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17
14
5
2
Hanns
The
MEMO
Heritage Foundation
To:
Policymakers
From:
DM
David M. Mason, Director, Executive Branch Liaison
Date:
October 2, 1990
Subject:
The Pepper Commission
America's health care system is in trouble. Congress needs
to enact reforms that create a consumer-oriented, market-based
health care system. What it does not need is the changes
recommended by the Pepper Commission.
In this Backgrounder, Heritage Policy Analyst Edmund F.
Haislmaier reviews the work of the Pepper Commission, which he
says is out of touch with the real problems facing the health
care system. By proposing more federal spending, taxes, and
regulation, Haislmaier argues that the Commission's
recommendations "pour gasoline on the inflation fire by
legislating access to health and then passing the tab to business
and the taxpayer."
Haislmaier calls for a politically and economically stable
health care system that contains incentives to curb the
escalating costs of medical care. He proposes giving consumers
control over the money spent on their health care, and
recommends changes in tax codes to allow all Americans access to
medical care and health insurance.
I trust you will find this Heritage Backgrounder useful in
your efforts to reform America's ailing health care system.
214 Massachusetts Avenue, N.E.
Washington, D.C. 20002
(202) 546-4400
The Backgrounder
Heritage Foundation
793
No.
The Heritage Foundation 214 Massachusetts Avenue N.E. Washington, D.C. 20002 (202) 546-4400
September 28, 1990
THE PEPPER COMMISSION'S MISGUIDED SOLUTION
TO AMERICA'S HEALTH CARE PROBLEMS
INTRODUCTION
The U.S. Bipartisan Commission on Comprehensive Health Care, named
the Pepper Commission after its congressional sponsor and first chairman,
the late Florida Democrat Claude Pepper, released its final report this
week. 1 While this final version contains some additions and modifications, its
basic recommendations are the same as those which received widespread
criticism when outlined in the Commission's preliminary report issued this
March. These recommendations show the Commission to be out of touch
with the real problems of the United States health care system, and
impractical in its suggested solutions.
The Pepper Commission was charged with finding ways to provide unin-
sured Americans with insurance coverage and access to health services, and
to improve the financing of long-term care. A majority of Commission mem-
bers recommended five steps to achieve those goals:
1) Require employers to provide health insurance or pay a new payroll
tax to pay for government-provided insurance;
2) Establish a federally-mandated basic minimum package of health
benefits for all insurance policies;
1 A Call for Action: The Pepper Commission, U.S. Bipartisan Commission on Comprehensive Health Care,
Final Report, September 1990.
Note: Nothing written here is to be construed as necessarily reflecting the views of The Heritage Foundation or as an attempt
to aid or hinder the passage of any bill before Congress.
3) Introduce a redesigned and expanded public assistance program
similar to Medicaid for all lower income Americans and families lack-
ing employer-provided insurance;
4) Place substantial new restrictions on how health insurers write
policies and conduct business;
5) Create a new federal entitlement program to pay for most of the long-
term care costs of middle-income and affluent retirees, whose assets
or income currently make them ineligible for public assistance
through Medicaid.
The recommendations in the Commission's final report also come with an
even higher price tag than the staggering $66.2 billion per year projected in
its March preliminary report. The Commission now estimates that its recom-
mendations will cost taxpayers $68.8 billion per year when fully implemented.
Complying with the proposed changes would impose additional net costs of
$14.7 billion per year on American businesses.
When the Commission issued its preliminary recommendations, it was
roundly criticized both by its own dissenting members and by many in Con-
gress - including liberal Democrats as well as conservative Republicans - for
failing to specify how the federal government would finance the enormous
cost of its proposals. In its final report, the Commission again ducks the ques-
tion by failing to recommend any financing methods. All it does is list a vir-
tual cornucopia of tax increases, inviting Congress to chose which to enact.
There are several reasons why Congress should discard the Commission's
report and look elsewhere for answers:
First, the costs of the proposed solutions are unacceptably high. Moreover,
the tab could hardly have been presented at a worse time. The Commission
calls for $68 billion a year in new federal spending and taxes just when con-
gressional and Administration budget negotiators are desperately seeking
ways to close the huge budget deficit. Furthermore, it is irresponsible for the
Commission to propose massive new government spending and taxes,
onerous new regulations on business, and a sharp increase in worker payroll
taxes at a time when the U.S. economy totters on the brink of recession. Even
without an economic downturn, the Commission admits that the payroll taxes
it proposes could cost 50,000 jobs. The Hoover Institution's John Cogan, the
only economist on the Commission and a labor specialist, maintains the los-
ses would be far in excess of that, reaching as high as 1.4 million jobs.
Second, the proposed changes would do nothing to curb the present escala-
tion in health care costs. Indeed, they would use new tax revenues to throw
more fuel on the fire.
Third, the Commission's expensive recommendations would create a
health system that would be politically and economically unstable. Rather
than offering a lasting solution to the problems of health care financing, the
Commission's proposals would ignite new problems requiring new solutions.
Ultimately, mounting problems would force Congress into either accepting
2
true market-oriented reforms or creating a fully nationalized health care sys-
tem.
Predictable Prescription. Regrettably, the Pepper Commission is yet
another report that concludes with Congress's predictable prescription of
more federal spending, taxes, and regulation. While the problems in
America's health care system are indeed real and serious, simply throwing
more money at them will not make them go away. A true solution must focus
on changing the basic underlying incentive structure that governs the
decisions of health care consumers, providers, and insurers. Needed are new
incentives that discourage, rather than encourage, over-pricing, over-con-
sumption, over-prescribing of marginally useful procedures, and waste and in-
efficiency in the purchase and delivery of medical services.
