% reduction in
capital payments to rural hospitals and increase the capital payment reduction to
25% for urban hospitals. The Administration contends that continued reductions are
necessary to provide hospitals with an incentive to control their expenditures for new
equipment or the expansion of facilities. The capital payment reduction of 15% for
rural hospitals is estimated to save $170 million, and the 25% reduction for urban
hospitals is estimated to save the program $1.36 billion in FY1991.
-- Kidney acquisition costs. The estimated net expenses associated with
kidney acquisition in certified renal transplantation centers are excluded from PPS
and paid for on a reasonable cost basis.
Special Treatment of Certain Facilities
Certain facilities receive special treatment under PPS as follows:
Sole Community Hospitals. Sole community hospitals (SCHs) are hospitals
that (because of factors such as isolated location, weather conditions, travel
conditions, or absence of other hospitals) are the sole source of inpatient services
reasonably available in a geographic area. For cost reporting periods beginning
before Apr. 1, 1990, SCHs are paid on the same basis as all other hospitals are paid
in the first year of the transition period: 25% of the payment is based on Federal
regional DRG rates and 75% on each hospital's cost base.
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Under the provisions of OBRA 89, the criteria for SCH designation are
liberalized by allowing hospitals to be designated as such if they are located more
than 35 road miles from another hospital. In addition, OBRA 89 provides that the
Secretary can designate a hospital as an SCH if, by reason of factors such as travel
time to the nearest alternative source of appropriate inpatient care, location, weather
conditions, travel conditions, or absence of other like hospitals, the Secretary
determines that it is the sole source of inpatient hospital services reasonably available
to individuals in a geographic area.
In addition, OBRA 89 establishes new payment provisions that are applied to all
SCHs for cost reporting periods beginning after Apr. 1, 1990. An SCH may receive
the higher of the following rates as the basis of reimbursement: a target amount
based on 100% hospital-specific prospective rates based on FY1982 costs updated to
the present; a target amount based on hospital-specific prospective rates based on
FY1987 costs updated to the present; or the Federal PPS rate. An SCH may
request additional payments if it experiences a decrease of more than 5% in its total
inpatient discharges due to circumstances beyond its control. A hospital may receive
such payments if it meets sole community hospital criteria but is not being paid as
a sole community hospital. Current SCHs not meeting the new proposed criterion
are allowed to continue to qualify for payments as provided under current law.
Referral Centers. Special payment provisions apply to referral centers defined
as follows:
--
rural hospitals having 275 or more beds;
-- hospitals having at least 50% of their Medicare patients referred from other
hospitals or from physicians not on the hospital's staff, at least 60% of their
Medicare patients residing more than 25 miles from the hospital, and at
least 60% of the services furnished to Medicare beneficiaries are furnished
to those who live more than 25 miles from the hospital; or
-- rural hospitals meeting the following criteria:
(a) a case mix index at least equal to the national median case mix index
for all urban hospitals, or the median case mix for urban hospitals located
in the same region, excluding hospitals with approved teaching programs
(case mix index is a measure of the relative costliness of the patients, or
cases, treated by a hospital compared to the national average cost for all
Medicare cases);
(b) inpatient discharges equal to the lesser of either 5,000 (3,000 in the
case of osteopathic hospitals), or the median number of discharges for urban
hospitals located in the same region; and
(c) at least one of the following three criteria: more than 50% of the
hospital's medical staff are specialists, at least 60% of inpatient discharges
reside more than 25 miles from the hospital, or at least 40% of inpatients
have been referred either from physicians not on the hospital's staff or from
other hospitals.
Hospitals meeting these criteria are paid according to the payment rates for
"other" urban areas, rather than the rural rates, adjusted by the hospital's area wage
index, for a 3-year period. P.L. 99-509 (OBRA 86) provided that hospitals classified
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as referral centers on the date of enactment (Oct. 21, 1986) would retain that status
through cost reporting periods beginning before Oct. 1, 1989.
