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American Business Conference 4/7/92 [OA 7571] [3]
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Speechwriting, White House Office of
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American Business Conference 4/7/92 [OA 7571] [3]
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26
22
4
3
FOR ANDY'S SPEECH
-- How much American business will NAFTA create? # of jobs, etc.
Copy of Quayle's speech to ABA
-- Legal reform horror stories ($ gobbled up in liability
insurance, etc.)
-- Get transcript of Darman's Brinkley appearance on Sun. 3/22/92
-- Health Care costs for business Katie Levitt FTS-646-7942
-- Regulatory horror stories
-- Exports; how business has boomed
-- Call Labor/Education: $ in training workers (reading, basic
skills) ; figures on loss of productivity.
The challenge of Free Trade
HF 1721.095 / NEOB Li boary
Ansere Center for Study of American Business
Washington U., st.lories
good for
dereg &
legal reform
litigation
costs,
THE WHITE HOUSE
WASHINGTON
DATE: Mar. 30, 1992
TO: Rae Nelson
FROM: CLAYTON YEUTTER
Counsellor to the President for
Domestic Policy
Rae, I suggested to Dave Demarest that
FYI
he have his speechwriters call you re next
week's endeavors. But feel free to call them
from
if you wish.
Sharan
Andy Ferguson will be doing the American
Business Conference speech on Tuesday,
and Dan McGroarty will be doing the Newspaper
Editors speech on Thursday.
The Tuesday speech will have primarily
a business orientation, with a secondary
education spin, so it should be fairly easy
to write and probably doesn't need a lot
of education material from you or the folks
at Education.
The one on Thursday, on the other hand,
will be primarily education in its orien-
tation, so that 11 require a good bit of
input. I would think though that McGroarty
could use a lot of Sec. Alexander's material
and just adapt it a bit for the President.
4
bc: D. Demarest
S. Danzansky
C. Kolb
H. Moore
THE white HOUSE
WASHINGTON
Raleigh Boreham
Baldor Electric Co.
501-646-4711
1990
: 1980
8.5%
7.4
7.2 m
6.7 in
supported
jobs
by exports
S.O in
1986
To
Bob
Date 4/2
Time 2:26
WHILE YOU WERE OUT
M
Lester Davis
of
# 377-1675
Phone Commerce Dept.
Area Code
Number
Extension
TELEPHONED
PLEASE CALL
CALLED TO SEE YOU
WILL CALL AGAIN
WANTS TO SEE YOU
URGENT
RETURNED YOUR CALL
Message
Export related X
Effer
Operator
AMPAD
EFFICIENCY®
23-021 CARBONLESS
3/30/92
DRAFT
AMERICAN BUSINESS CONFERENCE
MEMBERSHIP MEETING
The Willard Inter-Continental Hotel, Washington, D.C.
April 6 - - 8, 1992
AGENDA
Monday, April 6, 1992
2:00 p.m. -- ABC Board of Directors Meeting
5:00 p.m.
6:00 p.m. -- Reception and remarks by ABC Chairman Jim Jones and
7:00 p.m.
ABC President Barry Rogstad
7:15 p.m.
Dinner at the Red Sage Restaurant
Tuesday, April 7, 1992
8:00 a.m. -- Breakfast Meetings
9:00 a.m.
OUTLOOK FOR CONGRESSIONAL ACTION TO CHANGE THE TAX CODE
Congressman Beryl Anthony (D-4-AR)
Ways and Means Committee
Congresswoman Nancy Johnson (R-6-CT)
Ways and Means Committee
FISCAL AND BUDGET POLICIES TO STRENGTHEN AMERICA
Congressman Jim Cooper (D-4-TN)
Budget Committee
Congressman Chris Cox (R-40-CA)
Government Operations Committee
TAX AND REGULATORY REFORM
Senator Pete Domenici (R-NM)
Ranking Republican, Budget Committee
PROSPECTS FOR ECONOMIC GROWTH
The Honorable John LaWare
Governor, Federal Reserve System
CAN WE AFFORD PEACE?
Senator Sam Nunn (D-GA)
Chairman, Armed Services Committee
-2-
Tuesday, April 7, 1992 (continued)
Breakfast Meetings (continued)
TAX REFORM TO ENCOURAGE SAVING
Senator Bob Packwood (R-OR)
Ranking Republican, Finance Committee
AMERICAN TECHNOLOGY POLICY
Senator Tim Wirth (D-CO)
Energy and Natural Resources Committee
9:15 a.m. -- Plenary Sessions
11:45 a.m.
POLICIES TO IMPROVE AMERICA'S GREATEST RESOURCE: ITS PEOPLE
Senator John D. Rockefeller (D-WV)
Finance Committee
REFLECTIONS ON A PRESIDENTIAL CAMPAIGN: RESTORING ECONOMIC
GROWTH AS OUR MOST IMPORTANT DOMESTIC ISSUE
The Honorable Paul Tsongas
PRESIDENT BUSH'S DOMESTIC POLICY PRIORITIES
The Honorable Clayton Yeutter
Counsellor to the President for Domestic Policy
12:00 p.m. -- Luncheon Meetings
1:00 p.m.
OPTIONS AND EXECUTIVE COMPENSATION
The Honorable Richard Breeden
Chairman, Securities and Exchange Commission
DEFICIT REDUCTION AND SPENDING DISCIPLINE
Congressman Bill Green (R-15-NY)
Appropriations Committee
Congressman Jim Slattery (D-2-KS)
Banking, Finance and Urban Affairs Committee
POLICIES TO GET THE COUNTRY GROWING AGAIN
Senator Joe Lieberman (D-CT)
Small Business Committee
-3-
Tuesday, April 7, 1992 (continued)
Luncheon Meetings (continued)
CHALLENGES OF A CHANGING WORKFORCE
The Honorable Lynn Martin
Secretary of Labor
ARE WE ENTERING A PROTECTIONIST ERA?: THE FUTURE OF U.S. TRADE
POLICY
Senator Charles Robb (D-VA)
Foreign Relations Committee
PROSPECTS FOR LITIGATION REFORM
The Honorable Kenneth Starr
Solicitor General, Department of Justice
2:00 p.m. -- Plenary Sessions
5:00 p.m.
KEYNOTE ADDRESS
The President of the United States
BUSINESS AND POLITICAL CLIMATE
Michael Elliott
Washington Bureau Chief, The Economist
Alan Murray
Wall Street Journal
Robert Novak
Evans-Novak Political Report
CONGRESS, THE PRESIDENT AND THE BUDGET
Congressman Leon Panetta (D-16-CA)
Chairman, Budget Committee
DEBATE: TERM LIMITATIONS FOR MEMBERS OF CONGRESS
The Honorable James K. Coyne
Chairman, First Washington Management Group
Jim Glassman
Editor, Roll Call
-4-
Tuesday, April 7, 1992 (continued)
7:00 p.m.
Reception at the Decatur House
7:30 p.m.
Dinner at the Decatur House
Presentation of "ABC Distinguished Leadership Award"
Wednesday, April 8, 1992
8:00 a.m. -- Breakfast Meetings
9:00 a.m.
FORGING A BIPARTISAN TECHNOLOGY POLICY
Senator Jeff Bingaman (D-NM)
Joint Economic Committee
Senator Thad Cochran (R-MS)
Appropriations Committee
THE PRESIDENT, CONGRESS AND ECONOMIC GROWTH
The Honorable Nicholas Brady
Secretary of the Treasury
TAX REFORM AND GROWTH
Congressman Sam Gibbons (D-7-FL)
Ways and Means Committee
Congressman Charles Schumer (D-10-NY)
Banking, Finance and Urban Affairs Committee
FEDERAL SPENDING PRIORITIES AND DEFICIT REDUCTION
Congressman James Quillen (R-1-TN)
Rules Committee
Congressman Charles Stenholm (D-17-TX)
Budget Committee
GROWTH, REVENUE AND FAIRNESS
Congressman Bill Archer (R-7-TX)
Ranking Republican, Ways and Means Committee
9:00 a.m. -- Plenary Wrap-up Session
10:00 a.m.
THE PUBLIC POLICY ROOTS
OF ECONOMIC GROWTH
Expansion of Current Markets
Cultivation of New Markets
Market Opening Initiatives
Reallocation of
Uuguay Round
Federal Spending
North American Free Trade
Budget Process Reform
Higher Standard
Businessto-Business Diabgue with
Inter-Generational Balance
Japanese and European Entrepreneurs
Defense Cuts/Burden Sharing
of Living
Curtailment of Agricultural Subsidies
Export Control Reform
Economic
Worker/Organizational
Increased
Increased
Private
Deficit Reduction
Growth
Productivity
Investment
Savings
Entitlement Reform
Improved Schoolto-Work Transition
Lowering the Cost
Maintenance of Spending Caps
School Reform
More and Better
of Doing Business
Worker Training/Retraining
Accounting Reform
Jobs
Total Quality Management
Litigation Reform
Health Care Reform
Tax Reform
Improved/Expanded
Near Term Reform
Physical Capital
Restoration/Expansion of IRAs
Recrientation of Government R & D
Capital Gains Differential
Improved Government-Business Tech Transfer
Corporate Tax Integration
Energy Policy Reform
Consumption Taxes
Long Term Reform
Consumption-Based Income Tax
= Current ABC Project/Policy Position
THE WHITE HOUSE
Office of the Press Secretary
For Immediate Release
April 7, 1992
REMARKS BY THE PRESIDENT
TO THE AMERICAN BUSINESS CONFERENCE
The Willard Hotel
Washington, DC
2:11 P.M. EDT
THE PRESIDENT: Thank you, Jim, very, very much. Thank
you all, and I'm just delighted to be back with you. And, Jim Jones,
thank you, sir, for the introduction, for your leadership not just of
this wonderful organization, but of the exchange and for everything
else you do for this economy.
Some people think I've been traveling a little to much,
so today as an example of my new policy, no trips further than one
block away from the White House. (Laughter.)
It is a pleasure to be with you. I'm delighted to have
been accompanied by Barbara Franklin, who many of you saw coming in,
I think -- our new Secretary of Commerce, in whom I have great
confidence -- Barbara. (Applause.) And she and I both agree that
she has large shoes to fill over there at Commerce with one of your
originators, one of your founders, my dear, close friend Bob
Mosbacher sitting in the back, back here -- what a job he did for his
country as Secretary. (Applause.)
But let me just say it is always a pleasure to speak
with the members of the ABC -- the American Business Conference
-- because it's a pleasure to speak with the best, people that get
things done. And I'd like to talk to you today about the future, the
future of our country generally, and more particularly, the future of
our country's business environment. In fact, we cannot separate the
two. The America of the 21st century -- Jim talked about some of the
aspects of this, what ABC's about -- its ability to make peace in the
world, but to foster strong families, to create rewarding jobs will
be shaped today, in large part, by how hospitable we make America for
business.
We can learn from your achievement. The key to the
success of any high-growth company is the wise deployment of
resource. The successful company channels labor and investment into
those areas with the potential for the greatest expansion, for the
highest return. And you take the risk; you reap the reward;
everyone, meanwhile, benefits from the wealth you create.
And that, in brief, is the genius of entrepreneurial
capitalism, a system that has made America the envy of the world.
For 200 years our prosperity has sprung from our ability to innovate,
to create, to change as the world changes. But America's world
leadership is not automatic; it's not a birthright. We must continue
to earn it day by day, quarter by quarter, year by year. And the
world now is changing at a pace that no one could have dreamed of
just a generation ago. And America, which has led the world's
transformation, simply must change with it.
Over the last several years deadweights have begun to
slow the engine of growth, inefficiencies a competitive economy
MORE
- 2 -
simply cannot tolerate. And today I want to discuss five areas of
reform, five critical ways in which America must change if we are to
continue to lead the world. You understand the urgency, for each of
these problems presents itself to American companies not as an
abstraction, but in the most immediate way: as a cost of doing
business, a cost you can't control, an expenditure with no possible
return.
When our legal system becomes incapable of resolving
disputes in a timely and civil manner, business loses the incentive
to innovate and take risks. Secondly, when health care costs
escalate, business picks up much of the tab. When government imposes
barriers to trade, business pays the price in opportunities lost.
When our children leave school without rudimentary skills, business
bears the burden in lowered productivity. And when government
freezes in gridlock, business can no longer plan rationally for the
future.
Let me begin with the crying need to reform our
country's civil justice system. Every American has heard stories of
bizarre or frivolous lawsuits. But most of you have lived with them;
tales that could have been torn from the pages of Kafka. Consider
one example, related by one of your members, Roger Coleman, President
of Rykoff-Sexton, a food manufacturer and distributor.
After record earnings in 1989, Mr. Coleman publicly
expressed his confidence that 1990 would be even better. And when
earnings fell short, his hopeful statement became the cause of a
shareholder class-action lawsuit. First, in a meeting with
plaintiffs' contingency-fee lawyers, at which the merits of the case
were never even discussed. "The issue," says Mr. Coleman, "was the
depths of our pockets." And next -- next came the nightmare of
discovery: endlessly expensive and invasive. The company's
managers, instead of managing, spent their time preparing for
depositions. The lawsuit, he says, "brought everything to a stop."
In the end, rather than permit the total exhaustion of
company resources, Mr. Coleman decided to settle. And the tab for
this exercise in futility - -- $8.7 million. And as he says, "That's
over $8.7 million that was diverted from new investments in jobs and
facilities."
The scenario is repeated daily throughout American
business. And it is not repeated, let me stress, among our world
competitors. Only the United States has seen the number of lawyers
double over a 20-year period. And only the United States spends more
than $80 billion annually in direct litigation costs, perhaps four
times that in indirect costs. According to a recent survey, 40
percent of companies that had been the target of product liability
suits have discontinued certain types of product research.
We must remove this ball and chain from our ability to
produce, our ability to compete worldwide. And my Competitiveness
Council, led by the Vice President, has offered 50 recommendations
for legal reform. They would limit discovery to reasonable
proportions, discourage some frivolous suits through a "loser-pay"
rule, and offer alternative means of resolving disputes.
This broad legal reform will not be easy. Just look at
the fight that we've had on product liability reform. We introduced
a reform bill in 1990 and again in 1991. And the Senate opposition,
the majority in the Senate, refused to bring it to a vote. And in
the House it's stuck in two committees. The special interests are
lining up against legal reform, and we could certainly use your help
in moving it forward. We must reform the legal system of this
country. (Applause.)
MORE
- 3 -
If we are successful, the effects will be far-reaching,
extending into another area critically in need of change. Medical
malpractice premiums almost doubled in the second half of the '80s.
Doctors are practicing defensive medicine, ordering an estimated $20
billion a year in unnecessary tests and procedures to protect against
frivolous lawsuits.
The trends in health care costs are simply
unsustainable. From less than six percent 30 years ago, total health
care expenditures are today about 13 percent of GDP. Some midrange
estimates put that figure at 30 percent by the year 2030 -- that's 30
cents of every dollar of national income spent on health care. Right
now, according to one federal study, American corporations already
spend more on health care each year than they earn in after-tax
profits.
We must reform the system, but we face a crossroads.
Some have advocated nationalized care; others propose the so-called
pay or play approach, which I am convinced is merely a step on the
road to nationalized care. Neither is acceptable. Neither will
preserve the quality of our country's health care, which remains the
best in the entire world. And I will not let that high quality be
taken away from the American people through some scheme of government
control.
Nationalized care means rationed care. Its promise of
cost containment is a mirage. Pay or play would dump still more
mandates on business. For employers, a nine-percent payroll tax
would mean a 34-percent increase in health insurance costs. And that
money has got to come from somewhere. And for a company unable to
pass along the added costs through higher prices, that means
decreased investment; it means lower wages; it means fewer jobs.
There is an alternative, a good one. And my proposed
health care reform will build on the strengths of the existing
system, preserving the quality of American care. We will increase
consumer choice. And through transferable credits, we will assure
access to basic health insurance for the uninsured and control costs
through market incentives. And we will not have to raise taxes in
the process raise taxes on the employers.
I've targeted a third area for attention - like the
others, absolutely critical to our success in the coming decades.
You understand that for America to succeed economically at home, we
must succeed economically abroad. The fastest growing companies
among your group, the ones creating the greatest number of jobs here
at home are those with far-reaching involvement in foreign markets.
I am committed to opening markets to American goods and
services, removing the government-imposed barriers that act as a
hidden tax on American business. Each market shut off by protection
is a lost opportunity to sell your products. A successful conclusion
to the current Uruguay Round of trade negotiations, for instance,
could increase world output by $5 trillion over the next decade.
More than $1 trillion of that boon will go to the United States
creating a higher standard of living and, yes, more jobs for
Americans.
And then, even closer to home, an area where Bob
Mosbacher did so much and now Barbara Franklin has taken up the cause
-- exports to Mexico. They have more than doubled over the last five
years, creating more than 300, American jobs. Now, our North
American Free Trade Agreement -- Mexico, Canada and the U.S. -- will
lock in and even multiply these gains, creating a $6-trillion market
for American products in Canada, Mexico and the USA.
As world trade expands, the need for a sophisticated,
well-educated work force will intensify. And yet the fact is grim
MORE
- 4 -
and undeniable and Jim referred to this one in introducing me --
our current educational system is unable to produce the workers the
highly competitive world market demands.
Our educational failures have hit American employees
hard. English is now the language of international business and yet
only 20 percent of 17-year-olds can write a simple two-paragraph
letter applying for a job. The situation in geography, math, science
is equally dire. Too many businesses are forced to pay twice for the
education of prospective employees -- once through taxes that support
our schools, and again through job training to remedy the failures of
those schools in educating our young.
Communities have begun taking matters into their own
hands, with local businesses often acting as catalyst. ABC's Vital
Link, which works with local schools to establish learning incentives
for students, is a perfect example of the community-based efforts our
children need.
And still, there is much for the government to do. This
year, seven different federal agencies will spend $18 billion on a
patchwork of 60 mandated vocational training programs. Is it any
wonder that so many Americans who seek training don't know how to get
it? Now, working with state and local governments, we've got a new
program: our Job Training 2000 Initiative we call it. And that will
bring coherence to these programs and try to offer "one-stop
shopping" to aspiring workers.
Job Training 2000 perfectly complements the revolution
now taking place in American education as a whole. And through this
-- I hope you've heard of it -- our America 2000 initiative, we will
reinvent literally reinvent our schools. Your chairman, Jim
Jones, is a leader in what we call the New American Schools
Development Corporation. It's a private group created, at my
request, to launch an entire generation of break-the-mold new
American schools.
This revolution is essential to creating a world-class
work force. Now, to do that, we need to set world-class standards
for students and create a system of voluntary national tests to
measure their progress. We've got to redouble our efforts to rid our
schools of drugs and violence, to cleanse America of this scourge
that wastes so many young lives. And we must make schools more
accountable by forcing them to compete. And that means giving
parents the opportunity to choose their children's schools -- public,
private or religious. (Applause.)
I am convinced that each of these major reforms --
restoring sanity to our legal system, ensuring quality health care
for all, expanding world trade, reinventing American education -- is
essential to this country's productivity. But each faces powerful
opposition from special interests who profit from the status quo.
And so I've targeted a final reform, no less important than the
others. If America is to change, our government must change.
And last week in Philadelphia, I presented seven
specific programs -- proposals really -- to deal with the paralysis
that grips the Congress. And the results of this gridlock are
dismally plain. Congress was incapable even of passing a short-term,
stimulative economic growth package. But they must understand: I am
going to continue to fight for measures essential to economic growth
-- and that includes something you know something about, a lot about
-- including a cut in the tax on capital gains. (Applause.)
And you have sitting here today a leader that knows
something about the success of a capital gains cut, Jim Jones.
Because if my memory serves me correctly, it was the Jones-Stieger
Initiative in '78 that showed what can happen in the way of new
MORE
- 5 -
investment, entrepreneurship, when a capital gains tax cut was
enacted.
--
The American people
and I can understand this -- are
rightly fed up with business as usual: a deficit that is a fiscal
and a moral outrage, a permanent governing class oblivious to the
national interest, and hundreds of self-perpetuating programs that
don't even aid the people they were designed to help.
Now, I refuse to believe that this is the legacy we will
leave our children. But it will be, if we don't reform -- I'm
talking about perks. I'm talking about the gymnasium. I'm talking
about fundamental reform of the United States Congress.
The reforms that I've outlined here today are grounded
in basic principles, a way of looking at the world. As Jefferson
said, "The pillars of our prosperity are the most thriving when left
most free to individual enterprise." In practice, that means
government must trust the wisdom of the markets more than the whims
of the bureaucrats. The freely-made decisions of businessmen and
women must take precedence over the engineering schemes of
government. And all of our institutions, from the Congress to the
local school board, must be accountable to those that they serve.
Over the last decade, America has changed the world.
Given what's happening out there in this election year, we sometimes
fail to count our blessings. There had been fundamental changes in
this world, changes for world peace. And today we are blessed with
those changes and we are also blessed with the opportunity now to
change America. With these principles that I've outlined here as our
guide, I am absolutely convinced we will meet the challenges and
exploit the opportunities of the world that is now being born.
Thank you all very much for what you do. And may God
bless our country. Thank you all. (Applause.)
END
2:32 P.M. EDT
A Report from the
President's Council on Competitiveness
Agenda for
Civil Justice Reform
in America
ACICE OF PLURIBUS THE UNUM STATES DNITED
August 1991
A Report from the
President's Council on Competitiveness
Agenda for
Civil Justice Reform
in America
August 1991
THE VICE PRESIDENT
WASHINGTON
MEMORANDUM FOR THE PRESIDENT
Oan Le
FROM:
THE VICE PRESIDENT
SUBJECT:
PRESIDENT'S COUNCIL ON COMPETITIVENESS
AGENDA FOR CIVIL JUSTICE REFORM IN AMERICA
On behalf of the President's Council on Competitiveness,
I am pleased to transmit our report, "Agenda for Civil Justice
Reform in America."
Throughout our history, the United States has cherished our
system of civil justice as one of the cornerstones of our free
and democratic society. It is our civil justice system that
protects the individual's rights to life, liberty and property by
providing all Americans an opportunity to be heard in an
impartial court of law.
In the past 30 years, our legal system has become burdened with
excessive costs and long delays. Many features of the current
legal system no longer serve to expedite justice or to ensure
fair results. Instead, overuse and abuse of the legal system
impose tremendous costs upon American society. Each year the
United States spends an estimated $300 billion as an indirect
cost of the civil justice system.
To address these problems, the Council established a special
working group, chaired by Solicitor General Kenneth W. Starr.
The working group's recommendations, which were unanimously
accepted by the Council, provide concrete steps that can be taken
to restore our civil justice system as an institution that is
fair to all and serves the ends of justice.
To implement these changes, the Council has recommended fifty
specific changes to our current civil litigation system. These
changes can be implemented through legislation, by amendment to
the rules of civil procedure and evidence, and through
administrative actions including an executive order. The Justice
Department is preparing the documents necessary for
implementation and will coordinate the Administration's civil
justice reform effort.
I am confident that these reforms will greatly reduce the burden
of excessive, needless litigation, while at the same time
protecting and enhancing every American's ability to vindicate
legal rights through our judicial system.
Introduction
Litigation and the
for the U.S. economy. A recent
article in Forbes estimates that in-
American Economy
dividuals, businesses and govern-
ments spend more than $80 billion
merica has become a
a year on direct litigation costs and
A
litigious society. In 1989
higher insurance premiums, and a
nearly 18 million new
total of up to $300 billion indirectly,
civil cases were filed in
including the cost of efforts to avoid
the state and federal
liability.
courts. This amounts to
Unrestrained litigation neces-
one lawsuit for every ten
sarily exacts a terrible toll on the
adults. In the
U.S. econo-
federal courts
my. Accord-
alone, the
Businesses and governments
ing to a re-
number of
spend more than
cent report
lawsuits filed
by a Pro-
each year has
$80 billion a year on direct
fessor of
almost
litigation costs
Finance at
tripled in the
the Univer-
last thirty
sity of Texas,
years - from
it is esti-
approximately 90,000 in 1960 to
mated that the average lawyer
more than 250,000 in 1990.
takes $1 million a year from the
This dramatic growth in litiga-
country's output of goods and
tion carries with it very high costs
services. These baleful effects are
Total Federal District Court Filings
300,000
251,113
250,000
200,000
197,710
150,000
127,280
100,000
89,112
50,000
0
1960
1970
1980
1990
SOURCE: Federal Courts Study Committee Working Papers and Subcommittee Reports; July 1990, Vol. 2;
1990 filings; 1990 Federal Court Management Statistics.
1
Growth of the Legal Industry 1977-1989
400
382%
300
200
100
90.9%
40.0%
SOURCE: Survey of Current
Business, April 1991; U.S.
0
Department of Commerce.
AUTO
FOOD
LEGAL
Lawyers per 100,000 Population
300
281
250
200
150
111
100
82
50
11
0
JAPAN
ENGLAND
GERMANY
U.S.A.
AND WALES
SOURCE: Cambridge Law Journal, July 1990, Vol. 49 (2); Intro to Research in Japan, 1991.
2
not limited to the domestic economy.
Discovery
According to a 1984 study commis-
sioned by the U.S. Department of
ver 80 percent of the time
Commerce, foreign competitors often
have product liability insurance costs
American companies, more than
O
and cost of a typical lawsuit
that are 20 to 50 times lower than U.S.
involves pretrial exam-
ination of facts through
companies. In a survey of over 250
discovery. Discovery is the
stage of the lawsuit where
three-quarters of the executives said
the parties are supposed to
they believe that the United States will
obtain and preserve information
be increasingly disadvantaged in world
regarding the pending action, for later
markets unless modifications are made
use as evidence in the trial. The
in the liability system.
The adverse
current rules governing discovery
effects of
permit parties to
roam unfettered
unconstrained
The life of the average civil
through their
litigation are
legion. A recent
lawsuit in federal court - -
opponent's
most private
survey by the
Conference
from filing to completion - -
documents.
Board, a group of
is fourteen months.
An espe-
cially burden-
3,600 organi-
zations in over 50
some part of
discovery involves the taking of depo-
nations, reports that due to potential
sitions - interviews of witnesses taken
liability concerns:
under oath, often lasting several days
and occasionally even weeks. Another
47 percent of U.S. manufacturers
potentially intrusive and burdensome
have withdrawn products from the
discovery practice is the use of
market;
interrogatories. The most onerous
25 percent of U.S. manufacturers
aspect of discovery, however, is the
have discontinued some forms of
document demand, whereby litigants
can force their opponents to open all of
product research;
their file cabinets to inspection.
Approximately 15 percent of U.S.
Although discovery requests are
companies have laid off workers as a
relatively inexpensive to make, the
direct result of product liability
responding party's costs can be
staggering, involving the time of
experience.
employees to produce materials,
While some of these consequences
attorneys' fees for reviewing materials
result from meritorious lawsuits, the
to be produced, and the physical
unnecessarily high cost of litigation is
copying or recording costs.
undoubtedly a major factor as well.
There are currently no limits to the
The current procedural system adds
number of requests that a party can
costs by prolonging resolution of
make for discovery items, as long as
disputes and encouraging wasteful
the requests are at least tenuously
related to the action. In one antitrust
litigation.
case, the discovery stage lasted almost
3
a decade; the plaintiff's final pretrial
found that in 1985 the legal system
statement, which was over 10,000
incurred a total of $16-$19 billion in
pages long, cròss-referenced approxi-
transaction costs to deliver $14-$16
mately 250,000 pages of documents.
billion to plaintiffs in net compensa-
The life of the average civil lawsuit
tion.
in federal court from filing to
completion is fourteen months.