Rather than trying to extend the employer-provided health insurance sys-
tem to all Americans, Congress needs to recognize that it is this system, and
particularly the misguided tax policies and regulations governing it, that
generates the perverse incentives and resulting problems. Congress thus
should enact reforms in health care tax policy that put health care dollars and
decision-making power back in the hands of consumers. Reforms also must
provide direct subsidies to Americans with low incomes or high medical costs
to increase their purchasing power in the medical marketplace and thus
enable them to buy the care and insurance they need. 2
Creating a system that encourages consumers to purchase medical care and
health insurance directly, while allowing them to pocket any resulting savings,
would generate powerful and positive incentives. All parties concerned - con-
sumers, providers, and insurers - would be directly rewarded for seeking or
providing quality health care at reasonable prices.
Encouraging Private Insurance. In the area of long-term care, Congress
must realize that its job is not to protect the assets of affluent retirees by im-
posing new taxes on working Americans to fund the cost of their care. Asset
protection is a job for private insurance. Congress can and should enact tax
reforms making it easier for Americans to use such private mechanisms to
protect themselves against the potential costs of long-term care.
Congress must undertake reforms that replace the current perverse incen-
tives in the health care system with positive incentives to encourage economi-
cal use of health care services and assure help for those who need it most.
Only then will all Americans have access to affordable health care. The Pep-
per Commission does nothig to advance that day.
2 See Stuart M. Butler and Edmund F. Haislmaier, eds., A National Health System for America (Washington,
D.C.: The Heritage Foundation, 1989), and Stuart M. Butler, "Using Tax Credits to Create an Affordable
National Health System," Heritage Foundation Backgrounder No. 777, July 20, 1990.
3
THE COMMISSION'S RECOMMENDATIONS
The Pepper Commission recommends a package of steps to provide in-
surance and access to medical care for all Americans. These steps would have
a major impact on business, insurers, and taxpayers. In addition, it recom-
mends a sweeping new long-term care entitlement program.
1) Mandated Employer-Paid Coverage
Employers would be required to provide health insurance coverage for all
their workers, and for non-working dependents of those workers. Firms could
do this either by purchasing private insurance themselves or by paying a 7 per-
cent payroll tax to fund a new federal government plan which would provide
the insurance. Employers would be required to pay at least 80 percent of the
cost of either private insurance premiums or the public plan, and workers
could not be required to pay more than 20 percent. Initially, this "play or pay"
mandate would only apply to employers with 100 workers or more. During
the first several years of the new system, however, smaller employers would
be encouraged by various incentives to purchase similar coverage for their
workers. Smaller employers would only become subject to the same mandate
if these incentives did not work.
Health insurance for low-income individuals would be further subsidized,
with the subsidies varying according to income. Individuals and families with
incomes below the federal poverty threshold would pay no premiums, nor
could they be charged deductibles or coinsurance for covered services. Coin-
surance is the percentage of the bill which the patient pays in addition to any
initial deductible. Individuals and families with incomes between 100 and 200
percent of the poverty threshold would pay a share of the premiums, deduct-
ibles, and coinsurance according to a sliding scale based on their incomes.
Eventually, all Americans would be required to obtain coverage either from
their employers or from the federal plan.
2) Expanded Public Assistance
The existing federal-state Medicaid program would be replaced by a new
program, with eligibility divorced from welfare programs. This new program
would provide health insurance coverage to the poor and unemployed, includ-
ing those now covered by Medicaid, as well as the self-employed and the
employees of firms choosing to pay a payroll tax rather than to provide their
workers with private insurance. This new program would be a federal entitle-
ment with uniform federal rules and benefits. As is now the case with
Medicaid, states would pay a portion of the cost of the new program. States
would administer the program, subject to federal guidelines and regulations.
Premium and cost-sharing rules for the new government program would be
the same as those for the mandatory employer-provided insurance envisioned
by the Commission. Under the new public program, individuals and families
with incomes below the federal poverty threshold would be exempt from
4
paying premiums or any cost-sharing (deductibles or coinsurance) for
covered services. Those with incomes between 100 and 200 percent of pover-
ty would pay a share of the premiums and cost-sharing according to a sliding
scale based on income. The new program would pay health care providers ac-
cording to current Medicare rates or new rates determined using Medicare
rules.
3) The Minimum Benefit Package
A new federally-specified minimum health insurance benefits package
would be established. This package would supersede all existing state laws
governing the content of health insurance polices. Thus states no longer
would be allowed to require insurers to provide more generous benefits than
the federal minimum package. Private insurers could, however, still offer
more generous coverage on a voluntary basis.
Employers who chose to continue providing their workers with private in-
surance, whether through traditional insurance or managed care plans, would
be required to provide coverage meeting at least this new minimum standard.
The same minimum package would be provided to those enrolled in the new
public plan, although lower-income individuals and families would be given
more generous coverage.
The required minimum benefits provision would include all hospital ser-
vices, surgical services, physician office visits, diagnostic tests, and preventive
services (including prenatal and well-baby care and various cancer screening
tests). Mental health services of up to 45 inpatient days and 25 outpatient
visits per year also would have to be included. The annual deductible could
be no more than $250 for a single individual, or $500 for a family.
Coinsurance charges in general could not exceed 20 percent for any of the
covered services. The exceptions to that general rule would be a 50 percent
limit on coinsurance for outpatient mental health visits and no deductibles or
coinsurance at all for prenatal care, well-baby care, or cancer screening tests.
Under the Commission's scheme, all insurance would in addition be re-
quired to include a "stop loss" or "catastrophic" feature, limiting an in-
dividual or family's out-of-pocket payments for deductibles and coinsurance
to $3,000 per year.
4) New Insurance Regulations
The federal government would establish new regulations governing the way
health insurance companies do business. Again, these would supersede exist-
ing state laws.