OBRA 89 extends the status of current referral centers for 3 additional years,
including all hospitals classified as referral centers as of Sept. 30, 1989.
Hospitals Excluded from the Prospective Payment System
Medicare payments to certain hospitals or parts of hospitals are made through
systems other than PPS.
Hospitals in States With Cost Control Systems. Some States have
established their own prospective systems for setting hospital rates. A State may
apply for a waiver to permit Medicare to participate in such a system, paying the
State-defined rates instead of those that would be paid under PPS. Of the 4 States
originally excluded from PPS under this provision, only Maryland still has a waiver.
Hospitals Paid on a Reasonable Cost Basis. The following hospitals or
parts of hospitals are excluded from PPS and are paid on the basis of reasonable
costs, subject to certain rate of increase limits:
-- psychiatric, rehabilitation, children's, and long-term hospitals;
-- psychiatric and rehabilitation units which are distinct parts of hospitals;
-- hospitals outside the 50 States and the District of Columbia. Hospitals in
Puerto Rico are included in a specially modified version of the PPS.
Cancer hospitals extensively involved in treatment for and research on cancer
(according to criteria established in regulations) may elect to be paid on a reasonable
cost basis. OBRA 89 exempts cancer hospitals classified as such before Dec. 31,
1990, from PPS. In addition, the Act provides an exemption for any hospital
classified as a cancer hospital before Dec. 31, 1991, that is located in a State that has
a PPS waiver under Section 1814(b) (i.e., Maryland).
PPS Issues for the 101st Congress
Payment Increases
The 99th, 100th, and 101st Congresses repeatedly postponed the Secretary's
authority to set the update factor, the annual rate of increase for basic PPS
payments, and instead set the factors for FY1986 through FY1990 directly in
legislation.
As TABLE 1 indicates, these update factors were below the market basket
index. At the same time, the average Medicare payment per case rose faster than the
update factors. This is because the update factor is not the only element affecting
payment increases. For example, there have been changes in policies relating to
add-on payments (such as those for medical education, disproportionate share
hospitals, and capital costs). More important, there has been a steady change in the
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kinds of Medicare cases hospitals have reported treating; each year, more cases fall
into the higher-paying DRGs and fewer into the lower-paying ones. The "case mix
index" shown on TABLE 1 is a measure of this trend. Part of the change is real,
reflecting hospitals' decisions to admit only more seriously ill patients while treating
others on an outpatient basis, while part of the change results from improved
accuracy in hospitals' reporting on their patients.
In setting the annual update factors below the rate of inflation, Congress acted
in part on reports that most hospitals realized a profit on their Medicare cases in
the early years of PPS. Both ProPAC and the HHS Inspector General have
estimated that hospitals overall had a PPS operating margin of about 14% in the
first 2 years of the new system (the hospital industry regards these figures as
overstated). Estimated margins in the third year were somewhat lower, 8% to 9%,
and continued decline is believed to have occurred in the fourth and fifth years.
Conclusive data are not yet available, because of long delays in hospital cost
reporting. However, ProPAC has projected that the overall margin for FY1988 was
zero; that is, hospitals' PPS revenues equaled their PPS costs.
Even when hospitals in the aggregate were earning surpluses under PPS, not
all hospitals did equally well. Urban and teaching hospitals had the highest margins,
small rural hospitals the lowest. In the first year of PPS, 20% of hospitals were
estimated to have negative margins; the proportion was higher in rural areas. By
the third year, ProPAC estimates that 36% of hospitals were losing money under
PPS.
Numerous factors contributed to these trends. Basically, however, hospitals
were initially able to respond to the financial incentives of the new system by
increasing their efficiency, by shifting some patients to outpatient settings, and by
reducing the length of time patients stayed in the hospital. Hospitals' costs for
Medicare patients actually dropped in the first year of PPS. For reasons not yet
clear, costs began to rise again in subsequent years at rates well in excess of
inflation. Some people argue that recent cost increases are due to circumstances
beyond the hospitals' control, such as the adoption of costly new medical technologies.
