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26
22
3
1
could also still self-insure, but in this case, enhanced
insurance state solvency and increased Department of Labor
standards would apply to ensure the economic stability of the
plans.
Functions -- HINs could contract with insurers to provide
coverage to members or could self-insure subject to enhanced
state solvency regulation (if state solvency standards are
insufficient, Department of Labor solvency standards would
operate as a backup oversight system). All federally approved
HINs would be required to offer at least one coordinated care/HMO
option, and at least one fee-for-service or other alternative
option. Managed care and fee-for-service alternatives would
include a "basic" package priced at the amount of the refundable
health credit.
Organization -- HINs would be structured as non-profit
voluntary membership corporations with a board of directors
elected by the membership. HINs would have a full-time staff to
manage benefits. HINs would be registered and qualified, as
applicable, by a state agency or by the Department of Labor.
There would be no limit on the number of HINs that could be
established in a given area, but HINs would be required to have a
"significant" share of the small employment market in the State
to assure effective purchasing power in the market. HINs could
be established along the lines of professional societies,
industry, or trade associations and would be subject to all of
the market reforms listed in the preceding sections.
HINS will provide the mechanism for pooling large numbers of
individuals, that is now only available to large companies, to
small employees and individuals. These plans have not grown in
the past because of State laws. To allow for Federal preemption,
plans had to "self insure". Small groups have difficulty sharing
capital to self insure risk. This system allows "imputed ERISA
exemptions" -- small firms can join together without self-
insuring, and have insurers carry the risk.
Multi State Pooling -- HINS would allow for the first time,
multi state pooling of small firms. Groups like NFIB National
Small Business United and The Chamber of Commerce (or any other
group) could offer the same basic plans to members nationwide.
In the past, State barriers have prevented such plans. This will
simplify marketing and administration and sharply reduce costs.
Increasing Flexibility for Health Plans
24
The following provisions of State law would be preempted for
all health plans. These laws unduly limit flexibility for health
plans thereby increasing health care costs.
Limiting State Mandated Benefits -- These include state laws
that require insurers to cover certain optional or ancillary
services. These mandated benefits drive up premium costs up by
at least 3 to 5 percent and are enacted primarily because of
special interest group lobbying in State legislatures. States
could continue to require essential services such as hospital,
physician, and diagnostic testing services.
Provisions that Restrict Managed Care -- Many special
interest groups, lobby state legislatures to impose restrictions
which prevent the development of managed care -- and the
competitive pressure it imposes on fee-for-service providers.
Anti-managed care laws include --
Restrictions on reimbursement rates or selective
contracting: Laws that restrict the ability of a carrier to
negotiate reimbursement rates with providers or contract
selectively with a limited number of providers.
Restrictions on differential financial incentives: Laws that
limit the financial incentives that a health benefit plan
may require a beneficiary to pay when a non-plan provider is
used on a non-emergency basis.
Restrictions on utilization review: Laws that (a) prohibit
utilization review of any or all treatments and conditions,
(b) require that such review be made by an in-state
physician or by a physician in a particular specialty, (c)
require the use of specified standards of health care
practice in such reviews, or require the disclosure of the
specific criteria used in such reviews, or (d) require
payment to providers for the expense of responding to
utilization review requests.
Federal/State Relationships
Most of the reforms described in the preceding section would
be implemented by the states. Thus, the responsibility for
regulating health insurance would remain primarily with the
states. However, Federal legislation would be amended to provide
States with clear incentives to enact laws that will achieve
national goals. In many cases, as with HIN certification and
25
oversight, there would be backup federal certification and
oversight procedures.
Under this approach, after an initial period to allow state
action, if a state's health insurance laws do not meet prescribed
Federal guidelines, then insurance sold in-state would be
certified through a Federal back-up mechanism. And, to provide
further incentives for state action, without directly preempting
states' prerogatives a non-complying state's administrative grant
funding for health programs would be frozen at the level of the
first year of non-compliance.
Other reforms would be implemented directly by Federal
government through amendment of the Federal Employee Retirement
Income Security Act (ERISA) or through other appropriate
legislation. Certification of HINs would fall into this
category.
As stated above, Federally certified HINs would be protected
from state mandated benefit laws and state premium taxes in the
same manner as an ERISA-qualified self-insured plan. Federally
certified HINs would, however, be subject to additional state
requirements to assure solvency. States could provide an
alternative process for certification of HINs. Federal and state
certification processes would coexist in a manner similar to
Federal and state charter of banks. If state laws and state
premium taxes were excessive, a HIN could apply to the Department
of Labor for federal certification -- pre-empting state law. As
a result, state would be encouraged to facilitate market pooling
and access to coverage for small business -- or risk losing their
traditional insurance oversight and regulatory role to a federal
backup system.
26
DRAFT
1/28/92
1:10
throughout TMX Insurance credit
Chapter 4
Expanding Access By Helping People
chanse th
credit
Pay For Insurance:
to
The Health Insurance Tax I Credit (Voucher) and Deduction
Current tax law provides substantial benefits to individuals
whose employers contribute to their health care insurance costs.
Other federal programs -- including Medicare, Medicaid, VA, and
CHAMPUS -- provide substantial benefits to certain veterans,
elderly, and low-income people. Many unemployed individuals and
working uninsured do not receive any federal contribution to their
health insurance. Uninsured people often seek medical care in
hospital emergency rooms, which is costly and inefficient. The tax
credit and deduction plan described below is designed to help many
of the Nation's uninsured obtain health insurance. The plan places
the highest priority on providing health insurance for low-income
individuals, but also would provide benefits to millions of
moderate-income individuals who enjoy little or no employer
contributions for health insurance and to self-employed individu-
als.
Health Wanant
Tax Credits (Vouchers) and Deductions for Low-Income and Moderate-
Income Individuals
Low- and moderate-income persons who are not covered by other
federally subsidized health insurance programs will be eligible for
a tax credit (voucher) or deduction for the purchase of insurance.
Low-income individuals (who have no current income tax liability)
would transfer their credits to employers or insurance companies to
purchase a "basic" benefits package. States would identify basic
plans and ensure that insurance companies would make basic benefit
plans available (see Chapter _). Other individuals and families
will be eligible to receive a deduction for the purchase of health
insurance.
Eligible persons for a tax credit or deduction will include
single persons with modified adjusted gross incomes of up to
$50,000, persons filing as heads of households with incomes of up
to $65,000, and married persons filing jointly with incomes of up
to $80,000. The amount of the transferable health credit (voucher)
will decline with increasing income levels and will range from
$1250 to $125 for single persons, from $2500 to $250 for married
couples and other two-person families, and from $3750 to $375 for
families of three or more.
The Administration's proposal will also provide a tax
incentive for the purchase of health insurance for millions of
moderate-income individuals who are currently working but whose
27
-2-
health insurance premiums are not fully paid under an employer
plan. Specifically, families may elect to claim a deduction
instead of the credit applicable to them. The deduction will be
available to persons without regard to whether they itemize or
claim the standard deduction and will be equal to $1250 for single
persons, $2500 for married couples and other two-person families,
and $3750 for families of three or more.
Both the transferable health credit and deduction amounts will
be increased to account for inflation. Applicable credit and
deduction amounts will be reduced by the amount of any contribution
made by the employer to the employee's health plan. Individuals
with employer contributions exceeding the applicable credit will
receive neither the credit nor the deduction.
Beginning July 1, 1993, eligible individuals with modified
adjusted gross income (defined as the sum of adjusted gross income,
nontaxable Social Security payments, Railroad Retirement payments,
and tax-exempt interest) less than or equal to 50 percent of the
tax filing threshold (the sum of the standard deduction and
taxpayer and dependent exemptions) will receive the maximum credit.
The credit will be phased down between 50 and 100 percent of the
applicable tax threshold in 1993, 1994, and 1995. Phasedown
thresholds will increase to a range from 75 to 125 percent of the
tax threshold in 1996 and from 100 to 150 percent of the tax
threshold by 1997. Hence, when fully phased in, all eligible
individuals or family units with modified adjusted gross income at
or below the tax filing threshold -- which approximates the poverty
level -- will receive a transferable credit sufficient to purchase
a core health insurance benefits package. The credit would not be
reduced below a minimum equal to 10 percent of its maximum value,
so that a minimum credit would be provided in the amount of $125
($250 for married couples and $375 for families).
Individuals who receive other federal support (e.g., covered
+by Medicare Part A, Médicare Part B, Medicaid, CHAMPUS, and other
Federal health programs) would not be eligible for the credit.
Effective January 1, 1994, the transferable tax credit would
replace the supplemental earned income tax credit available under
current law for certain low-income taxpayers who contribute toward
the purchase of health insurance coverage for their children.
Health credits and deductions could be claimed on the tax
return at the end of the year. Alternatively, transferable health
credit recipients could receive an advance credit during the year
by applying to a state governmental office, or by being randomly
assigned to a participating insurer by a qualified provider, in
consultation with a registering agency. States may select a state
agency, such as the Employment Service human resource department
or, with the consent of the Secretary of Health and Human Services,
28
-3-
the Social Security Administration to certify applicants' eligibil-
ity and to notify the Internal Revenue Service of the issuance of
the advance credit. Advance credit holders will transfer the
credit to the employer or insurer who provides health insurance in
payment for coverage. The insurance provider will then reconcile
the amount of the advance credit on their tax return.
Tax Credits and Deductions for Self-Employed Individuals
Self-employed individuals will generally be entitled to the
greater of 100 percent of the applicable credit up to $3750 for a
family or a 50 percent deduction of their health insurance
premiums. The health insurance deduction for high-income self-
employed individuals may not exceed the maximum amount of the
exclusion for employer-provided health insurance allowed for high-
income employees (see Chapter xx).
Achieving the Goal of Expanded Access
The health insurance tax credit and deduction provides
assistance to many taxpayers for the purchase of health insurance.
When fully phased in, 92 million individuals are projected to use
a tax credit or deduction provided by the program to buy health
insurance. Virtually all low-income individuals who are currently
uninsured would receive the maximum credit.
In 1993, 3.1 million self-employed taxpayers currently buying
health insurance would benefit from the extension and increase in
the deduction available to the self-employed. Still more self-
employed individuals will benefit because they qualify for the
health insurance tax credit. The insurance market reforms
discussed in Chapter 3 will reduce the cost of health insurance for
many self-employed individuals at all income levels.
29
Chapter 5
Making the System More Cost-Effective
Overview
Over the past several decades, per capita health care costs
in the United States have been increasing more than 4 percent per
year faster than general inflation. Since 1960, real per capita
health spending has grown as a share of GNP from 5.3 percent in
1960 to an estimated 13.1 percent in 1991. If current trends
were to continue, total health spending could reach 26.1 percent
to 43.7 percent of GNP by 2030 under alternative assumptions
(Waldo et al., 1991). Clearly, these trends are unsustainable if
the United States is to improve its economic base and standard of
living.
This rapid growth reflects a number of ongoing pressures
that cannot be easily changed or controlled: the changing
demographics of the U.S. population, the labor-intensive nature
of health care services, and the introduction of beneficial --
but highly costly -- new technology. Other causes of escalating
health care costs -- market failures in health care and health
insurance -- accentuate these pressures but can and should be
addressed through enhanced competition.
Currently, the mix of services provided is not necessarily
that which fully informed consumers would purchase under optimal
conditions and services are not produced at minimum cost. A key
issue is the role of insurance. While health insurance has
important benefits -- it protects individuals and families from
unexpected high health care costs and it reduces financial
barriers to care -- traditional fee-for-service insurance with
low cost-sharing stimulates incentives for over-utilization of
services. The reason is straightforward: with insurance paying
most of the cost, health care is perceived to be a free good for
patients and demand for medical care increases above optimal
levels. Moreover, insulated from the cost of care, consumers
have little reason to shop for the best price.
More efficient forms of health insurance coverage are
available. These include fee for-servicencoverage with modest
cost sharing and coordinated care coverage, where the health plan
strives to buy the best package of health care at the lowest cost
on behalf of plan enrollees. However, due to distortions in the
health insurance market, demand has been relatively weak for
these more efficient forms of coverage.
There are three principal distortions in the market for
health insurance which support inefficient forms of coverage: (i)
open-ended government subsidies which reduce consumer sensitivity
30
to cost, (ii) opportunities for favorable risk selection -- or
"cream-skimming" -- which can give inefficient health plans an
unfair cost advantage, and (iii) limited consumer information
regarding the quality of care in competing health plans which can
lead consumers to mistake higher price (or more intense service
delivery) for better care or superior outcomes.
There are other weaknesses in our current system as well.
There is substantial consumer and provider uncertainty regarding
the effectiveness of a broad range of alternative diagnostic and
therapeutic procedures. Moreover, prevention often is neglected
resulting in needless illness and greater cost. Finally, our
current legal system increases health care costs by fostering
"defensive medicine" and excessive litigation costs.
Against this background, the outlines of a comprehensive
reform strategy become apparent. The key initiative is to shift
health care delivery to a more market-based, competitive system.
There must be additional and complementary initiatives as well.
Other critical elements include reducing administrative costs,
coordinated care initiatives, more prudent purchasing of care
(particularly through public programs), prevention, and
malpractice reforms.
Each of the elements proposed individually push the system
towards greater efficiency. Added together, these elements form
building blocks of a more fully integrated market-based system
which can spur an ongoing market dynamic.
Strengthening Competition
The Administration's reform proposal has three main elements
which will strengthen competition. These elements will lead to
greater efficiency and fairer allocation of resources. And, the
nature of competition will shift. Providers and the mix of
services will be will be chosen based more on price relative to
quality and meaningful outcomes.
Changes in Tax Policy. Three proposal contains three
changes in tax policy that strengthen competition: (i) a tax
credit for low-income individuals and families, (ii) a deduction
for self-paid health premiums of up to $1250/$3750 for middle
income individuals and families, and (iii) a limit on the
exclusion from Federal taxable income for employer-paid health
insurance for upper income taxpayers.
The tax credit is a crucial reform. For the first time,
government assistance for the low-income will be provided through
the credits rather than through a publicly administered health
insurance program. Reliance on tax credits will allow increased
consumer choice to price and purchase insurance coverage. Low
income individuals will be empowered through tax credits to shop
among plans and coverage options. Moreover, because the credit
31
is set as a fixed dollar amount rather than as a percent of
premium costs, consumers will be sensitive to cost and will
purchase additional coverage only when the benefits of such
coverage at the margin outweigh competing goods and services.
The capped tax deduction for self-paid premiums will have a
similar positive effect on consumer choice and competition.
The cap on tax subsidies for upper-income individuals and
families will also enhance equity and efficiency. There is
little justification to providing open-ended subsidies to
upper-income taxpayers who can afford health insurance without
government assistance. Moreover, a number of economists (see,
for example, Enthoven, 1980; M. Feldstein, 1971; Feldstein and
Friedman, 1977; Greenspan and Vogel, 1980; P. Feldstein, 1988;
Ginsburg, 1981; Newhouse, 1978; Pauly, 1980; Pauly, 1986;
Wilensky and Taylor, 1982) have pointed to the open-ended nature
of current income exclusions as a serious distortion which
subsidizes inefficient or excessive coverage and contributes to
health care cost inflation.
Consumers affected by the tax credit, capped deduction, and
tax cap for high income groups can be expected to be more
cost-sensitive. The best study to date indicates that restoring
marginal cost sensitivity in this way could result in a 5 percent
one-time reduction in health care costs for those affected
(Chernick, Holmer, and Weinberg, 1987). This estimate is
consistent with other studies which indicate one-time savings of
between 2 percent and 13 percent (EBRI, 1989). Moreover, OMB
staff estimates indicate a potential for ongoing savings. The
rate of health care cost growth could be reduced by 20 percent,
though this is more speculative.
While only a percentage of the population will be directly
affected by these reforms, a broader spillover effect seems
likely. Employers are likely to provide more efficient forms of
insurance coverage to all employees -- not just those directly
affected by the change in tax policy. Because coverage does not
correlate highly with income (Taylor and Wilensky, 1985), this
spillover effect is plausible. Thus, strengthening market forces
at both ends of the income spectrum could yield savings for all.
There will be spillover benefits into non-medical areas as
well. By providing subsidies for health insurance to low-income
workers, the tax credit will encourage re-entry into the work
force -- particularly for Medicaid recipients who may fear of
losing insurance coverage if they resume employment. Broader
health insurance should also lead to productivity gains from
improved health status for the uninsured unemployed/working poor.
Insurance Market Reforms. The insurance market reforms will
help correct serious distortions in market forces, making
competition more effective as a means of encouraging greater
efficiency. Competition based on "cream skimming" or favorable
risk selection will be effectively blocked. This will push
32-
competitors to focus on cost-containment and quality. Group
purchasing through Health Insurance Networks ("HINs") will also
give small businesses greater market "clout." And, pre-emption of
State-mandated and anti-managed care laws will give health plans
new flexibility to respond to market pressures for greater
efficiency and cost savings.
Improved Information. Comparative cost and quality
information would be made available to purchasers through a new
series of state and local initiatives. Providing this
information is a critical element for a pro-competition reform
strategy. Comparative information for individual and
institutional purchasers will enable purchasers to shift demand
towards high-value health plans and providers. This, in turn,
will provide powerful incentives for plans and providers to
compete by controlling costs while improving quality. Even a
minority of well-informed consumers can influence other consumers
and the direction of the market (Pauly, 1978). Plans and
providers that demonstrate equivalent or superior outcomes at
lower cost would gain a competitive edge. Service utilization
and costs could be cut appreciably with no deterioration in
outcomes.
Funding also will be increased for outcomes research. This
research will better define the safety and effectiveness of key
medical and surgical procedures and will facilitate more
appropriate use of costly technologies. Funding also will be
increased for efforts to develop practice guidelines for
practitioners. By specifying a "best practice" approach for
specific conditions, guidelines can help prevent unnecessary or
potentially harmful care.
Administrative Savings
Over the past year, considerable attention has focused on
administrative costs in the U.S. health care system. Several
studies suggest that administrative costs are indeed higher in
the U.S. when compared with countries such as Canada. However,
the story is more complex. Simple administrative cost
comparisons can be misleading.
For example, some administrative costs (e.g., spending on
utilization review) can result in net savings by identifying and
preventing costly, unneeded, and potentially dangerous care.
And, the U.S. leads the world in health care quality assurance.