Insurers would be prohibited from applying pre-existing condition ex-
clusions. This means insurers could no longer limit or refuse coverage for the
costs of treating a medical condition the policyholder had at the time he ap-
plies for insurance, or had been treated for in the past.
5
Insurers would be required to accept all groups wishing to purchase health
insurance. In the case of small groups, such as employees of a small company,
insurers would be required to set premium rates on the same terms for all
groups within specified areas and would be prohibited from selectively in-
creasing rates for a particular group or individual. Insurers would, however,
be allowed to require specified minimum enrollment periods as a condition
of providing coverage (to prevent policyholders buying a low cost policy, and
then switching temporarily to a more generous plan when they wanted an ex-
pensive service).
Insurers in the small group market would be required to include those
groups in the managed care systems they offer larger employers, allowing
them to choose between traditional insurance and Health Maintenance Or-
ganizations (HMOs) or Preferred Provider Organizations (PPOs).
5) The Five-Year Phase-In Period
The employer mandates, insurance regulations, and new public program
would be put into effect according to a five-year timetable.
Year 1: Coverage under the new public program is extended to all
pregnant women and children up to age six who are not cur-
rently covered by Medicaid or private insurance.
The new regulations on private insurers take effect.
Year 2: The new public program is expanded to include uncovered
children up to age eighteen.
Unincorporated businesses are allowed to deduct the cost of
health insurance fully from taxable income.
Firms with fewer than 25 employees and average payrolls
below $18,000 per worker receive a temporary 40 percent
refundable tax credit toward the purchase of minimum
coverage.
Year 3: All firms with more than 100 employees are required to pro-
vide the minimum package of health insurance to all full-time
and part-time workers and their non-working dependents,
either by purchasing private insurance or by paying the payroll
tax for coverage under the public program.
Year 4: Employers with 25 to 100 employees become subject to the full
mandate if at least 80 percent of their workers (and their de-
pendents) have not yet been provided by them with the basic
minimum health insurance coverage, through private in-
surance or the public program.
Year 5: Firms with fewer than 25 employees become subject to the
mandate if they have not yet provided at least 80 percent of
their workers (and their dependents) with the basic minimum
6
health insurance coverage, through either private insurance or
the public program.
All special tax credits or subsidies for buying health insurance
available to small businesses are eliminated at the end of the
year, except for firms "with ten or fewer workers at extreme
financial risk."
All remaining individuals not covered by either the public pro-
gram or private insurance become eligible for the new public
program.
6) Long-Term Care Program
The Commission recommends that the federal government establish a new
long-term care entitlement program, financed mainly by a social insurance
system. The program would be phased in over four years and serve all
Americans needing long-term care, regardless of income. It would cover the
first three months of nursing home care, and home and community-based
care of up to 400 hours per year for an unlimited period. This new program
would be financed completely by the federal government, with the states ad-
ministering it according to the federal guidelines.
Beneficiaries would be required to pay either 20 percent of the actual cost
of their care or 20 percent of the national average cost, whichever is lower.
This coinsurance would be reduced for individuals with incomes between 100
percent and 200 percent of the poverty threshold, and eliminated entirely for
those below the poverty line.
For care outside a nursing home, the program would use a "case manager"
system to control costs. The federal government would fix and regulate
provider reimbursement rates both for home and community-based care and
for nursing home care.
Sharing Costs With States. For persons with nursing home stays beyond
three months, a second level of assistance would be available, with the cost
shared by the states as well as by the federal government. Under this second
tier of coverage, the new program would continue to pay nursing home costs
after beneficiaries had spent their income and assets. However, beneficiaries
would be allowed to retain certain assets and resources. Specifically, single in-
dividuals could retain their home and $30,000 in other, non-housing assets.
They would also be allowed to keep $100 a month to meet personal needs,
and for the first year of a nursing home stay, they could retain 30 percent of
their income to cover the cost of maintaining their own residences.
Beneficiaries would be required to use all other income and assets above
these limits to defray the cost of their care. The same rules would apply to
couples, with the exception that they could retain $60,000 in non-housing as-
sets. In the case of nursing home patients with a healthy spouse, they would
be allowed to retain income equal to 200 percent of the poverty level for a
couple (or a total of about $16,900 in 1990), to support the healthy spouse
living in the community.
7
Under the Commission's proposal, new federal tax regulations would apply
to employer-provided private long-term care insurance. These regulations
would give such long-term care policies the same preferential tax treatment
now given to employer-provided acute-care health insurance. The federal
government also would set new standards for private long-term care in-
surance policies.
7) Additional Provisions in the Commission Report
The existing Medicare program would be restructured to make it com-
patible with the new federal minimum requirements for health insurance
policies.
The federal government would develop national guidelines for physician
practice and standards of care.
The federal government would develop a uniform national data system
to collect information on all doctors' visits, hospital stays and procedures,
regardless of where they occur or how they are paid for.
The federal government would develop and test better methods of as-
sessing and assuring the quality of medical care.
The federal government would develop an expanded network of local
review organizations designed to apply a uniform set of methods for review-
ing the quality medical care and create new procedures to deal with deficien-
cies.
The federal Physician Payment Review Commission, an independent ad-
visory body within the Department of Health and Human Services respon-
sible for recommending changes in the ways Medicare pays doctors, would be
empowered to study and test possible ways of reforming the current medical
malpractice system and recommend changes to Congress.
The federal government would increase spending on programs to pro-
vide medical services in underserved areas, to promote wellness and healthy
habits among the population, and to conduct more research on treating long-
term illnesses and disabilities.