Others say that hospitals, buoyed by their early financial success under PPS, stopped
working to improve efficiency.
On Oct. 16, 1989, the President issued a final sequester order under the
Balanced Budget and Emergency Deficit Control Act of 1985, imposing a 2.1%
reduction on total Medicare payments. OBRA 89 extends the sequester reductions
for Medicare Part A payments until Dec. 31, 1989. For payments after Dec. 31,
1989, OBRA 89 exempts Medicare Part A services from the continuing Government
wide sequester imposed for the remainder of FY1990.
OBRA 89 sets the following hospital update factors for FY1990 for discharges
occurring on or after Jan. 1, 1990: for hospitals located in large urban areas, the
market basket minus 0.12 percentage points; for hospitals in other urban areas, the
market basket minus 0.53 percentage points; and for hospitals in rural areas, the
market basket plus 4.22 percentage points. In addition, OBRA includes a DRG
weighting factor reduction of 1.22% for discharges in FY1990. This reduction is the
same as one proposed by the Secretary in regulations for FY1990. The DRG
weighting factor reduction will have the effect of reducing PPS payments as if the
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base had been decreased by 1.22%. The net effect of this reduction is to produce the
following actual FY1990 update factors: for hospitals in large urban areas, the
market basket minus 1.1 percentage points; for hospitals in other urban areas, the
market basket minus 1.75 percentage points; and for hospitals in rural areas, the
market basket plus 3 percentage points. OBRA 89 prohibits the Secretary from
adjusting DRG weighting factors on anything other than a budget neutral basis
beginning in FY1991.
For FY1990, HCFA estimates that the market basket will increase by 5.5%. The
following are therefore the final update factors for FY1990: 4.4% for large urban
hospitals, 3.75% for other urban hospitals, and 8.5% for rural hospitals.
OBRA 89 provides that for FY1991 and later years the update factor for all
hospitals, regardless of location, will be equal to the market basket increase. That
is, future rate increases are to take account of inflation but not of any other factors
potentially affecting costs. If hospitals' costs continue to rise faster than inflation,
Congress may face pressure to grant higher increases. On the other hand, deficit
reduction concerns may give rise to proposals for further rate reductions. The
President's FY1991 budget proposes setting the average update factor at 4.1%, an
amount 1.5 percentage points less than the projected MBI increase. The savings from
this proposal is estimated to be $640 million.
Rural Hospitals
As noted earlier, rural hospitals have been more likely than urban ones to lose
money under PPS. The rate of hospital closures in rural areas has been rising, and
many more rural hospitals report that they are financially distressed.
Not all of the rural hospitals' problems stem from the Medicare reimbursement
system. Hospitals in rural areas with declining populations may have low occupancy
rates; the smaller patient load may be insufficient to cover their fixed costs. These
problems may be compounded if there is a shortage of physicians in the area, so that
patients are drawn to urban physicians and hence to urban hospitals. Still, the
failure of some rural hospitals' PPS revenues to meet their costs for Medicare
patients may be especially critical. Because many rural areas have an aging
population, rural hospitals may have a high proportion of Medicare patients. They
may have been less able than other hospitals to make up any Medicare losses through
higher charges to other patients.
Several factors may have contributed to small rural hospitals' losses under PPS.
Smaller hospitals may have been less able than larger ones to improve their efficiency
in response to the financial incentives created by the new system. Some may also
have suffered large losses on a few cases. In paying for a "typical" case in each DRG,
PPS assumes that more costly cases in that DRG will be balanced by less costly ones.
If a hospital treats a very small number of cases, the law of averages may not work.
More fundamentally, however, rural hospitals argue that some of the basic
premises of PPS are wrong, including the urban/rural payment differential and the
area wage indexing system used to adjust hospitals' payments for local differences in
labor costs. Although the payment differences are based on historical data about
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actual urban and rural hospital costs, rural hospitals argue that conditions have
changed and that the gap between urban and rural costs may have narrowed.