Quality assurance increases administrative costs, but adds
important value for consumers. Furthermore, most of the
comparative studies have failed to note the "hidden" costs of the
Canadian system. Waiting times for patients seeking elective
surgery and other specialized services are dramatically lower in
the U.S. than in other countries. Finally, the U.S. health care
system provides greater diversity and choice.
33
Nonetheless, there are areas where overhead costs in the
U.S. are excessive and savings are possible. One area of concern
is administrative and marketing costs for health insurance sold
to small businesses. Overhead costs can be as high as 40 percent
of total premiums for very small businesses compared with less
than 6 percent for very large businesses. Another area of
concern relates to the high cost of paperwork associated with
billings and claims forms.
Under the Administration's proposal, group purchasing
arrangements, or Health Insurance Networks, for small business
will help reduce administrative and marketing costs. And the
market reforms will reduce overhead costs by prohibiting medical
underwriting and by discouraging "churning" of accounts.
[Insert Table here with estimated cost savings by firm size]
Other administrative savings will be proposed as well. The
Secretary of Health and Human Services is leading a number of
initiatives to streamline administrative procedures. These
include accelerated development of data standards for electronic
claims processing, and encouragement of electronic medical
records and/or "smart cards" for insurance enrollees.
Coordinated Care
The Administration's reform proposal would encourage greater
use of coordinated care arrangements through increased enrollment
in public programs -- Medicare and Medicaid -- and elimination of
state laws that hinder development of these arrangements.
"Coordinated care" refers to a diverse -- and still evolving
-- set of alternative delivery models introduced over the last
two decades. Examples include Health Maintenance Organizations
(HMOs) and Preferred Provider Organizations (PPOs). Coordinated
care plans offers the potential of: lower cost, improved outcomes
through better quality assurance, and expanded consumer choice
among health service delivery options. Coordinated care systems
closely integrate the financing and delivery of health care
Unlike fee-for-service or "a la carte" medicine, clinical
decisions are coordinated across the full continuum of care.
Combining organizational and financing components also allows for
more efficient management of price and volume.
Studies show direct savings from coordinated care (Luft,
1980; Manning et al., 1987; McCaffree et al., 1976; Luft, 1978;
Roemer and Shonick, 1973; Wolinsky, 1980) -- as high as 30
percent (Luft, 1981). Other studies (Dowd, 1986; Robinson, 1991;
Rossiter, 1989; Scheffler et al., 1988; Welch, 1991) show
significant "spillover" savings: as coordinated care systems gain
market share in local markets, fee-for-service costs are reduced
as providers are forced to compete more vigorously. And, it is
important to stress that the cost containment potential of
34
program
lave
BOX
coordinated care is dynamic. Further savings are like
management systems improve and as better techniques fo:
delivering medical care are developed.
Prudent Purchasing in Public Programs
Expenditures for both Medicare and Medicaid programs have
continued to grow at double digit rates. Medicare baseline
growth for FY 1992 is projected at 11.8 percent; expenditures
under Medicaid have increased at nearly 19 percent on average
over the last three years, making it the fastest growing domestic
program. The Administration's proposal would reduce growth in
Medicare costs to xx% a year through prudent purchasing and other
measures to improve efficiency. Medicaid cost growth would be
slowed to xx% a year by encouraging greater reliance on
coordinated care and by providing states with greater
flexibility. These savings will be achieved with no reduction in
Investion
benefits for program recipients.
for for not
The Administration also supports measures to stop abuses in
the current system. For example, payment for physician
self-referrals would be prohibited under the Medicare and
flex
Medicaid programs. Physicians and other providers increasingly
would
refer patients for tests or to diagnostic centers in which they
hold some financial stake -- a clear conflict of interest.
benefits would bedropped. to
Recent evidence indicates these "self-referral" arrangements can
increase costs per episode of care by as much as 400-700 percent
(Florida Cost Containment Board, 1991; Hillman et al., 1990).
Prevention
Prevention is a "win-win" investment. Health care costs can
be cut while improving well-being and increasing worker
productivity. Healthy behaviors can prevent between 40 and 70
percent of all premature deaths, a third of all cases of acute
disability, and two-thirds of all chronic disability.
Accordingly, the Administration's proposal focuses additional
dollars on prevention efforts which have maximum return on
investment. Specific initiatives include increased funding for:
(i) vaccine research and other research targeted at preventing
specific diseases; (ii) screening programs such as blood lead
level testing, pap smears, mammograms, and blood cholesterol
testing; and (iii) health promotion activities, such as campaigns
to reduce smoking, increase seat belt use, or encourage early
prenatal care for low-income women.
Medical Professional Liability Reform
Medical malpractice reform is a key element of health system
reform. Malpractice premiums more than doubled from
approximately $1.9 billion in 1984 to $4.2 billion in 1988. And,
date
Paul
35
mymi
and
etc
- ster
add
the threat of malpractice forces doctors to practice "derensive
medicine" -- ordering unnecessary tests and procedures simply as
documentation to protect against litigation. Defensive medicine
costs are estimated at about $20 billion a year. The current
system also involves lengthy delays and excessive litigation
costs.
To address these problems, the Administration is proposing
comprehensive reform. States would be encouraged to reform
medical malpractice litigation by: (i) capping the amount of
allowable non-economic damages; (ii) eliminating joint and
several liability for non-economic damages; (iii) eliminating the
collateral source rule that allows the double recovery; (iv)
requiring structured payments for malpractice awards, as opposed
to lump sum payments; (v) promoting pretrial alternative dispute
resolution to encourage reasonable settlements; and (vi)
implementing procedures to enhance quality of care. These
reforms would also be applied to Federal courts, and alternative
means of resolving medical malpractice claims would be piloted
within the Federal Employees Benefits Program.
In addition
Overall System Effects
Each of the individual elements will encourage greater
efficiencies and fairer allocation of resources across the U.S.
health care system. Added together, these elements also can
provide an ongoing dynamic within the overall health care
delivery system. Strengthening competitive forces plays an
important role in this system dynamic.
Tax policy reform, health insurance market reform, and
greater availability of comparative value information will
together generate increased cost sensitivity and increased
consumer shopping across all income and occupational groups.
Suppliers can be expected to respond with more affordable benefit
packages and more efficient mix of services. For example, use of
cost-sharing and coordinated care plans could increase. As
coordinated care achieve greater premium cost advantage, more
individuals would switch to these plans from fee-for-service
coverage. And, coordinated care plans would have incentives to
increase savings by making provider networks more selective and
by reducing marginally useful care, including cost-increasing
technologies.
Increased use of coordinated care by Medicare and Medicaid
would reinforce these market shifts. Public and private activity
combined could make coordinated care plans the dominant system.
The market power enjoyed by coordinated care approaches would
further mean that norms of care (and consumer and physician
expectations) would increasingly be established by this sector.
A so-called "norms effect" could have spillover effects into the
remaining fee-for-service sector, increasing both efficiency and
quality in the provision of care.
36
Additional elements of the reform will lessen overall excess
demand for medical services. For example, coordinated care plans
and other medical providers have little control over costly
behaviors such as smoking and not using a seat belt. The
prevention initiatives will help in this area. Similarly,
malpractice reforms will discourage costly practices related to
defensive medicine. Administrative savings will be achieved
through use of standardized claims format and electronic claims
processing. The overall impact on individual and market
behaviors will be greater than the sum of its individual parts.
ve
Savings Estimates
OMB/Bill Curtis estimates and discussion here
mor
mulms
they we would said
Implications for Future Research and Development
While the next steps for health system reform are clear,
further research and development is inevitably needed if our
market based health care system is to evolve and strengthen over
the next several decades. Three areas of research warrant
special priority: (i) factors that affect the demand for health
insurance and demand for traditional vs. coordinated care
coverage, (ii) development and refinement of risk adjustors for
insurance market reforms, and (iii) better approaches to develop
and package information on outcomes and cost of care.
Further research on the demand for health insurance is
crucial for a more complete understanding of the dynamics of a
market-based system and for more accurate predictions regarding
the response to policy interventions in terms of cost and
coverage. It also will be extremely important to understand
relative preferences for different types of coverage --
catastrophic, medical savings account type approaches,
coordinated care plans, and so on. Implementation of the tax
credit proposal offers researchers an opportunity to better
measure demand elasticities of price and income for health
insurance. Research could also be initiated to gain a better
understanding of the factors that affect demand by Medicare
beneficiaries for coordinated care versus traditional
fee-for-service coverage.
Development of improved health risk adjusters also is
critical if competition among health plans is to be focused on
efficiency and quality. At least two approaches exist currently
for adjusting for risk selection: Ambulatory Care Groups and
Diagnostic Cost Groups. A short-term strategy would be to
further refine and validate these systems as well as re-examine
previous research using health status measures and other
measures. A longer-term effort could involve development of
second-generation risk adjusters.
37
Research also is needed to develop better measures of
efficiency and quality. And this information needs to be
packaged in ways that will be most useful for health care
purchasers whether individual consumers or institutional
purchasers. For example, individuals and employers are likely to
find plan-level cost and quality information most useful, while
health plans need comparative data on individual providers for
purposes of selective contracting and negotiating discounts.
Over the next several months, the Administration will refine
research priorities in these and related areas as it moves
forward in support of system reform.
38
Section 5.A
Malpractice Reform:
Changing Incentives for Provider Behavior
Distortions in the current health care delivery system derive in part from
perverse incentives created by the current climate for malpractice and litigation.
Symptomatic of these distortions are the increasing levels of unnecessary and costly
defensive medical practices resulting from the perceptions of providers such as
physicians and hospitals. Fear of antitrust liability also increases costs by producing
often inefficient and duplicative distribution of sophisticated services and equipment.
Finally, the quality of health care can be diminished because of reluctance by
professional review boards and hospitals to deny or restrict a physician's privileges
because of potential antitrust liability.
In May 1991, the President proposed the "Health Care Liability Reform and
Quality of Care Improvement Act," to address the costs of malpractice insurance,
the transaction costs of malpractice litigation, the length of malpractice dispute
resolution proceedings, and to reduce the incidence of malpractice through
increasing the quality of care. The provisions of the health care initiative outlined
here supplement that proposal, addressing the increasingly common practice of
engaging in unnecessary defensive medicine and the effects of antitrust laws on
costs and the quality of care activities.
Principles for Malpractice Reform
The Health Care Liability Reform and Quality of Care Improvement Act is
based on three principles:
medical malpractice reform should seek both improved quality of care for
patients and lower litigation costs;
0
legal reforms should reduce the incentives for physicians to practice
unnecessary defensive medicine or to abandon practice in inner city and rural
areas;
o
incentives for States to act are preferable to Federal preemption of current
State law. Federal preemption should be used only selectively and narrowly.
39
Unnecessary Defensive Medicine
Malpractice costs play a significant role in the rapid growth of health care
spending. These costs include the direct costs of insurance, litigation, and
settlements. Perhaps most importantly, however, the current malpractice system
creates incentives for physicians to engage in defensive medicine -- excessive tests,
failure to delegate certain tasks to other qualified professionals, and in general a
more elaborate style of care than is necessary for the provision of sound medical
care.
Often, unnecessary defensive medicine may be the result of a misperception
on the part of providers. A recent study of physicians in New York (Hans, need
cite) found that physicians tend to overestimate the risk of being sued by a factor of
three. As a result, efforts should be made to communicate the true level of liability
risk to providers. And not all unnecessary defensive medicine is attributable to fear
of liability. In some cases, as in fee-for-service medicine, there may be a strong
economic incentive to engage in such activity. The fear of liability, however, does
result in an increase in the degree and kind of diagnostic testing, the reluctance to
delegate certain basic functions, and the abandonment of care for some high risk
patients or in high risk specialties such as obstetrics (Todd/AMA, 1989 -- Hans, do
you have this reference?).
Beyond the provisions in the Health Care Liability Reform and Quality of Care
Improvement Act, the President's plan endorses approaches to reduce the amount of
unnecessary defensive medicine and to clarify the application of antitrust laws in the
health care area; these include: (i) establishment of standards of care, (ii) offers of
settlement, (iii) encouragement of out-of-court dispute resolution, and (iv) offer to
use alternative dispute resolution (ADR). Each is discussed below.
Establishment of Standards of Care. Researchers, medical associations, and
others have attempted to provide guidance to physicians on the proper standard of
medical care for individual clinical indications. For the most part, however, it is the
tort system, through the judgments of lay juries, that defines the standards of care
physicians must meet. Although not regulatory, the precedential value of the jury's
determination and clinical uncertainty generally can effect profoundly the actions of
those in the medical sector. There is also a perceived lack of predictability in the
U.S. medical malpractice litigation system because of the variety of results that can
be generated by case-by-case determination by different juries. This uncertainty and
the role of non-medical persons in determining what is adequate medical care often
has reinforced overly cautious behavior -- and resentment -- of the litigation system
in the medical community.
The perceived problems of the medical liability system extend beyond the
40
uncertainty of outcomes. Many physicians are as troubled by the process of
litigation as its results. The cloud of a lawsuit, the delay, and subjecting the
physician's behavior to the review of others, particularly lay persons, is as daunting
as the notion of an insurance payout.
To avoid the judgment of lay juries and the delay inherent in the current civil
justice system, some have called for taking medical malpractice cases out of the
courts entirely. Other forms of dispute resolution have a significant role to play in
reforming malpractice litigation, and the President's plan proposes the use of such
procedures as discussed below. Nevertheless, the courts will continue to be the
focal point of alleged malpractice disputes. Accordingly, this initiative includes an
element to bring more predictability to jury determinations of whether certain
behavior by health care providers meets the standard of due care.
Standards of care offer the added benefit of enhancing the value of alternative
dispute mechanisms. Where voluntary non-binding alternative dispute resolution is
invoked, as proposed in this initiative, standards of care will bring heightened
confidence that the determination of the mediator or arbitrator will reflect accurately
the behavior of a jury if the case proceeds to trial. Thus, parties will be better
positioned to judge the consequences of rejecting the proposed determination.
In recent years, there has been increased interest in the development of
standards of care as references for physicians by medical groups, insurers, and
legislators. The debate has centered on who would develop such standards, the
degree of specificity required to make the standard useful, the degree of flexibility
necessary to reflect the individuality of patients and circumstances, and the proper
use of such standards. The Omnibus Budget Reconciliation Act of 1989 (PL 101-
239) established the Agency for Health Care Policy and Research within the Public
Health Service to promulgate guidelines and standards of quality and other
"performance measures." No provision was made for giving any legal effect to such
standards in litigation, however.
Moreover, since 1972, the organizations overseeing quality in Medicare, Peer
Review Organizations, (PROs, previously PSROs) have had the ability to adopt
standards of care; a physician adhering to those standards is given immunity from
liability. No such immunity producing standards have been promulgated, however.
This has been attributed to the use of internally inconsistent language in the statute
and the tendency of PROs to judge actions retroactively rather than to guide future
actions,
The President's plan proposes an expansion of the efforts of the Department
of Health and Human Services to develop standards of care. Properly established
standards can be given a rebuttable presumptive legal effect when introduced by the
41
defense in State or Federal court. But because the Administration does not like to
resort to wholesale preemption, and because some States, such as Maine, may
undertake to develop their own standards of care, Federal standards would preempt
state law only where a State had not adopted its own standard for use by providers.
S. 314, introduced by Senator Cohen, is a thoughtful approach to the adoption
and use of Federal standards of care. This approach contains three significant
answers to the troubling questions that have been raised in the debate over standards
of care in the past.
First, the bill places the responsibility for the promulgation of the standards
of care with the Department of Health and Human Services. The bill avoids
bureaucratic dominance of the process by providing ample opportunity for input and
comment by private physicians and other interested parties. This process will assure
that standards do not inadvertently endorse too high a standard or one that does not
take into account geographic variation. It also requires ongoing review of the
standards developed. Moreover, because the standards can be introduced at trial
only to create a rebuttable presumption of the standard of care, HHS will not be
creating a new regulatory burden.
Second, the bill recognizes that few, if any, standards will be uniformly
appropriate to all circumstances, either because of the nature of the practice,
geographical variations, and, implicitly, because no two patients are the same.
Finally, the bill allows the introduction in evidence of the standard of care by
the provider only. Once introduced, the standard is presumed to be an appropriate
standard of medical care. Because the use of the standard is controlled by the
defendant, it cannot be used to force a physician to comply with a standard with
which he or she does not agree.
Many commentators have opposed standards because they believe the use of
standards cannot be limited only to the deferse. However, no legislative action will
ever make medicine an exact science. To identify certain behavior as falling within
the set of behaviors that meet the legal standard of due care does not compel the
conclusion that all other behavior falls outside the set of behaviors that meet that
legal standard. There may be alternative methods of treatment that will also meet
the legal standard of due care that are not reflected in the standard promulgated.
There are also concerns that government sanctioned standards may result in
standards of care above the usual clinical practice in some areas -- and therefore
increase costs. Standards are intended to define one course of conduct that meets
the definition of adequate medical care; they are not intended to define the only
appropriate course of conduct. Moreover, standards are not intended to result in a
42
"gold standard" of treatment. The purpose is to reduce the level of unnecessary
defensive medicine while increasing the quality of care. Moreover, if a State
determines that the standard has been set too high and will have an adverse effect
on the delivery of care in the state, it may adopt its own standard.
Promulgating standards of care and providing some limited legal force to those
standards should bring increased predictability to the medical malpractice system.
Physicians knowledgeable about the standards will also have guidance in
determining the adequacy of care provided. This predictability and guidance will,
over time, reduce the amount of unnecessary defensive medicine practice. To the
degree fear of liability is a motivating factor for defensive medicine, standards of
care should reduce the cost of health care.
Dispute Resolution
In addition to standards of care, the President's plan seeks to reduce the delay
and adversarial nature of medical malpractice litigation. In this regard, three
provisions to preempt state law would be proposed: (i) offers of settlement, (ii)
offers to engage in alternative dispute resolution, and (iii) state contract law.
Offers of Settlement. The President's plan would permit either party to a
malpractice action to make a formal offer of settlement. This provision has been
discussed for application in other areas of civil justice in need of reform, such as
product liability. In effect, the provision makes Rule 68 of the Rules of Civil
Procedure available to plaintiffs as well as defendants. S. 1936, introduced by
Senator Chafee, contains such a provision.