PROBLEMS WITH THE COMMISSION'S
INSURANCE RECOMMENDATIONS
The most serious and crippling problem in the Commission's majority
report is its enormous cost. The report estimates that if all the proposals were
put into effect immediately, federal government spending would need to in-
crease next year by $24.3 billion for expanding coverage to the uninsured,
$42.8 for establishing the new long-term care entitlement, and $2.6 billion for
restructuring Medicare to comply with the new universal mandated minimum
health benefits package. The net total cost is a staggering $68.8 billion. To put
this sum in perspective, it:
8
Is larger than the combined 1990 budgets of the Departments of Com-
merce, Education, Interior, Justice, Labor, and State;
Equals three times the 1990 budget for the Department of Housing and
Urban Development;
Is almost two-thirds of the amount the federal government will spend in
1990 on Medicare;
Represents a 5.3 percent increase in the entire federal budget.
Besides this enormous direct cost to the taxpayers, there would be addition-
al indirect costs to Americans. For instance, the report estimates that its
proposals would cost American industry $14.7 billion per year to comply with
its new requirements.
PROJECTED COSTS OF PEPPER COMMISSION REPORT
New Federal Spending In Constant 1990 Dollars Using Optimistic Assumptions
Cost (billions)
100
90
80
70
60
50
40
30
20
10
o
'91
'92
'93
'94
'95
'96
'97
'98
'99
'00
'01
Year
Medicare Expansion
Long-Term Health Care Programs
Mandatory Health Care
Notes:
This graph is based on the assumption that the Commission's recommendations are
put into effect starting in 1991, and phased in according to the Commission's
proposed schedule.
The Commission tacitly admits that the costs of its recommmendations will escalate in
future years at rates of "at least 8 percent to 9 percent annually." Taking the lowest
estimate (8 percent), and discounting for an assumed constant general inflation rate of
4 percent, yields a projected 4 percent rate of real spending growth.
The 4 percent rate of real spending growth is applied here to years beyond those for
which the Commission provided estimates. Thus, this growth rate assumption is
applied to: years 1997 and beyond for the mandatory health insurance provisions;
years 1995 and beyond for the long-term care provisions; and years 1992 and beyond
for the Medicare expansion provisions.
The decrease in total spending in 1996 is attributable to the projected elimination of
tax credits to small businesses for health insurance, effective that year.
9
This estimate of the business costs, however, hides huge disparities in the
burden on individual businesses. For example, the Commission calculates
that while businesses now providing their workers with insurance (generally
larger firms) would face total new costs of $17.4 billion, these costs would be
offset by projected savings of $30.2 billion. The savings would come mainly
from dropping coverage for dependents of their workers who would be
covered by other employers and from reductions in the amounts billed by
providers to better insured patients to cover losses incurred in treating unin-
sured patients or ones whose insurance pays lower reimbursement rates.
These larger firms thus would enjoy total net savings of $12.8 billion. At the
same time, businesses not currently providing insurance (generally smaller
firms) would face total new costs of $36.4 billion, offset by projected savings
of just $8.9 billion, for a total net new cost of $27.5 billion.
Greatly Understated Estimates. Even these cost estimates probably are
greatly understated. Some members of the Commission itself argue that in a
number of places the report underestimates true costs and overestimates
potential savings for both the government and private sector. And even the
Commission's own price tag envisions huge cost increases in future years, as
the chart on the previous page indicates.
Perhaps the most damning indictment of the cost of the recommendations
is found in the Commission's own words. In the section describing possible
tax increases to fund the cost of its proposals, the report recommends that
Congress choose a package of tax increases whose projected revenues will
grow at a rate sufficient to meet the projected growth in spending. "To cover
program costs," states the report, "revenues should increase by at least 8 per-
cent to 9 percent annually."
This statement tacitly admits that the "reforms" will do absolutely nothing
to reduce the current health care inflation rate, now running at 8 percent to 9
percent a year, or double the general inflation rate. Indeed, given the in-
creased demand that the new benefits would unleash, the most likely effect
would be to make the cost problem even worse. If ever there were a classic
example of a government body recommending that the nation blindly throw
money at a problem, the Pepper Commission is it.
The Damaging Economic Effects
Obscured perhaps by the direct costs of the Commission's proposals are
numerous threats to the U.S. economy and individual citizens. Of particular
concern is the proposed mandate of employer-provided insurance. This
would constitute a heavy tax on jobs. Whether employers complied with the
mandate by spending more on private insurance or by paying a 7 percent
payroll tax to cover their workers under the new public program, the effect
3 Ibid., Chapter 5, "Revenues to Finance Commission Recommendations," p. 137.
10
would be the same. As with any tax, the more the government taxes some-
thing, the more it discourages it. Taxing employment means fewer jobs.
The Commission generally pretends that it is employers who would bear
the cost of the new spending or payroll taxes required to comply with the
mandate. But it is forced in its report to admit that these costs really fall on
workers, weakly conceding: "Economists typically assume that required
employer expenditures are borne by workers, in reduced wages. ,,4 Indeed,
the report explicitly admits that these costs will fall hardest on low-wage
workers, the very population that is now most likely to lack health insurance.
In the Commission's own words, "Wage reductions, however, are not possible
for workers at or near the minimum wage. For these workers, the cost would
be reduced employment. These reductions could come in layoffs, slower rates
of employment growth or failure to replace workers who leave their jobs. ,,5
Huge Job Loss. The report estimates that the unemployment resulting
from its recommendations would be between 25,000 and 50,000 jobs. But it
then dismisses it as "a number that is small enough to be offset by job crea-
tion through the normal workings of the economy." However, Commission
member and labor economist John F. Cogan, now a Hoover Institution
Senior Fellow and formerly Deputy Director of the Office of Management
and Budget (OMB), sharply disagrees. The only economist to serve on the
Commission, Cogan projects the likely job losses to be in the range 500,000 to
1.4 million. 6 Neither projection, however, considers an economy in recession,
with a slow, or even negative rate of job growth. Also left unstated is the fact
that newly unemployed individuals and their dependents would increase the
burden on other public assistance programs, adding to the indirect cost of the
Commission's proposals.