Fully 77 percent of litigators in one
Expert Witnesses and
large American city acknowledged in a
"Junk Science"
1988 survey that they had used
discovery as an economic weapon
n area of the law
against their opponents. One result of
this lengthy process is that attorneys'
fees account for a substantial portion
A
particularly ripe for reform
is expert witness practice.
The Federal Rules of
of all recoveries. In fact, when all of
Evidence, which govern
the expenses of the litigation process
most expert testimony,
are added up, the claimants in tort
eliminated many of the
cases often end up with compensation
common law restrictions on the use of
that amounts to only a small
expert witnesses. The resulting
percentage of the total money spent.
uncontrolled use of expert witnesses
Professor O'Connell of the University of
has led to longer trials, more expensive
Virginia Law School estimates this
litigation, and a reduction in the quality
figure to be about 15 percent of total
of expert testimony in many cases.
litigation costs. A study by the Rand
It has also allowed "junk science" to
Corporation's Institute for Civil Justice
tarnish the legal process. Peter Huber,
Caseload for State Trial Courts
30,000,000
29,854,332
28,610,489
27,278,907
26,475,828
25,000,000
20,000,000
17,321,125
16,979,204
16,027,139
15,695,246
15,000,000
10,000,000
5,000,000
0
1986
1987
1988
1989
Civil cases
Total cases SOURCE: National Center for State Courts - Reported Caseloads for State Trial Courts.
4
a leading observer of American court-
gency fees to pay expert witnesses.
rooms, has written recently that
Although expert witnesses are sup-
"scientific frauds
are attempted
posed to give objective testimony
almost daily in our courts, and many
based on scientific evidence in order to
succeed." Huber wrote that "the most
help judge and jury resolve complex
fantastic verdict recorded so far was
matters, this practice easily turns too
worthy of a tabloid:"
many expert witnesses into "hired
"With the backing of 'expert' testi-
guns."
mony from a doctor and police depart-
ment officials, a soothsayer who decid-
ed she had lost her psychic powers
Punitive Damages
following a CAT scan persuaded a
Philadelphia jury to award her
n the past, punitive damages were
$1 million."
Stories such as this are becoming
I
assessed only in cases where the
defendant was proved to have had
almost commonplace. "Expert" wit-
a quasi-criminal intent to harm
nesses regularly offer their "scientific"
the plaintiff. Today, however,
opinions on the connections between
plaintiffs in civil lawsuits routinely
automobile accidents and breast can-
ask juries to award not only
cer or environmental pollutants and
compensatory damages (for their
"chemically induced AIDS". As if the
economic, or out-of-pocket losses) but
ability to fashion almost any opinion
also punitive damages. And juries are
into expert testimony were not enough,
responding with enthusiasm. A 1987
there is considerable use of contin-
study by the Institute for Civil Justice,
U.S. District Courts - Number (and %) of
Civil Cases Over Three Years Old
% of cases over
Number of cases
three years old
30,000
100
25,207
25,000
80
22,391
21,487
20,000
19,782
19,252
16,726
60
15,646
15,000
40
10,000
20
5,000
0
0
1984
1985
1986
1987
1988
1989
1990
Number of cases over three years old
SOURCE: 1990 Federal Court Management Statistics.
Percent of cases over three years old
5
which examined 24,000 jury trials in
The working group was composed
Cook County, Illinois, found that the
of representatives from the White
average punitive damage award
House Counsel's office, the Domestic
increased, in inflation-adjusted dollars,
Policy Council, the White House Office
from $43,000 in 1965-69 to $729,000
of Policy Development, the Office of
in 1980-84 -- a jump of 1,500%. In
the Vice President, the Office of
personal injury cases, the rise has been
Management and Budget, the Council
even more dramatic.
of Economic Advisers, the
A prominent insurance lawyer in
Environmental Protection Agency, and
Washington has said that punitive
the Departments of Justice,
damages "have made civil litigation
Commerce, Treasury and Energy. In
sort of like the lotteries you have in so
June and July 1991, the Council acted
many states." Justice O'Connor and
on the working group's
Justice Scalia have observed that the
recommendations and formulated 50
"wholly standardless discretion" of
proposals for the nation's civil justice
punitive damages "appear[s] incon-
system.
sistent with due process." And former
Implementing the reforms proposed
Justices Brennan and Marshall noted
by the Council will bring direct
that juries "are left largely to them-
economic benefits to the United States.
selves in making this important and
The reforms will allow lawsuits to be
potentially devastating decision."
resolved quickly so that individuals and
Commenting on one particularly
companies will be able to redirect
shocking case, federal appeals court
assets that were formerly wasted on
Judge Alex Kozinski speculated: "I
frivolous and often defensive litigation.
suppose next we will be seeing lawsuits
Our economy and our country will
seeking punitive damages for
benefit.
maliciously refusing to return phone
calls or adopting a condescending tone
in interoffice memos."
The Federal Civil
Justice Working Group
n January 1991, a working group
I
on Federal Civil Justice Reform
was established under the aegis of
the Council on Competitiveness,
chaired by Vice President Dan
Quayle. The working group,
chaired by Solicitor General
Kenneth W. Starr, was asked to
examine the federal civil justice pro-
cess and to recommend efficient and
effective modifications to reduce
unnecessary litigation and to decrease
the costs and time required to resolve
legal disputes.
6
Council Recommendations:
An Overview
Voluntary Dispute
Discovery
Resolution
retrial discovery is frequently
ost potential litigants
M
consider only two
P
the source of needless delay
and expense. Currently
litigants have virtually unlimit-
avenues for dispute
ed ability to take sworn depo-
resolution: informal
sitions of witnesses, request
negotiation and litigation.
documents and submit written
The Council on
questions to parties.
Competitiveness recom-
The Council recommends several
mends providing greater access to
fundamental reforms to the discovery
alternative dispute
process,
resolution (ADR)
including
techniques that
More than 92 percent of all
disclosure of
would routinely be
civil lawsuits are
basic information
available as a
substitute for
settled
prior to trial
and an initial
round of
traditional litiga-
discovery that
tion. These
would continue to be "free" to the
techniques include (1) early neutral
requesting party. This would include
evaluation, (2) mediation, (3)
an extensive document request, a
arbitration, and (4) summary jury
limited set of depositions and written
trials. The Council also encourages the
questions. Beyond this initial round,
private sector to employ contract
however, the requesting party would
provisions establishing non-judicial
have to pay for additional discovery.
means of dispute resolution in order to
The Council also recommends that
introduce ADR into the corporate
greater sanctions be imposed if
process.
materials are wrongfully withheld.
Because more than 92 percent of
all civil lawsuits are settled or otherwise
disposed of prior to trial, the Council
encourages mandatory settlement
conferences soon after the commence-
More Efficient Trials
ment of any litigation. The Council
suggests that litigants be required to
itigation is sometimes
notify the opposing parties of their
the courts. These actions will enhance
L
necessary when the parties
intention to file suit before resorting to
are unable to resolve a dispute
through less formal means.
the possibility that disputes may be
The Council recommends
resolved amicably without the courts.
several reforms designed to
make trial practice more
efficient, including urging courts to set
early trial dates and to employ sum-
mary judgment procedures more
frequently to eliminate disputes that
can be properly resolved by legal
rulings alone.
7
Expert Evidence
allowed to assign a specific dollar
Reform
amount to their requests. Where there
is clear and convincing evidence of the
defendant's intent to cause injury, then
eform of expert witness
punitive damages may be awarded in
R
practice is also essential if
a separate phase of the proceeding. In
trials are to remain fair and
any event, however, the amount of
rational mechanisms for
punitive damages should not exceed
conflict resolution. One of
the plaintiff's actual damages.
the Council's principal
recommendations in this regard is to
Improved Use of
require expert testimony to be based
on "widely accepted" theories. This
Judicial Resources
would eliminate testimony unsup-
ported by professional practice or
he Council encourages courts
scientific knowledge. The Council also
recommends banning contingency fees
for expert witnesses. This should
I
to employ more efficient case
management techniques,
including flexible assignments
prevent expert witnesses from
of federal district judges. The
becoming mercenaries or advocates,
Council also encourages
instead of impartial and objective
greater emphasis on resolving
witnesses.
intracircuit conflicts. The Council has
proposed that
The Council recommends that
circuit courts
be maintained
greater sanctions be imposed if
at a manage-
materials are
able number
wrongfully withheld.
of judges, and
that the Ninth
Circuit, which
Punitive Damages
has almost thirty sitting judges, be split
into two circuits.
he current common law
I
approach to punitive dam-
ages frequently distributes
Enhanced Incentives
awards in a random and
capricious manner. While
for Reduced Litigation
some states have attempted
limited reform, the Council
n order to promote more
recommends a comprehensive pack-
I
disciplined and less wasteful
age designed to limit and restrict
litigation, the Council proposes to
punitive damages.
strengthen the current rules which
The Council recommends that
authorize judges to sanction
punitive damages be awarded in a
attorneys who file frivolous
rational and consistent manner as part
lawsuits.
of a coherent system. Plaintiffs seek-
The Council also recommends a
ing punitive damages should not be
test of a modified two-way fee-shifting
8
arrangement whereby the loser of a
Eliminating Litigation
lawsuit pays the costs incurred by the
winner. Although limitations would be
Caused by Poorly
built into this system to safeguard
Drafted Legislation
equal access to the courts, this reform
would encourage pretrial settlements
and impose market discipline on the
he Council recognizes that the
litigation process.
T
federal government bears a
The Council further proposes a
great deal of responsibility for
moratorium on the more than 150 one-
the rise in litigation caused by
way fee shifting statutes under which
poorly drafted federal
victorious plaintiffs recover their fees
statutes. The Council
from losing defendants, while
proposes that the Executive Branch
victorious defendants get no such
closely review all legislative proposals
recovery.
against a "litigation hazards" checklist.
Reducing Unnecessary
Burdens on Federal
Courts
he federal district and
T
appellate caseloads have
skyrocketed in the past
decade, creating endless
delays, and adding
substantially to the cost of
litigation. The Council has
proposed several reforms designed to
unclog the federal courts, including
revising the threshold for federal
diversity jurisdiction, restoring judicial
immunity to state court judges for
official actions, and reducing abuse of
habeas corpus petitions.
9
Council Recommendations:
Implementation
he civil justice reforms
Administration will draft proposed rules
T
proposed by the Council. may
changes and submit the proposals to
be implemented through one
the Supreme Court's Rules Advisory
of several approaches. The
Committees.
five principal methods of
Some reforms can also be accom-
implementation are (1)
plished locally by the efforts of
federal legislation, (2)
individual judges. The Administration
revisions to the federal rules of civil
will make available innovative
procedure and evidence, (3) judicial
management procedures and provide
action, (4) model state legislation and
technical assistance to support these
rules, and (5) executive action. Some
suggestions.
of the proposed reforms can be
Although the reforms contemplate
implemented through more than one
Federal law and rules changes, many
approach. Changes to the discovery
of the reforms may be equally appli-
process, for example, may be
cable to state court systems. The
accomplished either by federal statute
Administration will draft model legis-
or through rule changes. Most reforms
lation and model rules changes so that
are also suited to model state statutes,
these reforms may be implemented at
particularly because they permit
the state level.
reforms suggested for the federal
The Administration is committed to
systems to be applied in the
the fair, efficient, and early resolution of
state courts.
disputes. To underscore this commit-
The Administration will draft legis-
ment, the Administration will apply
lation to implement these recom-
many of the suggested reforms to the
mendations and will work with Con-
conduct of litigation by federal
gress toward reform. Other changes
agencies.
will require amendment to the Federal
Rules of Civil Procedure, the Federal
Rules of Evidence, and the Federal
Rules of Appellate Procedure. The
10
Table of Recommendations
VOLUNTARY DISPUTE RESOLUTION
1. Promote Voluntary Use of Alternative Dispute Resolution (ADR) Techniques
Provide a Choice for Resolving Disputes: Create Multi-door Courthouses (1)
Promote Greater Awareness of ADR (2)
2. Require Notice Prior to Filing a Lawsuit (3)
3. Encourage Earlier Settlement of Contested Cases
Provide Incentives for Settlement Offers (4)
Expand Settlement Opportunities Through Settlement Conferences (5)
DISCOVERY
4. Reforms to the Pre-Trial Discovery Process
Require Disclosure of "Core Information" (6)
Adopt Presumptive Numerical Limits on Discovery (7)
Additional Discovery Governed by Market Incentives (8)
Penalize Abusive Discovery (9)
Encourage Parties to Admit Facts Not in Dispute (10)
Tie Discovery Requests to the Pleadings (11)
5. Resolving Discovery Disputes: Reform of Discovery Motions
Require Parties to Consult Before Seeking Court Intervention in Discovery
Disputes (12)
"Loser Pays" Rule in Discovery Motions (13)
6. Maintain Safeguards for Trade Secrets (14)
MORE EFFECTIVE TRIAL PROCEDURES
7. Early Trial Dates (15)
8. Summary Judgment Reforms
Mandatory Summary Judgment (16)
Provide Appropriate Deference to Trial Court Findings (17)
9. Hands-on Docket Management (18)
EXPERT EVIDENCE REFORM
10. Reform the Rules Regarding Expert Witnesses
Require "Widely Accepted" Theories (19)
Bar Contingency Fees for Expert Witnesses (20)
Require Additional Disclosure from Expert Witnesses (21)
Permit Depositions without Leave of Court (22)
Expressly Require Courts to Determine that the
Expert is Qualified in the Field of Testimony Offered (23)
Resist Efforts to Make Use of Court-Appointed Experts Mandatory (24)
11
PUNITIVE DAMAGES
11. Reform of Unlimited Punitive Damages
Eliminate Dollar Amounts from Pleadings (25)
Split Punitive Damages Trials into Two Phases (26)
Adopt a Clear and Convincing Evidence Standard (27)
Judicial Determination of the Amount of Punitive Damages (28)
Cap on Punitive Damages Awards (29)
IMPROVED USE OF FEDERAL JUDICIAL RESOURCES
12. Flexible Assignments for District Court Judges (30)
13. Enhance Case Management Techniques (31)
14. Encourage Use of En Banc Panels to Resolve Conflicting Decisions
Eliminate Restrictions on En Banc Panels (32)
End the Use of Mini-Panels for En Banc Review (33)
15. United States Courts of Appeals Should be Maintained at Manageable Levels/
Reducing the Size of the Ninth Circuit
Cap the Size of Courts of Appeals at Reasonable Levels (34)
Split the Ninth Circuit Court of Appeals (35)
ENHANCED INCENTIVES FOR ENCOURAGING MERITORIOUS
LITIGATION
16. "Loser Pays" Rule for Attorney's Fees in Diversity Cases (36)
17. Strengthen Sanctions Against False Court Filings: Rule 11 Reform
Retain Current Rule 11 Sanctions (37)
Include Non-Signer Liability in Rule 11 Sanctions (38)
Correction of Subsequently-Detected False Statements (39)
Uniform Standards for Rule 11 (40)
18. Towards More Efficient Attorney's Fees Statutes
Moratorium on One-Party Pay Statutes (41)
Reducing Time Spent Litigating Attorney's Fees
Provide Clear Standards for Awards (42)
Indexing Uniform Fee (43)
REDUCING UNNECESSARY BURDENS ON FEDERAL COURTS
19. Reforming Diversity Jurisdiction
Amount-in-Controversy Based on Economic Damages (44)
Indexing Amount-in-Controversy (45)
20. Restore Full Judicial Immunity to State Court Judges for Judging Cases (46)
12
21. Reduce Frivolous and Unnecessary Prisoner Lawsuits
Reform of CRIPA to Encourage Greater Voluntary Resolution of Inmate
Grievances (47)
Habeas Corpus Reforms (48)
Protect the Waiver of Fees Process: In Forma Pauperis (49)
ELIMINATING LITIGATION OVER POORLY DRAFTED LEGISLATION
22. Reduce Poor Draftsmanship in Legislation (50)
13
Recommendations
VOLUNTARY DISPUTE
Although the parties would be given
RESOLUTION
opportunities to elect ADR, they would
not be required to do SO. This volun-
tary approach avoids the danger of
1. Promote Voluntary Use of
creating an additional, and costly,
Alternative Dispute Resolu-
obstruction through which litigants
must first travel before they enter the
tion (ADR) Techniques
litigation system.
Action Required: Encourage and
Provide a Choice for Resolving
facilitate judicial action.
Disputes: Create "Multi-door
Courthouses"
Promote Greater Awareness of
ADR
Recommendation: Create a "multi-
door courthouse" to permit the parties
Recommendation: Members of the
to choose between several different
legal, business, and government
methods for resolving their dispute.
communities should advocate dispute
Before the contest would be set for trial,
resolution techniques as an alternative
the parties would attend a mandatory
to litigation. (2)
conference to identify the areas in
controversy. At this conference the
The primary advantage of alternative
parties would be given the opportunity
dispute resolution is that it allows
to resolve their claims through a
parties to avoid the time and expense
variety of alternative dispute resolution
of formal court proceedings. Unfortu-
mechanisms, including early neutral
nately, this benefit may not be ade-
evaluation, mediation, arbitration,
quately publicized. Lawyers, business
minitrial, and summary jury trial. (1)
leaders, and government officials
should take the initiative in
Alternative Dispute Resolution (ADR)
disseminating the important message
seeks to resolve controversies with less
that ADR achieves justice.
cost and burden imposed upon the
parties. Remedies fashioned through
Action Required: Executive Branch
ADR may be more flexible than the
applies recommendation to federal
restricted relief available through the
agencies. Encourage actions to
courts. Because ADR frequently relies
increase public awareness.
upon consensus, its use may foster
continuing relationships.
2. Require Notice Prior to
Requiring the parties to explore ADR
Filing a Lawsuit
options at the initial stages of the
proceedings will motivate attorneys to
Recommendation: In most cases, the
analyze the case and prepare basic
right to sue should be conditioned on a
investigative homework at a much
showing that the parties have attempt-
earlier point than would be required by
ed, and failed, to resolve their dispute.
the traditional system. Because this
The party alleging harm would be
approach can help promote settle-
required to prove that it gave timely
ment, there could also be a reduction
notice of the grievance prior to filing
in transaction costs.
the suit, except where emergency or
15
other circumstances require immediate
Expand Settlement Opportunities
resort to the courts without prior notice
Through Settlement Conferences
to the opposing party. (3)
Recommendation: Once a lawsuit has
A pre-complaint notice requirement
been filed, the parties should be requir-
provides both parties with an oppor-
ed to attend regular conferences to
tunity to resolve the dispute at the
discuss settlement. (5)
earliest stages. The parties would have
the opportunity to reach an agreement
Mandatory settlement conferences
and fashion appropriate remedies at
would compel the parties to reevaluate
lower transaction costs and without the
their claims and litigation position.
constraints of court. At the same time,
These required meetings are currently
the dispute would be resolved without
used with success in several judicial
burdening the court.
districts. They promote settlement
earlier because there are more oppor-
Action Required: Propose legislation
tunities to focus issues. Mandatory
to amend appropriate federal statutes.
conferences also overcome posturing
by lawyers who perceive that initiating
3. Encourage Earlier Settle-
settlement discussions, even in the
ment of Contested Cases
most appropriate cases, will be seen as
a sign of weakness.
Provide Incentives for Settlement
Action Required: Encourage judicial
Offers
action.
Recommendation: Both parties
should be encouraged to evaluate
their claims closely and attempt to
DISCOVERY
settle their dispute. Settlement offers
advanced prior to trial should be
reinforced with financial incentives
4. Reforms to the Pre-Trial
such as requiring the party who re-
Discovery Process
jected the compromise bear the
additional costs of trial unless the
outcome at trial exceeds the settlement
Require Disclosure of "Core Infor-
offer. (4)
mation"
The party continuing to maintain an
Recommendation: Parties should be
improperly evaluated claim would be
required to disclose basic (or "core")
forced to pay the expenses of con-
information, such as the names and
tinuing prosecution after receiving a
addresses of people having knowledge
reasonable settlement offer. This
likely to bear on the claims and
reform creates incentives to make
defenses and the location of documents
settlement offers early and compen-
most relevant to the case. This require-
sates parties who make good faith
ment would obligate the parties to
offers that are nonetheless rejected.
make disclosure on their own initiative.
Should the core information not be
Action Required: Propose amend-
provided, the offending party would
ments to Federal Rule of Civil
not be able to engage in any
Procedure 68 and Title 28 of United
additional discovery. (6)
States Code.
16
Mandatory early disclosure of core
After reviewing the core information
information recognizes that in the vast
exchanged, the parties would meet to
majority of cases there are basic facts
formulate a plan that would limit and
that should be exchanged by the
direct discovery efforts within preset
parties in order to reach a satisfactory
limits. Presumptive quantitative limits
resolution and that this exchange
on discovery, established in the rules,
should be accomplished without
would set the outer boundaries of the
gamesmanship or expense. This early
plan unless good cause for additional
exchange would increase the opport-
inquiry is established. The parties
unity for effective discovery planning
would then submit a discovery plan to
and early settlement discussions.
the court for approval. Either party
would be able to pursue additional
Providing early disclosure of core
discovery by paying the costs its
information eliminates unnecessary
opponent would incur in producing the
filings and delays in exchanging basic
information.
information. Disclosure would be
accompanied by the attorney's
This approach would require the
certification that reasonable inquiry
litigants to evaluate carefully their
had been made and that the
additional discovery requests because
information will be supplemented if
paying production costs would
additional details become known.
discourage marginal or abusive
discovery. It also allows the parties
Action Required: Propose amend-
significant opportunities to conduct
ments to Federal Rule of Civil
discovery without judicial intervention.
Procedure 26.
Action Required: Propose amend-
Presumptive Numerical Limits on
ments to Federal Rule of Civil
Discovery, with Additional
Procedure 26.
Discovery Governed by Market
Incentives
Penalize Abusive Discovery
Recommendation: Amend the Federal
Recommendation: After the disclosure
Rules of Civil Procedure to establish
of core information, discovery should
be conducted within presumptive
clear standards for imposing sanctions
quantitative limits and a market-based
upon attorneys who abuse the system.
The party whose conduct necessitated
framework. The parties would be
the discovery motion would bear the
required to formulate a discovery plan
within predetermined numerical limits.
burden of establishing that its position
The parties would then be entitled to
was substantially justified. Sanctions
would be automatic in instances
conduct any additional discovery,
where the court finds an unreasonable,
provided that each party would pay
the opponent's "production" costs.
vexatious, or abusive discovery
practice. (9)
Judges would be permitted to change
the pre-set limits and review costs for
While the current rules allow the court
good cause. (7-8)
to impose penalties upon attorneys,
Parties should have access to relevant
judges should be encouraged to make
information but should not be able to
greater use of sanctions for discovery
abuse. At present, judges have the
use discovery to impose needless costs
upon an opponent.
17
authority to impose costs (including
the discovery by referring to the
attorney's fees) incurred in responding
portion of the complaint, answer or
to an abusive discovery request, but
other relevant pleading to be
most judges remain reluctant to levy
addressed in the desired discovery.
sanctions for unreasonable or vexa-
(11)
tious discovery. Making the imposition
of sanctions mandatory provides a
Requiring parties to explain the rele-
further disincentive to litigants who
vancy of materials being sought in
would abuse the discovery process.
discovery encourages them to assess
whether the request is necessary. This
Action Required: Propose amend-
also provides the responding party the
ments to Federal Rules of Civil
ability to evaluate the request in light of
Procedure 26, 37. Recommend
the issues in the case. Additionally,
judicial efforts to make discovery
this procedure would help focus areas
sanctions more uniform and
in controversy should resort to court be
predictable.
necessary to decide the discovery
dispute.
Encourage Parties to Admit Facts
Not in Dispute.
Action required: Propose amend-
ments to Federal Rule of Civil
Recommendation: After a party has
Procedure Rule 26.
admitted factual information, further
discovery should not automatically be
allowed. The court should have
5. Resolving Discovery Dis-
authority, where appropriate, to
putes: Reform of Discovery
prevent further inquiry regarding the
Motions
area admitted. (10)
Admissions sharpen the dispute by
Require Parties to Consult Before
narrowing the contested issues. Parties
Seeking Court Intervention in
should be encouraged to admit facts or
Discovery Disputes.
authenticate documents. Only the
most marginal purpose would be ad-
Recommendation: Before requesting
vanced by allowing further inquiry
that the court resolve a discovery
once reliable factual information has
dispute, counsel should be required to
been admitted. Preventing discovery
certify that they have conferred with
of admitted facts will eliminate the
their opponent and, despite good faith
potential for repetitive and abusive
negotiations, are unable to agree upon
inquiry.
a resolution. (12)
Action Required: Propose amend-
This proposal, currently used in many
ments to Federal Rule of Civil
federal and state courts, would require
Procedure 26(b).
efforts by attorneys to avoid burdening
the court with resolving unnecessary
Tie Discovery Requests to the
discovery disputes. It recognizes that
Pleadings
discovery should be structured to
minimize judicial intervention to
Recommendation: In making discov-
resolve most pre-trial disputes. As the
ery requests, the parties should be
certification requirement places a
compelled to supply the rationale for
18
premium upon cooperation,
by legislative action or rules changes.
acceptable compromises often result.
(14)
Action Required: Propose amend-
Most courts have broad authority to
ments to Federal Rule of Civil
grant "protective" orders that forbid the
Procedure 26. While awaiting full rule
disclosure of confidential or trade
amendment, encourage judicial
secret information required to be
action, through adoption of local rules
divulged in preparation for trial. Pro-
or standing orders.
tective orders enable the parties to
learn confidential information neces-
"Loser Pays" Rule for Discovery
sary to their cases while prohibiting
Motions
them from using the knowledge out-
side the lawsuit. Legislatures should
Recommendation: When the court
resist efforts to limit the ability of
decides a discovery motion, the losing
courts to grant this relief because these
party would pay to the winner the
orders allow parties to discover the
costs and attorney fees to vindicate the
facts necessary to prepare and eval-
prevailing position. As with the other
uate a case for trial, but protect the
"loser pays" provisions, this cost and
legitimate confidentiality interest of the
fee shifting could be limited by judicial
parties.
discretion where appropriate. (13)
Action Required: Oppose repeal
Requiring reimbursement to the
efforts. Propose amendments to
prevailing party encourages both sides
state codes where authority has been
to evaluate carefully their claims and
restricted.
defenses. This is particularly true for
discovery, which is intended to be self-
enforcing. Under the previous recom-
mendation, discovery motions could
MORE EFFECTIVE
only be pursued after the parties
TRIAL PROCEDURES
certified their inability to resolve their
dispute. Fee-shifting for discovery
motions will be an added incentive for
7. Early Trial Dates
the parties to limit unnecessary dis-
covery and should help discourage
Recommendation: Judges should
abusive discovery practices.
establish an early trial date imme-
diately after the initial pleadings are
Action Required: Propose amend-
completed. Once established, the trial
ments to the Federal Rules of Civil
date should be delayed only for
Procedure.
compelling reason or the needs of the
court. (15)
6. Maintain Safeguards for
One of the most effective remedies to
Trade Secrets
the costs of the litigation system is
establishment of rigid trial dates. Trial
Recommendation: Courts should
dates have a galvanizing effect on
retain the ability to preserve confi-
attorneys and parties alike; estab-
dential and trade secret information.
lishing the date promptly and firmly
These safeguards should not be eroded
reduces the occasions for delay and
19
gamesmanship. A side-benefit of this
Action Required: Propose amend-
cost-free reform is more efficient use of
ments to Federal Rule of Civil
discovery and the potential reduction
Procedure 56.
of other litigation expenses. This
reform need not mean that a "rocket
Provide Appropriate Deference to
docket" with very small allowances for
Trial Court Findings
discovery would be utilized.