The provision requires that, notwithstanding State rules of civil procedure, any
plaintiff or defendant may make an offer of settlement within a designated period
prior to trial. If an offeree rejects the offer of settlement and does not do at least as
well as the offer at trial, that party must pay the other's attorney's fees.
Offers to Engage in Alternative Dispute Resolution. Senator Chafee's bill
also permits any party to a malpractice action to offer to use a state-approved ADR
procedure. If the court finds that the other party's refusal to use ADR was not in
good faith, the party refusing ADR must pay attorney's fees. A rebuttable
presumption is created that a refusal to participate in ADR is not in good faith.
Although the Administration supports permitting either party to litigation to
make an offer to use ADR, the question of attorney's fees should be simplified.
The President's plan would propose that if the party refusing to engage in alternative
dispute resolution loses at trial, that party should pay the others attorney's fees.
43-
State Contract Law. Finally, the Administration seeks to encourage
agreements between patients and providers, made prior to the delivery of health care
services, to use out-of-court dispute resolution mechanisms if a dispute arises. It is
unclear, however, whether such contracts are valid in all States. Contracts between
patients and providers would be permitted to require non-binding arbitration before a
lawsuit can be filed notwithstanding conflicting state law.
Antitrust Law
In addition to the issues of medical liability and dispute resolution, antitrust
issues bring law and medicine together. For instance, professional peer review has
always reflected a tension between the necessity to "weed out" those who do not
meet the standards of the profession, and the possibility that such review could be
used unfairly and illegally to limit competition in the profession. With the
emergence of new methods of health care delivery, like HMOs and PPOs, and
increasingly sophisticated and costly technology, confusion about the proper
application of the antitrust laws in the health care field has increased.
As part of a comprehensive health initiative, the President's Plan proposes a
series of steps to assure that the new emphasis on the quality of care is not
undermined by concerns of allegations of collusion, that concerns of antitrust
liability do not discourage the evolution of a more organized and efficient health
care delivery system, and that the cost of health care is not increased unnecessarily
because of duplication of costly technology and services.
The President's initiative includes legislation to address (i) the issue of the
unnecessary duplication of technology, and the provision of guidance by the Federal
government on the issue of the application of the Federal antitrust laws to (ii) peer
review and (iii) coordinated care issues.
Medical Technology. Often expensive equipment is duplicated by competing
health care organizations because of concern over the application of the antitrust
laws to the sharing of equipment and services. As a result, the supply of this
expensive technology may unnecessarily exceed demand.
To reduce the costs of high technology equipment and services, the
Administration will again urge Congress to pass the joint production venture
legislation, S. , transmitted by the President on
-
Alternatively, the
Administration urges passage of legislation like that in S. 314, specifically providing
a waiver for hospitals jointly purchasing, contracting for, or sharing high technology
equipment and services.
44
Peer Review Activities. State disciplinary boards and hospital medical staffs
often review physicians' qualifications to determine whether a license or hospital
privileges for the physician should be limited, denied, or revoked. Presumably, the
goal is to ensure an appropriate quality of care. Often, however, the physician
whose privileges are curtailed will sue the reviewing physicians and witnesses on
the grounds that the review is really a veiled attempt to limit competition. As
hospitals try to become more competitive, they will want the most efficient
physicians on their staffs.
Some observers suggest that the creation of certain "safe harbors" for actions
limiting physician privileges can avoid litigation costs and the chilling effect of
potential litigation without unduly limiting competition. Changes in substantive law
are not necessary. Rather, the Department of Justice will provide enhanced
guidance for State peer review boards and hospitals with respect to actions to deny,
revoke, or suspend the license of privileges of any physician.
PPOs, HMOs and Other Pooling Arrangements of Providers. The emergence
of coordinated care is creating new legal issues in health care. For instance, if
physicians in an area ban together to form a PPO, thus fostering price reductions
and promoting higher quality care, it may be alleged that they are nonetheless
reducing the number of competitors for physician services. In rural areas,
physicians banding together3 to form a PPO could appear to reduce competition even
though they were fostering efficiency.
At the same time, diligent enforcement of the antitrust laws is necessary to
prevent price fixing and illegal tie-ins in the provision of health care. Reducing the
fear of liability for certain beneficial activities while maintaining the deterrent effect
of the antitrust laws for traditional anticompetitive endeavors is the challenge for
antitrust enforcement agencies, particularly the Department of Justice and the
Federal Trade Commission.
The President's Plan would clarify the antitrust standards that apply to provider
pooling arrangements such as PPOs and HMOs. Additionally, the Department of
Justice will increase its enforcement efforts against those in the health care industry
who would boycott such provider organizations. Together with the efforts of the
Federal Trade Commission, the actions of the Department of Justice should provide
the guidance that these evolving entities need to prosper.
45
Models of Care
ts
purver
GHAN
An array of coordinated care plans currently exist. One well-known example is
the health maintenance organization (HMO), in which a defined, comprehensive set of
health services is provided to an enrolled group of individuals. The organization
assumes financial risk for part or all of the group's health care. In the "group model"
HMO, a physician group contracts with the entity at financial risk. Under the "staff
model" HMO, physicians are employees of the HMO.
In recent years, the major growth in coordinated care arrangements has been in
organizations in which consumers retain greater choice about the care they receive
within the coordinated structure. A popular model has been the independent
practitioner association (IPA) HMO in which the HMO contracts with two or more
independent group practices or with an association of independent physicians.
Consumers are able to select their provider from the panel of participating
practitioners.
A second popular example is the preferred provider organization (PPO), in
which a network or panel of providers contracts with the entity. Many consumers have
favored PPOs because they allow greater freedom of choice in selecting providers.
Typically, providers are reimbursed for services based on a negotiated fee schedule.
Providers generally accept lower fees in exchange for directed access to increased
numbers of patients. Utilization review programs ensure that physicians do not offset
lower fees with inappropriately increased volume. Consumers may choose a provider
outside the PPO network, but face additional out-of-pocket payments.
Other plans exist, including the point-of-service (POS) plan, essentially an
HMO-PPO hybrid. POS plans utilize a network of participating practitioners.
Beneficiaries select a primary care physician, who makes all referrals for specialty
care. If individuals seek care from a participating provider, they incur little or no
additional costs. Individuals opting to seek care outside the plan face higher
deductibles and copayments.
the hunted Kaydon
Perhaps not surprisingly, other countries such as Canada and England are now
emulating the characteristics of coordinated care arrangements:
UK
national health
England has recently implemented the most thorough reform of its system since
rushiution
its founding, by installing elements of market responsiveness by providers,
especially by HMO-like private physician groups;
Canadians are experimenting with "Health Service Organizations" which are
similar to HMOs in concept but which do not always have the prepaid, locked-
in enrollment features that can increase efficiency.
47
Evidence: Cost and Quality
Evidence indicates that coordinated care plans offer health care to enrollees that
is as good as, and in many cases, superior to care that of fee-for-service medicine.
Studies have generally shown comparable quality based on assessments of medical
records between fee-for-service medicine and HMOs (Cunningham and Williamson,
1980; Luft, 1981). In addition, studies have shown that beneficiary satisfaction is very
benefi
high in Medicare HMOs and equal to that found in Medicare as a whole (Rossiter,
1989). Moreover, Medicare HMOs offered more supplemental benefits, including
anroum
preventative servicès, for a lower premium than that of traditional Medigap policies.
In general, HMOs have been able to reduce hospitalization and increase the use of
[they emon
primary care. A lower number of hospital patient days for coordinated care plans
now M
versus traditional fee-for-service results in substantial savings while ensuring quality
care.
Folls
as wall
A number of studies indicate cost savings associated with the use of coordinated
care (Luft, 1980; Luft, 1981; Manning et al., 1987; McCaffree et al., 1976; Luft, 1978;
Roemer and Shonick, 1973; Wolinsky, 1980) -- as high as 30 percent (Luft, 1981).
Other studies (Dowd, 1986; Robinson, 1991; Rossiter, 1989; Scheffler et al., 1988;
Compand
Welch, 1991) have shown "spillover" cost-saving into the fee-for-service sector as
coordinated care plans increase their market share in an area and stimulate competition
to
among a variety of plans, thereby driving down costs.
fa-for-
service
Evidence regarding cost savings from coordinated care is ongoing, in part
because of the newness of plans and their changing organizational nature. (Gail, are
you going to provide information on Allied Signal study???) Further savings are
likely as management systems improve and as better techniques for delivering medical
care are developed.
While there has been debate about whether some of the savings associated with
HMOs can be attributed to favorable selection (i.e., healthier people enrolling in
HMOs), the Rand Health Insurance Experiment (Manning et al., 1987) demonstrated
that HMOs provide significant potential savings over fee-for-service medicine.
Assessment of health outcomes between the HMO group and the traditional fee-for-
service group showed no difference. In this multi-year demonstration in which
individuals were randomly-selected into an HMO, reported savings over 5 years were
as high as 25 percent, compared to patients randomly selected into fee-for-service
arrangements.
Trends in Enrollment
The shift toward coordinated care over the past decade has been clear. As
48
system
Figure XX illustrates, in 1984 over 85 percent of all individuals with insurance received
their care through fee-for-service providers. The most significant growth has occurred
in those coordinated care plans that offer consumers substantial flexibility to choose
their own physicians. In 1990, managed fee-for-service, PPOs, IPAs, and POS plans
accounted for over 60 percent of the private insurance market.
Enrollment in public programs has been less robust. Medicare, under the
TEFRA risk contract HMO option, has promoted alternative delivery systems since the
mid-1980s. However, HMO enrollment has stalled since 1986, with risk enrollees only
increasing from 1.0 to 1.3 million beneficiaries. Only 3 percent of Medicare
beneficiaries currently are enrolled in alternative plans, in striking contrast with the
under 65 population.
Perhaps the most serious problem is that HMOs compete with a large,
government program that has near monopsony power. Medicare purchases fee-for-
service (FFS) care for most of its beneficiaries and obtains deep price discounts due to
its large market share. These price discounts may overwhelm potential savings that
HMOs can obtain from discounts and better control over utilization.
Medicare pays 9
A second problem has been that HMOs are paid only 95 percent of comparable
FFS costs (because of presumed efficiencies). Nevertheless, HMOs face marketing and
enrollment costs unlike government. They further face greater financial risk on
average due to full prospectivity, relatively small numbers of enrollees, and an AAPCC
payment methodology which currently fails to predict resource use and can fluctuate
substantially year-to-year.
speliout
A third, problem is that HMOs have a limited ability to offer seniors a more
attractive benefit package than what is offered by FFS Medicare. This is especially
true for seniors (about 40 percent) who have employer-based supplemental benefits.
These supplemental benefits can overlap with HMO-based benefits under Medicare
coverage. Moreover, HMOs cannot offer cash rebates to seniors because they are
prohibited from doing so by anti-kickback provisions. Nor can they lower Part B
premiums.
paid for Part B, the part of Medicare that pays for physician services outprtint
State agencies since 1967. However, only in the early 1980s did congressional restrictions seourgly and
For Medicaid, HMOs have had legislative authority to enter into contracts with
regulations inhibiting HMO contracting with Medicaid begin to better balance with
needs to maintain adequate oversight of quality, allowing greater enrollment.
laboratory
sennie
In addition, legislation authorized use of new forms of alternative delivery
arrangements, such as primary-care case management (with an appointed physician or
other primary care provider serving as a gatekeeper to specialist and inpatient services)
and health insuring organizations (a fiscal intermediary that functions much like the
49
insurance portion of an HMO by providing strong utilization controls). This meant
States had a variety of alternatives for testing the cost-effectiveness of Medicaid
examples
Medicard
recipients into coordinated care plans.
By 1991, nearly two and one-half million Medicaid recipients across 28 States
received care under coordinated care arrangements (Hadley and Langwell, 1991;
Wilensky and Rossiter, 1991). Nevertheless, these gains in enrollment still account for
less than 10 percent of Medicaid recipients nationally.
Increasing Incentives
The President's reform proposal emphasizes greater use of coordinated care
arrangements through increased enrollment in the private sector and through public
programs.
In the private sector, millions of Americans eligible for the tax credit would
have the choice of enrolling in coordinated care plans offered within their State.
Because of efficiencies of care provided by HMOs and other alternative delivery
arrangements, premiums offered by these plans would be expected to be very
competitive relative to traditional fee-for-service plans. From a quality and continuity
of care perspective, plans could provide more primary/preventive and comprehensive
benefits relative to fee-for-service plans.
Medicare and Medicaid. Through the public programs, incentives for
coordinated care will be pursued more aggressively. Medicaid intiatives will be
encouraged through increased State flexibility and Federal matching rates that are
based on a per capita basis discussed in greater length in section XX of this chapter.
1st instance spell out
Medicare is discussed in more detail here. HCFA will initiate a two-pronged
approach because the only coordinated care alternative currently is the HMO option.
Medicare will:
create new options, as alternatives to the most structured form of coordinated
care (HMOs), that would provide beneficiaries with greater provider choice
while introducing them to the benefits of coordinated care; and
take steps to strengthen the existing HMO option.
New options, such as Point of Service (POS) and Employer POS would be
created. Under current law, a beneficiary who wants to receive benefits through an
HMO must enroll with that plan. Beneficiaries enrolling in HMOs with risk contracts
are required to receive all of the Medicare covered services through the HMO.
50
In recent years, employers have been moving toward health plans where
individuals make a choice at the point of service of whether or not to receive care
through the plan's network of providers or outside of that network. These plans have
both been popular with employees and have achieved the desired results of moving a
significant percentage of services into the preferred provider network.
Under POS, HCFA would enter into multi-year contracts with entities (POS
These
contractors) to create comprehensive preferred provider networks (primary care
physicians, specialists, hospitals, labs, etc) for beneficiaries not enrolled in risk plans
bring ders hetworks ether
POS contractors would negotiate discounts for bundled Part A and Part
high cost/high volume surgical procedures. They would also negotiate
from providers and suppliers. POS physicians would have incentives to make referrals
only within the POS network.
some some another
For employer POS, HCFA would contract with employer or union-sponsored
of
their
plans to provide medical review/utilization review (MR/UR) for Medicare covered
witery
new
services for retirees. This would enable employers and Taft-Hartley trusts to
to offer
coordinate benefits to retirees through the same administrative structure used to
price discounts
coordinate care for active employees and/or under-65 retirees.
For the longer run, the more significant initiative will be to strengthen the
cost
existing coordinated care program. The President's plan will initiate several actions to
that will increase investment in the current program.
effectives
One approach will increase payments to HMOs with risk contracts. This could
either be done by (i) increasing payments from 95 to 100 percent of the AAPCC or by
(ii) increasing payments to 100 percent through outlier payments and beneficiary
rebates.
If through the AAPCC, the additional 5 percent could encourage the entry into
the Medicare market of HMOs who currently are not participating. Existing plans
could use the additional 5 percent to improve their competitive edge against Medigap
plans by offering additional benefits or providing rebates to beneficiaries.
If through an outlier pool, Medicare would make additional payments to HMOs
for a portion of the costs of high cost cases above a predetermined threshold. For
example, if Medicare paid for 60 percent of the costs for cases that exceeded $61,000
in 1993, payments to HMOs would increase on average by 2.5 percent.
In addition to outlier payments, Medicare could provide rebates to beneficiaries
enrolled in HMOs as a concrete sign of the support of the risk contract program. The
rebate could equal 30 percent of the Part B premium.
51
A second general approach to strengthen the current program will be through
reform of the current AAPCC payment methodology. Although the AAPCC
methodology is accurate in predicting the costs for an HMO's total enrollment, its
predictive power in regard to individual enrollees is extremely low.
Even though enrollment in risk plans as a percent of total Medicare enrollment
is low, in some counties enrollment is greater than 25 percent. Over the past few
years the increases in the AAPCCs for these counties has lagged-behind the national
average increase (USPCC). For example, while the national average increase in rates
for the past three years was 22.6 percent, in one county with 34 percent enrollment the
increase was 15.5 percent. In another county with 27 percent enrollment the AAPCC
actually decreased over the past three years. Several options are available, such as
Break the Link with Fee-for-Service in High Penetration Areas -- Recompute
rates for high penetration areas based on the growth in the USPCC rather than
changes in the geographic factor. Use the change in the USPCC to update rates
in subsequent years. This change would provide a somewhat higher rate for the
approximately dozen high penetration counties.
Experiment with Competitive Bidding To Establish Payment Rates -- The
premium contribution for beneficiaries in a defined market area could be set
equal to the lowest price for the Medicare benefit package submitted by a
qualified plan. The contribution could be adjusted by risk-specific categories.
Under one variation, a negotiated price, in the first year of a multi-year contract,
could be above AAPCC level as long as the rate moves toward the AAPCC rate
over the course of the contract through reduced updates.
A third general approach will be to increase flexibility of HMO option. HMOs
with risk contracts currently cannot deal exclusively with employer groups but must be
open to all enrollees in their services area. HMOs cannot currently enter into multi-
year contracts with Medicare with fixed rates for the term of the contract. Instead,
they are limited to contracting on a year-to-year basis. Under this approach:
Establish a new risk contracting option that allows for provision of coordinated
care services to Medicare group retirees only. If a group is 1,000 or more,
payment to the plan could be either the current HMO payment rate, or an
experience rate based on the projected health care utilization of the specific
Medicare group retirees enrolled. The proposal would eliminate problems under
current law which deter employers from offering an HMO option to their
Medicare-eligible retirees.
Establish a multi-year based contracting option, for up to three years. Each year
52
AAPCC projections would be developed for the subsequent two years. Plans
exercising the multi-year option could lock-in these rates rather than the
AAPCCs applicable for one-year contracts. A long-term contract with stable
rates would constitute a commitment on the part of Medicare and the HMO to
the risk contract program.
Permit HMOs/CMPs to conduct continuous open enrollment exclusively for new
beneficiaries. As a result of this proposal, more newly entitled beneficiaries
would have a coordinated care option available to them upon enrollment.
Develop Market Specific Comparative Material on HMOs and Medigap. Each
year HCFA would produce a comparative guide, by MSA, of coordinated care
options available to beneficiaries. Such a guide would show additional benefits
provided and premiums charged, by plan. To make beneficiaries aware of the
price value of the coordinated care options, premiums for Medigap plans with
comparable benefits would also be displayed.