Higher-wage workers would not tend to face job cuts, but employers would
tend to compensate for any increased employment cost imposed by the new
mandate by adjusting salaries or other fringe benefits. The result: reduced dis-
posable income for these families and hence cutbacks in non-health spend-
ing. Employers might also recoup part of the extra costs by raising the prices
they charge for their products, making U.S. goods less competitive here and
abroad. Furthermore, as the cost of these new taxes and mandates escalate in
the future faster than wages and general inflation, as the Commission implicit-
ly admits they will, all of the adverse economic effects would grow.
4 Ibid., Chapter 2, "Blueprint for Health Care Reform," p. 67.
5 Loc. cit.
6 Ibid., pp. 167-168.
11
WHY THE PROPOSALS WOULD BE POLITICALLY UNSTABLE
Even if Congress were to enact the Commission's recommendations, they
would not be a lasting reform because the programs would soon founder
amid political and economic turmoil - much as the 1988 catastrophic health
care legislation began to unravel before it even took effect. There would be,
for example, enormous constituency pressure on Congress to add more and
more services under the mandated minimum benefit package, and reduce its
cost-sharing requirements on beneficiaries. This would come from consumers
wishing more "free" or "lower cost" services. But it would also come from
providers initially excluded from the system (for example, chiropractors or
optometrists). There can be little doubt that Congress would bow to this pres-
sure. State legislators already have done so, enacting over 800 laws in the past
fifteen years requiring insurers to cover specific providers or services - even
when consumers expressed little or no interest in the benefits. The political
and economic problem of state insurance mandates, which artificially in-
crease the cost of insurance, simply would be transferred to the federal level.
Another source of instability is the assumption that co-payments and other
forms of cost sharing would be raised to keep pace with general inflation. In-
deed the Commission fails to recommend such a basic inflation adjustment
for future years. If the proposed coinsurance rates remain constant over time,
their real values will erode and their effectiveness in deterring wasteful con-
sumption will gradually diminish. In the case of beneficiary cost sharing, Com-
missioner Cogan points to the Medicare outpatient deductible as an example
of how political pressure generated by beneficiaries would produce results
contrary to good economic and health policy. 7 In the quarter-century history
of Medicare, Congress has increased that deductible only twice, from the
original $50 to the current $75. Had the deductible simply increased accord-
ing to the general inflation rate, needed for its effects on consumer behavior
to remain constant, it would today be $203.
Web of Regulation. The political and economic instability of the
Commission's proposed scheme would soon manifest itself in other ways as
well. As insurance costs escalated, Congress would come under increasing
pressure from business and taxpayers to regulate health care providers. The
result would be a growing web of government regulations, restrictions, and
price fixing, leading inevitably to even more distortions in the system. UI-
timately, Congress would be faced with the option of either deregulating the
system and handing the resources and decision-making power back to con-
sumers and providers, or, more likely, following regulatory logic to its natural
conclusion by creating a fully nationalized system.
It is actually quite likely that the greatest pressure for a fully nationalized
system would come from employers. By proposing a universal system of man-
7
Ibid., p. 169.
12
datory insurance, with government specified benefits and narrow limits on
the prices insurers can charge, the Commission effectively has called for a na-
tional health system paid for and administered by thousands of employers
and insurance companies. Most companies in America are not in the health
care business, and it would not be long before they tried to shed the burden
by pressing for the government to take over the national system.
A government monopoly, of course, would achieve some initial savings, but
over time it would become as unresponsive and inefficient as any other
monopoly. This pattern can be seen readily from the experience of other
countries with national health systems. In common with such countries as
Britain and Canada, the U.S. would face large problems in trying to control
the actions of both providers and consumers. Consumers would demand
more and more services; providers would resist cost controls. Eventually, as
in all nationalized systems, the government would only be able to restrain es-
calating costs by imposing a cap on total health care spending, with the in-
evitable results of rationing and waiting lists, to adjust the disparity between
unrestrained demand and finite resources. In Canada, for instance, patients
can expect to wait four to seven months for heart surgery, two to five months
for disc surgery, two to seven months for 8 cataract removal, and up to a year
for hemorrhoid surgery or hernia repair.
The Alternative Approach
The alternative to this bleak prospect is to introduce strong market
mechanisms to America's health care system. Rather than trying to assist the
poorer or less healthy members of society by artificially lowering prices, they
could be assisted far more efficiently by direct subsidies that sufficiently in-
creased their purchasing power and thus allowed them to obtain the services
they needed. Specifically, Congress should:
Provide all Americans with a basic tax credit for all of their health ex-
penses, both for out-of-pocket medical care and health insurance
premiums;
Increase the percentage of the tax credit for taxpayers whose total
health expenses exceeded specified percentages of total family in-
come. This would create a sliding scale of tax relief with the most
money going to those who had larger health expenses relative to in-
come;
Require employers to allow workers to take the money now spent on
their health insurance in cash so they could use it to buy medical care
and insurance of their own choice elsewhere and pocket any savings;
8 Steven Globerman and Lorna Hoye, "Waiting Your Turn: Hospital Waiting Lists in Canada," Fraser Forum,
The Fraser Institute, Vancouver, Canada, May 1990, pp. 16-21.