Recommendation: Courts of appeals
Action Required: Encourage judicial
should accord greater deference to the
action.
trial court findings whether a genuine
issue of material fact exists. (17)
8. Summary Judgment
Reforms
The trial court's discretion in reviewing
the factual record should be more
extensively recognized by the appellate
Mandatory Summary Judgment
courts. This acknowledgment would
not only demonstrate an appreciation
Recommendation: Courts must grant
that trial judges are more knowledg-
summary judgment when there is no
able about the dispute than appellate
genuine dispute as to any material fact
judges, but, more importantly, would
and the party is entitled to prevail as a
also assist the court system in dis-
matter of law. The presiding, judge
posing of nonmeritorious cases at an
must state reasons for denying or
earlier stage in the proceedings.
granting a motion for summary
judgment. (16)
Action Required: Propose amend-
ments to Federal Rule of Civil
Summary judgment is a method for
Procedure 56.
resolving cases where the facts are not
in dispute. Under Supreme Court
9. Hands-On Docket Manage-
precedent, federal courts are com-
pelled to grant summary judgment
ment
when there is no genuine issue of
material fact. Under the current rule,
Recommendation: Judges should
however, even when it is determined
take a hands-on approach to case
that there is no valid factual disagree-
management. Their active involve-
ment, the judge may refuse to dispose
ment in the discovery process and
of the case. In addition to conforming
other pre-trial matters should be
the rule to Supreme Court precedents,
encouraged. (18)
it would eliminate unnecessary liti-
gation expenses if judges were required
By adopting a "hands-on" policy
to make explicit findings concerning
towards case administration, including
the existence of a factual dispute and
the management of discovery, trial
to grant summary judgment when no
judges can play a vital role in expe-
conflict exists. Because the judge
diting litigation and reducing costs.
would be required to make specific
Active involvement by judges early in
findings even when factual questions
the proceedings is one of the most
remain, the finding will help focus the
effective ways to reduce the time
factual issues for trial.
required to resolve a dispute. When
judges efficiently manage their cases,
20
they assist the parties in resolving their
Action Required: Propose amend-
disputes. Hands-on management
ments to Federal Rule of Evidence
policies have resulted in increasing
702.
settlements within nine months of filing
to nearly 85 percent in some courts.
Bar Contingency Fees for Expert
Witnesses
At the same time, the Council's recom-
mended system of discovery incentives
Recommendation: Ban contingency
should make the judge's job easier.
fees (compensation in return for a
The market-based approaches are
"successful outcome") for expert
designed to be largely self-enforcing.
witnesses. (20)
Action: Encourage greater judicial
An expert witness should have no
involvement.
financial interest in any outcome of a
case in which he or she testifies. This
reform is designed to keep expert
EXPERT EVIDENCE
witnesses from becoming mercenaries
REFORM
or advocates, instead of remaining
impartial and objective.
10. Reform the Rules Regard-
Action Required: Propose amend-
ing Expert Witnesses.
ments to Federal Rule of Evidence
702.
Require "Widely Accepted"
Theories
Require Additional Disclosure
from Expert Witnesses
Recommendation: Require expert
testimony to be based on "widely
Recommendation: Permit more
accepted" theories. A party would
comprehensive inquiries of proposed
have to prove that its expert's opinion
"expert" witnesses through inter-
is based on an established theory that
rogatories and disclosure of additional
is supported by a significant portion of
core data, including a list of the ex-
experts in the relevant field. (19)
pert's publications and a description of
the compensation arrangement. (21)
This revision is designed to eliminate
testimony that is far afield from main-
Compared to the discovery of other
stream professional practice or current
witnesses, discovery of experts is
scientific knowledge. Currently,
very limited. Litigants should be
"expert" witnesses are permitted to
able to scrutinize experts by obtaining
offer testimony even if their theories
more information about them
are unproven and are not corroborated
automatically - - namely, a list of
by other experts. The Council's
publications and a description of the
recommendations would allow
expert's compensation arrangement,
testimony based on respected minority
without cost to the opposing party.
or majority theories while excluding
fringe theories.
Action Required: Propose amend-
ments to Federal Rule of Civil
Procedure 26.
21
Permit Depositions without Leave
away from juries or force the use of
of Court
court-appointed experts. (24)
Recommendation: Additional expert
Judges already have the ability to call
discovery such as depositions for ex-
on experts. Mandating their use could
pert discovery should be permitted,
lead to concerns about judicial favori-
subject to the market incentives regime
tism, particularly in jury trials.
outlined above. (22)
Action Required: Oppose repeal
Currently, discovery of experts requires
efforts.
a court order if accomplished through
deposition. The Federal Rules of Civil
Procedure should provide for deposi-
PUNITIVE DAMAGES
tion of experts without need for motion
of court. Depositions are particularly
useful for civil expert witnesses.
11. Reform of Unlimited
Punitive Damages
Action Required: Propose amend-
ments to Federal Rule of Civil Proce-
Recommendations: Punitive damages
dure 26.
should be awarded in a rational and
consistent manner as part of a coher-
Expressly Require Courts to Deter-
ent system. Plaintiffs seeking punitive
mine that the Expert is Qualified
damages should not be able to assign
in the Field of Testimony Offered
specific dollar amounts to their request.
Rather, punitive damages should be
Recommendation: Require courts to
awarded in a separate proceeding.
determine that proposed expert wit-
A jury should determine whether
nesses are legitimate experts in their
punitive damages are warranted
field before they are permitted to testify.
based only on "clear and convincing"
(23)
evidence supporting an award; the
trial judge should determine the
This revision would involve judges
amount of punitive damages. The
directly in protecting cases in their
amount of punitive damages should
courtrooms from unqualified experts.
not exceed the full amount of the
It should have the effect of discour-
compensatory damages. (25-29)
aging parties from retaining unqualified
The common law method of assessing
experts
punitive damages has developed vir-
Action Required: Propose amend-
tually without restriction. Lacking a
ments to Federal Rule of Evidence
unifying structure, the current
702.
approach to punitive damages will
continue to generate disproportionately
Resist Efforts to Make Use of
high awards in a random and capri-
cious manner. Because punitive
Court-Appointed Experts Manda-
damages are "quasi criminal," an
tory
award should be predicated upon
standards of proof requiring some ele-
Recommendations: Resist attempts to
ment of intent. Other limitations are
take the review of expert testimony
needed to restrict the measure of puni-
22
tive damages that can be levied in any
13. Enhance Case Manage-
single case.
ment Techniques
These reforms reduce the threat of
Recommendation: To ensure cost-
runaway jury verdicts, promote settle-
ments, and promote certainty in
effectiveness, federal, judges should
commercial transactions by estab-
utilize procedures to speed manage-
lishing reasonable boundaries for
ment of cases after a lawsuit has been
awards. This unified approach will
filed. (31)
insure that punitive damages are
effective in deterring and punishing
Many courts have adopted procedures
extreme or egregious conduct.
for speeding the processing of cases
and for resolving disputes earlier.
Continued innovation should be
Action Required: Encourage state
legislative action by means of a model
encouraged within the judiciary to
state code.
process cases efficiently and fairly.
The Federal Rules of Civil Procedure
should continue to retain the flexibility
to permit tests of promising case
IMPROVED USE OF
management approaches.
FEDERAL JUDICIAL
Action Required: Encourage judicial
RESOURCES
action. Provide necessary technical
support.
12. Flexible Assignments for
District Court Judges
14. Encourage Use of En
Banc Panels to Resolve
Recommendation: Encourage more
Conflicting Decisions
efficient use of judicial resources
through temporary judicial reassign-
ments. Judges from less busy districts
Recommendations: Eliminate
should be assigned to districts where
restrictions that prevent en banc panels
there is a more crowded docket. (30)
where all sitting judges on a federal
appeals court jointly decide important
Many district courts experience a
legal issues. The use of "mini-panels"
disproportionate influx of cases from
with less than a full compliment of
time to time. The result has been
judges as a substitute for en banc
significant backlogs in some areas and
panels should be eliminated. (32-33)
underutilization in others. The judi-
ciary can address this problem by
En banc hearings occur infrequently
creating a flexible system that would
because they are discouraged by the
temporarily transfer judges in response
current rules. As both the number of
to high caseload demand.
appellate judges and cases have
increased, most cases are decided by
Action Required: Propose legislation
3-judge panels. All too frequently,
to amend Title 28 United States
separate 3-judge panels in the same
Code.
circuit answer the same questions
differently. The resulting uncertainty
from these conflicting decisions
23
increases litigation. Eliminating the
ENHANCED INCEN-
restrictions from the current rule to
encourage more frequent use of the en
TIVES FOR ENCOUR-
banc process would help promote
AGING MERITORIOUS
consistency in the law.
LITIGATION
Action Required: Propose amend-
ments to Federal Rule of Appellate
16. "Loser Pays" Rule for
Procedure 35.
Attorney Fees in Diversity
15. United States Courts of
Cases
Appeals Should be Maintained
Recommendations: Adopt a "loser
at Manageable Levels/
pays" rule in cases involving state law
Reducing the Size of the
brought under the federal courts' diver-
Ninth Circuit
sity jurisdiction. The loser would pay
the winner's legal expenses incurred in
vindicating its prevailing position,
Recommendations: To avoid the
subject to two limitations: 1) fee
potential for inconsistent decisions
shifting would be restricted to the
within the same judicial circuit, the
amount of fees the loser incurred and
number of judges on each federal
2) could be further limited by judicial
circuit court of appeals should be
discretion where appropriate. (36)
maintained at a manageable level. The
Ninth Circuit should be divided into
Adopting a "loser pays" rule for
smaller circuits. (34-35)
payment of attorney's fees will provide
those bringing suit with a choice of
Beyond a certain number of judges,
methods to finance their litigation. The
the ordinary operation of a circuit court
rule would help fund meritorious claims
of appeals becomes unwieldy. The
not currently initiated because the cost
ability to issue clear guidance is often
of pursuing the claim would have ex-
diminished in relation to the number of
ceeded the expected recovery. The
different decisionmakers. A limit on
"loser pays" rule (sometimes called the
the number of judges assigned to a
English Rule) is grounded in fairness -
single circuit would help ensure a more
in the equitable principle that a party
manageable - and more productive -
who suffers should be made whole.
court. For example, the Ninth Circuit
Where the rule operates, it also
Court of Appeals, currently stretching
prompts more realistic case evaluation.
from Montana to Guam with twenty-
Because the losing party will be obli-
eight judges, should be divided in
gated to pay the winner's fees, this
smaller circuits. Previously, other
approach will encourage litigants to
circuit courts of appeals have been
evaluate carefully the merits of their
split when the number of judges
cases before initiating a frivolous claim
became unmanageable.
or adopting a spurious defense.
Action Required: Propose legislation
The "loser pays" rule approach
to amend Title 28 United States
recommended would limit the amount
Code, Section 44.
a losing party might have to pay to the
sum it expended in litigating the suit.
24
This would prevent a party from
ered, the parties should be obligated to
incurring disproportionate expenses for
supply correct information. Further,
the purposes of penalizing the loser.
Rule 11 should apply not only to the
Limiting the application of the "loser
lawyer who signs the pleading, but also
pays" rule to federal diversity cases
to any other lawyers responsible for the
provides an option for those litigants
falsehood.
desiring that each party pay its own
attorney fees to pursue their cases in
Action Required: Propose amend-
the state courts. Thus, this recom-
ments to Federal Rule of Civil
mendation will not impact federal
Procedure 11.
statutory rights such as civil rights and
environmental protection statutes.
18. Towards More Efficient
Action Required: Propose legislation
Attorney's Fees Statutes
to amend Title 28 United States
Code.
Moratorium on One-Party Pay
Statutes
17. Strengthen Sanctions
Against False Court Filings:
Recommendation: Impose a
Rule 11 Reform
moratorium on statutes that award
attorney fees only to the party who
initiated the lawsuit and subsequently
Recommendations: The present
prevails. Pending a review of the
attorney sanctions provision, Rule 11,
current statutes, subsequent statutes
should be retained. Courts should
with attorney fees provisions should be
have the power to penalize those
advanced only with substantial policy
responsible for making unfounded
justification, including cost-benefit
assertions in filings with the court, not
analysis. (41)
merely the attorney who signs the
document. All parties and their
Over 150 different federal statutes
counsel should be required to correct
provide attorney's fees and costs if the
any unfounded assertion immediately
party bringing the suit prevails, yet fail
upon learning of the inaccuracy.
to compensate the party who has to
Courts should apply sanctions in a
defend itself from nonmeritorious
uniform manner. (37-40)
allegations. The potential award of
fees may well increase the likelihood of
Rule 11 is an important reminder to
frivolous litigation. No additional "one-
litigants to avoid filings with insufficient
way" statutes should be enacted
legal or factual support. The rule
without a thorough examination of the
provides an important deterrent to
benefits and burdens they may cause.
frivolous conduct and should be
retained and strengthened.
Action Required: Executive Branch
imposes recommendation on all
Some courts currently construe Rule
federal agencies; encourage Congres-
11 to apply only to knowledge at the
sional restraint.
time the document was filed, while
other courts require parties to correct
filings when they learn of error. When-
ever an error or falsehood is discov-
25
Reduce Time Spent Litigating
diversity jurisdiction of the federal
Attorney's Fees
courts should be based on the amount
of economic damages alleged. This
Recommendations: Amend the Equal
jurisdictional amount should be
Access to Justice Act (EAJA) to
indexed to the rate of inflation. (44-45)
provide clear standards for the award
of attorney's fees caused by vague and
The jurisdiction of federal courts
conflicting statutory guidance. The
extends to cases involving state law
statute should specify that a uniform
only when the parties are citizens of
fee rate be applied absent exceptional
different states. The statute estab-
circumstances. The uniform rate
lishing jurisdiction based on diversity of
should be indexed to the rate of
citizenship now requires that at least
inflation. (42-43)
$50,000 be in dispute to ensure that
only the more significant cases are
The Equal Access to Justice Act
heard in federal court.
(EAJA) allows the award of attorney's
fees to those who prevail in litigation
Resort to the federal court should be
against the government. Because the
based on the possibility of demon-
statute does not provide clear guid-
strable economic harm rather than
ance, additional court hearings are
speculative wrongs. In addition,
required to set the proper amount of
indexing the monetary threshold to the
fees. This needless satellite litigation
rate of inflation would eliminate the
could be eliminated by amending
need for repeated congressional action
EAJA to replace its vague and
to revise the jurisdictional amount.
conflicting standards. The rate of
attorney compensation should be
Action Required: Propose legislation
consistent, clearly set forth in the
to amend Title 28 United States
statute, and altered only in limited
Code, Section 1332.
instances for good cause. Adjusting
the uniform fee awardable in relation to
20. Restore Full Judicial
a national index would eliminate the
Immunity to State Court
need for annual revision.
Judges for Judging Cases
Action Required: Propose legislation
amending the Equal Access to Justice
Recommendation: Enact legislation to
Act, Title 28, United States Code,
restore judicial immunity to state court
Section 2412.
judges for the fees and costs they incur
in defending their official actions. (46)
REDUCING UNNECES-
The Supreme Court has held that state
SARY BURDENS ON
court judges may be held liable for
attorney's fees and costs under the
FEDERAL COURTS
Civil Rights Attorney Fees Awards Act
of 1976. The threat of this liability
19. Reforming Diversity Juris-
places an enormous and needless
burden on state judges who fear
diction
personal liability for decision they
make in their official capacity as
Recommendations: The amount in
judges.
controversy required to invoke the
26
Action Required: Propose legislation
Action Required: Propose legislation
to amend Title 42 of the United
to amend Title 42 of the United
States Code, Section 1983.
States Code, section 1997e; Title 28
of the United States Code, Sections
21. Reduce Frivolous and
1915, 2244, 2254, and 2255.
Unnecessary Prisoner
Litigation
ELIMINATE LITIGA-
Recommendations: States should be
TION OVER POORLY
encouraged to use administrative
DRAFTED LEGISLA-
procedures to resolve inmate
grievances. Abusive prisoner litigation
TION
should be limited by restricting the
number of habeas corpus petitions an
22. Reduce Poor Draftsman-
inmate may file and by waiving court
filing fees only when the petitioner
ship in Legislation
demonstrates a substantial chance of
prevailing. (47-49)
Recommendations: All proposed laws
should undergo a "litigation hazards"
In 1988 over 10 percent of the federal
review to insure that poor drafting of
civil docket were prisoner civil rights
legislation does not create unnecessary
cases. Many prisoners use the federal
litigation. (50)
courts to harass prison officials or to
delay their sentencing.
Each year thousands of laws are
proposed. Too frequently, poor drafting
The vast majority of these cases
leaves routine areas e.g., statute of
challenge conditions of confinement in
limitations or standards of proof,
state institutions and can be resolved
unaddressed. These ambiguities and
without resort to the federal court.
omissions result in uncertainty and
States should be encouraged to adopt
court challenges.
grievance dispute measures that
adequately substitute for judicial
The federal government should
hearings. The Civil Rights of Institu-
develop a list of errors to be avoided in
tionalized Persons Act ("CRIPA")
legislation and should apply the
should be amended to remove un-
checklist to all proposed laws. Where
necessary barriers to effective
appropriate, the government should
grievance procedures.
make more consistent use of bright-
line tests to reduce ambiguities which
Inmates also abuse the writ of habeas
may lead to litigation. These steps will
corpus (which allows federal courts to
help promote certainty and will reduce
review state court convictions) by
the work of the courts.
repeatedly filing almost identical
actions. Reasonable standards,
Action Required: Executive Branch
requiring the consolidation of all issues,
imposes recommendation on federal
are needed. As another method to
agencies and adds screening to
discourage abusive filings by inmates,
current legislative review efforts;
courts should also examine closely
encourage Congressional restraint.
requests to waive filing fees.
27
The Federal Civil Justice Reform Working Group
Chairman
Kenneth W. Starr
Solicitor General, Department of Justice
Members
Alden Abbott
Department of Commerce
Diana Culp Bork
Department of Justice
Stephen Bransdorfer
Department of Justice
Barbara Bruin
Department of Justice
Jay Bybee
Office of White House Counsel
Robert Damus
Office of Management and Budget
E. Donald Elliott
Environmental Protection Agency
Lisa Farringer
Department of Justice
Dennis Foreman
Department of the Treasury
J. Mark Gidley
Department of Justice
John L. Howard
Counsel to the Vice President
Charles E. M. Kolb
White House Office of Policy Development
Peter Kostiuk
Council of Economic Advisers
Jay Lefkowitz
Domestic Policy Council
Marianne McGettigan
White House Office of Policy Development
David Mclntosh
President's Council on Competitiveness
William G. Myers III
Department of Justice
Richard Porter
Domestic Policy Council
Richard Schmalensee
Council of Economic Advisers
Stephen Wakefield
Department of Energy
Wendell L. Willkie II
Department of Commerce
President's Council on Competitiveness Staff
The Council is staffed by the Office of the Vice President with support from members.
Allan B. Hubbard serves as Executive Director.
Acknowledgement
Special thanks to the Department of Justice for making the publication of this report
possible.
28
The President's Comprehensive
Health Reform Program
OF
STANDENT THE OF THE ONLINED LSS
February 6, 1992
Table of Contents
Page
1. Overview
1
2. Principles for Reform: Building on American Strengths
5
3. Expanding Access and Increasing Affordability Through Market Re-
form
17
4. Expanding Access Through Tax Measures to Help People Pay for
Insurance
27
5. Making the System More Cost-Effective
31
A. Overview
31
B. Encouraging Coordinated Care
36
C. Providing Comparative Value Information for Health Purchasing
42
D. Encouraging Personal Responsibility and Prevention
45
E. Malpractice Reform: Changing Incentives for Provider Behavior
50
F. Reducing Administrative and Paperwork Costs
56
G. Making Public Programs More Efficient
60
(1) Reforming the Medicaid Program by Enhancing State Flexibility
60
(2) Phasing-Out Duplicate Subsidies and Increasing Efficiency in
Other Federal Programs
65
6. Problems With Alternative Approaches
69
A. The Canadian Model
69
B. Play-or-Pay
77
7. Examples of Impacts on Individuals and Families
85
References
89
i
Chapter 1
Overview
HIGHLIGHTS: The President's Plan For Comprehensive Health Care
Reform
The President's Plan is a comprehensive, market-based reform that builds on the strengths of our
current system to provide access to affordable insurance for all Americans.
The President's plan guarantees access to health insurance for all poor families
through a transferable health insurance tax credit (certificate)-available even to those too
poor to file taxes-that is large enough to purchase a basic health package ($3,750 for a fam-
ily).
The President's plan provides insurance security for all Americans. The fear of "job
lock"-where workers can't move to another job without losing access to insurance-is elimi-
nated. Limits on the availability of insurance for those with "preexisting conditions" are
eliminated.
The President's plan will reduce the cost of health insurance through major market
reforms. Smaller businesses and individuals would be pooled into larger groups-so they can
receive the same favorable health coverage enjoyed by large employers. Millions of people
who now can not find affordable insurance will be helped.
The President's plan provides new help to the middle class to pay for health care. Up
to $3,750 in health insurance costs can be deducted by families with incomes less than
$80,000. Over 90 million Americans will receive new assistance for health costs.
The President's plan encourages the growth of coordinated care-in private plans, Med-
icare and Medicaid. Laws limiting coordinated care would be prohibited-as would costly
State mandated benefit laws. The comprehensive plan encourages individuals, employers and
health providers to use coordinated care systems.
The President's plan will use the power of an informed marketplace to help control
costs by providing consumers with better information and by giving individuals the resources
to choose the coverage that best meets their needs.
The President's plan would reduce administrative costs through regulatory reforms that
will streamline the current paperwork maze, and through market reforms that allow small
employers to share-and thereby substantially reduce-administrative costs.
The President's plan includes major malpractice reform. A comprehensive liability re-
form plan is proposed to reduce the costs of malpractice and the resulting defensive medicine
that burdens the U.S. health system.
The President's plan would expand services in underserved areas. Many inner city and
rural areas have acute shortages of doctors and clinics. The President's budget expands fund-
ing for Community Health Centers, Migrant Health Centers and the National Health Service
Corps to increase preventive care in these areas.
The President's Plan Does Not:
-
include governmental price regulation or rationing of health care;
-
burden small business with new and costly mandates that will stifle the creation of new jobs
and be passed on in higher product costs and higher taxes for all Americans;
-
require massive tax increases like "play or pay" and national health insurance;
-
threaten poor older Americans with benefit reductions or premium increases.
1
2
The President's Comprehensive Health Reform Program
The President's Plan builds on a system
benefit package. To reduce the rapid growth
that provides the world's best health care.
of health spending, the plan makes radical
The plan provides all Americans access to
reforms in the health insurance system and
affordable health care coverage through a
includes strong incentives for the development
transferrable health insurance credit (cer-
and expansion of coordinated care systems
tificate)-available even to low-income Ameri-
and other efficient arrangements for delivering
cans who do not file tax returns—that can
high quality health care.
be applied to the purchase of a basic health
Summary Highlights
Expanding Access to Health Care (See
Health Insurance Networks (HINs)-
Chapters 3 and 4)
Pooled-Purchasing Power.When it comes
to health insurance, small businesses do
Transferrable Health Insurance Credits (cer-
not have many of the advantages of large
tificate) and Deductions-Benefitting Approxi-
businesses. Large companies can self in-
mately 95 Million Americans-
sure and avoid expensive benefit mandates
A transferrable health insurance credit
and premium taxes. Large firms are sold
(certificate) or tax deduction would be
coverage similar to that purchased by
available to ensure access to affordable
small firms, but at much lower prices. A
health care coverage for moderate and
new way of purchasing insurance, HINs
low-income families. About 95 million
would enable small firms to purchase low
Americans would receive assistance. When
cost, high quality health insurance. HINs
fully implemented, families with incomes
would enable small businesses to buy
below the tax filing threshold, approxi-
lower priced insurance by reducing admin-
mately the poverty line, would receive a
istrative costs and by exempting insurance
credit of up to $3,750, sufficient to pur-
purchased from HINs from excessive State
chase basic health benefits. Similarly, in-
mandates, anti-managed care laws, and
dividuals would receive $1,250 and two-
premium taxes. For the first time, groups
person families $2,500. A health insurance
like the National Federation of Independ-
credit (certificate) or deduction (also up to
ent Business, National Small Business
$3,750 per family) would be available to
United, and the U.S. Chamber of Com-
individuals, two-person, and larger fami-
merce would be able to offer affordable
lies with annual incomes up to $50,000,
health plans to their members nationwide
$65,000 and $80,000, respectively.
or join with other groups to increase pur-
chasing power in State or local markets.
Market Reform-
Insurance Affordability.-In the near
Basic Benefits.States would be required
term, premium costs for similar policies
to develop a basic health insurance pack-
sold to firms in a single block of business
age equal to the value of the health insur-
could vary by no more than 50 percent.
ance credit. This would enable low-income
A health risk adjustment across insurers
families to purchase adequate health care
would be phased in-removing premium
coverage.
disparities and allowing for plan flexibility
Insurance Security.-Workers changing
within a new insurance market driven by
jobs would no longer face concerns about
competition on quality and costs.
"job lock"-the inability to change jobs for
Containing Health Care Costs (See Chapter
fear of losing access to insurance. Health
5)
insurers would be required to provide cov-
erage to all employers requesting it. Cov-
Malpractice Reform.-The threat of mal-
erage would be guaranteed, renewable,
practice litigation prompts physicians to
and preexisting condition limits would be
order tests and perform procedures, ena-
eliminated.
bling them to assert that every effort has
Overview
3
been made to provide the best health care.
also be required to adhere to uniform
These defensive practices are extremely
claims processing procedures, a source of
costly to the system. To address this, the
additional administrative savings.
President's plan would provide incentives
Expanded Use of Coordinated Care-
to States to: (i) eliminate joint and several
liability for non-economic damages, (ii) cap
-In 1990, approximately 40 million Amer-
non-economic damages, (iii) eliminate
icans were enrolled in a coordinated care
rules that permit double recovery, (iv) re-
system-up from 10 million in 1980. The
quire structured awards, (v) promote pre-
President's plan encourages broader use
trial alternatives, and (vi) implement new
coordinated care including preferred pro-
procedures to improve quality of care.
vider organizations, point-of-service
Also, standards of care, developed in con-
choice plans, case management, HMOs,
junction with the medical community,
and other forms of coordinated care.
would be explored as a means to remove
-States would be encouraged to develop
physician uncertainty over malpractice
coordinated care systems and would be
litigation.
prohibited from having laws that hinder
Improving Consumer Information.-To as-
effective operation of these systems. Ex-
cessive State-mandated benefits-that
sist individuals and employers in evaluat-
increase the cost of insurance-would be
ing various health insurance policies, con-
sumers would have access to information,
prohibited.
that would provide information like that
-Medicare reforms would encourage in-
creased coordinated care enrollment and
in "blue books" on the average cost of serv-
increase incentives for coordinated care
ices and the quality of care provided by
physicians, hospitals, clinical laboratories,
systems to contract with Medicare. The
and other health care providers. This will
President's plan also would make it easi-
help control costs by providing consumers
er for beneficiaries of retiree group
with comparative value information that
health benefit plans to be served by co-
will enable them to make more informed
ordinated care systems.
choices.