A fourth general approach to strengthen the existing HMO program would be to
refine the current AAPCC payment methodology. Plans argue that the payment rates
are slightly depressed because of the treatment of Medicare beneficiaries for whom
Medicare is the secondary payor -- working aged. Another payment issue is the lack
of a health status adjustor. Experience with what was believed to be the most
promising adjustor (DCGs) indicated that it further exacerbated the current problems
with favorable selection rather than improving the accuracy of payment. Research and
analysis is already underway to address both of these issues within the next 2-3 years.
A fifth general approach is to reform cost contract options. In addition to the
risk contract option, coordinated care plans currently have two cost-based options
under Medicare. There is a cost contract option for which plans have to meet many of
the same requirements as for a risk contract. Under a second cost option, plans can
enter into agreements to become Health Care Prepayment Plans (HCPPs). Neither of
these cost options provide incentives for the efficient delivery of care, however, and
would be phased out over the next 5 to 10 years. Currently, these plans do contribute
to the program as additional choice to alternative delivery organizations for Medicare
beneficiaries.
A sixth and final approach to strengthen the existing HMO program is to
strengthen oversight of the HMO program. The President's Plan will expand sanction
authority against plans that (i) engage in prohibited marketing practices, (ii) distribute
marketing material without obtaining the required prior approval, or (iii) do not
cooperate with quality review.
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Anti-Coordinated Care Laws
Currently, many State-based laws and regulations discourage greater use of
coordinated care arrangements. Examples of these barriers include restrictions on
reimbursement rates, restrictions on selective contracting for providers and services,
restrictions against certain financial incentives arrangements, and utilization review
activity. The President's plan would eliminate anti-coordinated care laws and
regulations.
Second, Federal waivers are currently applied to demonstrating and evaluating
new coordinated care approaches, in effect designating them as exceptions to
mainstream health care policies and practices. Under the President's Plan, these
waivers of exception would be "flipped." States would have to apply for exceptions to
coordinated care policies instead.
54
Chapter 5.C
Effects of Consumer Information
(Suggested Alternative Title:
Providing Comparative Value Information for Health Purchasing)
Background
Providing useful information for purchasing health care is a critical element for
a pro-competition health reform strategy. Informed consumer choices should guide
the delivery of medical care. In a market of coordinated care organizations,
consumer choice could be exercised through selection of a health plan in which to
enroll. With traditional fee-for-service coverage, consumer choice would be exercised
through decisions about providers and procedures.
People now routinely make many decisions about insurance coverage and
medical care. Strengthening competition through the tax credit and through health
market reforms will encourage more direct comparisons with costs and outcomes --
that is, assessing the value of their health care dollar.
Currently, meaningful information about comparative costs and outcomes is
not routinely available to consumers. Consequently, consumers are unable to assess
the value of their health care dollars by making comparisons of costs and outcomes
across health care providers and health plans. This lack of consumer information has
potentially harmful effects on consumers and the Nation. Anecdotal information is
unreliable. Even surgical mortality rates can be misleading without adjustments to
reflect differences in the severity of illness.
As a result, consumers and purchasers of care do not know what they are
buying. In the absence of information, consumers are apt to rely on higher price or
more intensive service delivery as proxies for quality. Thus, limited consumer
information can insulate providers from competition and can lead to excessive prices
and inefficient delivery of care.
Wider availability of cost and outcomes information will strengthen incentives
for efficiency, especially coupled with changes in government subsidies for insurance.
Health plans that demonstrate equivalent (or superior outcomes) at lower premium
cost would gain a competitive edge. Similarly, people to know, for example, if
Hospital A provides better care than Hospital B and would choose accordingly, if
they could. Because consumers tend to mistake higher cost or more intensive service
delivery as proxies for better quality, service utilization -- and costs - could be cut
appreciably with no deterioration if consumer choices were guided by valid cost and
quality information.
Through concerted public/private sector action, it should be possible to
55
implement information systems that would enable health care purchasers to make
meaningful comparisons of cost and quality between health plans and health
providers. The long-run potential to control costs while improving quality is
substantial. Even a minority of well-informed consumers can influence other
consumers and the direction of the market (Pauly, 1978). With better information,
health plans that limit cost-increasing technologies could pass the savings on to
purchasers. Cost-increasing technologies would be adopted only if consumers believe
that the resulting improvement in health outweighs the added cost.
Comparative value information can change consumer decision making. For
example, Washington Consumers' Checkbook, a magazine published by a nonprofit
organization, illustrates that consumer's use of information changes market behavior.
Since 1979, Washington Consumers' Checkbook has prepared an annual guide to Federal
plans in the Washington, D.C. area. The guide compares plan benefits, special
features such as dental coverage or customer service, eligibility, premiums, and
out-of-pocket costs, and draws conclusions. The results of the comparisons have
influenced market share each open season. For example, during the 1980 enrollment
period, a plan that was ranked highly in terms of benefits relative to costs increased
its Washington D.C. enrollment by 120 percent, compared with less than 20 percent
nationally.
More sophisticated prototype systems for comparing costs and quality are
available as well. To encourage greater employee support for selective contracting
and to provide hospitals with stronger incentives to improve quality while controlling
costs, a group of major employers in Cleveland, Ohio is sponsoring the Cleveland
Health Quality Choice (CHQC) project. CHQC is developing a state-of-the-art system
for measuring and comparing the quality of care in Cleveland-area hospitals. The
system will include a survey to measure perceptions of quality from the patient's
standpoint and a system for measuring quality from a clinical standpoint. Patient
outcomes (e.g., death and complications) in hospital intensive care units and for
selected medical and surgical admissions will be monitored with detailed clinical
adjustments to account for differences in severity of illness.
CHQC hopes to be producing quality reports on a routine basis starting in
-1992. CHQC expects that participating employers would use this information to
guide their health purchasing decisions. Employers would share this information
with their employees to encourage use of the selected providers. While it will be
several years before the full impact of the program can be assessed and the Cleveland
group must overcome many hurdles, use of outcomes data to compare quality
appears to be just a matter of time.
Other systems for measuring outcomes have been developed as well. A
consortium of HMOs is working with leading researchers from RAND corporation to
develop indicators of quality that could guide consumers in selecting between
competing HMOs. The MedisGroups system is routinely used by over 500 hospitals
nationwide to monitor quality. And, the Health Care Financing Administration will
56
begin to implement the Uniform Clinical Data Set (UCDS) system to monitor the
quality of hospital care provided to Medicare patients in the Nation's hospitals.
Proposal
Under the Administration's proposal, each State would implement programs to
help make comparative value information more readily available for health care
purchasers. This initiative would be included as part of the health insurance market
reform proposal.
States could develop information systems directly or could delegate this
responsibility to private sector groups. States could give preference to local health
care purchasing coalitions, such as the Cleveland Quality Health Choice coalition.
Within one year of enactment, states would develop and make broadly
available "blue book"-type information with information regarding average prices and
costs for common health care services. Information could include mean and median
price and a measure of the variability across and within market areas. This
information could be especially useful for large purchasers of care for preferred
provider arrangements and negotiated discounts. Sufficiently discrete definitions
(e.g., CPT-4 codes) of a broad range of representative services could be developed to
permit meaningful comparisons.
Within five years, states would develop systems to provide comparative
quality and outcomes data for health care purchasers and for consumers choosing
health plans and hospitals.
The Federal government would implement these information systems directly
in the case of inaction by the state and would charge a user fee to defray the cost.
The Secretary of the Department of Health and Human Services would
develop prototype systems, such as Medicare's Uniform Clinical Data Set (UCDS), to
facilitate data gathering and comparisons of outcomes. There would be an emphasis
on experimentation to test different methods for gathering and analyzing outcomes
and quality information. HHS would fund evaluations to determine the most cost
effective methods (e.g., those methods that yield the greatest useful information at
lowest cost).
When appropriate, national standards could be established to facilitate uniform
data gathering that would facilitate analysis and comparisons across the Nation.
57
Section 5.D
Personal Responsibility and Prevention
Personal Responsibility
Effective reform of the U.S. health care system can neither be sufficient nor
complete until there are basic changes in how Americans view responsibility for their
own lives. Individuals must choose, for example, to improve eating habits and
increase exercise; to reduce consumption of alcohol and tobacco; to end substance
abuse; avoid the high risk behavior that spreads HIV; seek the necessary medical
examinations and vaccinations; seek early prenatal care; wear seat belts and take other
necessary precautions; and learn to resolve conflicts without resort to violence.
Personal decisions about how to live may have the most important effect on the
Nation's health and the cost of caring.
About half of the 2.2 million deaths which occur in the U.S. every year are
potentially preventable, as are many of the illnesses that afflict millions of Americans.
Many of these factors involve freely-made individual choices. Better control of fewer
than 10 factors -- such as diet, prenatal care, exercise, the use of tobacco, alcohol and
illegal drugs, and the use of seat belts -- could prevent between 40 and 70 percent of
all premature deaths, a third of all cases of acute disability, and two-thirds of all cases
of chronic disability. Since the preservation of individual choice is a cornerstone of
American democracy, disease and injury prevention must become individual as well as
national priorities. In this, the Nation will have created a "culture of character," which
actively promotes responsible behavior and the adoption of lifestyles that are conducive
to good health.
Benefits of Taking Responsibility for Health. Personal behavior can have a
dramatic effect on quality and length of life.
JAMA Chart
Public and private efforts to promote healthy behavior have already achieved
fairly dramatic results:
Smoking. The Nation has witnessed the effects of changes in behavior across
society as the incidence of one of the leading contributors to preventable deaths,
smoking, has declined from 40 percent in adults in 1965 to 28 percent in 1990. This
dramatic behavior change was brought about through a combination of actions by
individuals, private industry, health providers, and all levels of government.
58
Traffic Accidents. Increased use of safety belts, declines in drunk driving, and
better vehicle crashworthiness have cut the traffic fatality rate by 50 percent since
1973. If the traffic fatality rate had remained at the 1973 level, an additional 40,000
lives would have been lost in 1991 alone.
One of the most important factors in reducing the traffic fatality rate has been
the growing use of seat belts and child safety seats. As shown in the accompanying
chart, simply accepting the personal responsibility for using these safety devices has
saved many lives. As people increase their use of seat belts, child safety seats, and air
bags, the Nation will see more lives saved every year. Air bags will be installed in an
estimated 90 percent of all new cars sold in the United States by 1995.
Heart Disease and Stroke. During the 1980s, death rates declined for two of the
leading causes of death among Americans: heart disease and stroke. Much of this
progress is attributable to changes in behavior. The more than 40 percent decline in
heart disease mortality since 1970 reflects dramatic increases in high blood pressure
detection and control, the decline in cigarette smoking, and increasing awareness of the
role of blood cholesterol and dietary fat. Stroke death rates, which have dropped by
more than 50 percent in the same period, also reflect gains in hypertension control and
reductions in smoking.
Investing in Prevention
Prevention is an important addition to increased emphasis on personal
responsibility. Preventive practices are, by and large, simple, inexpensive and
effective. Prevention makes sense for a number of reasons. Many preventive
interventions are proven to be cost effective. And prevention is a good investment for
the market place, resulting in fewer productive days lost and in reduced morbidity and
cost to the health care system.
Costs of Preventable Health Problems. There is ample research estimating the
costs of illness and disability, in terms of diminished life, productivity foregone, and
money spent treating illness and disability. These costs are particularly sobering when
the illness or condition could have been prevented.
Health Problem
Years of
Costs
life lost
(millions of dollars)
cardiovascular disease
15,000,000
135,000 (1985 $)
2
59
alcohol abuse
3,140,178
7,672 (1980 $)
smoking
534,870
4,509
(1980 $)
high blood pressure
319,499
6,289
(1980 $)
cholesterol
159,333
7,655
(1980 $)
glucose intolerance (diabetes
133,627
5,239 (1980 $)
mellitus)
cancer
18,000,000
72,000 (1985 $)
injury
2,300,000
180,000 (1988 $)
Prevention is Cost Effective. In 1987, primary prevention and health promotion
accounted for less than 5 percent of overall health care spending, yet there is mounting
evidence that prevention is cost-effective.
Preventive activity
Savings per
Total savings
dollar spent
per year (in millions)
immunization
measles,mumps,rubella
14.40
-
-
polio
10.00
400 (1990 $)
Hib
-
prenatal care
3.40
breast cancer screening
-
3,538 (2020 $)
(30% women age 65-74)
hypertension screening
-
80,000 (1986 $)
Note: "-" means not available
Investing in Our Economic Future. Disease prevention presents the opportunity
to dramatically cut health care costs, prevent the premature onset of disease and
disability, and help all Americans achieve healthier, more productive lives. Although
the emphasis on prevention has led to overall health improvements, the U.S. is still
burdened by preventable illness, injury, and disability. Injury now costs the U.S. well
over $100 billion annually; cancer, over $70 billion; and cardiovascular disease, $135
billion.
3
60
Prevention presents the opportunity to dramatically cut health care costs, prevent
the premature onset of disease and disability, and help all Americans achieve healthier,
more productive lives.
Disease or condition
Preventable Risk Factors
Lives Lost
(1988)
heart disease
tobacco use, obesity, elevated blood
765,156
pressure, elevated cholesterol,
sedentary lifestyle
cancer
tobacco use, improper diet, alcohol
485,048
abuse, environmental exposures
cerebrovascular disease
tobacco use, elevated blood pressure,
150,517
elevated cholesterol, sedentary
lifestyle
unintentional injuries
safety belt nonuse, alcohol abuse,
97,100
home hazards
chronic lung disease
tobacco use, environmental exposures
82,853
Directions for Prevention. In recognition of the clear advantages of aggressive
prevention activities, the government is supporting and enhancing prevention programs
with known benefit, and, through demonstrations, testing interventions for their
efficacy and efficiency. The Federal government spent over $8 billion for prevention
in FY 1992. This will rise to nearly $9 billion in FY 1993. These programs fall into
the following basic categories:
0
Childhood Immunizations. Childhood immunizations are among the most
cost-effective prevention activities. A $1 investment in Measles-Mumps-Rubella
(MMR) vaccine may return $14 in averted medical care costs. Other routinely
administered vaccines such as Diphtheria-Tetanus-Pertussis (DTP) and Oral
Polio are reported to have similarly high rates of return. Through coordinated
efforts at all levels of government and the private sector, the Nation has
achieved a 98 percent immunization rate for children entering school.
The President's initiative will increase Federal support for Centers for Disease
Control (CDC) childhood immunization activities by $52 million. CDC will use
this increased investment to target more of its efforts toward raising
4
61
immunization levels in inner cities and other areas where the expected health
returns on these activities are certain to be high.
Healthy Start/Infant Mortality Prevention. The Nation's infant mortality rate
continues to decline, having reached its lowest level ever (9.1 deaths per 1,000
live births) in 1990. But while the overall infant mortality rate continues to
decline, mortality for African-American infants remains twice that for white
infants -- demonstrating the need for more intensely targeted assistance.
However, additional investment in prenatal care and nutritional assistance
targeted to low-income women continues to yield high returns. Overall, nearly
25 percent of all women and nearly 40 percent of African-American and
Hispanic women do not begin prenatal care during their first trimester of
pregnancy, the most crucial time for prenatal care. One study has indicated that
investment in prenatal care can yield significant returns: each dollar invested in
prenatal care for high-risk women might save $3 in treatment costs.
The President's initiative proposes over $9.3 billion for all Federal activities to
reduce infant mortality, including $143 million for Healthy Start, an important
program that targets Federal resources to 15 areas with exceptionally high rates
of infant mortality.
Women, Infants, and Children Nutrition Assistance (WIC). The proposal
continues the President's strong commitment to WIC with the largest one-year
increase ever proposed for the program, $240 million (9 percent), for a total of
$2.84 billion -- sufficient funds for full participation by eligible pregnant women
and infants. A recent evaluation of the Special Supplemental Food Program for
Women, Infants, and Children (WIC) found that for each dollar spent on
nutritionally at-risk pregnant women and infants, Medicaid spending fell by
between $1.92 and $4.21 during the first 60 days after birth.
0
Head Start/Early Childhood Development. Additional investment in early
childhood education programs such as Head Start continues to produce
significant returns. Head Start provides a range of comprehensive early
childhood development services, including education, nutrition, health and other
social services. Several studies indicate that children who enroll in Head Start
experience immediate gains in cognitive growth, social development, and health
status. One study even suggests that for every dollar invested, Head Start may
5
62
eventually save $6 in averted costs associated with special education, crime, and
income support.
The President's initiative contains the largest single-year funding increase in the
history of Head Start, proposing an additional $600 million for a total of $2.8
billion. With the Administration's proposal, Head Start will serve an estimated
157,206 more children in 1993. This unprecedented increase in Head Start
supports participation of all eligible and interested disadvantaged children for
one year, complementing the 36 States (plus the District of Columbia) which
also support pre-school programs.
The President's initiative also proposes $850 million for the child care and
development block grant, which was part of the child care legislation that the
President proposed and subsequently signed in 1990. Funds from this block
grant provide low-income families with vouchers they can use with the child
care provider of their choice, and provide additional early childhood
development services for pre-school age children.
The proposal further includes $6 million for a new initiative in HHS to use local
schools as a way to bring primary health care services to children from
low-income families who might not already have access to these services.
These "Ready to Learn" grants will enable community health centers and local
schools in selected low-income communities to provide health outreach services
through local schools.
0
Access to Primary Health Care/Expanding Community Health Centers.
Comprehensive primary health care services include diagnosis and treatment as
well as education designed to encourage healthy behavior. Continued
investment in improving access to primary health care is important to many
communities and can yield sizable returns. There is evidence that increased
access in low-income communities can improve overall health status and reduce
the use of emergency services.
To put primary health care services within the reach of people who do not
currently have adequate access, the 1993 initiative includes an additional $1.3
billion for programs supporting primary and preventive health care.
The initiative also contains $120 million for the National Health Service Corps
(NHSC). This 19 percent increase will enable the NHSC to expand the program
and train additional physicians to provide health services in low income and
6
63
underserved areas, increasing the availability of primary case -- particularly in
low-income underserved areas. NHSC will augment over a 100 health
professions training programs administered by the States and non-profit
organizations.
0
Breast and Cervical Cancer. Despite increasing Federal investment in breast and
cervical cancer screening, NIH predicts that over 45,000 women are expected to
die from these two diseases in 1993. Unless medical research can produce a
treatment to prevent these conditions, the key to successful treatment of breast
and cervical cancer remains early detection. The earlier these diseases are
discovered, the sooner treatment can begin and the greater the chance of
survival.