13
Reform current public assistance programs to provide low-income
Americans with vouchers based on income to use in purchasing medi-
cal care and health insurance;
Require all heads of households to purchase basic catastrophic health
insurance for themselves and their families;
Fund these changes by eliminating the current tax exclusion for
employer-provided 9 health insurance, thus making them budget
neutral;
With this system of tax credits, working Americans would be able to buy for
themselves the health insurance and medical care they needed for themselves
and their families. Furthermore, by putting the dollars and decision-making
power back in the hands of consumers, this strategy would provide new incen-
tives for Americans to seek the best value in medical care and health in-
surance. In this way, consumers would exert pressure on providers and in-
surers to become innovative and efficient. All parties concerned, consumers
providers and insurers, would be tangibly and directly rewarded for any steps
they took to curb escalating health care spending and reduce or eliminate ad-
ministrative costs and wasteful or marginally useful purchases.
WRONG GOALS IN LONG-TERM CARE
The Commission's recommendations for helping Americans who lack
health insurance are a case of pursuing the right goal with the wrong
methods. Its recommendations for reforming the financing of long-term care,
however, are a case of pursuing the wrong goal entirely.
For many Americans, the actual or potential need for costly long-term care
for themselves or relatives is an important and pressing financial question.
Naturally, one of the places they look to for solutions is Congress. Lawmakers
can and should take some significant steps to improve the financing of long-
term care. But the Pepper Commission does not provide a blueprint for any-
thing other than a policy disaster.
Before enacting any long-term care legislation, Congress needs to remem-
ber two very important points:
1) The federal and state governments already provide some $25 billion
in long-term care assistance, chiefly through the Medicaid program.
This assistance is targeted to those who need it the most: the poor; in-
dividuals who become poor as a result of long-term care expenses; and
the healthy spouses of nursing home patients who, in the absence of
public assistance, soon would become impoverished.
9 For a more detailed explanation of these and related proposals, see Butler and Haislmaier, op. cit., and
Butler, op. cit.
14
2) While reforms in Medicaid are needed so that existing funds can be
used more efficiently, those most worried about long-term care costs
are not the poor. Rather, they are older workers and retirees with com-
fortable levels of assets and income, who are ineligible for Medicaid.
These Americans correctly fear that the potential costs of long-term
care could completely consume the savings and assets they have care-
fully accumulated over a lifetime, leaving nothing for their heirs.
While it is easy to sympathize with these fears, the fact is that long-
term care for middle-income and upper-income Americans does not
concern access to needed medical care, but questions of asset protec-
tion and estate planning.
With workers already funding $356 billion a year in subsidies to the elderly
through Social Security and Medicare, to call for imposing on them another
$42.8 billion in taxes simply to protect the private estates of affluent senior
citizens is irresponsible. Not one cent of the new spending proposed by the
Pepper Commission would go to help impoverished senior citizens obtain
care they currently need but is not already provided for them by Medicaid.
Furthermore, from an insurance perspective, even the very structure of the
Commission's proposed long-term care program is backward. The program
would provide the most generous benefits to those facing the least risk. These
are the relative majority of disabled elderly Americans who incur short nurs-
ing home stays or need only limited spells of home care assistance. The much
smaller number who incur long stays in a nursing home or need more exten-
sive home care would still face large out-of-pocket bills. Such an inverted
scheme might be attractive to Congressmen seeking to buy the greatest num-
ber of votes from their elderly constituents, but it cannot be called insurance
and it is no solution to the long-term care problem.
Moreover, the likelihood of the costs of such a program ballooning com-
pletely out of control in future years is just as acute as in the medical care sys-
tem envisioned by the Pepper Commission. Warns Commissioner Cogan in
his dissent to the report:
During the last 15 years, numerous proposals have
been brought before the Congress to provide long-term
care assistance for the elderly. Each proposal has failed
enactment. The principal barrier has been long-term
care's exorbitant expense and the well-recognized fact
that we have no known method of controlling its ex-
plosive cost growth. Nothing in the majority's recom-
mended plan alleviates these concerns. While I have
great respect for the Commission's staff, I have no con-
fidence that the estimated cost of $42.8 billion will
prove accurate. More likely, the estimate will prove to
15
be only a fraction of the recommendation's eventual
10
cost.
THE ALTERNATIVE STRATEGY
Congress's role should not be to create an enormous new federal entitle-
ment program that imposes additional, heavy taxes on working Americans
simply to further subsidize affluent retirees. Rather, lawmakers should stick
to the more appropriate tasks of improving the delivery of long-term care ser-
vices to the poor - those who legitimately need government help - and en-
couraging middle-income Americans to use private insurance to protect their
assets from nursing home costs - precisely the same prudent actions they
take to protect themselves from other financial catastrophes.
Specifically, Congress should: 11
Restructure the public assistance for long-term care, now provided
through Medicaid, to create a more responsive program for meeting the
needs of the elderly poor;
Encourage working Americans and their spouses, through tax incen-
tives, to buy long-term care insurance while they are younger and the
premiums are low, to protect themselves when they retire;
Provide tax relief to help working families willing to shoulder the cost of
providing non-institutional care to their elderly relatives;
Change existing tax policies and regulations to enable today's middle-in-
come and upper-income retirees to obtain more affordable long-term care in-
surance, and remove penalties to enable them to use their existing financial
assets and resources, such as life insurance and Individual Retirement Ac-
counts, to pay for long-term care services;
Such a strategy constitutes a much fairer, compassionate and efficient ap-
proach to meeting the needs of America's present and future retirees for
long-term care, than that proposed by the Commission.
CONCLUSION
Some 31 million Americans lack health insurance today for at least part of
any year. The reason: they have been priced out of the market by escalating
health care costs and tax policy that discriminates against them. A majority of
the Pepper Commission proposes that Congress respond to this problem by
throwing more money at it. While such an approach certainly would result in
some improvement in coverage, the costs would be unacceptably high. Those
10 Pepper Commission Final Report, op. cit., p. 172.
11 For a more detailed explanation of these and related proposals, see Edmund F. Haislmaier, "Making
Long-Term Health Care More Affordable," Heritage Foundation Backgrounder No. 755, February 23, 1990.