Increased Flexibility for State Programs.-
Reducing Administrative Costs.-The
States are encouraged to implement a co-
President's plan will reduce administrative
ordinated care-based Medicaid program.
costs, which now total $43 billion a year,
They also would have the flexibility to re-
by more than 25 percent through elec-
design their entire health care systems.
tronic billing for providers, electronic bene-
-States could choose to combine current
fit cards for policyholders, simplified utili-
Medicaid funding with the new benefits
zation review, and insurance market re-
provided through the health insurance
forms.
credit (certificate) to develop a single
Insurance law changes and market re-
unified health plan for their low-income
residents.
forms will cut back the paperwork blizzard
that confronts all insured Americans-and
-With the new Federal health insurance
costs billions of dollars. Standardized
credit (certificate), all poor residents are
claims procedures and other reforms will
guaranteed basic health coverage-with-
reduce administrative costs. For small em-
out any further fiscal burden on the
States. This will allow States to more
ployers, administrative costs may account
for as much as 40 percent of the cost of
effectively allocate their health re-
insurance purchased. Marketing to and
sources for Medicaid and for the nonpoor
servicing small employer policies is costly.
population.
HINs, which unite many purchasers,
Cost-Effective Services are Expanded in
would reduce the cost of insurance admin-
Underserved Areas.-The inner city and
istration and premiums. These costs are
rural areas have acute shortages of doctors
usually under 10 percent for large busi-
and clinics. The President's fiscal year
nesses. Federally certified HINs would
1993 Budget expands funding for Commu-
4
The President's Comprehensive Health Reform Program
nity Health Centers, Migrant Health Cen-
faster than in the U.S.; patients endure
ters, and the National Health Service
long lines and wait for surgery and access
Corps to expand preventive care in these
to advanced technology; and, high quality
areas.
care is rationed. A Canadian-style plan
Prevention.-The President's fiscal year
would require from $250 billion to $500
1993 Budget includes $26.4 billion, an in-
billion a year in new taxes. For quality
crease of nearly $4 billion (18 percent),
care, many Canadians go to the U.S.
for preventive health activities. Prevention
Play-or-Pay Model.-"Play-or-pay" would
funding has increased by more than $11
hurt workers by increasing unemployment
billion (74 percent) since 1989. The Presi-
and forcing employers to cut wages to off-
dent's fiscal year 1993 Budget proposes in-
set mandated costs. One study indicates
creases of 18 percent for childhood immu-
that under "play-or-pay" between 400,000
nizations and infant mortality reduction,
to 700,000 jobs would be lost in the short-
a 27 percent increase for Head Start and
run, and up to 2 million jobs could be lost
Early Childhood Development, a 24 per-
cent increase for breast and cervical can-
in the long-run. The "play-or-pay" system
cer mortality prevention, and a 90 percent
is structurally unsound and guaranteed to
increase for childhood lead poisoning pre-
degenerate into national health insurance.
vention.
Upon enactment, 59 million privately-in-
sured Americans would fall into the public
Alternative Approaches (See Chapter 6)
plan and the plan's instability would
quickly force universal public coverage.
The two alternative approaches to health
Play-or-pay is a tax on low-wage workers
care reform have fundamental structural
and would result in millions of lost jobs.
weaknesses:
Finally, at least $37 billion per year in
Canadian Model.-In Canada neither pro-
new and additional taxpayer-financed sub-
viders nor consumers have incentives for
sidies would be required to adequately
efficiency; health care costs are growing
fund the public plan.
Chapter 2
Principles for Reform: Building on American Strengths
Overview
Reform should preserve the strengths of
the U.S. system while addressing its weak-
The cost growth of the U.S. health care
nesses. Reforms should not destroy its in-
system is unsustainable, both for individ-
centives for choice, quality, and innova-
ual Americans and for the economy as a
tion.
whole.
The President's Principles for Reform es-
Even with rapidly increasing health
tablish guidelines for a comprehensive re-
spending, 13 percent of Americans do not
structuring of a market-based health sys-
have access to health insurance.
tem.
Most federal health care support goes to
Americans need and deserve adequate access
the non-poor, the segment of society that
to affordable high quality medical care. Health
least needs government assistance.
care in the United States has evolved into
Despite the shortcomings of the American
the world's most sophisticated and advanced
system, it delivers the world's best quality
system.
care, and the world's most sophisticated
Our health care system has strengths and
health technology.
weaknesses. A clear understanding of both
is essential in guiding policy development.
Principles for Reform
The President has determined that several principles should guide the development of a com-
prehensive approach to health reform. The reform should:
Build on the strengths of an American health system that provides the highest quality health
care in the world;
Assure access to basic health insurance for Americans, and increase the affordability of such cov-
erage;
Promote consumer choice to ensure that the health care system continues to respond to the
needs and concerns of Americans;
Strengthen market incentives for providers and health plans to improve quality while controlling
costs;
Emphasize prevention and personal responsibility;
Reduce abuse and wasteful excess;
Meet the requirements of fiscal responsibility and budget discipline.
The approach should not:
Force the American people to give up the choice and diversity that makes the American health
system unique;
Lead to comprehensive governmental price controls and rationing health care by government;
Create new spending mandates for States and employers;
Require a net increase in taxes; or
Threaten older Americans with the prospect of either benefit cuts or premium increases.
These tests cannot be met by either "Canadian-style" or "Play-or-Pay" approaches to reform. Such
approaches necessarily involve major tax increases, comprehensive governmental price controls, or ra-
tioning.
5
6
The President's Comprehensive Health Reform Program
Understanding the Cost and Access
continues unchanged, health care could
Problems
consume over 16 percent of GDP by the year
2000, and between 27 and 43 percent of GDP
Health care costs are increasing too fast
by 2030 under mid-range and high-range pro-
and too many Americans have inadequate
jections (Sonnefeld et al., 1991).
access to health care. The causes of the
cost and access problems are complex. Unfortu-
These costs are shouldered by everyone-
nately, simplistic proposals, such as reducing
individuals, business and government. The
administrative costs to fund a universal access
federal government is spending increasing
program, are unrealistic (Doherty, 1991).
proportions of the federal budget on mandatory
health outlays. Before the year 2000, health
Moreover, the cost and access problems
entitlement programs (Medicare and Medicaid)
are not easily solved simultaneously. The
will surpass Social Security as the single
political system tends to trade cost-control
largest component of federal spending. Federal
for access, and vice-versa. Addressing the
Medicaid spending alone has grown from
access problem inescapably means re-allocat-
$14 billion in 1980 to $37 billion in 1989
ing tens of billions of dollars each year.
to a projected $84 billion in 1993. These
Addressing the cost problem requires correct-
figures reflect a 43 percent increase for
ing perverse incentives and market distor-
last year alone, an increase of 227 percent
tions-to encourage more efficient behavior
since 1989, and an increase of 600 percent
by individuals, insurers, and health providers.
since 1980.
Unsustainable Cost Growth.-Currently,
Medicare spending will have grown from
total health care expenditures are about 13
$34 billion in 1980 to about $131 billion
percent of the Gross Domestic Product
by 1993-an increase of nearly 300 percent.
(GDP)-up from less than 6 percent of GDP
Unrestrained, Medicare will grow at an aver-
only three decades ago. If the current system
age rate of 12 percent per year from 1993
Chart 1. HEALTH SPENDING IS PROJECTED TO REACH 16.4% OF GDP
PERCENT
BY 2000 -- RISING FROM 5.3% IN 1960
50
40
CURRENT LAW EXTRAPOLATION
OF CURRENT TREND
CURRENT LAW
30
MID-RANGE PROJECTION
20
HISTORIC
10
0
1960
1970
1980
1990
2000
2010
2020
2030
FISCAL YEAR
SOURCE: Health Care Financing Administration, Office of the Actuary
Principles for Reform: Building on American Strengths
7
Chart 2. PROJECTED SOCIAL SECURITY AND
HEALTH ENTITLEMENTS FOR 1990-2030
$ BILLIONS
8,000
7,000
6,000
HEALTH ENTITLEMENTS (MEDICARE/MEDICAID)
ASSUMES CONTINUATION OF SPENDING GROWTH RATES
5,000
HEALTH ENTITLEMENTS (MEDICARE/MEDICAID)
4,000
ASSUMES SIGNIFICANT SLOWING OF SPENDING GROWTH
3,000
2,000
1,000
SOCIAL SECURITY
0
1990
1995
2000
2005
2010
2015
2020
2025
2030
FISCAL YEAR
Note: Health entitlement projections based on data provided by Health Care Financing Administration,
Office of the Actuary, October, 1991.
through 1997. By 2025, Medicare is expected
percent of poverty (Needleman et al., 1990).
to exceed 27 percent of the federal budget.
Despite this, most of the massive federal
Even if it were possible to sustain health
spending on health care goes to the non-
spending at nearly 30 cents of every dollar,
poor. In 1992, only 21 percent of total
it is difficult to imagine who would pay
federal health care spending is estimated
these enormous costs. Most individuals already
to be spent for the poor. Almost 90 percent
feel that they are overburdened with health
of Medicare spending goes to individuals
care costs. Businesses are spending increasing
above the poverty level.
percentages of wages and other compensation
Uninsured Americans receive some health
on health care premiums-currently in excess
care, either by paying for it out-of-pocket,
of 100 percent of after-tax profits.
or in the form of "uncompensated" or "charity"
Clearly, health care costs must be contained,
care (Needleman et al., 1990). "Uncompen-
both in public programs and in the private
sated" care is not free, in the sense that
sector. Neither individuals, business, nor gov-
insured individuals must pay higher fees
ernment can afford to pay for the currently
and thus higher premiums, and hospitals
projected growth.
receive public (such as Medicare and Medicaid
"disproportionate share" payments and non-
Inadequate Access Despite Increasing
profit tax treatment-now over $15 billion
Spending.-Despite this rapid rise in health
per year) and private (such as charitable
care spending, 13 percent of Americans-34.7
contributions) subsidies to cover the costs.
million-are without health care insurance.
The uninsured are more likely to receive
Most of the uninsured are lower-income
health care in hospital emergency rooms,
Americans-30 percent of the uninsured have
rather than in physicians' offices and clinics
incomes below the poverty level, and 32
(NMES, 1987). This form of care can be
percent have incomes between 100 and 200
harmful to the individual, who may only
8
The President's Comprehensive Health Reform Program
Chart 3. BUSINESS SPENDING ON HEALTH PREMIUMS
PERCENT OF
PERCENT OF
PAYROLL
PROFITS
11
110
10
100
9
90
8
80
7
70
AS A PERCENT OF
6
PAYROLL
60
5
50
4
40
3
30
AS A PERCENT OF
AFTER-TAX PROFITS
2
20
1
10
0
0
1965
1970
1975
1980
1985
1989
FISCAL YEAR
SOURCE: Health Care Financing Administration, Office of the Actuary
receive care for serious illnesses instead of
been level or increased only slightly. This
coordinated, preventive care from a physician
suggests that the intensity (e.g., more tests
familiar with the patient. Emergency room
and procedures per hospital stay or per
care is also a more expensive and inefficient
office visit) is the primary cause of spending
use of resources, since emergency room visits
growth. International comparisons confirm this
are much more costly than physician office
conclusion (Schieber et al., 1991).
visits.
In addressing the growth in service inten-
No Easy Solution.-Rising health care ex-
sity, it is difficult to know how much of
penditures are a function of many interrelated
the increase is due to advances in medical
factors. These include: general inflation, popu-
technology, and how much is attributable
lation growth, relative aging of the population,
to excessive defensive medicine, poor health
growth in volume and intensity of medical care
care management, and gaming of a public
(HCFA, 1989), and "cost shifts" that re-allocate
price-regulated system.
the costs of caring for the uninsured. The re-
sulting medical inflation is consistently more
For preventable illnesses and conditions,
than double the growth rate of the Consumer
though, the issues are more apparent. For
Price Index.
example, at 13.8 per 100,000, the male homi-
cide rate is more than 12 times that of
General inflation, population growth and
Germany and 5 times that of Canada. More
relative aging necessarily occur. Other factors
than 200,000 AIDS cases have been reported
can be addressed, such as the growth in
in the US. In 1989, the rate of incidence
the intensity of medical services and of
of AIDS was more than three times that
preventable illnesses. Despite increasing per
of Canada and six times that of then-West
capita U.S. costs, utilization as measured
by hospital admissions, length of hospital
Germany. And, there are about 375,000 drug-
stay, and medical visits per capita have
exposed babies in this country. This problem
Principles for Reform: Building on American Strengths
9
Chart 4. MEDICARE FISCAL FINANCING GAP
PERCENT
18
16
14
12
PERCENT OF PAYROLL
(PESSIMISTIC ASSUMPTIONS)
10
PERCENT OF GNP
8
(PESSIMISTIC ASSUMPTIONS)
6
PERCENT
4
OF PAYROLL
(INTERMEDIATE
ASSUMPTIONS)
2
PERCENT OF GNP
0
(INTERMEDIATE ASSUMPTIONS)
1990
1995
2000
2005
2010
2015
2020
2025
2030
2035
FISCAL YEAR
Note: The Medicare Fiscal Financing Gap is the projected HI trust fund deficit and SMI revenue requirements above 1987 levels.
Source: Holohan, J. and J. L Palmer, Journal of Health Politics, Policy and Law, Spring 1988
is negligible in most other countries (Schwartz,
The health care market is further distorted
1991).
by limited consumer information about the
treatments patients receive and the efficiency
Rising costs are also the result of market
distortions. Because medical treatment is
of their care. Consumers and large purchasers
currently have few objective sources of infor-
largely in the hands of doctors and hospitals
mation on which to base cost and quality
(who have financial and defensive incentives
comparisons.
to provide more medical care) and not the
consumer, consumer-based market discipline
The problems of access and cost are inex-
has been weak.
tricably linked. Access ultimately is an issue
of affordability. Many low-income Americans
Under the current system, Americans with
need help to be able to afford coverage.
insurance are often overinsured and have
Cost growth needs to be slowed to assure
few incentives to use medical care prudently.
continued affordability for others. Thus, the
Instead, consumers tend to be risk-averse
where health is concerned. Insulated from
access and cost problems must be addressed
together in a comprehensive series of reforms.
the real cost of medical treatment by employer
Only then can all Americans begin to enjoy
and government subsidized insurance, Ameri-
cans tend to over-consume health care. More-
efficient health care at affordable prices.
over, because insurance itself is SO highly
subsidized for most Americans, they have
Building on American Strengths
little reason to prefer forms of coverage
Most Americans today have ready access
that are more efficient (e.g., coverage with
to state-of-the-art medical care. Breakthrough
higher cost sharing or coordinated care cov-
treatments spread rapidly from our Nation's
erage)
finest hospitals and laboratories and quickly
become routinely available throughout the
10
The President's Comprehensive Health Reform Program
Chart 5. FEDERAL HEALTH SPENDING
$ BILLIONS
(OUTLAYS AND TAX EXPENDITURES IN 1993 DOLLARS)
350
300
250
TO NONPOOR
200
150
TO POOR
100
50
0
1965
1970
1975
1980
1985
1990
1995
FISCAL YEAR
NOTE: Federal spending for Medicare, Medicaid, hospital and medical care for veterans, and other payments to individuals for
health purposes; and tax expenditures for employment-provided health plans and for deductions of health expenses.
Spending share to poor reflects percent of recipients with money incomes below poverty thresholds.
SOURCE: Census Bureau
Chart 6. MOST OF THE GROWTH IN REAL PER CAPITA SPENDING IS DUE TO SERVICE
INTENSITY-MORE TESTS AND SERVICES ARE BEING PROVIDED PER ENCOUNTER
HOSPITAL ADMISSION AND PHYSICIAN VISIT RATES HAVE CHANGED LITTLE
WHILE HOSPITAL STAYS HAVE SHORTENED
LEVEL RELATIVE TO 1960
400%
350%
REAL PER CAPITA
SPENDING -- HOSPITAL
AND PHYSICIAN CARE
300%
250%
EXCESS MEDICAL INFLATION
200%
150%
100%
MEDICAL VISITS PER CAPITA
50%
INPATIENT ADMISSIONS PER CAPITA
AVERAGE HOSPITAL LENGTH OF STAY
0%
1960
1965
1970
1975
1980
1985
1988
FISCAL YEAR
Sources: Utilization data from OECD, Health Care Financing Review, Annual Supplement, 1989; per capita spending
data from Health Care Financing Administration, Office of the Actuary.
Principles for Reform: Building on American Strengths
11
country. We must preserve this excellence
of lowering deaths due to major killers such
in our efforts to solve our problems.
as heart disease and cancer.
Vast improvements in health over the last
This success is based on several key features`
few decades are unmistakable. Charts 7 and
of the U.S. health care system.
8, for example, show dramatic improvements
Choice.-Individuals and families are free
over the past 40 years in life expectancy
to choose their own physician and hospital and
and in mortality rates. Overall mortality
an increasing number of Americans are able
rates have decreased from 840.5 deaths per
to choose among a variety of health plans.
100,000 in 1950 to 535.5 per 100,000 in
This, in turn, encourages physicians, hospitals,
1988. Mortality rates for heart disease and
and health plans to compete to provide better
for cerebrovascular disease have declined by
health care at a lower cost. As a result, our
46 percent and 66 percent respectively during
health care system reflects the needs and con-
this period.
cerns of ordinary Americans as expressed in
Advances in medical treatment are SO fre-
the choices they make. This dynamic should
quently reported that they seem almost rou-
be nourished and strengthened.
tine. Today, Americans from all walks of
life have ready access to these medical ad-
Diversity and Flexibility-Choice and the
vances. (See Chart 12.)
open competition by providers for patient care
also assures diversity and flexibility in the fi-
These trends neither reverse nor even pla-
nancing, organization and delivery of care. The
teau. Prevention and greater personal respon-
last two decades have witnessed unparalleled
sibility could increase average life expectancy
innovation in the organization and manage-
from about 73.8 years to 77.6 years (Hahn
ment of health care in the United States. The
et al., 1990). At the same time, new drug
most important development is the growth of
regimens and technologies offer the promise
coordinated care. Health maintenance organi-
Chart 7. LIFE EXPECTANCY IN THE U.S.
LIFE EXPECTANCY AT BIRTH
76
74
72
70
68
66
1950
1960
1970
1975
1980
1985
1989
YEARS
SOURCE: U.S. DHHS, "Health United States, 1990"; PHS, March 1991
12
The President's Comprehensive Health Reform Program
Chart 8. MORTALITY RATES FOR SELECTED CONDITIONS, 1950-88
AGE-ADJUSTED
DEATHS PER 100,000
350
300
250
200
150
100
50
0
DISEASES
MALIGNANT
CEREBROVASCULAR ACCIDENTS AND
CHRONIC
PNEUMONIA AND
OF HEART
NEOPLASMS
DISEASES
ADVERSE EFFECTS
PULMONARY
INFLUENZA
MAJOR DISEASES BY YEAR
DISEASES
1950
1960
1970
1980
1988
SOURCE: US DHHS, National Center for Health Statistics, "Health USA, 1990"
zations (HMOs) and preferred provider organi-
clinics; caring for AIDS patients and their
zations (PPOs) now serve over 40 million
families; participating in drug abuse preven-
Americans. These health plans combine the fi-
tion, education, and rehabilitation; delivering
nancing and delivery of health care and inte-
meals to the homebound; providing hospice
grate quality management across the entire
care; and assisting victims of debilitating
continuum of care-from prevention to care for
diseases and supporting their families.
chronic illnesses. Through competition, coordi-
Biomedical Research.-The U.S. leads the
nated care plans are driven to respond to
world in biomedical research. America's contin-
consumer needs leading to better quality care
ued dominance of the competition for Nobel
at lower costs.
prizes reflects that pre-eminence. Advances in
Skilled Medical Professionals.-U.S. phy-
biomedical research over the past four decades
sicians and health professionals are the best
have improved the quality of health care while
educated and most skilled health care work
saving billions in health care costs. With an
force in the world. U.S. Hospitals and medical
increasingly thorough understanding of basic
schools are world leaders for particular special-
disease mechanisms, researchers are likely to
ties and treatments.
achieve additional breakthroughs within the
next twenty years.
Caring Volunteers.-Hundreds of thou-
sands of groups and organizations engaging
Federal investment in biomedical and ap-
millions of volunteers assist in providing qual-
plied behavioral research has increased as
ity health care.
a proportion of GDP from 0.12 percent in
1970 to 0.16 percent in 1992. U.S. public
Health care volunteers improve access to
and private funding provides the lion's share
health services and help to control health
(Chart 10) of the funding for such research
care costs. These volunteers provide such
worldwide.
services as: working at community health
Principles for Reform: Building on American Strengths
13
The Success of American Health Care-Examples
Cancer.-Deaths from childhood cancers have been reduced 38 percent since 1973, with almost two-
thirds of children with cancer surviving beyond five years. There has been astonishing progress
against Hodgkin's disease, with a 50 percent reduction in deaths, and against testicular cancer with
a 60 percent reduction in deaths.
Heart attacks.-In the early 1960s, almost a million Americans a year died from heart attacks.
Today, deaths from heart attacks have been dramatically reduced to less than half that number due
to better prevention and better treatment. Major advances in treatment include therapy to dissolve
blood clots that cause heart attacks and balloon angioplasty to relieve chest pain during con-
valescence and beyond. Patients are now commonly discharged after 8-10 days, and return to full
activity within 4-6 weeks.
Hypertension.-High blood pressure affects 58 million Americans and can lead to heart disease and
stroke. Since the National High Blood Pressure Education Program was launched in 1972, age-ad-
justed stroke mortality in the U.S. has declined by more than 50 percent. Recommendations from a
recent study of hypertension in the elderly could further prevent 6 strokes and 11 major cardio-
vascular events a year per 1,000 seniors treated. Cost savings could total one-half billion dollars a
year.
Diabetic Retinopathy.-Damage to the blood vessels of the retina from diabetes accounts for ap-
proximately 12 percent of the new cases of blindness each year. Until the late 1960s this condition
was untreatable. Within the last two decades, laser surgery has been widely adopted as an effective
treatment. By the year 2000, $2.8 billion dollars will be saved and 279,000 years of vision preserved
as a result of this advance.
Paralysis due to Spinal Cord Injury-This year 10,000 Americans-most of them young-will suf-
fer a spinal cord injury, often resulting in life-long paralysis. Today, many patients recover thanks
to a recently discovered treatment that involves high dose methylprednisolone therapy.
Technology.-Similarly, new technologies
unparalleled access that Americans enjoy to
developed by the U.S. drug and medical device
sophisticated diagnostic and therapeutic tech-
companies have grown exponentially over the
nology. A difference in access to advanced
last three decades. This innovation has im-
technology is often the critical difference
proved the quality of health care for Americans
between health and disability, life and death.
and has strengthened our nation's inter-
national economic competitiveness. The U.S.
Quality Assurance.-Finally, leadership in
accounts for nearly half of the $65 billion dol-
the development and implementation of new
lar global market for medical devices. Medical
methods for assuring quality care has been a
equipment exports have grown about 20 per-
hallmark of health service delivery in the
cent per year since 1985. In 1991, exports of
United States for over a decade. Peer review,
such products reached nearly $7 billion.
practice guidelines, research on patient out-
comes, and other activities mean that appro-
A comparison with other prosperous Western
priate interventions are applied correctly to
nations-Canada and Germany-in Chart 12
the individual's clinical condition.
presents some astonishing implications of the
14
The President's Comprehensive Health Reform Program
Chart 9. PREDICTED DEATHS FROM HEART DISEASE WITH AND
WITHOUT CONTINUED INNOVATION
THOUSANDS OF DEATHS
1,400
1,180
1,200
1,100
1,040
970
1,000
890
800
800
800
698
604
600
522
452
391
400
200
0
1990
1995
2000
2005
2010
2015
BASELINE WITH
FORECAST WITH
CURRENT TECHNOLOGY
CONTINUED INNOVATION
NOTE: With aging of the population, deaths from heart disease would increase over the next three decades.
But this increase can be dramatically reversed with continued technological innovation.
SOURCE: Ruth Brown, et al., "The Value of Pharmaceuticals," Batelle, 1991
Potential Future Breakthroughs in Medical Treatment
Cancer.-Despite recent progress, more than 500,000 Americans will die of cancer in 1992. There is,
however, a new feeling of optimism among researchers. Clinical trials using a new drug, taxol, in
women with breast cancer have shown very high response rates. Another new approach, use of
chemotherapy before surgery can change an inoperable tumor to one that can be removed sur-
gically. And there is potential for major advances in gene therapy and anti-cancer vaccines during
the next 10 to 20 years
Alzheimer's Disease.-Alzheimer's Disease (AD) affects an estimated four million people in the U.S.
at a cost of $90 billion a year. Aging of the population could result in a five-fold increase in the dis-
ease over the next fifty years. At present, there is no treatment. In the last 12 months, however,
three major breakthroughs have occurred that give promise that research into the causes of AD will
soon yield definitive results. This, in turn, is likely to lead to new concepts for developing treat-
ments.
Cystic Fibrosis.-Over 30,000 children and young adults suffer from cystic fibrosis (CF). Discovery of
the CF gene in 1989 led to a new understanding of the disease. Recently, researchers successfully
used a cold virus to implant a normal human CF gene into the lungs of live animals. This advance
is likely to lead to an effective gene therapy in the foreseeable future.
Diabetes.-Despite insulin, millions of diabetics are at risk of disabling complications. Transplanting
pancreatic islet cells could "cure" the disease preventing these complications. Preliminary studies
have successfully demonstrated that enclosing the transplanted cells in an artificial covering blocks
rejection of the transplant by immune attack. A real cure for diabetes may be just a matter of time.