Screening for breast and cervical cancer has been increasingly effective at
preventing mortality, and the Federal investment has risen to enable more
women to benefit from such preventive measures. Over the past 15 years, the
incidence of invasive cervical cancer among women age 65 and older has
dropped at an estimated annual rate of about 4 percent, due largely to the
increased use of pap smears. While breast cancer remains a leading cause of
death, the use of mammography for early detection is the best current hope for
preventing breast cancer deaths.
The President's initiative will invest $515 million for screening through the
Medicare program and through the Public Health Service. This investment will
focus resources on screening low-income, high-risk women in age groups for
which screening is recommended.
0
HIV/AIDS Funding. Under the President's initiative, total Federal HIV/AIDS
funding increases by 13 percent to $4.9 billion.
o
Smoking Cessation. According to a report of the Surgeon General, continued
investment in smoking cessation, particularly if targeted towards pregnant
women, is likely to yield beneficial returns. Smoking during pregnancy retards
fetal growth, reduces birthweight, and doubles the risk of having a
low-birthweight baby. Studies have shown a 25-50 percent higher rate of fetal
and infant deaths among women who smoke during pregnancy compared with
those who do not. One study even suggests that each dollar invested in
smoking cessation for pregnant women may yield about $6 in averted costs for
7
64
neonatal intensive care and extended care for low-birthweight infants. Beyond
the damage tobacco use during pregnancy may cause, smoking is also a factor
in the deaths of over 400,000 Americans every single year.
The President's initiative increases support of smoking cessation by 5 percent
over 1992 levels. Included in this increase is an additional $3 million for the
CDC Office on Smoking and Health, enabling CDC to expand its smoking
cessation education activities for specific at-risk populations, including minority
and low-income pregnant women.
Lead Poisoning Prevention. Lead poisoning is the most common environmental
disease of young children, disproportionately affecting poor, minority children in
the inner cities. Yet childhood lead poisoning may be preventable through
detection and abatement. This initiative includes $40 million for CDC Lead
Poisoning Prevention Grants which support about 30 state-wide lead poisoning
screening programs. CDC grants allow States to identify low-income children at
risk of lead poisoning and refer those with high blood lead levels for medical
treatment.
In addition to the CDC grant program, the Department of Housing and Urban
Development (HUD) will continue assisting low- and moderate-income private
residential property owners abate lead-based paint by providing grants to States
and localities. HUD's public housing modernization program will continue to
be the main source of funding for lead-based paint testing and abatement
activity in public housing. It is estimated that approximately $50 million will be
spent on these activities in 1993.
Injury Prevention. Preventing injury through encouraging increased personal
responsibility can also save lives. For example, every one percent increase in
seat belt use saves more than 160 lives per year. If the U.S. were to increase
the national average of seat belt use from the 1990 rate of 48 percent to the
Administration's goal of 70 percent by the end of 1992, 3,800 lives could be
saved annually and 100,000 injuries could be prevented -- yielding potential
economic benefits of $2.5 billion.
The initiative increases funding for injury prevention to almost $2 billion, a 9
percent increase over 1992. These funds will be used primarily within the
Department of Transportation (DOT) for aviation, rail, highway, marine, and
pipeline and hazardous material transportation safety. An estimated 50,000 lives
8
are lost annually in incidents in the transportation sector. DOT will use these
funds for safety inspection and enforcement, research and development, and
education programs -- all aimed at reducing accidents in the transportation
sector. The initiative also includes increased emphasis on reducing drunk
driving and increasing occupant protection.
Family Planning. Studies suggest that investments in family planning may also
yield high returns. Some studies attribute reductions in infant mortality
achieved over the last 20 years in part to effective family planning.
Recognizing the importance of these services, the President's initiative contains
an additional $37 million for HHS family planning grants and Federal Medicaid
payments, an increase of 8 percent.
Physical Fitness and Diet. Studies show that regular physical activity can help
prevent or manage coronary heart disease, hypertension, non-insulin dependent
diabetes, osteoporosis, and obesity. People who are active have lower rates of
colon cancer and stroke, as well as fewer back injuries. Moreover, changes in
diet have been shown to reduce the risk of cardiovascular disease and stroke.
The initiative increases funding for health education, disease prevention, and
physical fitness activities. It also focuses on bringing health promotion and
disease prevention activities to older Americans. The Administration on Aging
will provide more health risk assessments, nutritional counseling, group exercise
programs and other health promotion activities. These activities might improve
the health and quality of life of older Americans and allow many older people
to receive these services regularly.
0
Tuberculosis Control. For years, the Nation has been making great strides
toward eliminating tuberculosis (TB). The disease has been curable and
preventable for almost four decades. The long-term decline in TB morbidity
enjoyed by the United States ended in 1984. TB cases in the U.S. have been
increasing since 1985.
TB diagnosis and treatment could be an effective health intervention and the
Administration is determined to stem the recent growth of TB levels by
attacking the recent outbreak of this preventable disease head on. Therefore, the
initiative includes a 106 percent increase over 1992 for CDC Tuberculosis
Control Grants.
9
66
In summary, to confront the problems of access to health care and the continued
escalation in health care costs, efforts are underway to address the problems of the
uninsured and the underinsured and to tackle the country's growing health care
expenditures. No matter what path is ultimately chosen, it is clear that prevention will
play a critical role in the future health of Americans. It is also apparent that
prevention can only be accomplished in partnership among individuals, the business
community, and government.
10
67
5.D: REFORMING THE MEDICAID PROGRAM
Overview
The President's reform proposal would dramatically modernize the twenty-six
year old Medicaid program.
Medicaid recipients will benefit from enhanced access and improved quality
through coordinated care plans.
States will have new flexibility to take advantage of innovation, program
efficiencies, and better methods for cost control.
Significant savings will be achieved that will help fund expanded insurance
coverage for an additional XX million low and modest income Americans
through the new health tax credit (HTC) system (see chapter xx).
Medicaid currently provides health insurance coverage for XX million
low-income Americans. Recently, Medicaid also has become a vehicle for funding
"uncompensated care" provided by disproportionate share hospitals (DSH) -
hospitals that have high charity care caseloads.
Medicaid has been widely criticized as providing fragmented, episodic, and
too often substandard care. Moreover the program is viewed as wasteful and inefficient.
These problems stem primarily from continued reliance on an outdated
fee-for-service delivery system. In addition, the program is overly rigid and
bureaucratic.
Under the proposal, Medicaid would be restructured to rely primarily on
delivery of health care through coordinated care systems. Moroever, states would
have new flexibilty to respond to local needs and concerns. States would have the
option of choosing between two broad approaches.
the
A state could maintain existing Medicaid eligibility and benefit levels while
shifting enrollment into coordinated care programs. Under this approach, the
new tax credit system would operate seperately from the existing Medicaid
program, though states would play an important role in administering the tax
credit system.
Alternatively, a state could combine its existing Medicaid programs with the
new health tax credit (HTC) system to develop a new universal access
program covering all state residents with incomes below poverty. Under this
approach, a state could operate a single public insurance program or could
provide credits for purchase of private coverage.
68
Coincident with these reforms, Federal funding for acute care for the
non-elderly (excluding DSH payments) would shifted from an open-ended draw on
the Treasury to a flat per capita grant to the states. This would provide states with
new incentives to maximize program efficiencies. Overall, the reforms would
improve quality and access for program recipients while freeing up funds to expand
access for other low income individuals and families through the new tax credit
system.
Summary of Current Law Versus Administration's Proposal
Current Law
($ in billions, Federal Share)
1992
1993
1994
1995
1996
1997
93-97
Total Medicaid
72.5
84.5
98.3
113.8
131.2
150.9
578.7
Percent Increase
-
16.6%
16.3%
15.8%
15.3%
15.0%
15.8%
Acute Care (including DSH)
31.0
36.5
42.9
50.2
58.5
67.9
255.9
Percent Increase
-
17.7%
17.5%
17.0%
16.5%
16.1%
17.0%
Long-Term Care &
38.9
45.0
52.0
59.8
68.5
78.2
303.7
Dual-Eligibles
Administration
2.6
3.0
3.4
3.8
4.2
4.8
19.1
Impact of Reform Proposal
($ in billions, Federal Share)
1992
1993
1994
1995
1996
1997
93-97
Total Medicaid
72.5
83.3
94.9
107.1
120.3
134.5
540.0
Percent Increase
-
14.9%
13.9%
12.9%
12.3%
11.8%
13.2%
Acute Care
31.0
35.3
39.5
43.6
47.7
51.7
217.7
as
Percent Increase
-
14.5%
11.9%
10.4%
9.4%
8.4%
10.8%
Long-Term Care &
38.9
45.0
52.0
59.8
68.5
78.2
303.7
Dual-Eligibles
Administration
2.6
3.0
3.4
3.7
4.1
4.6
18.6
69
As these charts show, there are three main components to Medicaid program costs:
(1) acute care for the non-elderly, (2) long-term care and services to "dual eligibles"
(those eligible for both Medicare and Medicaid), and (3) program administration.
The President's reform proposal is directed at the acute care portion only, excluding
DSH. Currently, the projected annual rate of growth for acute care is 17.0 percent
compared with 10.8 percent under the proposal.
Background
Medicaid is a joint Federal/State program designed to meet the health
insurance needs of certain low-income individuals. States set most program rules
within broad Federal guidelines, determine beneficiary eligibility, and pay provider
claims.
In general, Medicaid eligibility is linked to other cash assistance programs such
as Aid to Families with Dependent Children (AFDC) or Supplemental Security
Income (SSI). In recent years, mandatory eligibility has been extended to certain
groups with incomes above the cash welfare program standards (for example, poor
and near poor pregnant women and children). Optional coverage extends to certain
other groups, such as the "medically needy," whose illnesses force them to
"spend-down" to meet Medicaid eligibility criteria.
Current Medicaid eligibility requirements leave many poor without coverage.
Certain categories of persons cannot qualify for Medicaid under current rules, no
matter how poor or how sick they are (non-disabled single adults and childless
couples, for example). Only about 50 percent of the poor are covered by Medicaid.
Another 20 percent have other insurance. Thirty percent, therefore, are without
insurance.
Most Medicaid recipients receive health care through traditional fee-for-service
arrangements. Physicians, hospitals, and other providers are paid on the basis of
itemized bills for the services they render. As a result, they have strong incentives to
provide additional services regardless of benefit. Moreover, providers are not paid
on the basis of outcomes: no is paid to keep patients in good health. Nor is there
anyone responsible for coordinating services to avoid duplication and to improve
quality. As a result of this mismatch of incentives and responsibilities:
The care many Medicaid patients receive is often fragmented - too little, too
much, inappropriate, or too late;
Too many recipients use hospital emergency rooms as their primary entry
point to the medical care system, often for non-emergency conditions; and
70
Too many people are deterred from seeking treatment in the early stages of a
medical condition. Receiving treatment in the later stages often leads to
hospitalization that could have been avoided.
The Medicaid program also has been under stress due to recently enacted
service and eligibility mandates, increased caseloads, court mandated payment levesl,
and overall health care inflation. As a result of these forces, Medicaid is the fastest
rising portion of both Federal and State budgets.
In 1992, combined Federal/State spending on Medicaid will surpass $127
billion, up from $62.5 billion in 1989 - a 103 percent increase. The Federal
contribution, based on State per capita income ranging from 50-83 percent of program
expenses, will exceed $72.5 billion, or a 114 percent increase since 1989.
[insert graph showing Medicaid program cost growth]
While the current program clearly is in crisis, successful experience with
coordinated care programs show that responsible reforms can improve the health
care available to the disadvantaged while moderating cost growth. Two examples
underscore this point:
A Detroit-based health maintenance organization (HMO), Comprehensive
Health Services, provides care for the 60,000 Medicaid recipients and has saved
the Medicaid program at least $6.9 million in 1990. These savings are due to a
reduction in unnecessary hospitalizations and increased attention to
preventative care, particularly for high risk pregnant women and infants.
Under Kentucky's Primary Care Case Management (PCCM) program, each
Medicaid recipient has a primary care physician responsible for providing or
authorizing all non-emergency care care. By emphasizing primary and
preventative care through a single physician, cost and quality problems
associated with overuse of emergency rooms and duplication of medications or
tests have been avoided. As a result, the Kentucky program has reduced
infant mortality rates and has achieved savings of $25 million a year, or
approximately 10 percent of program costs.
While programs of this type holds promise, only XX million Medicaid
recipeients receive care through coordinated care programs: 1.4 million receive care
through HMOs and other prepaid health plans, while an additional 1 million receive
care through PCCM programs. The remaining XX million (xx%) continue to receive
care through fee-for-service systems. In contrast, xx% of workers and dependents
with employment-based private insurance are covered through coordinated care
plans, and this percentage continues to grow rapidly (see chart xx, chapter xx).
71
The comparatively small share of Medicaid recipients covered under
coordinated care plans reflects a number of factors. Most importantly, under current
law, states must go through a complex waiver process to secure Federal approval to
establish coordinated care programs. Waiver requirements are overly rigid and block
a number of initiatives that would be routine in the private sector. Moreover, state
Medicaid programs are subject to political resistance from entrenched interests has, a
factor that is not significant in the private sector.
It is important to note that Medicaid also has become a vehicle for funding
"uncompensated" or "charity" care provided by hospitals to individuals without
Medicaid or other insurance coverage. Under recently enacted legislation, states will
be able to provide higher Medicaid payments to "disproportionate share hospitals"
(DSH) that provide care to a disproportionate amount of uncompensated care to
uninsured patients. Over the next five years, the Federal government will provide
$75.5 billion in DSH payments.
While this is a reasonable stop-gap approach, it has two disadvantages when
compared with a direct expansion of insurance coverage. First, there is no assurance
that DSH payments are used exclusively for patient care. More importantly, DSH
payments for inpatient hospital care fails to provide access to ambulatory care and
primary and preventative services that could avert the need for a disabling illness
and costly hospital care.
Proposal
Scope.- The proposal focuses reform on acute care Medicaid for the
non-elderly. Long-term care and acute care programs under Medicaid for seniors,
including Medicare/Medicaid dual eligibles and qualified Medicare beneficiaries,
would remain unchanged. Disproportionate share hospital (DSH) payments also
would remain unchanged.
Financing.- Federal financial participation for acute care (excluding DSH)
would be shifted from open-ended cost-based reimbursement to a prospectively
determined per capita payment. This change would provide important incentives for
program efficiency. The resulting savings reflect the potential for significant
improvements in efficiency through either of the two major reform options that the
states would have under the proposal.
The per capita payment would be state-specific, based on total per capita costs
for the acute care portion of Medicaid in a state in 1992. Acute care costs related to
Medicare recipients would be excluded from this calculation as would DSH
payments. The state's 1992 per capita cost would then be indexed for general
inflation, using the percent increase in the consumer price index for urban areas
(CPI-U) plus 6 percent for 1993, 5 percent for 1994, 4 percent for 1995, 3 percent for
1996 and 2 percent for 1997 and future years. This add-on to the CPI-U accounts for
additional amount for medical cost inflation.
72
From 1960 to 1990, per capita health care costs in the United States increased
by about 4 percent a year faster than the CPI-U. Thus, the add-on of 2 percent for
1997 and future years assumes that the reforms could moderate the historical rate of
health care cost growth by about a half. Savings of this magnitude should be
possible through coordinated care and increased flexibility for state programs. The
phase-in from CPI-U plus 6 percent in 1993 to CPI-U plus 2 percent in 1997 provides
time for states to take advantage of the new programmatic flexibility provided.
Actual Federal payments to a state would equal the product of the total
number of Medicaid recipients in the state times the inflation indexed state per capita
acute care costs times the Federal Matching Assistance Percentage (FMAP). The
FMAP formula would remain unchanged from current law and is intended to reflect
a state's relative need for Federal assistance.¹ Different per capita payment amounts
could be used for different age-sex or other groupings to adjust for changes in the
population covered by a state program over the years.
Although the proposal does not affect DSH payments directly, the need for
DSH payments could decrease dramatically. With a projected increase in insurance
coverage of XX million Americans resulting from tax credits and other reforms, there
would be fewer uninsured patients, hence less need to assist hospitals with "charity"
care costs. Thus, additional funds could be available to further expand the credits.
Alternatively, the payment formula could be revised to include DSH payments within
the Federal per capita payment while still yielding the same aggregate savings as
those proposed.
State Option 1 - Separate Medicaid and Tax Credit Programs.-- As noted
above, states would have two broad options regarding reform of their Medicaid
programs for acute care services provided to the non-elderly. Under the first option,
states would be required to shift all non-elderly Medicaid recipients into coordinated
care programs, over a five year period. Otherwise, program rules would remain
substantially unchanged.
Coordinated care programs would include health maintenance organizations
(HMOs), preferred provider organizations (PPOs), primary care case manager
(PCCM) programs and other cost effective alternative delivery systems. Current
restrictions that impede access to coordinated care plans under Medicaid would be
relaxed. Because enrollment in coordinated care would be the norm, a state would
need to apply for a Federal waiver to continue significant fee-for-service enrollment.
Eligibility rules would remain the same as under the current Medicaid
program. States would be required to continue to cover all current mandatory
1 The Federal matching assistance percentage (FMAP) = 1.00 - .45 X [(state per capita income)/ (U.S.
per capita income)]²
73
eligibility groups under Medicaid, as well as any optional groups they covered as of
January 1, 1992.
States would continue to provide mandatory Medicaid benefits. States
currently provide optional Medicaid benefits would be able to adjust these benefits,
but would be required to maintain the actuarial value of the total benefit package
(e.g., an optional benefit could be dropped if another benefit of equivalent value is
added). States also could modify the amount, duration, and scope of mandatory or
optional benefits subject to a requirement that the actuarial value of the benefits be
maintained. As under current law, providers would be required to accept Medicaid
rates as payment-in-full with no signficant cost sharing or balance billing.
Under this option, states would be responsible for coordinating the certain
aspects of the HTC program. As described more fully in chapter XX, the tax credit
would be used for the purchase of private insurance coverage. States would certify
eligibility for and the amount of the HTC for those who wish to obtain their tax
credit prospectively.