Congress has repeatedly modified PPS to improve payments to rural hospitals.
Many of these changes have been discussed earlier, including revisions in the outlier
system and special payment provisions for sole community hospitals and rural referral
centers. OBRA 87 and OBRA 89 have granted rural hospitals higher FY1988,
FY1989, and FY1990 rate increases than urban hospitals. OBRA 87 also increased
payments to certain rural hospitals on the fringes of urban areas and potentially
obliged to compete in the urban labor market. H.R. 1110 would base the wage
indexes on statistically established labor market areas, instead of using the current
MSA/non-MSA boundaries. OBRA 89 requires the Secretary to establish a
Geographical Review Board for hospitals to direct appeals for a change in
classification from rural to urban, or from one urban area to another urban area.
Legislation in the 101st Congress includes a variety of more sweeping proposals
to change the way rural hospitals are paid. One option would be to eliminate the
urban-rural differential. This would raise payments to rural hospitals and lower
payments to urban ones. H.R. 880 and S. 205 would phase out the differential over
a 3-year period. OBRA 89 requires the Secretary of DHHS to develop a proposed
phase-out plan; further congressional action would be needed to implement the plan.
Other proposals, including H.R. 186, H.R. 762, H.R. 1270, H.R. 1583, S. 10, and S.
306, would permit certain rural hospitals to return to retrospective cost-based
reimbursement. OBRA 89 permits small rural hospitals that are classified as
Medicare-dependent (with caseloads consisting of 60% or more Medicare beneficiaries)
to be paid on the same basis as sole community hospitals (see above).
Some people say that there may be areas in which it is more feasible to
maintain access to essential services through some means other than operating a full-
service hospital. The prototype for these proposals is Montana's program to develop
a class of acute care providers called "medical assistance facilities" (MAFs). An MAF
is licensed to provide inpatient care while a patient is awaiting transfer to another
hospital, or for stays lasting 4 days or less. OBRA 89 establishes the Essential
Access Community Hospital (EACH) demonstration project providing grants in up to
7 States for developing a rural health network. Under the demonstrations a new
type of facility, Rural Primary Care Hospitals (RPCHs), would serve as providers of
only limited emergency inpatient care and temporary inpatient care for patients
requiring stabilization before discharge or transfer to another hospital. RPCHs would
be linked in networks with full service hospitals (EACHs). The Administration's
FY1991 budget proposal does not include funding for the EACH demonstration.
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TABLE 1. Historical Trends in Factors Affecting the PPS Rates
and Average Payments per Case
(Percentage change from the previous year)
FY83
FY84
FY85
FY86
FY87
FY88
FY89
Market basket
index
5.9
4.9
4.1
3.1
4.5
4.7
5.4
Update factor
---
5.9
4.4
0.5
1.15
1.6
3.3
Case mix index
...
8.4
2.5
2.7
2.4
1.5
0.5
Average payment
per case
10.4
10.4
14.9
7.1
4.1
2.0
1.9
The update factor for this year was offset by adjustments including
the budget neutrality adjustment.
Effective beginning with the eighth month of the fiscal year.
Weighted average of the separate update factors for large urban,
other urban, and rural areas, effective Apr. 1, 1988.
Source: U.S. Congress. House. Committee on Ways and Means.
Background Material and Data on Programs within the Jurisdiction of the
Committee on Ways and Means. [WMCP: 100-29] Mar. 24, 1988: 212. Figures
for FY1989 are revised to reflect estimates included in the FY1989 final
rule as published in the Federal Register, Sept. 30, 1988.
~
Many of the legislative proposals of the 101st Congress affecting rural hospitals
are included in OBRA 89. OBRA 89 sets a higher PPS update factor for rural
hospitals than for urban hospitals, increases the disproportionate share adjustment,
extends for 3 years the classification of referral centers, and liberalizes the criteria
for classifying hospitals as SCHs. The Act also increases rural health care transition
grants to $25 million for FY1990, and provides that the grants may be awarded for
telecommunications projects. The President's FY1991 budget proposal does not
include funding for rural health care transition grants.