Principles for Reform: Building on American Strengths
15
Chart 10. FUNDING FOR HEALTH CARE RESEARCH AND DEVELOPMENT, 1990
UNITED STATES
REST OF WORLD
55.0%
45.0%
SOURCE: US DHHS/PHS/Office of International Health
Chart 11. PRODUCTION OF MEDICAL EQUIPMENT
UNITED STATES AND THE WORLD, 1991
REST OF WORLD
(7.0%)
JAPAN
(18.0%)
UNITED STATES
(48.0%)
EUROPE
(27.0%)
SOURCE: Medicine & Health, January 27, 1991
316-608 0 - 92 - 2 : QL 3
16
The President's Comprehensive Health Reform Program
Chart 12. COMPARATIVE AVAILABILITY OF SELECTED MEDICAL TECHNOLOGIES
PER MILLION PERSONS
6
UNITED STATES
5.1
5
CANADA
WEST GERMANY
4.0
4
3.7
3.3
3.1
3
2.6
2
1.5
1.2
1.3
1.1
1
0.9
0.7
0.9
0.5
0.5
0.3
0.5
0.2
0
OPEN-HEART
CARDIAC
ORGAN TRANS-
RADIATION
EXTRACORPOREAL
MAGNETIC
SURGERY CATHETERIZATION PLANTATION
THERAPY
SHOCK WAVE
RESONANCE
LITHOTRIPSY
IMAGING
SOURCE: Dale A. Rublee, "Medical Technology in Canada, Germany and the U.S." Health Affairs, 1989
Chapter 3
Expanding Access and Increasing Affordability Through
Market Reform
Overview
spread health risks evenly across insurers
and thereby allow insurers to charge uni-
The President's proposal for reform of the
form premiums for the sick and the
health insurance market will make coverage
healthy. On an interim basis, pending
more secure, available, and affordable for
phased implementation of this new sys-
millions of Americans.
tem, insurers would be subject to limits
Everyone-young and old, healthy and
on their ability to vary premiums.
sick-will benefit from the assurance of
the availability of affordable health insur-
Encourage group purchasing of health in-
ance regardless of future changes in their
surance by small businesses to give them
health.
the same cost advantage enjoyed by larger
businesses. Small businesses could pool
Workers will be able to change jobs with-
their purchasing power through Health In-
out fear that insurance coverage will be
surance Networks (HINs). This will help
denied due to a preexisting illness.
small businesses negotiate discounts and
Premium costs will be reduced by as much
save on overhead and marketing costs.
as 20 percent for at least 70 million work-
Moreover, the Employee Retirement In-
ers and their dependents affected by small
come Security Act (ERISA) preemption
group reforms.
that allows larger self-insured firms to
avoid cost-increasing State laws will be ex-
Five million Americans currently without
tended to small businesses purchasing cov-
health insurance will have insurance as
erage through HINs. For the first time na-
a result of these market reforms.
tional and regional small business associa-
The market reform proposal has four major
tions and other groups will also be able
components. These components will:
to establish inter- and intra-State HINs
to better assist their membership.
Assure availability and security of cov-
erage. Insurers would offer coverage with-
Give health plans increased flexibility to
out regard to health status. Coverage
control costs. Health plans would be pro-
would be renewable, and preexisting con-
tected from mandated benefit and
dition limits would be eliminated. Employ-
"anticooridnated care" laws that hinder
ers would provide information and facili-
designing cost-effective benefit packages to
tate access to group coverage to all em-
meet individual and family needs and
ployees and dependents, but would not be
drive up costs. Health plans would also
required to administer or contribute to the
be protected from laws and regulations
cost of coverage. Further, colleges and uni-
that hinder innovative cost control meas-
versities would provide continued access
ures, such as utilization review and selec-
to group coverage to recent graduates and
tive contracting.
other students for six months after leaving
An important benefit of these reforms is
school.
strengthening significantly competition among
Assure affordability of coverage for indi-
health plans. In today's environment, health
viduals and small businesses through
plans can gain a significant premium cost
broad risk pooling. Insurers would partici-
advantage by avoiding high risk individuals
pate in broad pooling arrangements to
and groups. Under the Administration's reform
17
18
The President's Comprehensive Health Reform Program
proposal, such "risk avoidance" will be stopped.
This disparity in coverage reflects three
As a result, competition will focus on price,
main problems. First, many small businesses
value, and quality, leading to long-term gains
cannot afford to provide costly fringe benefits.
in efficiency and improvements in quality.
Second, health insurance is more costly for
small businesses due to (i) higher overhead
Strengths and Weaknesses of the Current
and marketing costs and (ii) costs resulting
System
from State mandated benefit laws and pre-
153 million working age Americans and
mium taxes which generally do not apply
their dependents-62 percent of the total
to self-insured coverage ("ERISA exempt" from
population-are covered primarily through pri-
State insurance laws) typically provided by
vate health insurance. Most of these are
larger businesses. Finally, the market for
covered through employment. This system
health insurance for small business is in
has worked well because employment can
turmoil due to risk selection.
be a stable basis for risk-pooling, particularly
Erosion of Risk Pooling.-For people with
for medium and large firms and because
serious illness, the cost of medical care can
substantial administrative savings and econo-
mies of scale are possible through employment-
easily consume a substantial share of family
based group coverage.
income. With broad risk pooling, through in-
surance, the costs of illness are spread across
Special Problems for Small Business.-
a broad pool of premium payers, making costs
While generally successful, there are signifi-
more uniform, thus more affordable. The value
cant problems with the current system, espe-
of risk pooling is particularly great because
cially for small group and individual coverage.
spending on health care is highly skewed. At
Workers at small firms are much more likely
any given time, most of the population is
to be uninsured than workers at medium and
healthy, and has little need for medical care.
large firms.
However, a small percent of the population is
Chart 13. INSURANCE COVERAGE OF THE POPULATION UNDER 65
UNINSURED
(11.6%)
MEDICAID
(10.4%)
SELF INSURED
(6.6%)
EMPLOYER
PROVIDED
(71.0%)
MEDICARE
(0.3%)
SOURCE: Agency for Health Care Policy and Research, NMES, 1987
Expanding Access and Increasing Affordability Through Market Reform
19
Table 3-1. Number of Uninsured Workers and Dependents By
Establishment Size-1987
(Source: AHCPR, 1991)
Number of
Percent of
Percent of
Number
Percent
Establishment Size
Workers and
Workers and
Uninsured
Uninsured
All Working
Dependents
Dependents
Uninsured
Less than 25
74.2 m
44
17.2 m
23.1
68
26-100
34.6 m
21
4.3 m
12.3
17
Greater than 100
59.2 m
35
3.9 m
6.6
15
Totals
168.0 m
100
25.4 m
15.1
100
Note: Interventions affecting groups below a threshold, such as a hundred workers, will generally affect all
firms below the threshold, as well as workers in establishments below that threshold, where firms have
establishments in one or more. States that fall below the threshold. Even limiting to the strict "firm"-based
definition of size it is estimated that about 70 million workers and their dependents fall below a size of 100.)
seriously ill, and requires extremely costly
average per capita cost when compared with
care. The top 5 percent of the population in
other pools.
terms of health care use (i.e., the 95th percent-
Risk selection is extremely difficult to pre-
ile) have per capita health expenditures
vent. This is because healthy and sick people
($7,100) 26 times greater than costs ($270) for
have different needs for health insurance
people at the midpoint of the population in
and choose different health plans to meet
terms of health care use (i.e., the 50th percent-
these needs. Generally, healthy people are
ile).
attracted to leaner benefit packages (higher
Insurance risk pooling is valuable for every-
cost sharing, fewer covered benefits) because
one because even those who are healthy
they expect that they will not have a need
today may develop a serious illness at some
for more extensive coverage. In contrast,
point in their life. However, risk selection
sicker people prefer richer benefit packages
can undermine insurance as a pooling mecha-
because of their expected needs. Moreover,
nism. Risk selection occurs whenever a par-
certain features of coordinated care, such
ticular pool has a skewed selection of risks.
as a greater emphasis on preventive care,
Such a pool will have a higher or lower
could be more attractive to the healthy.
As a result, sick and healthy people will
Table 3-2. Distribution of Per Capita Health Spending By Age and
Within Age Categories, 1987
(Source: AHCPR, 1991)
(In dollars)
25th
50th
75th
95th
Age
Mean
Percentile
Percentile
Percentile
Percentile
0-6 years
1,133
50
180
600
3,800
7-18 years
643
15
120
400
2,500
19-24 years
839
0
150
550
4,000
25-54 years
1,238
50
260
860
5,500
55-64 years
2,469
160
570
1600
11,424
Greater than 65 years
4,551
330
960
3,500
22,528
Total
1,591
50
270
1,000
7,100
20
The President's Comprehensive Health Reform Program
sort themselves into different plans, even
Assuring Availability of Coverage
without any effort at selective marketing
by insurers. The result will be that sick
The President's reform proposal contains
people will face high premiums due to the
several initiatives to assure that health insur-
non-random distribution of health risks.
ance coverage is readily available. These
reforms apply broadly to all private health
Risk selection is especially likely in the
insurance coverage regardless of group size
market for small group because a single
and to coverage provided by employers who
small business cannot serve as a stable
self-insure.
risk pool. One or two sick workers can
Prohibition on Exclusion from Coverage
greatly increase average per employee health
Due to Health Status.-All insurers wishing
benefit costs. Insurers originally combined
to sell group health insurance in a State would
many small businesses into a single risk
be required as a condition of doing business
pool and charged all members of the insured
to (i) accept every employer group in the State
group a uniform (or age-adjusted) premium
that applies for coverage and (ii) provide cov-
that did not vary based on health risk.
erage to individuals within an employer group.
This approach helped to make coverage afford-
In addition, all employers would be prohibited
able for individuals with chronic illnesses.
from excluding any individual from health in-
surance coverage for reasons of health status.
However, in today's market, some insurers
Finally, any insurer selling coverage to indi-
have developed strategies for attracting low
viduals receiving health insurance tax credits
risk groups, while leaving higher-risk groups
would be prohibited from excluding any credit
without coverage or with unacceptably high
recipient from coverage.
premiums. Favorable risk selection provides
Guaranteed
an opportunity to make a profit by offering
Renewability.-Insurers
low premiums to attract healthy groups while
wishing to sell group coverage in a State would
discontinuing coverage (or increasing pre-
be required to renew coverage for a group ex-
miums to a prohibitive level) once a group
cept in the case of nonpayment of premiums,
becomes more costly. Some insurers are also
fraud, or misrepresentation.
using medical information (health screening)
Portable Access.-Under the proposal,
to exclude higher-risk groups or individuals
workers would be able to change jobs without
from coverage. Some insurers exclude preexist-
loss of coverage due to a preexisting coverage
ing medical conditions from coverage. In
exclusion. Currently, some health insurance
some cases, even individuals with relatively
does not cover costs related to any illness or
mild health problems have been denied cov-
disease diagnosed prior to the initial date of
erage.
coverage. As a result, many working Ameri-
cans with chronic illnesses have been afraid
As some insurers succeed in attracting
to change jobs for fear that the insurance pro-
low-risk groups and avoiding high-risk groups,
vided at their new job would no longer cover
other insurers face an upward premium spiral,
their medical expenses.
and must risk select to keep up with competi-
The use of preexisting condition exclusions
tive pressures. Similar-possibly even more
would be eliminated. This will assure that
severe-problems affect the market for individ-
all workers can change jobs without losing
ual non-group coverage.
access.
These problems are increasingly common.
Access to Group Coverage for Workers
Moreover, there appears to be no natural
and Dependents.-All employers would be re-
end to current trends. Thus, if left unchecked,
quired to provide information on affordable
broad risk pooling seems likely to unravel
basic health insurance plans available in their
in the small group and individual coverage
respective States. This information is to be
markets. If this were to happen, health
prepared and provided by State insurance com-
insurance would become unaffordable for many
missioners. This will expand access to plans
Americans-especially those most in need
that provide individual and family coverage to
of coverage.
all employees-but employers would not be re-
Expanding Access and Increasing Affordability Through Market Reform
21
quired to administer a health plan or make
Assuring Access to Coverage for Individ-
any contribution towards the cost of health
uals and Families Receiving Health Insur-
coverage. States would assist employers by
ance Tax Credits (certificates).-Each State
making available information regarding the
would define a "basic" benefit package or a
availability and cost of "basic" coverage from
series of packages with an estimated actuarial
various health plans. Employers would be re-
value equal to the value of the health tax cred-
quired only to arrange for deduction of pre-
it. A number of benefits packages are provided
miums from paychecks if employees SO re-
as illustrative examples (See Table 3-3).
quested, but would have no other administra-
Any health plan in a given State could
tive burden. Health insurance networks-
offer the State-defined "basic" benefit package
group purchasing arrangements for small em-
to credit recipients and to others. To ensure
ployers-would facilitate this process and it is
that credit recipients have a variety of plans
anticipated that most small employers would
available, if no insurers offer the "basic
join a HIN (see below).
plan" the State insurance commissioner could
Access to Group Coverage for College
require two or more health plans with a
substantial market share to offer the "basic"
Graduates.-To help fill a significant unin-
sured gap for new work force entrants, all col-
benefit plan. Health plans could charge a
leges and universities that provide group cov-
market price for the "basic" benefit package.
erage to students would be required to offer
The State and Federal Governments would
extended group coverage for new graduates
implement outreach programs with the goal
and other students for six months after they
of securing 100 percent participation among
leave undergraduate and graduate programs.
credit eligibles. Broader participation would
The college or university need not make any
help prevent unnecessary and costly emer-
contribution toward the cost of coverage under
gency care by encouraging primary and pre-
such a plan.
ventative care.
Table 3-3. Basic Benefit Plan Examples for Approximate Amount of the Full
Health Insurance Tax Credit in 1993
(Plans are illustrative only-States will design benefits)
"Coordinated" Fee-For-Service Plans
Plan A-Unlimited inpatient hospital, inpatient physician care, prescription drug coverage,
3 ambulatory physician visits and associated diagnostic services with a $10 co-pay per
visit.
Plan B-Unlimited inpatient hospital, inpatient physician care, and 5 ambulatory physi-
cian visits and associated diagnostic services with a $10 co-pay per visit.
Plan C-Unlimited inpatient hospital, inpatient physician care, 10 ambulatory physician
visits and associated diagnostic services with a $10 co-pay per visit.
Plan D-Inpatient hospital up to 15 days, inpatient physician, lab, emergency room, and
ambulatory physician visits and associated diagnostic services covered for $5 fee per visit
for the first three physician visits, then a 10 percent co-pay up to a $500 out-of-pocket
limit.
Plan E-Includes all services under Plan D, but with a 20 percent co-pay on physician vis-
its after 3 visits.
Plan F-Includes all services and co-payment under Plan E, but would offer prescription
drug coverage.
Model HMO Benefit Plan
Plan G-Unlimited inpatient hospital and inpatient physician services, emergency room,
and unlimited ambulatory physician visits with associated diagnostic services (subject to
a $10 copayment), prenatal care, and prescription drugs (subject to a $5 copayment).
22
The President's Comprehensive Health Reform Program
In cases where a hospital emergency room
Delayed implementation in the small group
is an individual's first point of contact with
market is appropriate to permit an orderly
the system, rotating assignment would be
transition and to avoid undue disruption
used to enroll an uninsured credit-eligible
of existing arrangements. Immediate imple-
individual to a specific health plan if the
mentation of health risk pooling would, how-
individual were unable to make a choice.
ever, be possible for credit recipients since
So for example, a homeless person entering
this is a new market.
the hospital and having no preference for
any carrier would be assigned to an insurer
Transition Measures for Small Group
by rotation and the credit would automatically
Coverage.-These transition measures would
flow to the insurer.
apply to all insurance provided to small busi-
nesses employing fewer than 100 workers. The
Assuring Affordability of Coverage
premium standards (or "bands") limit variation
Through Risk-Pooling
in premiums within each insurance company's
overall set of offerings. They would not con-
As noted above, broad risk pooling is essen-
strain premium variation between insurers.
tial if health insurance is to be affordable
The premium standards would be temporary
for the sick as well as for the healthy.
and would be phased-out with full implementa-
The President's market reform proposal pro-
tion of a system to equalize risk among insur-
vides both interim and longer-term solutions.
ers.
Transition measures, including "premium
bands" would be implemented immediately
Premium Standards Across and Within
to stabilize the small group market pending
Demographic Categories.-Insurers could
full implementation of longer-term measures.
vary premiums by age. This means that
younger workers would not be forced to
In the near term, premium bands will
subsidize older workers (who typically
spread risks within an insurer's pool by
have higher income and higher health
limiting the difference in premiums that
risks). But, insurers would be limited in
an insurer may charge to groups with different
their ability to vary premiums based on
health risks. This will make coverage less
health status or prior use of care. Pre-
costly in the near term for higher risk
miums could not differ by more than 50
groups. However, premium bands may be
percent within age/sex categories in the
unstable in the longer term. Because an
first year decreasing to 35 percent by the
insurer would be unable to vary premiums
third year.
to reflect fully actual differences in expected
health care costs, healthy enrollees would
Rate of Increase Standard for Renewal
have incentives to shift to other insurers
Premiums.-Insurers could not increase
that have fewer sick people in their pools.
premiums excessively for groups with de-
teriorating health status or claims experi-
Health risk pooling would assure affordable
ence. The maximum percent increase in
coverage over the long term both for small
renewal premiums would be set at 5 per-
groups (under 100 employees) and for individ-
cent plus the percent change in the "base
uals and families receiving health insurance
premium rate." The "base premium rate"
tax credits. Under this approach, health plans
is the lowest premium the insurer could
insuring a sicker than average population
have charged under the relevant block of
would receive a net transfer from the risk
business for a group with similar demo-
pool while other insurers will be net payers
graphic characteristics, excluding factors
into the pool. This will assure stable risk
related to health status, claims experience,
pooling over the long-term and will level
industry, occupation, or duration of cov-
the competitive playing field among insurers
erage.
to focus competition on efficiency and quality.
Premium Standards Across "Blocks of
The health risk pooling approach would
Business-Premiums could vary by up to
be implemented immediately for tax credit
20 percent across different blocks of busi-
recipients and would be phased-in over a
ness. A carrier may establish different
five year period for small group coverage.
blocks of business: (i) for business acquired
Expanding Access and Increasing Affordability Through Market Reform
23
from another carrier, (ii) for business ob-
pool. Payments from and to the pool would
tained through a distinct system of mar-
be based on the difference between the ex-
keting (e.g., brokers VS. associations), and
pected health care costs for the entire covered
(iii) for business obtained through dif-
population and the expected health care costs
ferent associations (for example, HINS).
for the population covered by the insurer.
Carriers could establish three different
As a result, insurers would no longer
blocks of business for each of the three
have an incentive to deny coverage to individ-
reasons, for a total of nine different blocks
uals with chronic disease. Moreover, insurers
of business.
would be able to provide coverage at a
Enforcement.-An independent actuary
near uniform premium for the sick and
would certify compliance. Failure to have
the healthy. The health risk pool would
a valid certification would trigger a vio-
have this effect because a health plan that
lation. The State enforcement agency
enrolls an individual with a high-cost chronic
could conduct an investigation to verify
illness will receive a transfer of funds from
certifications.
the pool equal to the difference between
the expected health care costs for the individ-
States could also implement a prospective
ual involved and the average expected cost.
reinsurance or risk allocation system on an
This moves the system back toward a flexible
interim basis to pool risks among insurers.
community rate-where choice in plans is
Under a prospective reinsurance model, an
maintained, but risk is truly pooled.
insurer could obtain optional reinsurance
A number of methods have been developed
for any group or newly eligible group
for measuring expected health care costs
member. The primary insurer would be
based on the health characteristics of the
liable for an individual's health costs up
population involved. These methods include
to a threshold amount. Above the thresh-
the Diagnostic Cost Group system developed
old, the reinsurance program would be re-
at Boston University and the Ambulatory
sponsible for most of the cost. The pro-
Care Group system developed at Johns Hop-
gram would be funded by reinsurance pre-
kins. Other systems are available for use
miums and an assessment on all small
by the States. The Department of Health
group insurers.
and Human Services would fund research
Under risk allocation, each insurance car-
to refine these systems and to develop im-
rier would have a quota of assigned risks
proved systems for adjusting for health risk.
based on the carrier's market share. Insur-
The Department would also provide technical
ers could initially refuse to provide cov-
support to assist States in establishing the
erage based on health risk. However, the
risk pools.
rejected group or individual would have
As is true for any system that varies
a right to select any insurer from an as-
payment according to health status, some
signed risk list maintained by the State
degree of overreporting is possible, but such
provided that the insurer's allotment has
overreporting would not have an adverse
not been filled.
effect on the pooling system unless some
Health Risk Pools.-Each State would im-
insurers were more successful at it than
plement two broad health risk pools: one for
others. If necessary, to prevent this outcome,
small group coverage and another for coverage
a random sample audit of insurance claims
provided to individuals and families receiving
and other records could be used to verify
transferrable health insurance tax credits.
the accuracy of health risk assignments.
These pools would spread risk broadly across
The health risk pools for small group
all health plans providing such coverage with-
coverage and for credit recipients would be
in a State.
similar in most respects. Participation would
Under this system, health plans that cover
be required for all health plans providing
a sicker than average population would receive
coverage to small groups and to credit recipi-
a net payment from the pool, while other
ents. If an individual purchases the basic
health plans would be net payers into the
benefit package, the insurance company re-
24
The President's Comprehensive Health Reform Program
ceives the credit plus or minus an amount
by as much as 16 percent through efficiencies
related to the individual's age (and possibly
of scale, lower administrative costs, and
gender). These adjustments mitigate the prob-
through pooling of purchasing power that
lem of adverse selection for the basic benefit
helps small businesses negotiate better rates
packages.
with insurers.
Amounts received by an insurance company
Cleveland's Council of Smaller Enterprises
would also be subject to health status adjust-
(COSE) operates a successful health insurance
ments. On an annual basis, each credit
group purchasing program for small firms.
recipient would be assigned to a health
While COSE has been successful, surprisingly
status category. Each health category would
little of this type of group purchasing is
have a corresponding weight based on expected
going on nationwide. The reforms described
health care costs defined relative to the
in the preceding sections will spur group
population average. Each insurer would cal-
purchasing by protecting against some of
culate an average weight for all credit recipi-
the abusive practices that have daunted some
ents covered by the insurer. Insurers with
local purchasing groups. Additional assistance
an average weight greater than the statewide
is provided as well to encourage rapid forma-
average would receive net transfers from
tion of group purchasing arrangements.
the pool, while insurers with an average
weight less than the statewide average would
ERISA Reform/Incentives for Group Pur-
be required to make contributions to the
chasing.-The federal preemption of State
pool.
regulation of self-insured health benefit plans
under ERISA that benefits virtually all large
States would implement pools for credit
employers would be extended to small busi-
recipients simultaneously with federal imple-
nesses that purchase coverage on a group basis
mentation of the transferable health tax credit
through a Health Insurance Network (HIN).
system. Implementation of health risk pools
This would protect against (i) State mandated
for small group coverage would occur over
benefit laws that require firms to provide cer-
a five-year period on a phased-in basis,
tain costly services, (ii) excessive State health
starting in the third year after enactment
insurance premium taxes, (iii) and State anti-
of the reform proposal. Transition measures,
coordinated care laws. These laws typically in-
including premium limits, would apply in
crease premium costs by 2 to 5 percent. HINs
the small group market in the interval.
could also still self-insure, but in this case,
enhanced insurance State solvency and in-
Encouraging Group Purchasing For Small
creased Department of Labor standards would
Employers: Health Insurance Networks
apply to ensure the economic stability of the
The President's reform proposal will help
plans.
reduce insurance costs for small businesses
Functions.-HINs could contract with in-
by encouraging group purchasing. Group pur-
surers to provide coverage to members or could
chasing can reduce health insurance costs
self-insure subject to enhanced State solvency
Table 3-4. Savings From Small Market Reforms:
Administrative and Bargaining Effects
(Expressed as percent of total premium, by firm size)
Firm Size Claims
Total Savings
<4
15.9
5-9
13.1
10-19
10.9
20-49
8.5
50-99
6.0
Expanding Access and Increasing Affordability Through Market Reform
25
regulation (if State solvency standards are in-
will simplify marketing and administration
sufficient, Department of Labor solvency
and sharply reduce costs.
standards would operate as a backup oversight
system). All federally approved HINs would be
Increasing Flexibility for Health Plans
required to offer at least one coordinated care
States would no longer be allowed to man-
option and to use a standard claims form.
date benefits that unduly limit flexibility
for health plans, thereby increasing health
Organization.-HINs would be structured
care costs and restrict coordinated care.
as non-profit voluntary membership organiza-
tions with a board of directors elected by the
State Mandated Benefits.-Many State
membership. HINs would be registered and
laws require insurers to cover certain optional
qualified, as applicable, by a State agency or
or ancillary services. These mandated benefits
by the Department of Labor. There would be
drive up premium costs up by at least 3 to
no limit on the number of HINs that could
5 percent.
be established in a given area. HINs could be
Provisions that Restrict Coordinated
established along the lines of professional soci-
Care.-Some State laws impose restrictions
eties, industry, or trade associations and would
which prevent the development of coordinated
be subject to all of the market reforms listed
care-and the competitive pressure it imposes
in the preceding sections. By buying coverage
on fee-for-service providers. Anti-managed care
through a HIN, small businesses would be able
laws include:
to achieve more effective purchasing power in
the market, thereby helping reduce the cost
Restrictions on reimbursement rates or se-
of insurance to their employees.
lective contracting: Laws that restrict the
ability of a carrier to negotiate reimburse-
HINs will provide the mechanism for pooling
ment rates with providers or contract se-
large numbers of individuals and employees
lectively with a limited number of provid-
of small firms, an advantage that is now
ers.
only available to large companies. These
Restrictions on differential financial incen-
plans have not grown in the past because
tives: Laws that limit the financial incen-
of State laws. To allow for federal preemption,
tives that a health benefit plan may re-
plans had to "self insure". Small groups
quire a beneficiary to pay when a non-
have difficulty raising capital to self insure
plan provider is used on a non-emergency
risk. This system allows "imputed ERISA
basis.
exemptions"-small firms can join together
without self-insuring, and have insurers carry
Restrictions on utilization review: Laws
the risk.
that (a) prohibit utilization review of any
or all treatments and conditions, (b) re-
Intrastate and Regional Pooling.-The
quire that such review be made by an in-
State or Federal government could certify an
State physician or by a physician in a par-
HIN. For example, Pennsylvania (or the Fed-
ticular specialty, (c) require the use of
eral government) could certify an HIN of 1,000
specified standards of health care practice
small employers who pooled market power to
in such reviews, or require the disclosure
negotiate with local providers in Philadelphia,
of the specific criteria used in such re-
or the Federal government could certify a simi-
views, or (d) require payment to providers
lar HIN for the Philadelphia area (PA, NJ,
for the expense of responding to utilization
and DE) that would pool market power in the
review requests.
entire region.
Federal/State Relationships
Multi State Pooling.-HINs would allow
for the first time, multi State pooling of small
Most of the reforms described in the preced-
firms. Groups like NFIB, National Small Busi-
ing section would be implemented by the
ness United and The Chamber of Commerce
States. Thus, the responsibility for regulating
(or any other group) could offer the same basic
health insurance would remain primarily with
plans to members nationwide. In the past,
the States. However, federal legislation would
State barriers have prevented such plans. This
be amended to provide States with clear
26
The President's Comprehensive Health Reform Program
incentives to enact laws that will achieve
As stated above, federally certified HINs
national goals. In many cases, as with HIN
would be protected from State mandated
certification and oversight, there would be
benefit laws and State premium taxes in
backup federal certification and oversight pro-
the same manner as an ERISA-qualified
cedures.
self-insured plan. Federally certified HINs
Under this approach, after an initial period
would, however, be subject to additional State
to allow State action, if a State's health
requirements to assure solvency. States could
insurance laws do not meet prescribed federal
provide an alternative process for certification
guidelines, then insurance sold in-State would
of HINs. If State laws and State premium
be certified through a federal back-up mecha-
taxes were excessive, a HIN could apply
nism.
to the Department of Labor for federal cer-
tification-pre-empting State law. As a result,
Other reforms would be implemented di-
State would be encouraged to facilitate market
rectly by Federal Government through amend-
pooling and access to coverage for small
ment of the Federal Employee Retirement
business-or risk losing their traditional insur-
Income Security Act (ERISA) or through
ance oversight and regulatory role to a federal
other appropriate legislation. Certification of
backup system.