States also would be required to define a "basic" benefit package with an
actuarial value equal to the tax credit amount. And, states would be required to
assure that at least two private health plans offer this basic plan to credit recipients
within the state. Federal quality assurance programs would continue to assure
proper program administration, e.g, proper eligibility determination for Medicaid and
tax credit recipients and prevention of fraud and abuse.
State Option 2 - Unified Program.-- Under this option, states could establish a
unified program that combines Medicaid with the new Federal HTC to provide
health insurance coverage for all state residents with incomes below poverty.
Coverage would be phased-in in tandem with the phase-in for the HTC.
States would have broad flexibility in establishing these programs. They could
operate a unified public insurance program or establish a state health credit program
to supplement Federal HTC payments. Any eligible individual or family could
opt-out of the state's public insurance program to purchase private insurance. Those
who opt out would receive the full amount of the Federal HTC that they would
otherwise be eligible to receive plus a supplementary state credit equal to the value
of any additional benefits the state might provide under the program.
States that operate a unified public insurance program for Medicaid and credit
eligibles would provide uniform benefits for both groups. States that provide
supplementary state health credits would provide uniform credits to all individuals
and families varying only by income.
States that provide insurance directly would cover all Medicaid mandatory
benefits and as well as prescription drugs. States would have flexibility to modify
the amount, scope, and duration of benefits and could add or drop optional benefits
74
provided that the actuarial value of the benefit package is maintained when spread
over all individuals who are eligible to participate in the program.
States that operate a unified health insurance credit program would be subject
to a maintenance of effort requirement. The state's financial contribution would be
set to equal the amount the state would have paid had it maintained a seperate
Medicaid program, as under option 1.
To help finance these programs, states would receive a lump sum payment
from the Federal government. This payment would equal the sum of Federal per
capita payments for those who meet Medicaid eligibility requirements and HTC
payments for those who are eligible for them. Payments would be based on
estimates of the Medicaid and HTC eligible populations within the state. Estimates
would be reflect base year eligibility rates updated to reflect changes in population
and changes in unemployment and other factors likely to influence the size of the
eligible population.
To the extent practical, states would no longer apply complex Medicaid
eligiblity standards for the under 65 population. Eligibility would be based simply
on individual or family income in relation to poverty. States would help to
administer the Federal HTC and would assure availability of "basic" benefit coverage
from at least two private health plans, as under option 1.
75
Chapter 5.H
ADMINISTRATIVE SAVINGS
Overview
Recent studies suggest that paperwork savings of $67 to $100 billion a year
would be possible if the United States shifted to a Canadian-style national health
insurance program. (GAO, 1991; Woolhandler and Himmelstein, 19xx) A critical
review of available information by OMB indicates that potential savings are much
lower, at most $31 to $49 billion. The OMB analysis also shows that these savings
would be more than offset by an increase in benefit costs. (Darman, October, 1991)
Moreover, simple administrative cost comparisons are misleading because they
fail to capture the value added by effective administrative measures. The United
States spends over $xxx million a year on various quality assurance programs,
measures that improve health care and reduce costly and potentially dangerous
inappropriate care. And, as a recent study points out, delays in treatment under the
Canadian system lead to "hidden" costs of up to 0.6 percent of GDP - or more than
$xx billion dollars a year if translated to the United States. (Danzon, 1991)
Nonetheless, significant administrative savings are possible while maintaining
choice and diversity for our citizens. Moreover, paperwork burdens, hassles, and
confusion associated with obtaining health care can be reduced. The reform proposal
contains five initiatives to accomplish these goals:
Electronic billing using standardized formats will drastically reduce
paperwork and reduce administrative costs by xx%, or $-- billion a year.
Shifting from costly case-by-case medical review to pattern of care review
will reduce the "hassle" factor for physicians, focus review efforts on
problem areas, and improve quality.
Use of electronic "smart" for billing and eligibility determinations will
reduce paperwork and confusion for consumers at the point of service.
Development of user-friendly computerized medical record systems will
reduce paperwork burdens for providers while improving quality.
Market reform will reduce administrative costs by xx%, or $-- billion a year
by providing efficiencies of scale through group purchasing for small
businesses and by eliminating medical underwriting costs.
These reforms will bring the billing and record-keeping in our health care system into
the twenty-first century, through a system-wide movement to automated and more
76
standardized billing, claims adjudication, eligibility determination, and clinical
information.
A.A.
77
Background
Health care overhead is a diverse category that embraces a wide range of
activities including: claims processing costs for insurers, billing costs for providers,
utilization review, quality assurance, maintenance of enrollment and eligibility
records, premium collection, marketing costs, and profit. Public and private
insurance and billing costs totalled almost $80 billion in 1991, or about 12.2% of total
personal health spending. Insurance administration accounts for $43.6 while provider
billing costs account for the remaining $36.2 billion.
Insurance Administration and Provider Billing Costs in the U.S.,
1991(Source: HCFA, OMB staff estimates)
Cost in Billions
As % of Total
As % of Total
of $
Administration
Personal Health
Spending
Insurance Administration
$43.6
54.6%
6.7%
Hospital Billing Costs
$17.1
21.5%
2.6%
Physician Billing Costs
$10.4
13.0%
1.6%
Billing Costs for Other
$8.7
10.9%
1.3%
Providers
Total Insurance and Billing
$79.8
100.0%
12.2%
Costs
Of the total of $43.6 billion for insurance administration in 1991, $32.8 billion is
for private insurance, $5.7 in Federal costs, and $5.0 billion in state and local costs.
The bulk of this spending (77.5%) is for claims processing, quality assurance, and
general administration. Marketing costs and profits total $6.0 billion while taxes paid
by private insurers account for the remaining $3.7 billion.
Administrative Costs for Public and Private Insurance in the U.S.,
1991(Source: HCFA, HIAA, BCBS, OMB staff estimates; excludes billing costs for providers)
&
Cost in Billions
As % of Total
As % of Total
of $
Insurance
Personal Health
Administration
Spending
Total Public and Private
43.62
100.00%
6.70%
Insurance Administrative Cost
78
Claims Processing , Quality
33.82
77.54%
5.19%
Assurance and General
Administration,(private and
public)
Taxes Paid by Private Insurers
3.76
8.61%
0.58%
Marketing and Commissions
3.83
8.77%
0.59%
Profit
2.21
5.07%
0.34%
Insurance administration costs have increased from 5.3 percent of total
personal health spending in 1965 to 6.7 percent in 1991. This change primarily
reflects an increase in insurance coverage during the interval. Out-of-pocket
spending, as a percent of total personal health spending, decreased from xx% in 1965
to xx% in 1991. With this decrease, administrative costs were bound to increase.
Private insurance administrative costs vary substantially with firm size as a
percentage of benefit payments, ranging from up to 40% of benefit costs for very
small firms to under 6% for very large firms. This disparity in costs reflects the fact
that large businesses enjoy efficiencies of scale in the purchase and administration of
insurance benefits. Risk premiums are lower for large groups coverage because
benefit costs are much more predictable. Commissions for brokers also are higher for
very small firms due to the retail nature of this segment of the market.
Health Insurance Overhead Cost as Percent of Benefit Payments(Source: CRS,
1989)
Firm Size
Claims
Gen.
Interest
Risk &
Commisi
Premium
Total
Admin.
Admin.
Credit
Profit
ons
Taxes
1 to 4
9.3
12.5
-1.5
8.5
8.4
2.8
40
5 to 9
8.6
11.2
-1.5
8.0
6.0
2.7
35
10 to 19
7.2
9.2
-1.5
7.5
5.0
2.6
30
20 to 49
6.3
7.6
-1.5
6.8
3.3
2.5
25
50 to 99
4.3
4.8
-1.5
6.0
2.0
2.4
18
100 to 499
4.1
4.0
-1.5
5.5
1,6
2.3
16
500 to 2,499
3.9
3.2
-1.5
3.5
0.7
2.2
12
2,500 to 9,999
3.8
1.4
-1.5
1.8
0.3
2.2
8
10,000 or
3.0
0.7
-1.5
1.1
0.1
2.1
5.5
more
79
Proposal
Administrative costs could be cut by as much as xx% under four major reform
initiatives. Three of the initiatives would streamline paperwork. The first three of
these initiatives are already underway under the leadership of Secretary Louis
Sullivan of the Department of Health and Human Services. These three paperwork
reduction initiatives could reduce administrative costs by as much as xx% saving up
to $xx billion a year. These initiatives would be complemented by reform of the
small group market. As described more fully in Chapter xx, health insurance market
reform could reduce administrative costs for small group coverage by as much as
xx%, saving up to $xx billion a year.
Reducing Claims Processing and Billing Costs Through Standardization and
Automation- Voluntary standardization of claims forms can reduce billing costs
and reduce provider billing costs to levels comparable to those that can be achieved
under single payer systems. In December, 1990, the Health Care Financing
Administration's HCFA-1500 claims form was finalized. This form -- which is used
for physician and outpatient services - was developed by the Uniform Claim Form
Task Force, co-chaired by the American Medical Association and HCFA. Task Force
participants included representatives of every major third payer. While use of the
HCFA-1500 is voluntary, wide acceptance is expected. Similar efforts have led to
near universal acceptance of the UB-82, as the standard form for inpatient hospital
bills.
Substantial savings could also be achieved through electronic billing. HCFA is
actively working with the private sector to develop technical standards to promote
greater use of electronic billing. Currently, 75 percent of Medicare Part A and 42
percent of Part B claims are submitted electronically. Medicare costs are reduced by
about $0.50 per claim with electronic submission. Electronic billing also reduces costs
for providers and helps reduce clerical errors. Comparable savings can be achieved
for private sector claims. HCFA has set 100 percent electronic submission for
hospitals and 75 percent for others within three years.
The combination of electronic claims submission and standardization of the
data elements required for claims will reduce provider cost and frustration.
Providers submitting claims electronically will benefit from clearer adjudication of
claims. Moreover, electronic systems will help avoid technical mistakes, such as
missing one line on a form, that often delay payment.
Over the next several months, the Administration will study options for
encouraging electronic claims submission. Secretary Sullivan has already initiated a
public/private task force chaired by [insert name and position] to [describe mission
of task force]. The task force is scheduled to make recommendations to the Secretary
by [insert date]. One possible reform to encourage widespread use of electronic
billing involves incentives for physicians and other providers to submit Medicare
claims electronically (see chapter xx).
so
Streamlining Medical Review.- A third area - improving medical review --
can reduce the "hassle factor" for physicians while reducing costs for unnecessary
care. The goal would be to shift away from claim-by-claim denials toward
monitoring and encouragement of cost-effective practice patterns. Claim-by-claim
review is burdensome and costly - sometimes the cost of the review can exceed the
potential savings.
HCFA has developed and is now testing the Uniform Clinical Data Set (UCDS)
a new system that would permit a shift to pattern review for inpatient hospital care.
The UCDS is a state-of-the-art system for abstracting critical medical information for
hospital records. Once this information is abstracted and entered into a
computerized system, "expert" system programs can identify patterns of care that
suggest a systematic problem that might warrant further review and corrective
action.
If the UCDS system proves to be successful in practice, it could serve as a
model for use by private insurers. In a complementary effort, the Public Health
Service is devoting $130 million in 1991-2 to outcomes research to increase
information about what patterns of care are most effective in improving health
outcomes and at what cost.
Developing Electronic "Smart" Cards.- Secretary Sullivan has launched an
initiative to accelerate development of electronic "smart" cards for use by consumers.
[Insert information on task force - who is the chairman, what charge has been
given, when is the report date]
Electronic "smart" cards would be used by patients at the point of service to
provide insurance information to providers. This would eliminate the need for
patients to repeatedly fill out confusing forms. Smart cards also would streamline
billing procedures for doctors and hospitals by immediate information regarding
eligibility, coverage, benefits, copayments and deductibles.
Dollar savings will accrue directly to insurers and providers through more
efficient administrative procedures, and be passed on to consumers through lower
premiums and out of pocket costs. Eventually, "smart" cards could be used for
electronic storage of the card holder's medical records. This would help prevent
duplication of tests, medication errors, and other quality of care problems.
Developing Computerized Medical Record Systems.-- Secretary Sullivan also
has initiated a task force to accelerate development of computerized medical record
systems.
[Insert information regarding this task force, who is chairman, what is the
charge, what is the date for report to the Secretary. Also insert one or two
sentences on AHCPR efforts, if any, to assist in development ]
81
Computerization will facilitate rapid access to critical information regarding an
individual's past medical record. Once computerized patient records and related
information networks are in widespread use, providers will have access to
state-of-the-art information on the effectiveness of various care paths as well as more
complete, accurate patient medical records.
"Expert" systems can be built-in as part of these systems to alert physicians to
potential problems, such as the need to follow-up on an abnormal test result.
Computerized records will also strengthen quality assurance by providing hospitals
and health plans with reliable statistical information regarding outcomes and
complication rates.
Health costs could be reduced as well. Up to 20 percent of all medical care
performed in the United States may be unnecessary or harmful. Computerized
patient records will capture clinical data for effectiveness research. This research will
help physicians better understanding of when certain costly therapies should be used.
Early reports are encouraging. The General Accounting Office has reported
that an automated medical record system reduced hospital costs by $600 per patient
in a Veterans Affairs hospital. Other studies have demonstrated reduced lengths of
stay associated with computerized patient records. If broadly implemented,
computerized patient records could reduce unnecessary care by about 5 to 10 percent,
saving $20 billion a year by the end of the decade. More significant savings are
likely in later years.
Reducing Overhead Costs Through Health Insurance Market
Reform.--Finally, health insurance market reform will reduce administrative costs for
small group coverage by an average of XX percent. Savings will be even higher for
groups with 10 or fewer workers. The bulk of this savings will be achieved through
health insurance networks (HINs) - group purchasing associations for small business
and individual coverage. HINs will help reduce overhead costs to xx% of benefit
costs. It is projected that xx% of coverage sold to firms with fewer than 100 workers
will be provided through HINs.
Even outside of HINs, substantial savings will be achieved through elimination
of costs associated with medical underwriting. Moreover, by refocusing competition
on costs, the reforms will also help to reduce marketing costs. The overall effect will
be to reduce administrative costs by an estimated xx% for small group coverage
purchased outside of HINs, with savings of xx% for firms with fewer than 10
workers.
82
[NOTE: EDITING IN PROGRESS]
CHAPTER 6
PROBLEMS WITH ALTERNATIVE APPROACHES
Many of the proposals for health system reform are patterned after one of two
basic models: a centralized Canadian-style national health insurance system or an
employer "play-or-pay" mandate. While widely discussed, these proposals are often
designed in relatively cursory fashion, with little or no assessment or analysis of
impacts for implementation in this Nation. This chapter presents a rigorous
analysis of these models.
A. CANADIAN MODEL
Overview
While apparently successful in many respects and highly popular with the
Canadian people, the Canadian system -- like all other universal public insurance
systems -- suffers from two basic structural flaws -- flaws that are bound to lead to
serious long term problems with cost, access, and quality.
There are no demand side incentives for efficiency. Because medical care is
free to consumers, consumers do not play the same role they play in normal
markets.
Market forces that normally drive economic systems to greater efficiency
simply do not exist. Moreover, consumers are unable to express their
preferences through market choices.
Second, all major resource allocations are made centrally through the politi-
cal process, but health care is too complex, too sensitive to micro-level
conditions, for centralized management to be effective.
The Canadian system relies on blunt, macro-level, supply-side constraints
such as global budgets, limits on high-tech equipment, and limits on
physician supply.
But, efficiency -- high quality care at the lowest possible cost -- requires that
optimal decisions be made at the hospital bed-side and in the physician's
office.
This cannot result from central planning, so resources are bound to be wasted
and quality is at risk.
83
These flaws are are already beginning to be manifest in the actual experience
of the Canadian system:
Costs have not been controlled effectively despite the enormous power that a
single payer has under a universal public insurance program. Indeed,
Canadian costs have been rising slightly faster than U.S. costs.
Costs growth can be moderated through non-market means, but with
significant inefficiency. Resources are wasted on low-priority care while blunt
cost containment measures limit spending where added resources could
make a real difference in outcomes.
Supply-side constraints has led to artificial shortages of critical personnel and
equipment.
Canadians have significantly less access to state-of-the-art technologies and
often have to wait weeks or months for effective treatments that are readily
available for Americans from all walks of life.
While waiting, many Canadians are at an increased risk of death or must
indure painful or disabling symptoms that could have been corrected. And,
certain procedures, such as coronary bypass surgery, appear to be rationed,
especially for senior citizens.
Lost productivity and other costs associated with delays in surgery are
estimated at 0.6% of Canadian GDP. These losses could be even higher if
delays for other medical services are taken into account.
Incentives for Canadian physicians and hospitals reward additional care
regardless of appropriateness or quality. As a result, utilization rates are have
increased rapidly and resources have been wasted.
Reliance on crude global budgets as a means of controlling costs has forced
Canadian hospitals to cut back on staffing in critical areas. As a result, post-
operative death rates in Canada are are 40 percent higher than in U.S.
hopsitals, for certain high-tech, life saving surgical operations.
Even if the Canadian system were an unqualified success, its success, if
imported into the United States would be less than assured. Each nation has its own
unique political, cultural, and economic environment. Experience with the
Medicare and Medicaid programs in the United States suggests that a Canadian-style
universal public insurance program could not be imported successfully.
84
Over the past decade and a half, effective management of Medicare and
Medicaid has been stymied by increasing politicization. Today, an Act of
Congress is needed to change the amount that Medicare pays for a wheel
chair.
As a result, Medicare and Medicaid per capita costs continue to grow more
rapidly than per capita costs for the remainder of the population.
If the U.S. political process has been unable to control xx% of health
spending, there is little reason for optimism that it could be more successful
in controlling costs for the entire health system.
Indeed, the thought that as much as xx% of the GNP by the year 2000 could be
subject to direct political control should be enough to give most Americans pause
for serious concern.
Basic Features of the Canadian Model
For the past two decades, the ten Canadian provinces have operated
government-based health insurance plans that cover hospital and physician care.
The Canadian system was not implemented all at once, but gradually evolved over
many years following World War II. The Canadian system itself, and American
proposals to implement a Canadian-style approach, share a number of basic
structural features:
Health insurance is provided to all citizens through a centralized, publicly
administered program. Health care services are provided by private-sector
hospitals, physicians, and other providers. Private insurance is prohibited,
except for services not covered by the public program.