LEGISLATION
P.L. 101-239 (H.R. 3299, Panetta)
Omnibus Budget Reconciliation Act of 1989. Extends 2.1% payment reduction
under Sept. 16, 1989 sequester order through Dec. 31, 1989. Sets hospital PPS
update factors for discharges occurring during FY1990 equal to the market basket
increase minus .12 percentage points for large urban hospitals, the market basket
increase minus .53 percentage points for other urban hospitals, and the market
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basket increase plus 4.22 percentage points for rural hospitals. Reduces DRG
weighting factors by 1.22%. Reduces capital-related payments for FY1990 by 15%,
and increases the PPS payment adjustment for disproportionate share hospitals.
Extends the status of currently designated rural referral centers for 3 additional
years. Expands the designation of sole community provider hospitals to include all
hospitals more than 35 miles from another hospital and provides designated hospitals
with the option of receiving prospectively determined rates, based on 100% of
hospital-specific costs based on costs reported in FY1982 or FY1987, or PPS rates.
Establishes an Essential Access Community Hospital (EACH) Demonstration program
in up to 7 States providing funds for the conversion of full-service rural hospitals to
facilities providing short-stay inpatient care and emergency services. Introduced Sept.
20, 1989; passed House, amended, Oct. 5, 1989; passed Senate, amended, Oct. 13,
1989; conference agreement reported Nov. 21, 1989; passed House Nov. 21, 1989;
passed Senate Nov. 22, 1989; signed into law Dec. 19, 1989.
H.R. 1026 (Downey)
Prohibits any change in percentage of total outlier payments made for day
outlier cases before FY1993; limits any change in FY1993 or a later year to 5% a
year. Introduced Feb. 21, 1989; referred to Committee on Ways and Means.
H.R. 1110 (Skelton)
Provides that payment for cases in DRGs with a high degree of cost variation
will be made on the basis of a blend of a hospital-specific rate and a national rate.
Eliminates separate urban and rural rates. Changes wage indexing system to require
that labor market areas consist of groups of political subdivisions with comparable
wage levels. Introduced Feb. 23, 1989; referred to Committee on Ways and Means.
H.R. 1812 (Donnelly)
Extends for 2 years the automatic reductions in payments to hospitals for
capital-related costs of inpatient hospital services. Provides further reductions in
capital-related costs for low occupancy hospitals, with large urban, other urban and
rural hospitals subject to different occupancy requirements. Disproportionate share
hospitals would be exempt from capital reductions. Introduced Apr. 12, 1989; referred
to Committee on Ways and Means.
S. 2019 (Symms)
Requires the Secretary and ProPAC to each submit a report to Congress on or
before Apr. 1, 1990, recommending a method for eliminating separate average
standardized amounts for hospitals located in urban, other urban, or rural areas.
Requires the different standardized amounts to be phased out beginning on Oct. 1,
1990, and eliminated by Oct. 1, 1992.
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CRS Report for Congress
Physician Payments by Medicare:
Bibliography-in-Brief, 1988-1989
Edith Sutterlin
Senior Bibliographer, Education and Public Welfare
Library Services Division
December 1989
CRS
Congressional Research Service The Library of Congress
The Congressional Research Service works exclusively for the Congress, conducting re-
search, analyzing legislation, and providing information at the request of committees,
Members, and their staffs.
The Service makes such research available, without partisan bias, in many forms includ-
ing studies, reports, compilations, digests, and background briefings. Upon request,
CRS assists committees in analyzing legislative proposals and issues, and in assessing the
possible effects of these proposals and their alternatives. The Service's senior specialists
and subject analysts are also available for personal consultations in their respective fields
of expertise.