HINs would fall into this category.
Chapter 4
Expanding Access Through Tax Measures to Help People
Pay for Insurance: Health Insurance Tax Credit and De-
duction
Overview
Other federal programs-including Medicare
and Medicaid-provide health insurance cov-
The cornerstone of the President's plan
erage directly to eligible groups including
to increase access to health insurance is
the elderly, disabled, and certain low-income
a new transferable tax credit and deduction
individuals. However, many low income indi-
designed to help most of the Nation's unin-
viduals-including many unemployed individ-
sured obtain health insurance. The plan places
uals and the working uninsured-do not
the highest priority on providing health insur-
qualify for any of these benefits and do
ance for low-income individuals, but also
not receive any direct or indirect Federal
would provide substantial benefits to middle-
contribution to their health insurance.
income individuals who enjoy little or no
employer contributions for health insurance
Overall, there are estimated to be 34.7
and to self-employed individuals.
million Americans without health insurance
(CPS, March 1991). Lack of coverage has
a number of adverse consequences. Health
Policy Background
may be at risk because of reduced access
Current tax law provides substantial bene-
to primary and preventive care. Moreover,
fits to individuals whose employers contribute
uninsured people often seek medical care
to their health care insurance costs. The
in hospital emergency rooms, which is costly
entire amount of the employer's contribution
and inefficient. The cost of providing care
is excluded from taxable income and from
to the uninsured produces large cost-shifting
the FICA wage base.
within the health care system, increasing
costs for the insured-by up to 15 percent
Self-employed individuals are able to deduct
for some services. For these and other reasons,
25 percent of their premium payments. And
expanding insurance coverage is an important
all taxpayers are able to deduct out-of-pocket
goal for the Nation.
medical expenses and premium payments to
the extent that these expenses exceed 7.5
Analysts have suggested a variety of options
percent of adjusted gross income; however,
as means of expanding insurance coverage.
this deduction is of limited value to most
These options include national health insur-
taxpayers because few have medical expenses
ance (see Chapter 6, section A), and a
significantly in excess of the AGI threshold.
"play or pay" mandate to require employers
95 Million Americans Will Benefit
To make health insurance more affordable, the President's plan includes:
A tax credit of up to $3,750 for low-income families;
A tax deduction of up to $3,750 for middle-income families;
An increase to 100 percent in the deduction for health insurance available to self-em-
ployed individuals.
27
28
The President's Comprehensive Health Reform Program
to provide coverage or to pay a tax (see
CHAMPUS, and selected other federal health
Chapter 6, section B). Both of these alter-
programs) would not be eligible for the credit.
natives will lead to higher costs for American
The transferable tax credit would replace
taxpayers, rationing of care, and inefficient
the supplemental earned income tax credit
delivery in an unstable system. The Presi-
available under current law for certain low-
dent's proposal instead relies on significant
income taxpayers who contribute toward the
reforms of the health insurance market, a
purchase of health insurance coverage for
new transferable health insurance tax credit
their children.
for low-income families, and a new health
insurance tax deduction for middle-income
Amount.-The maximum amount of the
families.
credit is $1,250 for single persons, $2,500 for
married couples and other two-person families,
The President's plan will promote individual
and $3,750 for families of three or more. These
choice. With a system of health insurance
credit amounts would be sufficient to purchase
tax credits and deductions, low- and middle-
a basic health insurance benefits package (See
income families will be free to choose among
Table 3-3). The amount of the credit would
a variety of health plans with increased
phase down to a minimum at increasing in-
availability due to the market reforms. This
come levels.
helps ensure that coverage meets individual
and family needs.
Individuals, couples, and families may also
elect to claim a deduction instead of the
Moreover, providing choice is a critical
credit. The deduction will be available to
prerequisite of competition in any market
persons without regard to whether they item-
system-and competition among health plans
ize or claim the standard deduction and
is the best way of assuring continuous im-
will be equal to $1,250 for single persons,
provements in quality of care, service, and
$2,500 for married couples and other two-
cost-effectiveness. None of the alternative op-
person families, and $3,750 for families of
tions for expanding insurance coverage pro-
three or more.
mote choice or enhance competition. Indeed,
Both the credit and deduction amounts
they generally have the opposite effect. Other
will be increased to account for inflation.
disadvantages are detailed more fully in Chap-
Applicable credit and deduction amounts will
ter 6.
be reduced by the amount of any contribution
made by the employer to the employee's
Tax Credits and Deductions for Low-
health plan. Individuals with employer con-
Income and Middle-Income Individuals
tributions exceeding the applicable credit or
Low- and middle-income persons who are
deduction amount will receive neither the
not covered by other federally subsidized
credit nor the deduction.
health insurance programs will be eligible
As noted above, the amount of the tax
for a tax credit or deduction for the purchase
credit would vary based on modified adjusted
of insurance.
gross income in relation to the tax filing
Eligibility.-Eligibility for the credit or the
threshold. The tax filing threshold is the
deduction is related to income and extends up
sum of the standard and taxpayer and depend-
to a modified adjusted gross income of-
ent exemptions and approximates the poverty
level. Modified adjusted gross income equals
$50,000 for single persons
the sum of adjusted gross income, plus non-
$65,000 for persons filing as heads of
taxable Social Security payments, Railroad
households, and
Retirement payments, and tax-exempt inter-
est.
$80,000 for married persons filing jointly.
The tax credit would be implemented over
These income levels will be increased to
a five-year period. When fully implemented-
account for inflation.
All eligible individuals, married couples,
Individuals who receive other federal sup-
or families with incomes below the tax
port (e.g., covered by Medicare, Medicaid,
threshold (100 percent of poverty) will re-
Expanding Access Through Tax Measures to Help People Pay for Insurance
29
ceive the maximum credit (e.g., to $1,250,
in payment for coverage. The insurance pro-
for individuals, $2,500 for married couples,
vider will then reconcile the amount of the
and $3750 for families).
advance credit on their tax return.
All eligible individuals, married couples,
Credits would be used to purchase a "basic"
or families with incomes above the tax
benefit package (or other health plans of
threshold will receive a partial credit, de-
their choice). States would ensure that insur-
creasing to 10 percent of the maximum
ance companies would make basic benefit
credit (e.g., to $125 for individuals, $250
plans available (See Chapter 3).
for married couples, and $375 for families)
at 150 percent of the tax threshold.
Tax Credits and Deductions for Self-
Employed Individuals
All eligible individuals, married couples,
or families with incomes above 150 per-
The self-employed would be entitled to
cent of the tax threshold, will receive the
deduct 100 percent of the cost of their
greater of the minimum credit or the de-
health insurance premiums or receive the
duction of up to $3,750 as described above.
applicable credit, whichever is greater.
As noted previously, individuals, married
Using the Tax Credit/Deduction to
couples, and families with incomes above
Purchase Insurance
$50,000, $65,000, and $80,000, respectively,
The market reforms described in Chapter
would be ineligible for either the credit
3 would apply to help assure that coverage
or the deduction. Also, as noted previously,
is both available and affordable for individuals
individuals, couples and families could take
the health insurance deduction instead of
and families receiving health insurance tax
the credit. Moreover, the amount of the
credits. Specifically, guaranteed issue, guaran-
credit and the deduction would be phased
teed renewability, and elimination of preexist-
out over the range of $40,000 to $50,000
ing condition exclusions would all apply.
for single persons, $55,000 to $65,000 for
Moreover, broad based health risk pooling
married couples and other two-person families,
would apply to insurance sold to credit recipi-
and $70,000 to $80,000 for families of three
ents to ensure affordability of coverage for
or more. The tax credit and deduction would
recipients with chronic illnesses. Finally, credit
cost about $35 billion in 1997 when fully
recipients would be able to buy low cost
phased-in.
coverage through health insurance networks
or HINs.
Administration.-For filers, credits and de-
ductions could be claimed on the tax return
The initial credit amounts of $1,250, $2,500,
at the end of the year in the usual manner
and $3,750 for individuals, couples and fami-
used for other credits and deductions.
lies were selected to cover the cost of an
efficiently-run health plan that provides
Alternatively, low-income credit recipients
"basic" services. Each State would define
could receive a transferable credit certificate
a basic benefit plan or plans that could
during the year by applying to a governmental
be purchased for the approximate amount
office. States may select a State agency,
of the credit. Any insurer in the State
such as the Employment Service or contract
could offer basic benefits to credit recipients.
with the Social Security Administration to
Credit recipients would be able to buy coverage
certify applicants' eligibility and to notify
other than the State-defined basic benefit
the Internal Revenue Service of the issuance
package if such other coverage would better
of the advance credit.
suits their needs.
This mechanism would immediately qualify
Achieving the Goal of Expanded Access
the individual or family for assistance in
purchasing health insurance; people would
The health insurance tax credit and deduc-
not have to wait until they file their tax
tion will help millions of low- and middle-
returns to benefit. Transferable credit holders
income families afford health insurance. When
would transfer the credit to an employer
fully implemented, approximately 86 percent
or insurer who provides health insurance
of all individuals not receiving Federal medical
30
The President's Comprehensive Health Reform Program
support have income in the range of eligibility
Self-employed workers would also be helped.
for a credit or deduction; the remaining
In 1993, 3.1 million self-employed taxpayers
14 percent are higher-income individuals or
currently buying health insurance would bene-
families.
fit from the increase in the deduction available
Individuals who have employment based
to the self-employed. Still more self-employed
coverage, but who pay much of the cost
individuals will benefit because they qualify
themselves, would receive a substantial
for the health insurance tax credit. And,
new deduction or credit.
the insurance market reforms discussed in
Chapter 3 will reduce the cost of health
A total of 95 million individuals would
insurance for self-employed individuals at
benefit from the health insurance tax credit
all income levels.
and deduction when the President's program
is fully phased in.
After five years, 29 million Americans will
become newly covered. The number of unin-
About 25 million low-income individuals
sured will be decreased from 34.1 million
would receive the maximum credit (ad-
to 4.9 million-or less than 1.8 percent of
justed for any employer contributions).
the total population. Twenty-four million
Approximately 13 million individuals with
Americans will gain coverage primarily as
incomes between 100 percent and 150 per-
a result of the new health insurance tax
cent of the tax filing threshold would re-
credits and deductions. And, by reducing
ceive a partial credit or deduction.
premium costs substantially, the health insur-
ance market reforms and other cost-contain-
Finally, about 57 million middle-income
ment reforms will encourage employers to
individuals would receive a partial credit
expand coverage voluntarily to an additional
or deduction. Of these, 51 million would
five million Americans.
receive a deduction.
Table 4-1. Effect of Overall Reform Proposal on the Number of Uninsured
Americans
(People in millions; projected to population)
Below 100
Between
As
Income Level
100 and 150
Percent
Percent of
Percent of
Totals
of Total
Poverty 1
Poverty 1
Popula-
tion
Current Law Uninsured
15.4
5.7
34.1
12.8%
Covered Through Tax Credits and Deductions
14.9
5.0
24.1
9.1%
Covered Through Market and Other Reforms
0.4
0.6
5.0
1.9%
Total Newly Covered
15.3
5.6
29.2
11.0%
Remaining Uninsured
0.1
0.2
²4.9
1.8%
1 Poverty here is the income level at which individuals, couples, and families must begin paying income taxes.
2 Many of the 4.9 million remaining uninsured are eligible for a credit or deduction.
Chapter 5
Making the System More Cost-Effective
A. Overview
Over the past several decades, per capita
More efficient forms of health insurance
health care costs in the United States have
coverage are available. These include fee
increased more than 4 percent per year
for-service coverage with modest cost sharing
faster than general inflation. Since 1960,
and coordinated care coverage, where the
real per capita health spending has grown
health plan strives to buy the best package
as a share of GDP from 5.3 percent in
of health care at the lowest cost on behalf
1960 to an estimated 13.1 percent in 1991.
of plan enrollees. Due to distortions in the
If current trends were to continue, total
health insurance market, however, demand
health spending could reach 26.1 percent
has been relatively weak for these more
to 43.7 percent of GDP by 2030 under
efficient forms of coverage.
alternative assumptions (Waldo et al., 1991).
Clearly, these trends are unsustainable if
There are three principal distortions in
the United States is to improve its economic
the market for health insurance which support
base and standard of living.
inefficient forms of coverage: (i) government
subsidies which reduce consumer sensitivity
This rapid growth reflects a number of
to cost, (ii) opportunities for favorable risk
factors that cannot easily be changed or
selection-or "cream-skimming"-which can
controlled: the demographics of the U.S. popu-
give inefficient health plans an unfair cost
lation, the labor-intensive nature of health
advantage, and (iii) limited consumer informa-
care services, and the introduction of bene-
tion regarding the quality of care in competing
ficial-but highly costly-new technology.
health plans which can lead consumers to
Other causes of rising health care costs—
mistake higher price (or more intensive service
market failures in health care and health
delivery) for better care or superior outcomes.
insurance-can and should be addressed
through enhanced competition.
There are other weaknesses in our current
system as well. Substantial consumer and
Currently, the mix of health services pro-
provider uncertainty exists regarding the effec-
vided is not necessarily that which fully
tiveness of a broad range of alternative
informed consumers would purchase under
diagnostic and therapeutic procedures. More-
optimal conditions and services are not pro-
over, prevention often is neglected resulting
duced at minimum cost. A key issue is
in needless illness and greater cost. Finally,
the role of insurance. While health insurance
our current legal system increases health
has important benefits-it protects individuals
care costs by fostering "defensive medicine"
and families from unexpected high health
and excessive litigation costs.
care costs and it reduces financial barriers
to care-traditional fee-for-service insurance
Against this background, the outlines of
with low cost-sharing stimulates over-utiliza-
a comprehensive reform strategy become ap-
tion of services. The reason is straightforward:
parent. The key initiative is to shift health
with insurance paying most of the cost,
care delivery to a more market-based, competi-
health care is perceived to be a free good
tive system. Other critical elements include
for patients and demand for medical care
reducing administrative costs, coordinated care
increases above optimal levels. Moreover, insu-
initiatives, more prudent purchasing of care
lated from the cost of care, consumers have
(particularly through public programs), preven-
little reason to shop for the best price.
tion, and malpractice reforms.
31
316-608 0 - 92 - 3 : QL 3
32
The President's Comprehensive Health Reform Program
Each of these elements move the system
likely to provide more efficient forms of
toward greater efficiency. Together, these ele-
insurance coverage to all employees-not just
ments form the building blocks of a more
those directly affected by the change in
fully integrated market-based system.
tax policy. Because coverage does not correlate
highly with income (Taylor and Wilensky,
Strengthening Competition
1985), this spillover effect is plausible.
The President's reform proposal has three
Non-medical areas will experience spillover
main elements which will strengthen com-
benefits as well. By subsidizing health insur-
petition. These elements will lead to greater
ance for low-income workers, the tax credit
efficiency and a more equitable allocation
will encourage re-entry into the work force-
of resources. The nature of competition will
particularly for Medicaid recipients who may
shift. Providers and the mix of services
fear losing insurance coverage if they resume
will be chosen based more on price relative
employment. Broader health insurance should
to quality and meaningful outcomes.
also lead to productivity gains from improved
health status for the uninsured unemployed/
Changes in Tax Policy.-The President's
working poor.
Plan contains two changes in tax policy that
make health care moare widely available and
Insurance Market Reforms.-The insur-
affordable: (i) a transferable tax credit for low-
ance market reforms will help make com-
income individuals and families, and (ii) a de-
petition more effective as a means of encourag-
duction for self-paid health premiums of up
ing greater efficiency. The market reforms will
to $1250/$3750 for middle income individuals
effectively block "cream skimming" or favor-
and families.
able risk selection. This will cause competitors
to focus on cost-containment and quality.
The transferable tax credit is a crucial
Group purchasing through Health Insurance
reform. For the first time, government assist-
Networks ("HINs") will also give small busi-
ance for low-income individuals and families
nesses greater market "clout." And, pre-
will be provided through tax credits rather
emption of State-mandated benefit and anti-
than through a publicly administered health
managed care laws will give health plans new
insurance program. Reliance on tax credits
flexibility to respond to market pressures for
will allow increased consumer choice. Tax
greater efficiency and cost savings.
credits to low-income individuals will permit
them to shop among plans and coverage
Improved Information.-Comparative cost
options. Moreover, because the credit is set
and quality information would be made avail-
as a fixed dollar amount rather than as
able to purchasers through a new series of
a percent of premium costs, consumers will
State and local initiatives. Providing this infor-
be cost-sensitive and purchase additional cov-
mation is a critical element for a pro-com-
erage only when the benefits of such coverage
petition reform strategy. Comparative informa-
tion for individual and institutional purchasers
at the margin outweigh competing goods
and services.
will enable purchasers to shift demand to-
wards high-value health plans and providers.
Consumers affected by the tax credit and
This, in turn, will provide powerful incentives
the capped deduction can be expected to
for plans and providers to compete by control-
be more cost-conscious. Restoring marginal
ling costs while improving quality. Even a mi-
cost sensitivity in this way could result
nority of well-informed consumers can influ-
in a 5 percent one-time reduction in health
ence other consumers and the direction of the
care costs for those affected (Chernick, Holmer,
market (Pauly, 1978). Plans and providers that
and Weinberg, 1987). This estimate is consist-
demonstrate equivalent or superior outcomes
ent with other studies which indicate one-
at lower cost would gain a competitive edge.
time savings of between 2 percent and 13
Service utilization and costs could be cut ap-
percent (EBRI, 1989).
preciably with no deterioration in outcomes.
While these reforms will directly affect
Funding will increase for outcomes research.
only a portion of the population, a broader
This research will better define the safety
spillover effect seems likely. Employers are
and effectiveness of key medical and surgical
Making the System More Cost-Effective
33
procedures and will facilitate more appropriate
The Secretary of Health and Human Serv-
use of costly technologies. Funding also will
ices is leading a number of initiatives to
increase for efforts to develop practice guide-
streamline administrative procedures. These
lines for practitioners. By specifying a "best
include accelerated development of data stand-
practice" approach for specific conditions,
ards for electronic claims processing, and
guidelines can help prevent unnecessary or
encouragement of electronic medical records
potentially harmful care.
for insurance enrollees.
Administrative Savings
Coordinated Care
Some administrative costs (e.g., spending
The President's reform proposal would en-
on utilization review) can result in net savings
courage greater use of coordinated care ar-
by identifying and preventing costly, un-
rangements through increased enrollment in
needed, and potentially dangerous care. The
public programs-Medicare and Medicaid-
U.S. leads the world in health care quality
and eliminate State laws that hir der develop-
assurance. Quality assurance increases admin-
ing these arrangements.
istrative costs, but adds important value
"Coordinated care" refers to a diverse—
for consumers.
and still evolving-set of alternative delivery
Nonetheless, there are areas where overhead
models introduced over the last two decades.
costs in the U.S. are excessive and savings
Examples include Health Maintenance Organi-
are possible. One area of concern is adminis-
zations (HMOs) and Preferred Provider Orga-
trative and marketing costs for health insur-
nizations (PPOs). Coordinated care plans offer
ance sold to small businesses. Overhead costs
the potential of: lower cost, improved outcomes
can be as high as 40 percent of total
through better quality assurance, and ex-
premiums for small businesses compared with
panded consumer choice among health service
less than 6 percent for large businesses.
delivery options. Coordinated care systems
Another area of concern relates to the high
closely integrate the financing and delivery
cost of paperwork associated with billings
of health care. Unlike fee-for-service medicine,
and claims forms.
clinical decisions are coordinated across the
full continuum of care.
Under the Administration's proposal, group
purchasing arrangements, or Health Insurance
Accumulating evidence presented in sub-
Networks, for small businesses will help re-
section B shows direct savings from coordi-
duce administrative and marketing costs. And
nated care as high as 30 percent. Other
market reforms will reduce overhead costs
studies show significant "spillover" savings:
by prohibiting insurers from refusing coverage
as coordinated care systems gain market
to particular individuals in a group due
share in local markets, fee-for-service costs
to their health status and by discouraging
are reduced as providers are forced to compete
frequent changes of insurers.
more vigorously. And, it is important to
Table 5-1. Savings From Small Market Reforms:
Administrative and Bargaining Effects
(Expressed as percent of total premium, by firm size)
Total Adminis-
Total Savings
Firm Size Claims
tration Savings
with Bargaining
Effects
Fewer than 4
12.6
15.9
5-9
10.6
13.1
10-19
9.1
10.9
20-49
7.4
8.5
50-99
5.5
6.0
34
The President's Comprehensive Health Reform Program
stress that the cost containment potential
(iii) health promotion activities, such as cam-
of coordinated care is dynamic. Further sav-
paigns to reduce smoking, increase seat belt
ings are likely as management systems im-
use, or encourage early prenatal care for
prove and as better techniques for delivering
low-income women.
medical care are developed.
Medical Professional Liability Reform
Prudent Purchasing in Public Programs
Medical malpractice reform is a key element
Expenditures for both Medicare and Medic-
of health system reform. Malpractice pre-
aid programs have continued to grow at
miums more than doubled from approximately
double digit rates. Medicare baseline growth
$2.7 billion in 1984 to $5.6 billion in 1989.
for fiscal year 1992 is projected at 11.8
And, the threat of malpractice forces doctors
percent; expenditures under Medicaid have
to practice "defensive medicine"-ordering un-
increased at nearly 25 percent on average
necessary tests and procedures simply as
over the last four years, making it the
documentation to protect against litigation.
fastest growing domestic program. Prudent
Defensive medicine costs are estimated at
purchasing and other measures to improve
about $21 billion a year. The current system
efficiency could reduce growth in Medicare
also involves lengthy delays and excessive
costs. Medicaid cost growth would be slowed
litigation costs.
by encouraging greater reliance on coordinated
care and by providing States with greater
To address these problems, the Administra-
flexibility. These savings will be achieved
tion is proposing comprehensive reform. States
with no reduction in benefits for program
would be encouraged to reform medical mal-
recipients.
practice litigation by: (i) capping the amount
of allowable non-economic damages; (ii) elimi-
The Administration also supports measures
nating joint and several liability for non-
to stop abuses in the current system. For
economic damages; (iii) eliminating the collat-
example, payment for physician self-referrals
eral source rule that allows for double recov-
would be prohibited under the Medicare and
ery; (iv) requiring structured payments for
Medicaid programs. Physicians and other pro-
malpractice awards, as opposed to lump sum
viders increasingly refer patients for tests
payments; (v) promoting pretrial alternative
or to diagnostic centers in which they hold
dispute resolution to encourage reasonable
some financial stake-a clear conflict of inter-
settlements; and (vi) implementing procedures
est. Recent evidence indicates these "self-
to enhance quality of care. These reforms
referral" arrangements can increase costs per
would also be applied to Federal courts,
episode by as much as 400-700 percent
and alternative means of resolving medical
(Florida Cost Containment Board, 1991;
malpractice claims would be piloted within
Hillman et al., 1990).
the Federal Employees Health Benefits Pro-
Prevention
gram.
Prevention is a "win-win" investment.
In addition, the President's reform proposal
supports amending State and federal rules
Health care costs can be cut while improving
of civil procedure to provide that a party
well-being and increasing worker productivity.
who refuses to engage in alternative dispute
Healthy behaviors can prevent between 40
and 70 percent of all premature deaths,
resolution and who loses at trial must pay
the other party's attorneys' fees. Finally,
a third of all cases of acute disability,
the Department of Justice will provide addi-
and two-thirds of all chronic disability. Accord-
tional guidance concerning the application
ingly, the President's plan focuses on preven-
of the antitrust laws to certain aspects of
tion efforts which have maximum return
the health care system.
on investment. Specific initiatives include in-
creased funding for: (i) vaccine research and
Practice guidelines and standards of care
other research targeted at preventing specific
have assumed growing importance in providing
diseases; (ii) screening programs such as
quality assurance. Such guidelines and stand-
blood lead level testing, pap smears, mammo-
ards also may play an important role in
grams, and blood cholesterol testing; and
reducing defensive medicine. Their implica-
Making the System More Cost-Effective
35
tions for malpractice litigation will be the
marginally useful care, including cost-increas-
focus of scrutiny by the Secretary of Health
ing technologies.
and Human Services.
Increased use of coordinated care by Medi-
Overall System Effects
care and Medicaid would reinforce these mar-
ket shifts. Public and private activity combined
Each of the individual elements will encour-
could make coordinated care plans the domi-
age greater efficiencies and a more fair
allocation of resources across the U.S. health
nant system. The market power enjoyed by
care system.
coordinated care approaches would further
mean that norms of care (and consumer
Tax policy changes, health insurance market
and physician expectations) would increasingly
reform, and greater availability of comparative
be established by this sector.
value information will together generate in-
creased cost sensitivity and increased con-
sumer shopping across all income and occupa-
Projected Savings Estimates
tional groups. Suppliers can be expected to
The President's health care reform proposals
respond with more affordable benefit packages
can reduce the rise in health expenditures.
and a more efficient mix of services. For
The individual savings estimates, both static
example, use of cost-sharing and coordinated
and ongoing, are presented in Chart 14.
care plans could increase. As coordinated
By 1997, total health expenditures could
care plans achieve greater premium cost
be cut by 6 to 14 percent if the proposals
advantages, more individuals would switch
are adopted.
to these plans from fee-for-service coverage.
And, coordinated care plans would have incen-
In dollar terms, projected system-wide sav-
tives to increase savings by making provider
ings through 1997 would total $394 billion.
networks more selective and by reducing
Projected estimates of cumulative savings
Chart 14. IMPACT OF HEALTH REFORMS ON PROJECTED U.S. HEALTH SPENDING
PERCENT OF GDP
30
BASELINE WITHOUT REFORM
25
LOW SAVINGS ESTIMATE
20
15
HIGH SAVINGS ESTIMATE
10
5
0
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030
SOURCE: Office of Management and Budget
36
The President's Comprehensive Health Reform Program
through the end of the decade total nearly
Incentives for coordinated care;
a trillion dollars-$954 billion.
Making information available to consum-
Over the longer term running into the
ers;
next century, many of the President's proposed
reforms can be expected to reduce the growth
Increases for prevention programs and
rate of real per capita medical expenses.
higher levels of personal responsbility;
As shown in Chart 14, the long-term rate
Malpractice reforms;
of growth in the Nation's health care costs
Reductions in administrative costs;
can be cut from 10 to 19 percent. A lower
growth rate in per capita costs, will eventually
Increased efficiency, reduction in waste,
restrain the share of medical costs in the
and increased cost-effectiveness of publicly
total economy. By 2030, the share of GDP
funded programs.
devoted to health care will be 4 to 8 percentage
points lower. Instead of 27 percent (the
The combination of these reforms will yield
middle range projected estimate), it could
public sector savings that would be sufficient
be 19 percent.
to offset the new health insurance tax credit
and deduction.
Summary
Health care savings are to be achieved
through implementation of the following re-
forms:
B. Encouraging Coordinated Care
Overview
care through a coordinated care arrangement
as opposed to less than 2 percent in 1980.