Covered benefits include hospital, physician, mental health, and preventative
care. (Some Canadian provinces also cover prescription drugs and long-term
care.) Care is free with no cost-sharing at the point of service
Hospitals and other institutional providers are paid on the basis of global
budgets that cover all patient care costs during a year. Global budgets are set
annually by government authorities, through a process that involves some
element of negotiation.
Physicians, and other non-institutional practitioners and providers are paid
on a fee-for-service basis according to a government-established fee schedule.
Overall payment for physician services are limited by a a global budget or
"expenditure target."
85
To control costs, the supply of facilities, equipment, and providers is strictly
regulated. Hospitals are limited to government-set budgets for capital
expenses. Construction projects and high-cost equipment purchases require
special approval. Physician supply is limited and the specialty distribution is
regulated to encourage general practice.
Financing is primarily through broad based taxes (including a payroll tax).
Some Canadian provinces also require small premium payments. Others
place a special tax on employers.
The Canadian system is administered through the provinces with
supplemental Federal financing. A Canadian-style system in the U.S. could
be jointly administered by Federal and state governments (as proposed by
Senator Kerrey) or primarily by the national government (as proposed by
Congressman Russo).
Basic Structural Flaws in the Canadian Model
Lack of Demand-Side Incentives.-- At a fundamental level, the Canadian
system lacks effective incentives for efficiency. Because medical care is free to
consumers, market forces that normally drive economic systems to greater efficiency
simply do not exist.
This flaw could be partly remedied by requiring some cost-sharing at the point
of service. The RAND health insurance experiment has conclusively shown that
modest levels of cost-sharing reduce demand with little or no measurable impact on
health status. (references to follow) But, the flaw in the Canadian system is deeper
than a simple lack of cost-sharing.
Because consumers do not have a choice of alternative health plans and do
not pay any portion of the premium cost, there is no dynamic that could lead to the
development of more efficient systems for delivering high quality care at low cost.
It is no accident that innovative health care delivery systems, such as Kaiser
Permanente or Group Health of Puget Sound, have emerged in the United States,
but not in Canada.
In the U.S., employers and individuals, concerned about getting good value
for their health care dollars, have incentives to demand better forms of health care
delivery. This, in turn, creates a market for such systems, and organized health
plans then compete with one an other for market share, leading to progressive
improvements in cost-effectiveness and quality. This consumer-driven process of
progressive simply improvement cannot occur in a Canadian-style system.
As a result, the Canadian health care system is curously frozen in time,
resembling the U.S. health care system as it existed in the mid-1960s. Medical care
86
continues to be an unorganized cottage industry. Physicians are subject to little
oversight to assure efficiency and quality of care. And physicians continue to be paid
exclusively on a fee-for-service basis despite clear evidence that this approach is
inherently inflation. None of the improvements in health systems delivery or
innovative payment arrangements that have developed in the United States over
the past decades have been able to take root in Canada.
Overall, Canadian citizens as individuals are relegated to a diminished role in
decision making in the health care system. Because they cannot make their own
choices in the market, they are forced to rely on the vagaries of the political process.
Supply-Side Controls.-- Because incentives for needed, appropriate care only
are so poorly structured, the government is left with controlling costs through crude
supply side controls implemented through a central planning measures. There are
at least problems with this approach.
Arbitrariness of Measures. An initial problem is the relative crudeness of the
measures used for budgeting; technical details tend to be highly arcane. Hospital
budgets have historically not accounted for case-mix differences or efficiencies in
care across settings. Only recently have some provinces begin to experiment with
Diagnosis-Related Groups (developed and used in the United States for over a
decade) for assessing severity of its caseload. Overall, centrally planned budgets and
spending caps may or may not be developed with adequate information about
patient population needs or appropriate funding for cost-effective care. Frequently,
there is no correct decision and policies tend to be arbitrary.
Loss of Flexibility. A second problem is that use of central controls necessarily
curtails local flexibility and needs. Decisions for new facilities and the purchase of
new technology can take months or even years to complete; the application process
can be cumbersome, expensive and politicized, without necessarily resulting in an
efficient allocation of resources (NEJM cite). Lowered quality of care can result from
lags in the decision process.
The Veterans Affairs (VA) system in the U.S. is an analogous example of
using supply controls to determine resource distribution. The VA has been a
recognized leader in such areas as cardiac care and radioisotopes, but not all facilities
have been adequately utilized. At the same time, even as late as the mid 1980s,
fewer than one-third of VA centers had CT scans. An earlier, extensive study by the
National Academy of Sciences (1979) found widespread evidence of maldistribution
in terms of equipment, basic and specialized services, staffing, and number of beds.
Weak Political Incentives to Contain Costs. The third general problem is that
the centralized process may be too removed or too politicized to effectively contain
costs. The link between health costs and the consumer preference for benefits
relative to costs may be too attenuated. Broad-based political support for cost-
87
containment may be unrealistic. Lobbying by providers and special interest groups,
partisan disputes, and a host of other complications make success in containing costs
erratic, at best.
At the other extreme, centralized systems are often vulnerable to swings in
economic cycles. Because revenues are raised through the tax system, budgets must
adjust to revenue flows. This means that Federal contributions are cut back during
recession or economic downturn. Federal contributions in Canada in fact have been
frozen starting in 1991; the freeze will be extended through 1995 (Barer and Evans,
1991). During this recent downturn, the Canadian health system has made-up for
declining federal revenues by both adding user fees and cost-shifting to provincial
budgets.
Canada: The Evidence to Date
The preceding discussion suggests that the design inherent in any centralized,
government-controlled health insurance scheme will have adverse impacts on
costs, access, appropriate use of resources, and quality. In fact, a growing body of
evidence strongly suggests ive of these impacts in the current Canadian system.
Failure to Control Cost Growth.-- Even with strict global budgeting and some
rationing of care, Canadian health costs continue to grow faster than U.S. costs.
Between 1970 and 1980, Canada's annual compound rate of growth for per capita
health expenditures was 12.4 percent, compared with 11.9 percent in the U.S.
Between 1970 and 1990, Canada's expenditures grew annually 10.8 percent,
compared with 10.5 percent in the U.S. (OECD, 1990; Schieber et al., 1991).
[Bar Chart or Growth
Cost-containment also has become more difficult in Canada in recent years.
Rising demands on the system resulting from free universal access have placed
increased financial burdens on the government -- burdens which are increasingly
difficult to bear.
Declining national contributions and cost-containment measures have
initiated a recent round of hospital staff layoffs and bed closings. In Ontario, for
example, the richest and most populous province, where more than a third of the
Canadians live, has lost nearly 5,000 hospital jobs and 3,500 beds over the last two
years. In Toronto, the provincial capital, 2,900 of 15,000 acute-care beds have been
taken out of service (Media Digest, November 25, 1991).
To contain costs, Canada has cut payments to providers, making the yearly
price negotiations more and more difficult. The rising Canadian costs, kept
88
artificially under control by government price and spending caps, has been described
as "a pressure cooker that is building steam on a hot stove" (Iglehart, 1986).
Limited Access to High-Tech Services.-- Reliance on crude supply side
constraints to control costs will inevitably lead to shortages and delays in treatment.
This has occurred in practice.
Treatment Delays -- Canadians must often wait to receive treatment. For
example, Canadians can wait (on average) 4.9 months for open heart surgery, and 5.5
months for bypass surgery (Globerman, 1990).
Chart 1: Bar Chart: Waiting Times
These waiting times for medical treatment can have potentially adverse
effects on patients' health. Patients not receiving timely access to diagnostic
procedures -- such as MRIs, CT scans and mammograms - and can suffer setbacks
due to delayed treatment. Those waiting for acute procedures - such as open heart
surgery -- can risk death waiting for care.
Waiting for treatment also results in a direct economic loss. (Danzon, 1991).
If unable to work while waiting for care, individuals may face financial setbacks.
Some may even lose their jobs. There is the additional social loss of productivity.
The overall cost of delays in surgery has been estimated at 0.6 percent of Canadian
GDP. (reference - see Danzon for primary cite)
Technology. The most advanced medical technology is limited to Canadian
citizens. Government control of hospital capital and operating budgets limits the
penetration of medical technology in the Canadian market. For example, U.S.
citizens have access to more open heart surgery, cardiac catheterization, organ
transplants, radiation therapy, extracorporeal shock and lithotripsy, and magnetic
resonance imaging.
[Bar Chart, Medical Technologies, U.S.vs Canada
Dale Rublee, Health Affairs]
Data from Anderson et al. (NEJM, 1990?) also suggest rationing of selected
expensive procedures for older age groups. Heart valve surgery and bypass surgery
for patients ages 65-74 and 75+ were consistently performed less often in Canada.
For patients age 75 and above, a full 4 times as many bypass procedures were
performed in the U.S. as in Canada for the same age group of patients.
Limited availability of medical technology has prompted the Canadian
government to even send some patients to the U.S. to seek advanced medical care.
For example, the British Columbia Health Association has contracted with Seattle
89
hospitals for coronary bypass surgeries (Washington State Hospital Association,
1990), and Ontario and Alberta have similarly contracted with U.S. hospitals for
high technology care (Goodwin, 1990; Sherlock, 1990).
While these instances may be rationalized as temporary problems, the
Canadian system generally is able to use U.S. access to technology as a "safety valve."
Since the U.S. provides an available supply of medical technology just across the
boarder, Canada may have an incentive not to invest in sufficient supply. If the U.S.
were to adopt a Canadian system, this safety valve would no longer exist for Canada,
nor would one exist for Americans (HIAA, 1990).
Innovation. There are several areas of evidence of the Canadian system
lagging in organizational and managerial innovations. For example, coordinated
care arrangements have just recently taken hold in a few of the Canadian provinces.
As mentioned in Chapter xx, these Health Service Organizations use similar
approaches for more cost-effective care.
Limited hospital budgets for capital improvements has meant that the
physical plants and equipment in many hospitals is nearing obsolescence (Iglehart,
1986). This lessens Canadian hospitals' ability to provide the best structural
attributes for high quality care.
Ineffective Use of Resources Resulting from Inappropriate Incentives.-- Be-
cause Canada continues to rely primarily on fee for service payment, physicians are
rewarded for additional care regardless of need or quality. As a result, utilization per
physician increased by 25.1 percent in Canada between 1971 and 1985, compare with
only 7.0 percent in the United States (Barer et al., 1988). Overall, Canadian
physicians provide a much higher volume of services than U.S. physicians. While
no data are available on rates of appropriateness, these substantially higher levels of
medical utilization raise concerns about the amount of inappropriate and
unnecessary care being delivered and paid for by the Canadian taxpayer.
Relative Use of Physician Services in the Canada
and the United States (services per capita)
Source: Fuchs, 1990.
Service Type
Canadian Rate as
percent of U.S. Rate
Diagnostic and Therapeutic
120%
Procedures
Office Visit and Consultations
156%
All Physician Services
139%
90
Hospitals also face perverse incentives. Because hospitals are paid on a fixed
global budget, the financial incentive is to use available beds for patients with the
lowest cost. As a result, Canadian hospitals are filled with chronically ill, but low
cost, patients, termed "bed blockers." These incentives affect quality as well for
hospitals spill-over to staffing decisions. There are lower staff-to-patient ratios in
Canada (1.87) versus the United States (3.47) (Newhouse et al., 1988). The mix of
staff is less specialized reflecting lower case severity; quality and intensity of care for
high-risk patients, however, can suffer as a result of these staffing patterns (see
below).
Comparison of Hospital Care in Canada and the United States
(use rates for people aged 65 and older)
(Source: Newhouse, 1988)
Unites States
Canada
Canadian Rate as
% of U.S. Rate
Admissions Per Capita
0.33
0.35
106%
Length of Hospital Stay
7.96
13.32
167%
(in days)
Hospital Days Per
2.63
4.66
177%
Capita
Hospital Staff Per
3.47
1.87
54%
Occupied Bed
Generally, service production is poorly integrated in the current system across
the continuum of care. Because settings and sets of providers are paid on a fee-for-
service basis, efficiencies across settings lag behind the U.S. experience. Fully
integrated health plans such as Kaiser are able to achieve production efficiencies that
are difficult to achieve in fee-for-service settings. Same-day, ambulatory surgery and
substitution of outpatient for inpatient care has lagged behind its U.S. counterparts.
Pressures on Quality.-- While compartive studies are scant, Roos et al. (1989)
recently reported a comparison of Canadian and U.S. post-operative mortality rates.
Interestingly, Canadian hospitals did as well as U.S. hospitals on low risk surgical
procedures. However, relative risk of post-operative survival was much poorer in
Canada than in the U.S. for high risk procedures. These outcomes may be due to
(again) incentives of hospital budgeting practices which encourages lower staff-to-
bed ratios, which in turn mean that needed intensive care support following
surgeries is far less available and effective in the Canadian system.
Quality assurance activities such as peer review, second opinion, utilization
management and outcomes information are also relatively undeveloped in Canada
compared with the United States. Historically, Canada has not attempted to
question physicians' judgements about the medical necessity of the treatments they
91
recommend. This professional sovereignty and freedom from outside interference
is an aspect of their health care system that Canadian physicians value highly. One
observer has characterized it as the price they extract for their participation in an
otherwise highly regulated system (HIAA, 1990).
Similarly, Canadian hospitals have few incentives to compete based on
increased quality of care, and because of tight budgets, do not invest to any
significant level in data collection and quality review.
Could a Canadian-Style System Be Successfully Implemented in the United States?
Critical Differences Between the United States and Canada.- The notion of
simply copying the Canadian system is simplistic. Each nation has its own unique
political, cultural, and economic environment and history. Even if the Canadian
system were an unqualified success in Canada, its success, if imported into the
United States would be less than assured.
One major difference between the United States and Canada is our form of
government. We rely on a system of checks and balances, with independent
executive, legislative, and judicial branches. Canadians, in contrast, have a
parliamentary form of government, which effectively combines legislative and
executive functions. The result is, that there is little potential in Canada for the
political deadlock that has characterized health policy in the United States over the
past decade.
Experience with the Medicare and Medicaid Programs.-- Experience with the
Medicare and Medicaid programs suggests that a Canadian-style universal public
insurance program could not be translated successfully into the United States.
While these programs have succeeded in expanding access to the elderly, the
disabled and many low income Americans, these programs has become increasingly
politicized over the past 10 years with the result that effective program management
has been stymied.
When enacted in 1965, Congress delegated broad responsibility for
management of Medicare and Medicaid to the Executive branch and to the States.
Congress legislated only the broad outlines of the programs and limited its role to
oversight. Today, virtually every detail of operation of Medicare and Medicaid is
dictated in hundred of pages of dense legislative language that are comprehensible
only to a handful of Congressional staff and executive branch experts.
With the increasing complexity of the legislation, few Members of Congress
even have an opportunity to vote on the issues involves. Over the past decade, the
full House and Senate have only had a handful of opportunities to debate and vote
on critical programmatic issues. Generally, these issues are decided in Committee or
92
Subcommittee, with other members being limited to an up or down vote on the
whole package.
Micromanagement of program details by legislators may be inevitable because
it extends political power and influence of key Committee members.. The technical
details of payment policy often are highly arcane but of great monetary significance.
Often there is no "correct" decision. Thus, many payment policies are somewhat
arbitrary. Yet, once the policy is set, it tends to be rigid and is stoutly defended by the
interested party that benefits.
This process of politicization has progressed to the point where it now
virtually requires an Act of Congress to change how much Medicare pays for a
wheel chair. As a result, per capita health care costs for Medicare and Medicaid
recipients have grown consistently faster than per capita health care costs for the
remaining population.
If the politcal process has been unable to control xx% of health spending,
there is little reason for optimism that it could be more successful in controlling
costs for the entire health system. Indeed, the thought that as much as xx% of the
GNP by the year 2000 could be subject to direct political control should be enough to
give pause for serious concern for most Americans.
Potential for Massive Transition Costs and Disruptions.-
[discussion of budget and transition costs association with shift to national
health insurance system]
93
References
Steven Globerman, Waiting Your Turn: Hospital Waiting Lists in Canada
(Vancouver: Fraser Institute, May 1990).
Carol Goodwin, "U.S. Miracle Workers Take Pay Cuts the Help Canadians," The
Kirchner-Waterloc (Ontario) Record, February 15, 1990.
John K. Igelhart, "Canada's Health Care System," New England Journal of Medicine
315 (3): July 17, 1986, p. 203.
Howard Kim, "Canada Tabs Washington Hospital, Modern Health Care, March 26,
1990.
Ed Neuschler, Canadian Health Care: The Implications of Public Health Insurance,
HIAA Research Bulletin, June 1990.
Karen Sherlock, "Detroit Offers Short Wait for Health Surgery," The Edmonton
Journal, January 6, 1990.
Washington State Hospital Association Weekly Report 15:8 (February 23, 1989).
94
6. B. THE PROBLEMS WITH "PLAY-OR-PAY"
Overview
"Play-or-pay" is a widely discussed approach for expanding health insurance
access. Employers would be required to play, e.g., provide private insurance for
workers and dependents or pay a payroll tax to fund public insurance for their
workers and dependents. Variants of this approach have been proposed by Senators
Mitchell and Kennedy and by Representative Rostenkowski, among others.
While "play-or-pay" would expand insurance coverage, it suffers from four
serious drawbacks. "Play-or-pay" would:
Hurt workers by increasing unemployment and by forcing employers to cuts
wages to offset mandate costs. While "play-or-pay" seems to put the burden
on employers, this is largely an illusion. Employers will inevitably shift the
burden to employees. Between 400,000 and 700,000 jobs could be lost in the
short-run, with a long-term potential as high as one and a half million.
Moreover, cash wages for the "beneficiaries" of the mandate would decrease
by 7 to 9 percent depending on the payroll tax rate.
Be a back door to national health insurance. "Play or pay" is inherently
unstable and would rapidly degenerate into national health insurance.
According the Urban Institute, XX million workers and dependents with
private coverage would be shifted into the public plan. Overall, xx% of
Americans would be insured publicly. At this point, the public plan would
undoubtedly use its near-monopsony position to gain deep discounts from
providers resulting in a massive cost-shift that would rapidly price the
remaining private coverage out of the market.
Increase inflation and hurt small business. While the $30 billion cost of the
mandate will be shifted to workers, in the near-term, employers will bear the
burden. Some employers may try to pass this added cost on to consumers in
the form of higher prices. But, many businesses that do not currently provide
coverage have low profitability and are engaged in intense competition. Of
particular concern, small business will be disproportionately impacted.