PHYSICIAN PAYMENTS BY MEDICARE:
BIBLIOGRAPHY-IN-BRIEF, 1988-1989
SUMMARY
Medicare reimbursements to physicians have undergone some changes
since 1984, but more significant revisions have been proposed in the 101st
Congress. Medicare reimbursement: selected references, 1986-1988, CRS report
88-679 L, identifies materials on early proposals and changes in payment for
hospitals and physicians and on quality of care. This bibliography focuses on
proposals made in 1988-1989, particularly the recommendation of the
Physician Payment Review Commission favoring a relative value scale system
for payment.
Citations have been selected from the CRS Public Policy Literature data
base, as well as the CRS products file.
PHYSICIAN PAYMENTS BY MEDICARE:
BIBLIOGRAPHY-IN-BRIEF, 1988-1989
Alston, Chuck.
Belt-tightening in Medicare pits doctor vs. doctor. Congressional
Quarterly weekly report, Oct. 7, 1989: 2605-2609.
LRS89-9163
Describes Congress' recent actions to overhaul the Medicare
payment system and what it pays for physician fees. Also describes a
split in the medical lobby.
Cahill, Kenneth R. Reuter, James. Langwell, Kathryn. Shin, Richard.
Prospective budgeting for Medicare's physician service. Oct. 31, 1989.
Washington, Congressional Research Service, 1989. 128 p.
89-600 EPW
Examines many of the basic issues that would be addressed in an
assessment of prospective budgeting for Medicare. Among the issues
are: the basic purpose and scope of the budget, the geographic areas
and/or physician or service groups for which budgets would be
developed, methods for setting the budgets, strategies for monitoring
performance, and the type of feedback used to encourage compliance.
Edwards, Winston O. Fisher, Charles R.
Physician charges and utilization trends. Health care financing review,
V. 11, fall 1989: 117-123.
Gives a synopsis of charge and payment trends of Medicare
physicians and other noninstitutional suppliers of goods and services
for 1975-1987.
Fisher, Charles R.
Physician charges for surgical services under Medicare, by medical
specialty: 1980 and 1985. Health care financing review, V. 9, summer
1988: 127-132.
LRS88-8157
"Since 1980, a number of Medicare practice and utilization
patterns have changed as a result of payment reform, certification of
new types of providers, and changes in technology. The shift in
physician surgical charges by specialty and by setting is examined in
this article."
Medicare payments to hospitals and physicians: info pack. Updated as
needed. Washington, Congressional Research Service.
IP317M
Includes information both on the origin and operation of the
prospective payment system and proposed changes in Medicare
reimbursement.
CRS-2
O'Sullivan, Jennifer.
Medicare: physician fee schedule; issue brief. Updated regularly.
Washington, Congressional Research Service.
IB89116
From 1984 to 1987, Congress, as part of the budget reconciliation
process, approved a number of amendments to Medicare's physician
payment rules which were designed to stem high expenditure increases.
As of December 19, 1989, the President signed into law P.L. 101-239,
the Omnibus Reconciliation Act of 1989, which provides for establish-
ment of a new payment system for physician services paid for by
Medicare. This issue brief discusses the new law and related issues.
Physician-payment reform. New England journal of medicine, V. 319,
Sept. 29, 1988: 865-888.
LRS88-8570
A three part discussion of "a resource-based relative-value scale as
an alternative to the system of payment based on charges for
physicians' services. Resources inputs by physicians include (1) total
work input performed by the physician for each service; (2) practice
costs, including malpractice premiums; and (3) the cost of specialty
training. These factors were combined to produce a relative-value scale
denominated in nonmonetary units." Includes the response of the
Administrator of the Health Care Financing Administration.
Contents.--Perspectives on physician-payment reform, by William
L. Roper.--Estimating physicians' work for a resource-based
relative-value scale, by William C. Hsiao and others.--Results and policy
implications of the resource-based relative-value study, by William C.
Hsiao and others.
Physician Payment Review Commission (U.S.)
Physician Payment Review Commission: annual report to Congress.