Rapid increases in health care costs have
The trend is based on the realization that
focused attention on the inflationary incentives
inherent in fee-for-service and cost-based reim-
coordinated care systems offer better incen-
bursement, which traditionally have character-
tives for appropriate, less costly, high-quality
health care.
ized American medicine. Under fee-for-service
arrangements, physicians and other providers
Coordinated care plans redirect incentives.
have incentives to perform more, not fewer,
The organization is placed at financial risk
services, because practitioners receive higher
for the entire continuum of patient care.
levels of income by providing additional care.
Many of these extra services offer little
As a result, coordinated care plans have
or no additional health benefit. Moreover,
incentives to organize their systems and
under these systems, health care delivery
deliver care in the most efficient manner
is often fragmented, with patients receiving
possible. Selective contracting to obtain
services from different providers without any
discounts, exclusive use of providers, and
means of coordination.
provider payment incentives are ap-
proaches utilized to improve efficiency.
In the past decade, health care delivery
in the United States has been moving away
Importantly, there are also incentives to
from fee-for-service medicine toward "coordi-
ensure that the plans deliver high quality
nated care" plans. The term refers to a
care:
diverse-and still evolving-set of delivery
-Unlike fee-for-service medicine, the
models that integrate the financing and deliv-
plans are responsible for the entire epi-
ery of care and alter the incentives for
sode of any illness and for the future
both providers and consumers of care. As
welfare of the patient. Thus, plans have
Chart 15 indicates, by 1989, some 27 percent
of workers in medium and large firms received
incentives to keep patients healthy and
Making the System More Cost-Effective
37
Chart 15. COORDINATED CARE ENROLLMENT IN MEDIUM AND LARGE FIRMS
PERCENT OF WORKERS
35
30
27
26
25
20
14
15
10
5
4
5
2
0
1980
1982
1984
1986
1988
1989
HEALTH MAINTENANCE ORGANIZATIONS / PREFERRED PROVIDER ORGANIZATIONS
SOURCE: Interstudy, BLS Annual Survey
to ensure the most rapid and complete
Models of Care
recovery from illness.
-An important byproduct is that plans
An array of coordinated care plans currently
have incentives to offer preventive serv-
exist. A popular example is the preferred
ices.
provider organization (PPO), in which a net-
-Moreover, plans must maintain high
work or panel of providers contracts with
standards of quality because plans com-
the entity. Many consumers have favored
pete for patients and patients can choose
PPOs because they allow greater freedom
to enroll elsewhere.
of choice in selecting providers. Typically,
providers are reimbursed for services based
Coordinated care plans employ a variety
on a negotiated fee schedule. Providers gen-
of mechanisms to ensure high quality care
erally accept lower fees in exchange for
and coordination of services. These include
directed access to increased numbers of pa-
utilization review to determine whether serv-
tients. Utilization review programs ensure
ices are medically necessary and appropriate,
that physicians do not offset lower fees with
pre-admission certification, second surgical
inappropriately increased volume. Consumers
opinions, patient case management, and the
may choose a provider outside the PPO
use of primary care physicians as coordinators
network, but face additional out-of-pocket pay-
and managers of care.
ments.
Coordinated care plans are "win-win" or-
A second example is point-of-service (POS)
ganizations for providers and consumers.
plans that utilize a network of participating
Consumers can receive high quality care
practitioners. Beneficiaries select a primary
with additional benefits such as preventive
care physician, who makes all referrals for
services. Efficiency gains can mean better
specialty care. If individuals seek care from
returns for providers and lower premiums
a participating provider, they incur little
for consumers.
or no additional costs. Individuals opting
38
The President's Comprehensive Health Reform Program
to seek care outside the plan face higher
service results in substantial savings while
deductibles and copayments.
ensuring quality care.
A third well-known example is the health
A number of studies indicate cost savings
maintenance organization (HMO), in which
associated with the use of coordinated care
a defined, comprehensive set of health services
(Luft, 1980; Luft, 1981; Manning et al.,
is provided to an enrolled group of individuals.
1984, 1987; McCaffree et al., 1976; Luft,
The organization assumes financial risk for
1978; Roemer and Shonick, 1973; Wolinsky,
part or all of the group's health care. In
1980)-as high as 30 percent (Luft, 1981).
the "group model" HMO, a physician group
Other studies (Dowd, 1986; Robinson, 1991;
contracts with the entity at financial risk.
Rossiter, 1989; Scheffler et al., 1988; Welch,
Under the "staff model" HMO, physicians
1990) have shown "spillover" cost-savings into
are employees of the HMO.
the fee-for-service sector as coordinated care
plans increase their market share in an
Perhaps not surprisingly, other countries
such as Canada and the United Kingdom
area and stimulate competition among a
are now emulating the characteristics of co-
variety of plans, thereby driving down costs.
ordinated care arrangements:
Evidence regarding cost savings from coordi-
nated care is ongoing, in part because of
The United Kingdom has recently imple-
mented the most thorough reform of its
the newness of plans and their changing
organizational nature. Further savings are
system since its founding, by installing
likely as management systems improve and
elements of market responsiveness by pro-
as better techniques for delivering medical
viders, especially by HMO-like private
care are developed.
physician groups;
While there has been debate about whether
Canadians are experimenting with
some of the savings associated with HMOs
"Health Service Organizations" which are
similar to HMOs in concept but which do
can be attributed to favorable selection (i.e.,
healthier people enrolling in HMOs), the
not always have the prepaid, locked-in en-
rollment features that can increase effi-
Rand Health Insurance Experiment (Manning
et al., 1984) demonstrated that HMOs provide
ciency.
significant potential savings over fee-for-serv-
ice medicine. Assessment of health outcomes
Evidence: Cost and Quality
between the HMO group and the traditional
Evidence indicates that coordinated care
fee-for-service group showed no difference.
plans offer health care to enrollees that
In this multi-year demonstration in which
is as good as, or superior to that of fee-
individuals were randomly-selected into an
for-service medicine. Studies have generally
HMO, reported savings over 5 years were
shown comparable quality based on assess-
as high as 25 percent, compared to patients
ments of medical records between fee-for-
randomly selected into fee-for-service arrange-
service medicine and HMOs (Cunningham
ments.
and Williamson, 1980; Luft, 1981). In addition,
studies have shown that beneficiary satisfac-
Trends in Enrollment
tion is very high in Medicare HMOs and
Private Sector Growth-The shift toward
equal to that found in Medicare as a whole
coordinated care over the past decade has been
(Rossiter, 1989). Moreover, Medicare HMOs
clear. As Chart 15 illustrates, in 1989 over
offered more supplemental benefits, including
27 percent of all employees in medium and
preventive services, for a lower premium
large firms receive care through HMOs or
than that of traditional Medigap policies
PPOs. The most significant growth has oc-
(which pay deductibles and co-payments not
curred in those coordinated care plans that
covered by Medicare). In general, HMOs
offer consumers substantial flexibility to
have been able to reduce hospitalization and
choose their own physicians.
increase the use of primary care. A lower
number of hospital patient days for coordi-
Public Programs.-Enrollment in public
nated care plans versus traditional fee-for-
programs has been less robust. Medicare began
Making the System More Cost-Effective
39
to enter into fixed price contracts ("risk con-
A final problem is that until 1992, the
tracts") with HMOs in the mid-1980s. How-
only coordinated care option available to
ever, HMO enrollment has stalled since 1986,
the elderly has been HMOs, a structure
with risk enrollees only increasing from 1.0
that is too rigid and inflexible for many
to 1.3 million beneficiaries. Only 3 percent of
Americans. As more flexible options be-
Medicare beneficiaries currently are enrolled
come available, this could dramatically
in alternative plans, in striking contrast with
change their interest in coordinated care.
the under 65 population.
For Medicaid, HMOs have had legislative
The most serious problem is that the el-
authority to enter into contracts with State
derly have typically not used HMOs dur-
agencies since 1967. However, Congress adopt-
ing their nonelderly years and have some
ed measures in the 1980s inhibiting HMO
reluctance to become involved in a new
contracting with Medicaid.
delivery system during a time when they
can expect to become heavy users of health
Current law authorizes use of new forms
care. As more individuals with experience
of alternative delivery arrangements, such
in coordinated care plans turn 65, this
as primary-care case management (with an
problem will diminish.
appointed physician or other primary care
provider serving as a gatekeeper to specialist
A second problem is that HMOs have a
and inpatient services) and health insuring
limited ability to offer seniors a more at-
organizations (a fiscal intermediary that func-
tractive benefit package than what is of-
tions much like the insurance portion of
fered by FFS Medicare. This is especially
an HMO by providing strong utilization con-
true for seniors (about 40 percent) who
trols). This meant States had a variety of
have employer-based supplemental bene-
alternatives for testing the cost-effectiveness
fits. These supplemental benefits can over-
of Medicaid recipients into coordinated care
lap with HMO-based benefits under Medi-
plans.
care coverage. Moreover, HMOs cannot
offer cash rebates to seniors because they
By 1991, nearly two and one-half million
are prohibited from doing SO by anti-kick-
Medicaid recipients across 28 States received
back provisions. Nor can they lower Part
care under coordinated care arrangements
B premiums.
(Hadley and Langwell, 1991; Wilensky and
Rossiter, 1991). Nevertheless, these gains in
A third problem is that HMOs compete
enrollment still account for less than 10
with a large, government program that
percent of Medicaid recipients nationally.
has near monopsony power in most mar-
ket areas. Medicare purchases FFS care
Increasing Incentives
for most of its beneficiaries and obtains
deep price discounts due to its large mar-
The President's reform proposal emphasizes
ket share. These price discounts may over-
greater use of coordinated care arrangements
whelm potential savings that HMOs can
through increased enrollment in the private
obtain from discounts and better control
sector and through public programs.
over utilization.
In the private sector, millions of Americans
A fourth problem has been that HMOs are
eligible for the transferable tax credit (cer-
paid only 95 percent of comparable FFS
tificate) would have the choice of enrolling
costs (because of presumed efficiencies).
in coordinated care plans offered within their
Nevertheless, HMOs face marketing and
State. Because of efficiencies of care provided
enrollment costs unlike government. They
by HMOs and other alternative delivery ar-
further face greater financial risk on aver-
rangements, premiums offered by these plans
age due to full prospectivity, relatively
would be expected to be very competitive
small numbers of enrollees, and an Aver-
relative to traditional fee-for-service plans.
age Annual Per Capita Cost (AAPCC) pay-
From a quality and continuity of care perspec-
ment methodology which currently fails to
tive, plans could provide more primary/preven-
predict resource use and can fluctuate sub-
tive and comprehensive benefits relative to
stantially year-to-year.
fee-for-service plans.
40
The President's Comprehensive Health Reform Program
Medicare and Medicaid.-Through the
A summary of the individual initiatives
public programs, incentives for coordinated
are listed in the table below.
care will be pursued more aggressively. As
Chart 16 demonstrates, the percent of Medi-
Creating New Options.-New options,
care and Medicaid recipients currently enrolled
such as Point of Service (POS) and Employer
POS would be initiated. Under current law,
in coordinated care programs lags significantly
a beneficiary who wants to receive benefits
behind private sector enrollment. Medicaid ini-
tiatives will be encouraged through increased
through an HMO must enroll with that plan.
Beneficiaries enrolling in HMOs with risk con-
State flexibility and federal matching rates
tracts are required to receive all of the Medi-
that are based on a per capita basis-discussed
care covered services through the HMO.
in greater length in section G of this chapter.
Medicare is discussed in more detail here.
In recent years, employers have moved
toward health plans where individuals make
HCFA will initiate a two-pronged approach
a choice at the point of service of whether
because the only coordinated care alternative
to receive care through the plan's network
currently is the HMO option. Medicare will:
of providers or outside that network. These
create new options, as alternatives to the
plans have been popular with employees
most structured form of coordinated care
and have achieved the desired results of
(HMOs), that would provide beneficiaries
moving a significant percentage of services
with greater provider choice while intro-
into the preferred provider network.
ducing them to the benefits of coordinated
Under POS, HCFA would enter into multi-
care; and
year contracts with POS contractors to create
take steps to strengthen the existing HMO
comprehensive preferred provider networks
option.
(primary care physicians, specialists, hospitals,
labs, etc.) for beneficiaries not enrolled in
Chart 16. PUBLIC PROGRAMS LAG IN COORDINATED CARE
PERCENT ENROLLED IN
COORDINATED CARE
35
30
27
25
20
15
11
10
3
5
0
MEDICARE
MEDICAID
MEDIUM AND LARGE
EMPLOYERS
Making the System More Cost-Effective
41
Table 5-2. Summary of Medicare Corodinated Care Initiatives
General Approach
Initiative
Features/Comments
Create New Options
Point-of-Service
multi-year contracts
preferred provider networks
negotiated discounts
Employer
union/employer-sponsored plan
Point-of-service
provide medical review/utilization review
coordination of services/benefits
Case Management
high cost/chronic cases
voluntary
plan of care
medical/utilization review
Strengthen Risk-Based
100 Percent AAPCC
2 options:
Program.
(1) increase AAPCC payment
(2) outlier payments/beneficiary rebates
Reform AAPCC Methodology
(1) use USPCC to update rates in high penetration
areas
(2) experiment with competitive bidding approaches
Increased Flexibility
(1) large group contracts
(2) multi-year contracts
(3) continuous open enrollment
(4) comparative information materials
Refine Current AAPCC
Methodology
(1) working aged adjustor
(2) health status adjustor
Reform Cost Contract Options
advantage: introduces beneficiaries to plan option
disadvantages:
poor incentives for efficiency
would over time phase-out
Strengthen Oversight
expand sanction authority for:
(1) prohibited marketing practices
(2) illegal marketing material
(3) non-compliance with quality review
risk plans. POS contractors would negotiate
ing coordinated care program. The President's
discounts for combined Part A and Part
plan will initiate several actions that will in-
B payments for high cost/high volume surgical
crease investment in the current program.
procedures. They would also negotiate other
discounts from providers and suppliers. POS
For example, one important approach will
physicians would have incentives to make
increase payments to HMOs with risk con-
referrals only within the POS network.
tracts. This could either be done by (i)
directly increasing payments from 95 to 100
For employer POS, HCFA would contract
percent of the AAPCC or by (ii) indirectly
with employer or union-sponsored plans to
increasing payments to 100 percent through
provide medical review/utilization review (MR/
a combination of payments through an outlier
UR) for Medicare covered services for retirees.
pool and provision of beneficiary rebates.
This would enable employers and joint union/
management Taft-Hartley trusts to coordinate
Under the first option, the additional 5
benefits to retirees through the same adminis-
percent AAPCC payment could encourage
trative structure used to coordinate care for
entry into the Medicare market of HMOs
active employees and/or under-65 retirees.
that currently are not participating. Existing
plans could use the additional 5 percent
Strengthening Existing Risk-Based Pro-
to improve their competitive edge against
gram.-For the longer run, the more signifi-
Medigap plans by offering additional benefits
cant initiative will be to strengthen the exist-
or providing rebates to beneficiaries.
42
The President's Comprehensive Health Reform Program
Under the second option, Medicare would
percent enrollment the AAPCC actually de-
make additional payments to HMOs through
creased over the past three years.
an outlier pool for a portion of the costs
Several options are available such as (i)
of high cost cases above a predetermined
recomputing the rates for high penetration
threshold. For example, if Medicare paid
areas based on the growth in the USPCC
for 60 percent of the costs for cases that
rather than changes in the geographic factor,
exceeded $61,000 in 1993, payments to HMOs
and (ii) experimenting with competitive bid-
would increase on average by 2.5 percent.
ding to establish payment rates.
In addition to outlier payments, Medicare
Several other initiatives to strengthen the
could provide rebates to beneficiaries enrolled
current risk-based program are not detailed
in HMOs as a concrete sign of the support
here but are summarized in the table above.
of the risk contract program. The rebate
could equal 30 percent of the Part B premium.
Anti-Coordinated Care Laws
A second general approach to strengthen
Currently, many State-based laws and regu-
the current program will be through reform
lations discourage greater use of coordinated
of the current AAPCC payment methodology.
care arrangements. Examples of these barriers
Although the AAPCC methodology is accurate
include restrictions on reimbursement rates,
in predicting the costs for an HMO's total
restrictions on selective contracting for provid-
enrollment, its predictive power in regard
ers and services, restrictions against certain
to individual enrollees is extremely low.
financial incentives arrangements, and utiliza-
tion review activity. The President's plan
Even though enrollment in risk plans as
would protect health plans from anti-coordi-
a percent of total Medicare enrollment is
nated care laws and regulations.
low, in some counties enrollment is greater
than 25 percent. Over the past few years
Second, federal waivers are currently ap-
the increases in the AAPCCs for these counties
plied to demonstrating and evaluating new
coordinated care approaches, in effect des-
has lagged behind the national average in-
ignating them as exceptions to mainstream
crease (USPCC). For example, while the na-
health care policies and practices. Under
tional average increase in rates for the past
the President's Plan, these waivers of excep-
three years was 22.6 percent, in one county
tion would be "flipped." States would have
with 34 percent enrollment the increase was
to apply for exceptions to coordinated care
15.5 percent. In another county with 27
policies instead.
C. Providing Comparative Value Information for Health
Purchasing
Background
People now routinely make many decisions
about insurance coverage and medical care.
Providing useful information for purchasing
Strengthening competition through the tax
health care is a critical element for a pro-
credit and through health market reforms
competition health reform strategy. Informed
will encourage more direct comparisons with
consumer choices should guide the delivery
costs and outcomes-that is, assessing the
of medical care. In a market of coordinated
value of their health care dollar.
care organizations, consumer choice could be
exercised through selection of a health plan
Currently, meaningful information about
in which to enroll. With traditional fee-
comparative costs and outcomes is not rou-
for-service coverage, consumer choice would
tinely available to consumers. Consequently,
be exercised through decisions about providers
consumers are unable to assess the value
and procedures.
of their health care dollars by making compari-
sons of costs and outcomes across health
Making the System More Cost-Effective
43
care providers and health plans. This lack
ployee Health Benefits Plan (FEHB) makes
of consumer information has potentially harm-
consumer choice relatively easy, and this
ful effects on consumers and the Nation.
is something of a model for improved consumer
Anecdotal information is unreliable.
involvement. Since 1979, Washington Consum-
As a result, consumers and purchasers
ers' Checkbook has prepared an annual guide
of care often do not know what they are
to federal plans in the Washington, D.C.
area. The guide compares plan benefits, special
buying. In the absence of information, consum-
ers are apt to rely on higher price or
features such as dental coverage or customer
service, eligibility, premiums, and out-of-pocket
more intensive service delivery as proxies
costs, and draws conclusions on values. The
for quality. Thus, limited consumer informa-
results of the comparisons have influenced
tion can insulate providers from competition
market share during each federal employee
and can lead to excessive prices and inefficient
open season. For example, during the 1980
delivery of care.
enrollment period, a plan that was ranked
Wider availability of cost and outcomes
highly in terms of benefits relative to costs
information will strengthen incentives for effi-
increased its Washington D.C. enrollment
ciency, especially when coupled with changes
by 120 percent, compared with less than
in government subsidies for insurance. Health
a 20 percent increase nationally.
plans that demonstrate equivalent (or superior
outcomes) at lower premium cost would gain
More sophisticated prototype systems for
comparing costs and quality are available
a competitive edge. Similarly, people want
to know, for example, if Hospital A provides
as well. The Pennsylvania Health Care Cost
Containment Council publishes information
better care than Hospital B and would choose
accordingly, if they could. Because consumers
about what hospitals charge and comparisons
tend to mistake higher cost or more intensive
of mortality rates for every hospital in the
State.
service delivery as proxies for better quality,
service utilization-and costs-could be cut
This information allows consumers to learn,
appreciably with no deterioration if consumer
for example, that two hospitals within 40
choices were guided by valid cost in quality
miles of each another charge very different
and quality information.
prices for the same procedure. For coronary
Through concerted public/private sector ac-
artery bypass surgery, one hospital charged
$17,490 while the other charged $28,059
tion, it should be possible to implement
in 1989.
information systems that would enable health
care purchasers to make meaningful compari-
The Council also calculates actual mortality
sons of cost and quality between health
rates and projected mortality rates following
plans and health care providers. The long-
hospital stays for hospitals that take into
run potential to control costs while improving
account age and sickness when admitted,
quality is substantial. Even a minority of
two of the many variables that determine
well-informed consumers can influence other
how sick a population a hospital treats.
consumers and the direction of the market
This data shows that for the same two
(Pauly, 1978). With better information, health
hospitals, the lower cost hospital had a
plans that manage cost-increasing technologies
lower mortality rate than expected and the
could pass the savings on to purchasers.
higher cost hospital had a higher than ex-
Cost-increasing technologies would be utilized
pected mortality rate.
only if consumers believe that the resulting
improvement in health outweighs the added
To encourage greater employee support for
selective contracting and to provide hospitals
cost.
with stronger incentives to improve quality
Comparative value information can change
while controlling costs, a group of major
consumer decision making. For example,
employers in Cleveland, Ohio, is sponsoring
Washington Consumers' Checkbook, a maga-
the Cleveland Health Quality Choice (CHQC)
zine published by a nonprofit organization,
project. CHQC is developing a state-of-the-
illustrates that consumer's use of information
art system for measuring and comparing
changes market behavior. The Federal Em-
the quality of care in Cleveland-area hospitals.
44
The President's Comprehensive Health Reform Program
The system will include a survey to measure
delegate this responsibility to private sector
perceptions of quality from the patient's stand-
groups. States could give preference to local
point and a system for measuring quality
health care purchasing coalitions, such as
from a clinical standpoint. Patient outcomes
the Cleveland Quality Health Choice coalition.
(e.g., death and complications) in hospital
intensive care units and for selected medical
Within one year of enactment, States would
and surgical admissions will be monitored
develop and make broadly available informa-
with detailed clinical adjustments to account
tion regarding average prices and costs for
for differences in severity of illness.
common health care services. Information
could include mean and median prices and
CHQC hopes to be producing quality reports
a measure of the variability across and
on a routine basis starting in 1992. CHQC
within market areas. This information could
expects that participating employers would
be especially useful for large purchasers of
use this information to guide their health
care for preferred provider arrangements and
purchasing decisions. Employers would share
negotiated discounts. Sufficiently discrete defi-
this information with their employees to
encourage use of the selected providers. While
nitions (e.g., utilizing standardized profes-
it will be several years before the full impact
sional codes like CPT-4 codes) of a broad
of the program can be assessed, and the
range of representative services could be
Cleveland group must overcome many hurdles,
developed to permit meaningful comparisons.
use of outcomes data to compare quality
Within five years, States would develop
is growing in its popularity and its impact.
systems to provide comparative quality and
Other systems for measuring outcomes have
outcomes data for health care purchasers
been developed as well. A consortium of
and for consumers choosing health plans
HMOs is working with leading researchers
and hospitals.
from RAND corporation to develop indicators
The Federal Government would implement
of quality that could guide consumers in
these information systems directly in the
selecting between competing HMOs. The
case of inaction by the State and would
MedisGroups system is routinely used by
charge a user fee to defray the cost.
over 500 hospitals nationwide to monitor
quality. And, the Health Care Financing
The Secretary of Health and Human Serv-
Administration will begin to implement the
ices (HHS) would develop prototype systems,
Uniform Clinical Data Set (UCDS) system
such as Medicare's Uniform Clinical Data
to monitor the quality of hospital care provided
Set (UCDS), to facilitate data gathering and
to Medicare patients in the Nation's hospitals.
comparisons of outcomes. There would be
an emphasis on experimentation to test dif-
Proposal
ferent methods for gathering and analyzing
Under the Administration's proposal, each
outcomes and quality information. HHS would
State would implement programs to help
fund evaluations to determine the most cost
make comparative value information more
effective methods (e.g., those methods that
readily available for health care purchasers.
yield the most useful information at lowest
This initiative would be included as part
cost).
of the health insurance market reform pro-
When appropriate, national standards could
posal.
be established to facilitate uniform data gath-
States could develop information systems
ering that would facilitate analysis and com-
directly, as Pennsylvania has done, or could
parisons across the Nation.
Making the System More Cost-Effective
45
D. Encouraging Personal Responsibility and Prevention
Personal Responsibility
Public and private efforts to promote healthy
Reform of the U.S. health care system
behavior have already achieved dramatic re-
sults:
can neither be fully effective nor complete
until there are basic changes in how Ameri-
Smoking.-The Nation has witnessed a dra-
cans view responsibility for their own health.
matic change in behavior as the incidence
Individuals must choose, for example, to im-
of one of the leading contributors to pre-
prove eating habits and increase exercise;
ventable deaths, smoking, has declined
to reduce consumption of alcohol and tobacco;
from 40 percent in adults in 1965 to 28
to end substance abuse; to avoid the high
percent in 1990. This change was brought
risk behavior that spreads HIV; to seek
about through a combination of actions by
the necessary medical examinations and vac-
individuals, private industry, health pro-
cinations; to seek early prenatal care; to
viders, and all levels of government.
wear seat belts and take other necessary
precautions; and to learn to resolve conflicts
Traffic Accidents.-Increased use of safety
without resort to violence. Personal decisions
belts, declines in drunk driving, and better
about how to live may have the most impor-
vehicle crashworthiness have cut the traf-
tant effect on the Nation's health and the
fic fatality rate by 50 percent since 1973.
cost of caring.
If the traffic fatality rate had remained
About half of the 2.2 million deaths which
at the 1973 level, an additional 40,000
occur in the U.S. every year are potentially
lives would have been lost in 1991 alone.
preventable, as are many of the illnesses
One of the most important factors in re-
that afflict millions of Americans. Many of
ducing the traffic fatality rate has been
the "risk factors" for these diseases involve
the growing use of seat belts and child
freely-made individual choices. Better control
safety seats. As shown in the accompany-
of fewer than 10 factors-such as diet, pre-
ing chart, simply accepting the personal
natal care, exercise, the use of tobacco, alcohol
responsibility for using these safety de-
and illegal drugs, and the use of seat belts-
vices has saved many lives. As people in-
could prevent between 40 and 70 percent
crease their use of seat belts, child safety
of all premature deaths, a third of all cases
of acute disability, and two-thirds of all
seats, and air bags, the Nation will see
cases of chronic disability. Since the preserva-
more lives saved every year. Air bags will
tion of individual choice is a cornerstone
be installed in an estimated 90 percent
of all new cars sold in the United States
of American democracy, disease and injury
prevention must become individual as well
by 1995.
as national priorities. In this, the Nation
Heart Disease and Stroke.-During the
must encourage a culture of character, which
1980s, death rates declined for two of the
actively promotes responsible behavior and
leading causes of death among Americans:
the adoption of lifestyles that are conducive
heart disease and stroke. Much of this
to good health.
progress is attributable to changes in be-
Benefits of Taking Responsibility for
havior. The more than 40 percent decline
Health-Personal behavior can have a dra-
in heart disease mortality since 1970 re-
matic effect on the quality and length of life.
flects dramatic increases in high blood
Regardless of access and costs, families and
pressure detection and control, the decline
individuals are and will remain our first line
in cigarette smoking, and increasing
of defense in preventing illness. Indeed, any
awareness of the role of blood cholesterol
strategy for constraining costs must include a
and dietary fat. Stroke death rates, which
plan to reduce the need for medical interven-
have dropped by more than 50 percent in
tion. The average American could live almost
the same period, also reflect gains in hy-
four years longer if currently available preven-
pertension control and reductions in smok-
tive measures were followed fully.
ing.