16
costs would come in the form of new federal spending, higher taxes, reduced
employment and diminished disposable income for Americans.
Basic Structural Reform Needed. Furthermore, even those costs will esca-
late in future years unless Congress reforms the basic underlying incentive
structure that govern the decisions of health care consumers, providers and
insurers. The present employer-provided insurance system, and particularly
the health care tax policies and regulations that support it, have created a sys-
tem in which consumers are encouraged to over-consume and providers to
over-price and over-prescribe. Neither consumers nor providers are directly
and tangibly rewarded for economy or efficiency. Prudent consumers thus are
effectively prevented from pocketing any savings they achieve on their health
care. And efficient providers and insurers who offer good value - that is,
quality services at reasonable prices - rarely can attract more customers.
Until this situation is reversed, health care costs will continue to escalate
and even more Americans will join the ranks of the uninsured. All the Pepper
Commission proposes is to pour gasoline on the inflation fire by legislating ac-
cess to health and then passing the tab to business and the taxpayer. If Con-
gress adopts the Pepper Commission's "solution" only one thing will change.
The escalating costs will be expressed not in terms of more uninsured
Americans, but rather in terms of higher taxes, fewer jobs and declining
productivity and purchasing power. Such a result is hardly a solution.
Needed instead, is for Congress to enact reforms which create a consumer-
oriented, market-based health care system. The keys to such reforms are that:
1) Consumers be given control over the money spent on their health care
and the power to decide how best to spend it;
2) All Americans receive, through the tax code, an equal incentive to pur-
chase needed medical care and health insurance;
3) The tax code and public programs be further reformed to provide direct
subsidies to Americans with low incomes or high medical costs, sufficient to
increase their purchasing power in the medical marketplace and thus allow
them to buy the care and insurance they need.
These reforms would create powerful new incentives for consumers,
providers, and insurers to seek or provide the best value in health care -
quality services at reasonable prices. Furthermore, rather than the system
being distorted by the unintended consequences of government attempts to
artificially lower health care costs for the needy, a restructured subsidy sys-
tem would directly give to disadvantaged Americans the extra purchasing
power they need to buy into the reformed and improved medical market.
While the Pepper Commission proposes the wrong means to achieve the
worthy goal of expanding access to health insurance and medical care for the
uninsured, it seeks to achieve the wrong goal entirely in long-term care
policy. The goal of reform in long-term care financing should not be to find
ways for the government to protect the estates of affluent retirees. Rather,
the goal should be to clear away obstacles in the tax code and government
17
regulations that hamper efforts by Americans to use private means to protect
their private assets. Even more important, Congress should eliminate policies
that encourage Americans to ignore their own potential need for long-term
care until it is too late to do anything but rely on government assistance.
Removing Tax Biases. Equalizing the tax treatment of all medical care and
health insurance expenses, including those for long-term care as well as acute
care, would be a major step in the right direction. With existing biases
removed from the tax code, Americans quickly would see that the best value
for their health care dollars is found in purchasing insurance for unlikely but
expensive events, such as catastrophic acute or long-term care, and not in
covering routine medical treatments. To its credit, the Commission does
propose a small step in this direction, arguing that employer provided long-
term care insurance should receive the same tax treatment as employer-
provided acute-care insurance. But this is far from enough, and in the context
of the Commission's other recommendations would probably have little, if
any, effect.
Not only should Congress make this reform part of an overall restructuring
of health care tax policy, but it should also remove barriers to Americans
using their existing financial assets, such as life insurance and Individual
Retirement Accounts (IRAs), to pay for long-term care insurance and ser-
vices.
Unfortunately, the Pepper Commission failed to provide the workable solu-
tion to America's health care problems that many members of Congress had
hoped for. Those problems are too important to leave unattended. Congress
should put the Commission's report aside and move on with the difficult task
of developing better access to affordable health care for all Americans.
Edmund F. Haislmaier
Policy Analyst
18
Peppen
commissin
CONFIDENTIAL
Working Meeting Number Thirteen:
Initial Agreement on Structure
December 15, 1989
Purpose of the Meeting
The purpose of this meeting is to explore the potential for
agreement on the basic elements of our proposed recommendations
for expanded access to coverage for health care and long term
care. The Chairman will introduce a proposal outline to focus
the discussion.
You or your staff have been briefed on the proposal. Its
key features will provide the agenda for discussion (see
attached). The agenda will not include all issues the proposal
or the Commission must ultimately address. Rather it will deal
with "threshold issues"--decisions that determine the basic
direction our recommendations will take.
Other issues, to be addressed at January meetings, include:
benefits to be included in proposed coverage expansion
financing mechanisms
federal-state roles in financing and administration
O quality assurance (including practice guidelines and
malpractice reform)
o delivery interventions for the underserved
o changes in health care benefits for the elderly.
If there are critical issues you wish to raise on
December 15 that are not on the agenda, please let the staff or
the Chairman know as soon as possible.
DETERMINED TO BE AN
ADMINISTRATIVE MARKING,
PER E.O. 12958, SEC. 3.3 (C)
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Working Meeting Number 13
December 15, 1989
Agenda
Following a walk-through of the Chairman's proposal outline, a
series of questions will be used to order our discussion of the
proposal's key elements. Members should be prepared to indicate
whether they agree with the plan's elements, would like to revise
these elements, or have an alternative to propose.
9:00 - 9:15 Chairman's Opening Remarks
9:15 - 9:45 Staff Walk-through of Chairman's Proposal Outline
9:45 - 11:00 Employer/Public System
should public policy expand health care coverage
through an employer/public system? How?