Increase costs for government by $xx billion $37 billion over and above the
new payroll tax receipts. "Play or pay" is not self-financing. A Federal
subsidy of $37 billion would be needed to fund the gap between payroll tax
receipts and actual costs, and this gap is likely to grow rapidly. Although
premium costs average 7 percent of payroll, actual costs vary widely. Low-
wage firms incur costs well in excess of 7 percent. These firms will dispropor-
tionately opt to "pay," but the tax will be grossly inadequate for health
coverage for these firms. This problem will be compounded by the fact that
premium costs also vary widely. Firms with higher premiums due to an
older or sicker workforce would have strong incentive to opt into the public
plan, further undermining the solvency of the plan.
How Play or Pay Plans Operate
"Play or pay" employer mandates are designed to provide coverage for
workers and their dependents with little direct cost to government. Employers are
required to provide coverage directly or pay a payroll tax. Mandates typically apply
for all workers employed more than 17.5 hours a week.
To "play," employers would be required to provide "basic" health coverage.
Typically, employers could require workers to pay up to 20 percent of
premium costs and could require workers to pay modest cost sharing on
benefits.
Employers not providing health benefits directly would be required to pay a
payroll tax to cover a portion of the cost of benefits provided through a public
insurance program. Typical payroll tax rates are in the range of 7 to 9 percent.
Generally, there is no cap on taxable wage base.
"Play or pay" mandates usually are complemented with an expanded public
insurance program to replace Medicaid and provide subsidized coverage on a
sliding-scale basis for those without employer-paid coverage or Medicare. Some
form of price regulation also generally accompanies "play or pay" proposals as a
means of restraining costs. The regulation may involve some form of payer/
provider negotiations or may be administered directly by a regulatory agency.
Characteristics of the Working Uninsured
The working uninsured are the intended beneficiaries of "play or pay"
mandates. Thus, it is important to understand who they are.
[insert table from Monheit & Short article showing health insurance status and
characteristics of employed persons: age, sex, race, size of establishment, hourly
wage, and occupation]
[summary of pertinent features from table: uninsured workers tend be
predominantly low wage, low skilled occupations, therefore highly
vulnerable to a shift in burden of mandate from employers]
Consequences of "Play or Pay"
96
Effects on Insurance Coverage.- From this standpoint, "play or pay" appears
to be a success. According to a simulation of this policy conduced by analysts at the
Urban Institute, an estimated XX million Americans and their dependents would
receive insurance coverage as a result of the mandate. An additional XX million
Americans would be covered through a public plan for unemployed and self-
employed individuals and dependents.
[insert summary table 2 and 3 on changes in coverage from Urban Institute study;
tables need to be consolidated and clarified]
Assuming a 7 percent "play or pay" tax, insurance costs would increase by $29.7
billion for employers, in 1989 dollars, and by $36.8 billion for employers. Premiums
paid by individuals would increase by $0.8 billion, while uncompensated hospital
care would decrease by $15 billion.
[insert summary table 7 from Urban study]
The Effects on Wages and Employment ,- "Play or pay" mandates appear to
put the burden on employers, but in the long-run, the burden will fall primarily on
workers As a result, workers will inevitably be hurt more than they are helped.
For primary breadwinners who will need to hold a job under all circumstances, the
main effect of the expanded health insurance coverage is likely to be a drop in real
take-home pay. For workers who are able to move in or out of the labor force, the
effect is likely to be a combination of lower take-home pay and reduced jobs.
The reason is a straight forward matter of economics. At the margin, the total
compensation an employer is willing to pay (including wages and fringe benefits)
will equal the marginal value to the employer of the labor that is provided. As a
result, if employers are forced by government mandate to increase benefits, em-
ployer will reduce employment or reduce cash wages. A mandate simply cannot
force an employer to pay more in compensation than the value of the labor to the
employer. This conclusion has been supported by a number of empirical studies
that have analyzed other mandates. (See, e.g, Gruber and Krueger, 1990; insert other
references)
For workers who are not free to leave the labor market, the cost of keeping
their jobs with a 7 percent "play-or-pay" payroll tax would be a 7 percent reduction
in cash wages. The burden would be particularly great because most of the working
uninsured are low-wage workers who are already struggling just to make ends meet.
For example, the mandate would result in -
A pay cut of $xxx a year for the average 34 year old male high-school graduate,
currently earning $xx,xxx a year; and
A pay cut of $xxx a year for the average 34 year old male high-school dropout,
currently earning $xx,xxx a year.
97
For other workers, 400,000 to 700,000 jobs would be lost. Moreover, if the "play-or-
pay" mandate evolves into a universal public insurance program, as seems likely,
available to all regardless of employment, job losses could exceed one and one half
million.
A review of the characteristics of the uninsured workers makes these
predictions seem even more realistic. (See table xx). Most of uninsured workers are
low-wage, low-skilled workers. To be blunt, these workers simply do not have the
"clout" in the market place to command costly fringe benefits. While unfortunate,
this is a fact that cannot be overlooked.
A far better approach is to provide direct assistance for low-income workers
through tax credits, as the President has proposed. This approach is much more
"progressive" in terms of income distribution. Income is actually transferred
directly to assist low-income workers, without the risk of job loss or reduction in
wages that a mandate inevitably involves.
"Play or pay" health mandates have other disadvantages for workers as well.
XX million currently insured workers would be forced to change coverage.
XX million would be forced to give up their private insurance and would be
forced into a "one size fits all" public insurance plan that may not meet their
needs. These shifts in coverage are illustrated in table XX.
[Be sure that tables are provided to illustrate these shifts.]
Families that depend on supplemental income from part-time employment
of a spouse could be hurt. If the mandate applies to part-time work. Em-
ployers will cut back on part-time jobs because of the added cost. On the other
hand, if the mandate does not apply, it would fail to close an important gap in
coverage and government would be forced to pick up the costs through the
back-up public plan.
Finally, "play or pay" may be lead to frequent changes in coverage that would
be confusing for workers and increase adminstrative costs. Only 32 percent of
currently uninsured workers end the year in the same job. In contrast, 72
percent of people who start a year employed and insured end the year in the
same job. (Klerman and Buchanan, 1990) Job turnover will force often a
changes in coverage because different employers tend to contract with
different insurers.
A Backdoor to National Health Insurance
98
Pay-or-play is often presented as an alternative to universal public health insurance
like that in Canada or Britain. Such plans remove choices from patients and limit
doctors' flexibility as described in more detail elsewhere in this document.
Recognizing these shortcomings, proponents of pay-or-play have generally
presented their proposals as simple extensions of the existing system of employer
provided health insurance in which the public component is downplayed.
This overlooks the strong temptation that employers, who now offer health
insurance to their workers, will have to choose the shift to the public pay option, if
the new payroll tax rate is as low as 7 or even 9 percent. A recent study conducted
for the Labor Department by independent policy analysts at the Urban Institute
reaches some startling conclusions on the potential size of such a shift.
PIE CHART -- HEALTH INSURANCE COVERAGE PUBLIC VERSUS PRIVATE:
3 WEDGES: PRIVATE, NEW PUBLIC(INCLUDING MEDICAID), AND MEDICARE.
ASSUME A 7 PERCENT TAX RATE.
A pay-or-play plan with a 7 percent payroll tax would cause a shift of 52
million Americans from employer provided health insurance to the newly
created public plan. Even if the tax were as high as 9 percent, there would still
be a shift of 32 million.
At the 7 percent tax rate, 26 million of the 33 million who are currently
uninsured would end up in the public plan. Only 7 million would actually
receive health insurance through their employers. At the higher 9 percent
rate, 22 million of the uninsured would join the public plan.
When the Medicare population is included, the enrollment in public health
insurance is 144 million or 58 percent of the total population, when the
payroll tax is 7 percent; it is 117 million, or 47 percent, of total population at a
payroll tax of 9 percent.
For workers in small firms, private health insurance would quickly become a
thing of the past under pay-or-play. At a 7 percent tax, 81 percent of the
workers in firms with 25 workers or less would be enrolled in the public plan.
The Urban Institute study only considers the static effects of a pay-or-play mandate.
It analyzed the initial shifting that would take place as employers selected the least-
cost option. Once a pay-or-play system is in effect, however, dynamic forces will be
set in motion that drive the system further toward univeral public coverage.
As long as some private employers continue to offer coverage, a pay-or-play
mandate does not require Congress to raise taxes to "improve" that coverage.
It will be difficult for lawmakers to resist pressures from provider groups to
99
include extra services in the mandated benefit package. Over time this will
induce more employers to shift to the pay option.
Unless Congress is willing to let the payroll tax rise to whatever level is
needed to fund the public plan entirely out of its revenues, there will be a
marked cost advantage to employers from paying rather than playing. This
competitive advantage is likely to widen over time as Congress adds benefits
to the mandate.
Effects on Employers
The initial harmful economic effects of a pay-or-play mandate will fall mainly on
employers. Small firms would be especially hard hit.
Employers would have to come up with $30 billion in extra health insurance
premiums or higher taxes under a pay-or-play mandate with a 7 percent
payroll tax, a 23 percent increase in their current health insurance costs; if the
tax is 9 percent, the added payments from employers are larger, $44 billion, a
34 percent increase.
The largest proportional increases are for small employers. For firms
employing less than 25 workers, employer payments for health insurance
would rise by 71 percent with a 7 percent payroll tax rate, and by 100 percent if
the tax rate were 9 percent.
Many employers would be forced to pay a higher share of premium costs
under a pay-or-play mandate, since most proposals limit sharply the amount
of employee cost-sharing.
Some employers would also be required to provide broader benefits,
the estimated cost of the required upgrades for a typical pay-or-play mandate
is $15 billion.
Health insurance coverage varies widely by sector ranging from a low of 24
percent in agriculture to a high of 80 percent in local and state government.
Sectors with low rates of coverage will be hard hit by the mandate.
Coverage also varies widely by firm size, ranging from 40 percent for small
firms with less than 25 workers to 73 percent for firms with 500 or more
employees. A sharp increase in costs for small firms relative to large firms
would threaten the most dynamic sector of the U.S. economy.
In the short run, a pay-or-play mandate will lead to somewhat higher prices
and increase in the inflation rate. For firms, that cannot pass on increases in
costs through higher prices, there would be a fall in profits. Assuming the
100
monetary authorities maintain their existing targets for inflation, the effect of
the mandate would be to raise unemployment and lower real GNP.
The Cost to the Government of Pay-or-Play
A pay-or-play mandate would give rise to a vast new Federal health insurance
program, four times as large as Medicare and inadequately funded.
BAR CHARTS - COST TO GOVERNMENT UNDER PAY-OR-PLAY WITH
7 PERCENT AND 9 PERCENT PAYROLL TAXES COMPARED WITH CURRENT
The Urban Institute estimates that a pay-or-play mandate with a 7 percent
payroll tax would not be adequately funded. The new payroll tax would not
cover the full cost of the new public plan. A subsidy of $37 billion would be
needed from general revenue. A 9 percent payroll tax would lower the
subsidy to $25 billion, but not eliminate it. The subsidy is likely to grow over
time.
Pay-or-Play Fails to Address Cost-Control Effectively
Play-or-pay proposals are often coupled with proposals to control rising medical
costs through price regulation schemes. Price controls of this sort are doomed to
fail, since pay-or-play does nothing to address the dynamic factors that are driving
up health care costs. In the absence of meaningful reforms, imposing price controls
is like putting lid on a pressure cooker. If the heat remains on the lid evenutally
blows off and the pot boils over.
The flawed incentives present in the existing system that lead consumers to
use more and physicians to provide more are left in place.
Some features of pay-or-play could drive up costs. Coverage will be
duplicated for families with multiple employers. That could lead to more
inefficient "first dollar" coverage in which employees do not face any out-of-
pocket health costs.
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1/27/92
Case Studies
The President's plan will allow all Americans to have access to
affordable health insurance. The following are illustrative
examples of how the President's plan would work.
Case #1
A family of three with one working parent, and a total family
income of $10,000 (just below the poverty level) :
[Full Credit of $3750]
Under the current system, this family is not eligible for
Medicaid and cannot afford private health insurance.
Under the President's plan, this family would qualify for a
$3750 transferable credit to buy basic health insurance
through the State designed group health plan (or another of
their choice).
Case #2
A mother with two children who was on welfare (AFDC) in the past,
and has returned to a job earning $8500 per year. No employer
health insurance is provided:
[Full Credit of $3750]
Under the current system, a mother receiving AFDC who
returns to work continues to receive Medicaid for 6 months;
after the 6 month period, the family is charged 3 percent of
the family income as a Medicaid premium. After 1 year, the
family is no longer eligible for Medicaid.
Under the President's plan, the family would qualify for a
$3750 transferable credit to buy basic health insurance
through the State group health plan (or another private
plan) when they no longer qualify for Medicaid.
The President's plan removes the current disincentive for
AFDC families to remain on welfare because they fear losing
Medicaid coverage -- the President's plan will ensure
continued coverage for welfare recipients who return to
work.
Case #3
A family of 4 with a household income of $35,000, and no employer
sponsored health insurance:
[Full Health Care Deduction of $3750 and Access to Group
Coverage]
Under the current system, they often cannot find affordable
coverage.
Under the President's plan they would receive a $3750 tax
deduction (a benefit of approximately $1050) to help with
the purchase of insurance.
In addition, their employer(s) would provide information and
arrange access (but not be required to contribute) to group
coverage. For example, the employer could arrange coverage
through a Health Insurance Network (HIN), so that the family
can buy more affordable coverage through a large employer
group -- with larger risk pools rather than costly
individual coverage.
Case #4
A single individual below the poverty level not eligible for
Medicaid (e.g. woman with no children and most males) :
[Individual Credit of $1250]
Under the current system, this individual has no access to
health insurance, and usually receives "unreimbursed care"
through hospital emergency rooms.
Under the President's plan, this person would receive a
$1250 transferable credit for the purchase of group health
insurance through the basic State health plan, or some other
private plan.
Case #5
A homeless person who currently relies on emergency room
treatment for serious illnesses:
[Individual Credit of $1250]
Under the current system, hospitals and other providers give
uncompensated care, shifting the costs and higher charges to
government and individuals with insurance.
Under the President's plan, this person would use the $1250
credit to choose a basic health insurance package. If the
individual did not choose a plan, the State and/or hospital
could assign them to a "basic plan" insurer -- with the
premium paid by the transferable credit. Hospitals would
receive reimbursement for most costs that they formerly had
to provide for free.
Case #6
A family of 4 with household earnings of $50,000, and a $1000
employer contribution to health insurance:
[Health Care Deduction]
Under the President's plan, this family would receive a
health care tax deduction of $2750 ($3750 minus employer
contribution of $1000), making their health insurance much
more affordable.
Case #7
An individual with a serious health problem is considering
changing jobs, but is afraid of giving up current employer
coverage:
[Portability and Security of Health Care]
Under the current system, a person changing jobs may not be
covered under a new employer's policy because of health
status. Pre-existing conditions exclusions may also apply,
interrupting coverage.
Under the President's plan, regardless of health status, the
new insurer would be required to offer unrestricted access
to the new employer's group coverage.
In addition, insurers would not be permitted to deny
coverage due to health status, and persons with previous
health benefits could be not denied coverage of preexisting
conditions. [so long as no insurer can avoid pre-existing
conditions, and all must accept new risks, no insurer will
be disadvantaged].
Case #8
An employer of a small firm of 20 workers would like to offer
employees health insurance, but cannot find affordable coverage:
[Small Market Reforms]
Under the current system, small employers have difficulty
finding affordable coverage. The problem becomes worse when
one member of a small group has a poor medical history or
current high medical costs.
Under the President's plan, small employers would have
access to larger group coverage through Health Insurance
Networks (HINs) spurred by major insurance and ERISA reform.
Large group coverage is less expensive and more efficient,
since insurance administrative costs are much lower and risk
is more effectively distributed.
In addition, the plan would set limits on the variation of
premiums insurers can charge to different groups. Insurers
would not be able to deny coverage to any individual, or
drastically increase premiums when one member of a group
becomes ill. Additionally, a long term "risk adjustment"
between insurance pools would remove the incentive for
insurers to compete by "cherry picking" low risks and
encourage competition on service and cost effectiveness.
Case #9
An individual just diagnosed with a serious health problem
applies for health insurance for the first time:
[Guaranteed Issue]
Under the current system, uninsured persons with serious
health problems are often denied health insurance -- for any
price.
Under the President's plan, insurers would be required to
offer coverage to any individual, regardless of health
status. Premium levels would be limited so that costs would
not be prohibitive.
Case #10
A family earning $17,000 has no employer coverage and currently
cannot afford health insurance:
[Partial Health Credit]
Under the President's plan, this family would receive a
partial health tax credit of $XX towards the purchase of
health insurance (or a $3750 deduction -- whichever provides
the greater benefit).
Affordable group coverage would be made available through a
State coordinated "basic plan" pool that would guarantee
access to basic health insurance coverage.
Case #11
An individual with an income of $200,000 and an employer
contribution of $1940 towards health insurance:
[Limit on Deductibility of Rich Plans for High Income People]
Under the President's plan, nothing would change for this
individual.
However, if the employer contribution increased above $1940
(the projected 70th percentile level of average national
employer contributions for 1993) to, for example, $2140, the
individual would realize $200 of imputed taxable benefits.
This is intended to address the prevalent problem of high
income people overconsuming health care because of excessive
employer-purchased insurance coverage that is a tax free
benefit to the individual. This will encourage high income
individuals and their employers to buy more reasonable
insurance plans.
Case #12
An individual is planning on choosing a health plan, and wants to
get the best quality plan for the most competitive price. But he
is unsure of which plan to choose:
[Consumer Information]
Under the current system, consumers have limited objective
knowledge of the relative prices of insurers, providers. Nor
are they aware of the hospitals and doctors included in the
plan -- or of the relative quality of local hospitals and
doctors.
Under the President's plan, comparative information on
quality and price of health care will be available to
consumers. Area provider groups will collect and disseminate
information on insurers, physician, hospitals, labs and
other facilities -- both on price and quality. This local
health care "blue book" will allow consumers to identify the
best health plans, and providers. As a result, consumers
will be better equipped to choose the health plan that is
best suited to their needs.
1. The examples presented assume the fully-phased in program.
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