Washington, The Commission, 1988. 321 p.
LRS88-8837
Proposes a fee schedule and provides analysis of "options to
moderate the growth in expenditures without reducing quality of care
and issues related to capitation and Medicare data needs." Includes
lengthy bibliography.
Physician Payment Review Commission: annual report to Congress,
1989. Washington, The Commission, 1989. 400 p.
LRS89-4364
Recommends that "the current CPR [customary, prevailing, and
reasonable] payment system should be replaced with a Medicare Fee
Schedule (MFS) based primarily on the resource costs incurred in
efficient medical practice," consisting of a relative value scale,
geographic multiplier, and possibly specialty multiplier."
CRS-3
The Physician Payment Review Commission report to Congress. JAMA
[Journal of the American Medical Association], V. 261, Apr. 28, 1989:
2382-2385.
LRS89-4655
Outlines the Commission's recommendations regarding payments
to physicians by Medicare designed to slow the rate of increase in
program costs so that they are affordable to beneficiaries and
taxpayers."
Reuter, James A.
Medicare: geographic variations in payments for physician services.
Dec. 28, 1988. Washington, Congressional Research Service, 1988.
70 p.
88-775 EPW
Prices physicians charge for their services vary among geographic
areas. These variations lead to differences in the amounts paid by
Medicare for these services. In recent years, there has been growing
concern that the extent of geographic variations in payments for
services may be excessive. This report provides background data on
the extent of geographic variations that exist in current Medicare
payments, and discusses issues and options involved in the design and
implementation of an index for adjusting payments among areas. The
paper concludes with a brief summary of recent legislation that has
had an impact on geographic variations in Medicare payments for
physician services.
Medicare: physician payments. Oct. 1988. Washington, Congressional
Research Service, 1988. 26 p.
88-658 EPW
This report provides background information on the physician
reimbursement system currently used to make payments under the
Part B program of Medicare. Chapter I provides background on
Medicare and Medicare's Part B or Supplementary Medical Insurance
(SMI) program. This section includes historical data on Medicare
expenditure and Medicare payments for physician services. Chapter II
describes Medicare's reasonable charge methodology for determining
payments to physicians. This section includes a description of three
aspects of current policy, assignment, participation, and the so-called
Maximum Actual Allowable Charge (MAAC) limits that determine
beneficiary liability for covered services. This section also describes the
special limits that have been placed on the reasonable charges of
procedures that are perceived as being overpriced. Chapter III
describes the major provisions of recent legislation that have effected
physician reimbursement under Medicare.
Second report on the Physician Payment Review Commission (PPRC).
Washington, Office of Technology Assessment, 1988. 6 p.
LRS88-11790
Summarizes changes in the Commission's organization, operation,
and funding.
CRS-4
Stevens, Carol.
Here's what RBRVS will really do to your income. Medical economics,
V. 66, May 15, 1989: 19-20, 22, 24, 26-28, 32, 34.
LRS89-3380
"The Physician Payment Review Commission endorsed a resource-
based relative value scale for Medicare payments. It recommended that
Congress adopt a fee schedule, based on resource costs, which would
have the general effect of lowering payments to surgeons and
increasing reimbursement to primary-care doctors."
Symposium on medical cost containment. Notre Dame journal of law,
ethics & public policy, V. 3, no. 2, 1988: whole issue (161-291 p.)
LRS88-7450
Partial contents.--Balancing efficiency and quality--toward
market-based health care, by William R. Roper.--The ethics of cost-
containment: bureaucratic medicine and the doctor as patient-advocate,
by Barry R. Furrow.--The Medicare prospective payment system: impact
on the frail elderly and an alternative reimbursement formula, by
Phoebe D. Sharkey and June Buckle.
U.S. Congress. House. Committee on Energy and Commerce.
Subcommittee on Health and the Environment.
Medicare peer review organizations. Hearings, 100th Congress, 1st
session. Washington, G.P.O., 1988. 459 p.