11:00 - 12:00 Private Health Insurance
Should public policy promote change in insurance
practices to assure availability of coverage to
all at affordable rates, regardless of health
status?
To what extent should coverage through a public
program be allowed or promoted as an alternative
to private insurance?
12:00 - 1:00 LUNCH
1:00 - 2:15 Health Care Cost Containment
What measures should be used to contain costs?
2:15 - 3:45 Social Insurance in Long-term Care
What is the role of social insurance, relative to
private insurance or means-tested protection? For
some or all services?
3:45 - 4:00 Next steps
Direction to staff
Agenda for future meetings
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OVERVIEW OF HEALTH AND LONG-TERM CARE PLANS
HEALTH PLAN
The goal of assuring access to coverage for all Americans
is achieved through a combination of (1) requiring employers to
offer insurance to their employers or to pay a tax, and (2)
establishing a public plan that can provide coverage for all
those without private insurance. The public plan would be
federally financed and run, replacing Medicaid.
To assure the availability of decent, affordable coverage
to employers, improvements would be made to the private insurance
market.
Costs would be contained by building on the provider payment
principles now in place or soon to be in place in Medicare, and
allowing development of managed care initiatives.
LONG-TERM CARE
Regardless of age or income, all Americans are insured
through a government program for home care and short stays in a
nursing home. To qualify for benefits, persons would have to be
severely disabled.
For nursing home stays longer than those covered under this
plan, persons would rely on private insurance, on savings, or on
Medicaid, which would continue to be means-tested.
Federal and state governments would share financing, and
states would administer the program under federal guidelines.
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HEALTH PLAN
WHO'S COVERED AND HOW
Employers must either provide insurance to cover
specified services for employees, or pay a tax.
Everyone not covered through an employer plan can got
insurance through a federal program, or, if they wish, can
purchase private insurance.
PRIVATE INSURANCE PROVISIONS
Private insurance market is improved so that no one is
denied coverage, at reasonable rates, because of health status.
COVERAGE OF LOW-INCOME PEOPLE
All low-income people, including current Medicaid acute care
recipients, would be covered under the new plan for the specified
benefits.
FINANCIAL OBLIGATIONS
Employers
o If employer chooses to buy insurance, it pays at least
a specific share (for example, 80%) of premium for full-
time employees (and a proportional contribution for
part-time employees to participate in public plan).
If employer chooses not to buy insurance, it pays a
tax.
Small business subsidy -- Help for obligations for
small, new and heavily burdened businesses.
Individuals
o Pay deductibles, coinsurance and a specified portion of
premium (for example, 20%), within appropriate out-of-
pocket limits.
Subsidy for low income people--No payments for low
income persons, with sliding scale payment above the
chosen cut-off point.
Federal Government
Funds needed to subsidize low-income people, subsidize
small businesses, and cover public plan costs that exceed
employer tax revenues and individual payments.
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state Government
No obligations for services covered by new federal
plan (that is, new federal plan replaces current
Medicaid obligations).
O Continued responsibility, at their option, for optional
services now offered under Medicaid, but not included in
new plan.
BENEFITS
Benefits package including at least medically necessary
hospital and physician services, primary and preventive care.
Benefits are subject to cost sharing, up to a maximum.
COST CONTAINMENT
Public plan sets provider payment rates in conjunction
with (and according to rules of) Medicare program.
Private insurers have the option to use publicly
determined rates (which providers must accept as a
condition for participation in Medicare and new public
program).
Opportunity for private insurers' development of managed
care.
Improvement in the private insurance market that directs
competition toward efficient delivery.
Cost sharing
QUALITY ASSURANCE1
O Technology assessment and practice guidelines which are
developed, in part, with the help of a newly created
health outcomes data base.
o A system that builds on existing mechanisms for quality
assurance.
o Malpractice reform
1 CAO is preparing a report for the Commission on approaches
to quality assurance and the Commission has contracted with
Professor Paul Weiler of Harvard Law School for a report on
options for malpractice reform.
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LONG-TERM CARE SOCIAL INSURANCE FOR
THE SEVERELY IMPAIRED
Create a new limited long-term care social insurance program for
the severely impaired.
ELIGIBILITY
Persons assessed as "severely impaired"
All ages
BENEFITS
Case manager decides actual mix of services.
Home and Community-Based Care (HCBC):
Includes skilled nursing, personal care services,
homemaker services, adult day care, respite care.
Amount of services dependent upon level of
disability up to a maximum ceiling (for example, 25
hours/week).
Family support included in the case manager's
decision to allocate services.
Nursing Home Care:
"Front-end" coverage (for a specified period per
stay; for example, 6 months).
o Limit on lifetime use--perhaps 3 episodes or 18
months.
COST SHARING
Coinsurance for HCBC and nursing home care benefits
Subsidize coinsurance for low-income persons
COST CONTROLS
Government approval of provider rates
Certified case manager authorizes services, within a fixed
budget.
Cost sharing
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ADMINISTRATION
Federal-state financing
Federal administrative responsibilities: Set eligibility
standards, certify assessment agencies and oversee
provider payments.
State responsibilities: Design and implement delivery
structure, certify providers and oversee case management.
OTHER LONG-TERM CARE
Encourage private insurance for lengthy nursing home
stays:
Tax clarification
Government standards and oversight
Medicaid waivers to promote private insurance
policies
Retain Medicaid program for persons who
stay in nursing homes over 6 months, or
need care but do not satisfy the social insurance
program's eligibility requirements (not "severely
impaired").
Improve Medicaid program:
Raise asset protection levels for all nursing home
residents.
Raise personal needs allowance.
Assure no deterioration of care for persons
exhausting period of nursing home care under social
insurance plan.
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