LRS88-4639
Hearings held Apr. 30 and Oct. 26, 1987.
"Serial no. 100-85"
Hearings on H.R. 1445--a bill to amend title XI of the Social
Security Act to ensure physicians hearing and judicial review rights
before exclusion from the Medicare program [and] H.R. 2116--a bill to
amend part B of title XI of the Social Security Act with respect to
providing due process and equity for all providers under the peer
review program.
Medicare physician payment reform. Hearing, 101st Congress, 1st
session. May 25, 1989. Washington, G.P.O., 1989. 259 p. LRS89-7099
"Serial no. 101-36"
U.S. Congress. House. Committee on Ways and Means. Subcommittee on
Health.
Coverage of psychologists' services under the Medicare Program,
including H.R. 774. Hearing, 101st Congress, 1st session. Mar. 6,
1989. Washington, G.P.O., 1989. 130 p.
LRS89-8571
"Serial 101-23"
Fiscal year 1990 budget issues relating to Medicare payments to
physicians. Hearing, 101st Congress, 1st session. Apr. 17, 1989.
Washington, G.P.O., 1989. 146 p.
LRS89-8573
"Serial 101-19"
CRS-5
Fiscal year 1990 budget issues relating to physician incentive payments
by prepaid health plans. Hearing, 101st Congress, 1st session.
Apr. 25, 1989. Washington, G.P.O., 1989. 61 p.
LRS89-9836
"Serial 101-30"
1989 report of the Physician Payment Review Commission. Hearing,
101st Congress, 1st session. Mar. 21, 1989. Washington, G.P.O.,
1989. 140 p.
LRS89-9541
"Serial 101-40"
Includes testimony from invited witnesses from the American
Association of Retired Persons, the American College of Surgeons, and
the American Medical Association as well as the report of the
Commission and written statements from other medical groups.
Payments of physicians by the Medicare program. Hearing, 100th
Congress, 2nd session. May 25, 1988. Washington, G.P.O., 1989.
112 p.
LRS89-927
"Serial 100-71"
Includes discussion of recommendations made by the Physician
Payment Review Commission.
U.S. Congress. Senate. Committee on Finance. Subcommittee on
Medicare and Long-Term Care.
Physician payment reforms. Hearings, 101st Congress, 1st session.
Washington, G.P.O., 1989. 216 p. (Hearings, Senate, 101st Congress,
1st session, S. Hrg. 101-173, pt. 1)
LRS89-7614
Hearings held Mar. 17 and Apr. 20, 1989.
"Part 1 of 2"
U.S. Congress. Senate. Special Committee on Aging.
Medicare physician reimbursement: issues and options; information
paper. Washington, G.P.O., 1988. 105 p. (Print, Senate, 100th
Congress, 2nd session, S. Prt. 100-134)
LRS88-10838
"Serial no. 100-L"
Partial Beneficiary cost-sharing and the medicare
program.--Growth in physician expenditures. Health expenditures in
the United Physician services and the SMI program.--Problems
with the current physician reimbursement system Recent legislation.--
Physician payment reform options.
CRS-6
U.S. General Accounting Office.
Medicare: impact of State mandatory assignment programs on
beneficiaries; report to the chairman, Subcommittee on Housing and
Consumer Interests, Select Committee on Aging, House of
Representatives. Sept. 19, 1989. Washington, G.A.O., 1989. 43 p.
"GAO/HRD-89-128, B-236487"
LRS89-10484
Analyzes Medicare payment data in Connecticut, Massachusetts,
Rhode Island, and Vermont, States which have enacted laws that
require physicians, under certain circumstances, to accept Medicare's
approved amount as payment in full.
Medicare: physician-sponsored organizations receive priority for peer
review contracts; report to congressional requesters. Jan. 21, 1988.
Washington, G.A.O., 1988. 4 p.
LRS88-5653
"GAO/HRD-88-43, B-229169"
Concludes that HCFA does give the required preference to
physician-sponsored organizations when awarding PRO contracts.