46
The President's Comprehensive Health Reform Program
Investing in Prevention
health care spending, yet there is mounting
Prevention is an important element of an
evidence that prevention is cost-effective.
increased emphasis on personal responsibility.
Investing in Our Economic Future.-Dis-
Preventive practices are, by and large, simple,
ease prevention presents the opportunity to
inexpensive and effective. Prevention makes
dramatically cut health care costs, prevent the
sense for a number of reasons. Many preven-
premature onset of disease and disability, and
tive interventions are proven to be cost
help all Americans achieve healthier, more
effective. And prevention is a good investment
productive lives. Although the emphasis on
for the market place, resulting in fewer
prevention has led to overall health improve-
productive days lost and in reduced morbidity
ments, the U.S. is still burdened by prevent-
and cost to the health care system.
able illness, injury, and disability. Injury now
Costs of Preventable Health Problems.-
costs the U.S. well over $100 billion annually;
There is ample research estimating the costs
cancer, over $70 billion; and cardiovascular
of illness and disability, in terms of diminished
disease, $135 billion.
longevity, productivity foregone, and money
Directions for Prevention.-In recognition
spent treating illness and disability. These
of the clear advantages of aggressive preven-
costs are particularly sobering when the illness
or condition could have been prevented.
tion activities, the government is supporting
and enhancing prevention programs with
Prevention is Cost Effective.-In 1987,
known benefit, and, through demonstrations,
primary prevention and health promotion ac-
testing interventions for their efficacy and effi-
counted for less than 5 percent of overall
ciency. The Federal Government spent over $8
Table 5-3. Preventable Health Costs
Health Problem
Years of Life
Costs (in millions of
Lost
dollars)
Cardiovascular Disease
15,000,000
135,000 (1985 $)
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 Mellitus)
133,627
5,239 (1980 $)
Cancer
18,000,000
72,000 (1985 $)
Injury
2,300,000
180,000 (1988 $)
Table 5-4. Return on Investments in Prevention
Savings per
Total Savings per
Preventive Activity
Dollar Spent
Year (in millions of
dollars)
Immunization:
Measles, Mumps, Rubella
14.40
0
Polio
10.00
400 (1990 $)
Hib
-
I
Prenatal Care
3.40
I
Universal Breast Cancer Screening (30 percent women age 65-74)
I
3,538 (2020 $)
Hypertension Screening and Effective Followup
-
80,000 (1986 $)
Note: "_" means not available.
Making the System More Cost-Effective
47
Table 5-5. Social Costs of Preventable Risks
Lives Lost
Disease or Condition
Preventable Risk Factors
(1988)
Heart Disease
Tobacco use, obesity, elevated blood pressure, elevated
765,156
cholesterol, sedentary lifestyle.
Cancer
Tobacco use, improper diet, alcohol abuse, environmental
485,048
exposures.
Cerebrovascular Disease
Tobacco use, elevated blood pressure, elevated choles-
150,517
terol, sedentary lifestyle.
Unintentional Injuries
Safety belt nonuse, alcohol abuse, home hazards
97,100
Chronic Lung Disease
Tobacco use, environmental exposures
82,853
billion for prevention in fiscal year 1992. This
Helping Vulnerable Populations
will rise to nearly $9 billion in fiscal year 1993.
Table 5-6 describes the substantial funding
These programs fall into three basic categories:
increases proposed in the President's fiscal
(i) measures to help vulnerable populations at
year 1993 budget for prevention programs.
high risk of preventable disease, (ii) measures
to make primary care more readily available
Childhood Immunizations.-Childhood im-
to disadvantaged or geographically isolated
munizations are among the most cost-ef-
Americans, and (iii) measures to encourage
fective prevention activities. A $1 invest-
healthier lifestyles.
ment in Measles-Mumps-Rubella (MMR)
vaccine may return $14 in averted medical
care costs. Other routinely administered
Table 5-6. The Budget Provides Substantial Increases for Programs
Focused on Prevention and the Next Generation
(Obligations in millions of dollars)
Percent
Percent
1989
1992
1993
Initiative
Change:
Change:
Actual
Enacted
Proposed
1992 to
1989 to
1993
1993
CDC Childhood Immunization
141
297
349
+18%
+148%
Infant Mortality Reduction
5,681
7,950
9,365
+18%
+65%
(Healthy Start)
-
64
143
+123%
N/A
Women, Infants, and Children Nutrition Assist-
ance (WIC)
1,929
2,600
2,840
+9%
+47%
Head Start
1,235
2,202
2,802
+27%
+127%
Access to Primary Health Care Services
4,184
6,334
7,643
+21%
+83%
(Community/Migrant Health Centers)
482
594
684
+15%
+42%
(National Health Service Corps)
48
100
120
+19%
+150%
Nutrition Education
138
152
178
+17%
+23%
Breast and Cervical Cancer Mortality Prevention
-
416
515
+24%
N/A
Smoking Cessation
78
106
111
+5%
+42%
Physical Fitness and Diet
68
100
102
+2%
+50%
Injury Prevention
1,482
1,862
2,026
+9%
+37%
Family Planning
333
461
498
+8%
+50%
CDC Lead Poisoning Prevention
-
21
40
+90%
N/A
Tuberculosis Control
21
32
66
+106%
+214%
48
The President's Comprehensive Health Reform Program
vaccines such as Diphtheria-Tetanus-Per-
Food Program for Women, Infants, and
tussis (DTP) and Oral Polio are reported
Children (WIC) found that for each dollar
to have similarly high rates of return.
spent on nutritionally at-risk pregnant
Through coordinated efforts at all levels
women and infants, Medicaid spending fell
of government and the private sector, the
by between $1.92 and $4.21 during the
Nation has achieved a 98 percent immuni-
first 60 days after birth.
zation rate for children entering school.
Head Start/Early Childhood Develop-
The President's initiative will increase fed-
ment.-Head Start provides a range of
eral support to target efforts toward rais-
comprehensive early childhood develop-
ing immunization levels in inner cities and
ment services, including education, nutri-
other areas where health returns on these
tion, health and other social services. Chil-
activities are certain to be high.
dren who enroll in Head Start experience
Healthy Start/Infant Mortality Preven-
immediate gains in cognitive growth, so-
tion.-The Nation's infant mortality rate
cial development, and health status. For
continues to decline, having reached its
every dollar invested, Head Start may
lowest level ever (9.1 deaths per 1,000 live
eventually save $6 in averted costs associ-
births) in 1990. But while the overall in-
ated with special education, crime, and in-
fant mortality rate continues to decline,
come support.
mortality for African-American infants re-
The President's initiative contains the
mains twice that for white infants-dem-
largest single-year funding increase in the
onstrating the need for more intensely tar-
history of Head Start, proposing an addi-
geted assistance.
tional $600 million for a total of $2.8 bil-
Additional investment in prenatal care
lion. With the Administration's proposal,
and nutritional assistance targeted to low-
Head Start will serve an estimated
income women also continues to yield high
157,206 more children in 1993. This un-
returns. Overall, nearly 25 percent of all
precedented increase in Head Start sup-
women and nearly 40 percent of African-
ports participation of all eligible and inter-
American and Hispanic women do not
ested disadvantaged children for one year,
begin prenatal care during their first tri-
complementing the 36 States (plus the
mester of pregnancy, the most crucial time
District of Columbia) which also support
for prenatal care. Investment in prenatal
pre-school programs.
care can yield significant returns: each
The President's initiative also proposes
dollar invested in prenatal care for high-
$850 million for the child care and devel-
risk women might save $3 in treatment
opment block grant, which was part of the
costs.
child care legislation that the President
The President's initiative proposes over
proposed and subsequently signed in 1990.
$9.3 billion for all federal activities to re-
Low-income families receive vouchers they
duce infant mortality, including $143 mil-
can use with the child care provider of
lion for Healthy Start, an important pro-
their choice; block grant funds provide ad-
gram that targets federal resources to 15
ditional early childhood development serv-
areas with exceptionally high rates of in-
ices for pre-school age children.
fant mortality.
The proposal further includes $6 million
Women, Infants, and Children Nutrition
for a new initiative in HHS to use local
Assistance (WIC).-The proposal continues
schools as a way to bring primary health
the President's strong commitment to WIC
care services to children from low-income
with the largest one-year increase ever
families who might not already have ac-
proposed for the program, $240 million (9
cess to these services. These "Ready to
percent), for a total of $2.84 billion-suffi-
Learn" grants will enable community
cient funds for full participation by eligible
health centers and local schools in selected
pregnant women and infants. A recent
low-income communities to provide health
evaluation of the Special Supplemental
outreach services through local schools.
Making the System More Cost-Effective
49
Lead Poisoning Prevention.-Lead poison-
cervical cancer screening, NIH predicts
ing is the most common environmental
that over 45,000 women are expected to
disease of young children, disproportion-
die from these two diseases in 1993. The
ately affecting poor, minority children in
key to successful treatment of breast and
the inner cities. Yet childhood lead poison-
cervical cancer remains early detection.
ing is preventable through detection and
The sooner treatment can begin, the great-
abatement. This initiative includes $40
er the chance of survival.
million to support about 30 Statewide lead
The President's initiative will invest $515
poisoning screening and referral programs.
million for screening through the Medicare
In addition, the Department of Housing
program and through the Public Health
and Urban Development (HUD) will con-
Service. This investment will focus re-
tinue assisting low- and moderate-income
sources on screening low-income, high-risk
private residential property owners abate
women in age groups for which screening
lead-based paint by providing grants to
is recommended.
States and localities. HUD's public hous-
HIV/AIDS Funding.-Under the Presi-
ing modernization program will continue
dent's initiative, total federal HIV/AIDS
lead-based paint testing and abatement
funding increases by 13 percent, to $4.9
activity in public housing. Approximately
billion.
$50 million will be spent on these activi-
ties in 1993.
Tuberculosis Control.-The Nation has
made great strides toward eliminating tu-
Expanding Cost-Effective Primary Care
berculosis (TB). The disease has been cur-
able and preventable for almost four dec-
Access to Primary Health Care/Expanding
ades. The long-term decline in TB morbid-
Community Health Centers.-Comprehen-
ity enjoyed by the United States ended,
sive primary health care services include
however, in 1984.
diagnosis and treatment as well as edu-
cation designed to encourage healthy be-
The President's Plan attacks the recent
havior. Continued investment in improv-
growth of TB levels head on. The initiative
ing access to primary health care is impor-
includes a 106 percent increase over 1992
tant to many communities and can yield
for CDC Tuberculosis Control Grants.
sizable returns. Increased access in low-
Promoting Lifestyle Changes
income communities can improve overall
health status and reduce the use of emer-
Smoking Cessation.-Smoking during
gency services.
pregnancy retards fetal growth, reduces
To put primary health care services within
birthweight, and doubles the risk of hav-
the reach of people who do not currently
ing a low-birthweight baby. Studies have
have adequate access, the President's 1993
shown a 25-50 percent higher rate of fetal
initiative includes an additional $1.3 bil-
and infant deaths among women who
lion for programs supporting primary and
smoke during pregnancy compared with
those who do not. Each dollar invested in
preventive health care.
smoking cessation for pregnant women
The initiative also contains $120 million
may yield as much as $6 in averted costs
for the National Health Service Corps
for neonatal intensive care and extended
(NHSC). This 19 percent increase will en-
care for low-birthweight infants. Beyond
able the NHSC to expand the program and
the damage tobacco use during pregnancy
train additional physicians to provide
may cause, smoking is also a factor in the
health services in low income and under-
deaths of over 400,000 Americans every
served areas, increasing the availability of
single year.
primary case-particularly in low-income
underserved areas.
The President's initiative expands smoking
cessation education activities for specific
Breast and Cervical Cancer.-Despite in-
at-risk populations, including minority and
creasing federal investment in breast and
low-income pregnant women.
50
The President's Comprehensive Health Reform Program
Injury Prevention.-Every one percent in-
Medicaid payments, an increase of 8 per-
crease in seat belt use saves more than
cent.
160 lives per year. If the U.S. were to
Physical Fitness and Diet.-The Presi-
increase the national average of seat belt
use from the 1990 rate of 48 percent to
dent's initiative for 1993 increases funding
the Administration's goal of 70 percent by
for health education, disease prevention,
the end of 1992, 3,800 lives could be saved
and physical fitness activities. It also fo-
annually and 100,000 injuries could be
cuses on bringing health promotion and
disease prevention activities to older
prevented-yielding potential economic
benefits of $2.5 billion.
Americans. The Administration on Aging
will provide more health risk assessments,
The initiative increases funding for injury
nutritional counseling, group exercise pro-
prevention to almost $2 billion, a 9 percent
grams and other health promotion activi-
increase over 1992. These funds will be
ties. These activities can improve the
used primarily within the Department of
health and quality of life of older Ameri-
Transportation (DOT) for aviation, rail,
cans and allow many older people to re-
highway, marine, and pipeline and haz-
ceive these services regularly.
ardous material transportation safety. An
estimated 50,000 lives are lost annually
In summary, to confront the problems of
access to health care and the continued
in incidents in the transportation sector.
The initiative also includes increased em-
escalation in health care costs, efforts are
phasis on reducing drunk driving and in-
underway to address the problems of the
uninsured and the underinsured and to tackle
creasing occupant protection.
the country's growing health care expendi-
Family Planning.-Evidence attributes re-
tures. No matter what path is ultimately
ductions in infant mortality achieved over
chosen, it is clear that prevention will play
the last 20 years in part to effective family
a critical role in the future health of Ameri-
planning. Recognizing the importance of
cans. It is also apparent that prevention
these services, the President's initiative
can only be accomplished in partnership
contains an additional $37 million for
among individuals, the business community,
HHS family planning grants and federal
and government.
E. Malpractice and Antitrust Reform: Changing Incentives
for Provider Behavior
Our legal system distorts health care deliv-
Proposal
ery in America. These distortions derive in
In May 1991, the President proposed the
part from perverse incentives that encourage
"Health Care Liability Reform and Quality
malpractice litigation. Unnecessary and costly
defensive medicine has increased. Fear of
of Care Improvement Act" to address the
costs of malpractice insurance, the transaction
antitrust liability has helped produce an
costs of malpractice litigation, and the length
often inefficient and duplicative distribution
of sophisticated services and equipment. Fi-
of malpractice dispute resolution proceedings,
and to reduce the incidence of malpractice
nally, the quality of health care is diminished
through increasing the quality of care.
by the reluctance of professional review boards
and hospitals to discipline poorly performing
The Administration's reform package in-
physicians because of potential antitrust liabil-
cludes proposals that encourage States to:
ity.
Cap the amount of allowable non-economic
damages. In the 26 States that have lim-
ited total damages, malpractice rates have
declined significantly;
Making the System More Cost-Effective
51
Eliminate joint and several liability for
ever, our malpractice system creates incentives
noneconomic damages;
for physicians to engage in defensive medi-
Eliminate the collateral source rule that
cine-excessive tests, failure to delegate cer-
allows for double recovery;
tain tasks to other qualified professionals,
and in general a more elaborate style of
Require structured payments for mal-
care than is necessary for the provision
practice awards, as opposed to lump sum
of sound medical care.
payments;
In 1989, defensive medicine accounted for
Promote pretrial alternative dispute reso-
an estimated $20.7 billion, 17.6 percent of
lution, including mediation and pretrial
total physician expenditures (Moser and
screening panels, to encourage reasonable
Musacchio, 1991). In addition, of all medical
settlements;
practice growth components, professional li-
ability premiums exhibited the fastest annual
Implement procedures to enhance the
percentage growth between 1982 and 1989-
quality of care.
increasing 15.1 percent annually (AMA Socio-
Additionally, at the Federal level the Admin-
economic Monitoring System, 1982; 1989).
istration proposes to apply these tort reforms
Charts 17 and 18 present increases in profes-
to Federal courts to begin a pilot program
sional liability premiums relative to other
in the Federal Employees Health Benefits
physician practice costs and impact on total
Program that offers alternative dispute resolu-
physician service expenditures over time.
tion; and to improve the quality of medical
Often, unnecessary defensive medicine may
care through enhanced effectiveness research
result from a misperception on the part
and improved peer review.
of providers of the real potential for liability.
The proposed Act is based on three prin-
A recent study found that physicians in
ciples:
New York State tend to overestimate the
risk of being sued by a factor of three
Medical malpractice reform should seek
(Harvard Medical Practice Study, 1990). For
both improved quality of care for patients
that reason, efforts should be made to commu-
and lower litigation costs.
nicate the true level of liability risk to
Legal reforms should reduce the incentives
providers.
for physicians to practice unnecessary de-
Not all unnecessary defensive medicine is
fensive medicine or to abandon practice in
attributable to fear of liability. In some
inner city and rural areas.
cases, as in fee-for-service medicine, health
Incentives for states to act are preferable
care providers may have a strong economic
to Federal preemption of current state
incentive to engage in such activity. The
law. Federal preemption should be used
fear of liability, however, does result in
only selectively and narrowly.
an increase in the degree and kind of diag-
nostic testing, the reluctance to delegate
The elements outlined below supplement
certain basic functions, and the abandonment
this proposal. They address three areas: (i)
of care for some high risk patients or in
the delay associated with malpractice litiga-
high risk areas of treatment such as obstetrics.
tion, (ii) the increasingly common practice
Based on a 1984 study, 41.8 percent of
of engaging in unnecessary defensive medicine,
physicians made at least one change in
and (iii) the effects of our antitrust laws
their practice patterns in response to risk
on costs and the quality of care activities.
of malpractice liability. The average physician
increased record keeping costs by 2.9 percent,
Medical Malpractice Reforms
prescribed 3.2 percent more tests and treat-
The costs associated with malpractice litiga-
ment procedures, increased follow-up visits
tion have contributed to the rapid growth
by 2.6 percent, and spent 2.4 percent more
of health care spending. These costs include
time with patients (Reynolds et al., 1987).
the direct costs of insurance, litigation, and
In addition to the monetary costs associated
settlements. Perhaps most importantly, how-
with medical malpractice litigation, there are
52
The President's Comprehensive Health Reform Program
Chart 17. PROFESSIONAL LIABILITY COSTS AS A PORTION OF
TOTAL PHYSICIAN SERVICE EXPENDITURES
$ BILLIONS
140
120
WITH PROFESSIONAL
LIABILITY COSTS
100
80
WITHOUT PROFESSIONAL
60
LIABILITY COSTS
40
1982
1983
1984
1985
1986
1987
1988
1989
SOURCE: Expenditures including professional liability costs, HCFA; expenditures excluding professional liability costs, AMA
Chart 18. GROWTH IN MEDICAL PRACTICE COST COMPONENTS
(AVERAGE ANNUAL PERCENTAGE CHANGE, 1982 TO 1989)
PERCENTAGE CHANGE
20
15.1
15
12.2
9.4
9.2
10
8.3
7.2
5.9
5
0
PROFESSIONAL
MEDICAL
OFFICE
MISCELLANEOUS
NON-
PHYSICIAN
MEDICAL
LIABILITY
SUPPLIES
EXPENSES
PHYSICIAN
PAYROLL
EQUIPMENT
PREMIUMS
PAYROLL
SOURCE: AMA Socioeconomic Monitoring System, 1983 and 1989 core surveys
Making the System More Cost-Effective
53
other costs that cannot be quantified. Both
the dispute from a traditional trial setting
providers and patients suffer from the pro-
altogether.
tracted process of litigation. Patients who
Encouraging the Use of ADR Through Party
ultimately gain a recovery must wait years
Choice. The Administration supports amending
to recover the damages due them. Physicians
state and Federal rules of civil procedure
are often as troubled by the process of
to permit either party to litigation to make
litigation as its results.
an offer to use ADR. If the party refusing
Collectively, these monetary and emotional
to engage in ADR loses at trial, that party
costs erode one of the most important aspects
must pay the others attorney's fees. This
of health care, the doctor-patient relation-
change in the rules will provide a strong
ship. What should be a cooperative relation-
incentive for parties to consider seriously
ship marked by trust between the doctor
the desire of the other party to resolve
and patient is sometimes wary and somewhat
the dispute without the necessity of a full
adversarial. Reduced communication may un-
trial.
dercut the patient's confidence in the physician
State Contract Law. The Administration
and breed passivity in a patient, leading
seeks to encourage agreements between pa-
to a decrease in patient information about
tients and providers, made prior to the deliv-
treatment.
ery of health care services, to use out-
Reform of the medical malpractice system
of-court dispute resolution mechanisms if a
offers the prospect of not only reducing
dispute arises. It is unclear, however, whether
monetary costs but, as importantly, helping
such contracts are valid in all states. The
to restore patient confidence in the medical
President's plan proposes to permit contracts
system and provider confidence in our legal
between patients and providers that require
system.
non-binding arbitration before a lawsuit can
be filed notwithstanding conflicting state law.
Beyond the provisions in the Health Care
Liability Reform and Quality of Care Improve-
Promising Areas for Innovation. Although
ment Act the Administration endorses the
the proposals discussed below address the
following approaches to reduce the delay
issue of delay and the merit of increasing
of malpractice dispute resolution, reduce the
the expertise of those who decide malpractice
amount of unnecessary defensive medicine,
cases, each has its shortcomings and critics.
and clarify the application of antitrust laws
The Administration believes, however, that
in the provision of health care:
it is important that these issues become
an integral part of the debate on reforming
Alternative Dispute Resolution (ADR).-
our malpractice system. The Administration
The desire of physicians to avoid malpractice
will cooperate with Congress, state legisla-
litigation extends beyond the issue of liability
tures, medical associations, and others to
and the perception that outcomes are unpre-
explore whether such proposals can remedy
dictable. Removing malpractice suits from the
the problems of the current system.
adversarial forum of the courtroom offers at
least three benefits. It will lessen the sense
Mandatory ADR for Federal Beneficiaries.
of confrontation of the dispute. In many, if
Several malpractice reform proposals
not most, cases it will speed resolution of the
would make the receipt of Federal health
dispute. And, it will vest resolution of often
care benefits implied consent to enter into
complex medical issues in a person or persons
ADR if a dispute arises out of the health
who will likely have more experience with
care provided. The added cost of health
medical issues than the typical member of a
care resulting from the shortcomings of
jury.
our malpractice litigation system is di-
rectly reflected in the cost of these pro-
The Administration supports two approaches
grams to the treasury. The Federal gov-
to persuade or require parties to use ADR
ernment thus has a legitimate interest in
and seeks to work with Congress to consider
finding ways, such as ADR, to reduce
two other approaches that would remove
those costs.
54
The President's Comprehensive Health Reform Program
Mandatory ADR for All Claimants. To
cumstances, and what use and legal force,
avoid the judgment of lay juries and the
if any, should be given to such guidelines
delay inherent in our current civil justice
or standards.
system, some have called for taking medi-
The Omnibus Budget Reconciliation Act
cal malpractice cases out of the courts en-
of 1989, Public Law 101-239, established
tirely. The American Medical Association,
for example, has proposed that every state
the Agency for Health Care Policy and Re-
search within the Public Health Service to
create an administrative tribunal to hear
medical malpractice claims with courts
promulgate guidelines and standards of quality
permitted only appellate review. Although
and other "performance measures." No provi-
the theoretical benefits of such a system
sion was made for giving any legal effect
are obvious, serious questions of con-
to such standards in litigation, however.
stitutionality, practicality, and increasing
The Secretary of Health and Human Serv-
bureaucracy must be resolved before any
ices will intensify his efforts to develop these
large-scale proposal moves forward.
guidelines and standards. The Secretary will
Offers of Settlement.-The Administration
also consult with experts in the field, including
also proposes to permit either party to a mal-
providers, medical associations, legal scholars
practice action to make a formal offer of settle-
and others, to study the feasibility and desir-
ment. This provision has been discussed for
ability of giving some legal force to such
application in other areas of civil justice in
guidelines. The Secretary's study should in-
need of reform, such as product liability. In
clude a discussion of the process for forming
effect, the provision makes Rule 68 of the
such guidelines or standards, and the degree
Rules of Civil Procedure available to plaintiffs
to which the guidelines would have to be
as well as defendants.
specific and/or take into account variations
in practice geographically, because of re-
Standards of Care.-Medical associations,
sources, or the age and condition of the
authors, and commentators have attempted to
patient.
provide guidance to physicians on appropriate
standards of medical care. It is the tort sys-
The Administration believes that practice
tem, however, through the judgments of lay
guidelines and standards offer great promise
juries, that too often defines the standards of
in reducing the level of unnecessary defensive
care physicians must meet. The precedential
medicine without compromising the quality
value of the jury's determination and the un-
of medical care. Physicians knowledgeable
certainty generated in gray areas, can effect
about the practice guidelines and standards
profoundly provider behavior.
can look to them in determining the adequacy
of care provided to their patients.
Variation is inherent in case-by-case deter-
minations by different juries. This translates
Guidelines and standards of care could
into a perceived lack of predictability in
offer the added benefit of enhancing the
our medical malpractice litigation system.
value of alternative dispute mechanisms. As
This uncertainty and the role of lay persons
alternative dispute resolution is increasingly
in determining what is adequate medical
used, practice guidelines and standards of
care has encouraged overly- cautious behavior
care will heighten confidence that the mediator
and some resentment of the litigation system
or arbitrator will reflect accurately the behav-
in the medical community.
ior of a jury if the case proceeds to trial.
Thus, parties will be better positioned to
In recent years, there has been increased
judge the consequences of rejecting the pro-
interest in the development of guidelines
posed determination.
or standards of care as references for physi-
cians by medical groups, insurers, and legisla-
Antitrust Law
tors. The debate has centered on who would
develop such standards, the degree of specific-
In addition to the issues of medical liability
ity required to make the standards useful,
and dispute resolution, antitrust issues bring
the degree of flexibility necessary to reflect
law and medicine together. For instance,
the individuality of patients and cir-
professional peer review has always reflected
Making the System More Cost-Effective
55
a tension between the necessity to weed
cian should be limited, denied, or revoked. Pre-
out those who do not meet the standards
sumably, the goal is to ensure an appropriate
of the profession and the possibility that
level of quality of care. Often, however, the
such review could be used unfairly and
physician whose privileges are curtailed will
illegally to limit competition in the profession.
sue the reviewing physicians and witnesses on
With the emergence of new methods of health
the grounds that the review is really a veiled
care delivery, like HMOs and PPOs, and
attempt to limit competition.
increasingly sophisticated and costly tech-
Some commentators suggest that the cre-
nology, confusion about the proper application
ation of certain safe harbors for actions
of the antitrust laws in the health care
limiting physician privileges can avoid litiga-
field has grown.
tion costs and the chilling effect of potential
The Administration proposes a series of
litigation without unduly limiting competition.
steps to assure that the new emphasis on
The Administration does not believe changes
quality of care is not undermined by concerns
in substantive law are necessary. Rather,
of unwarranted allegations of collusion, that
the Department of Justice will provide en-
concerns of antitrust liability do not chill
hanced guidance for state peer review boards
the evolution of a more organized and efficient
and hospitals with respect to actions to
health care delivery system, and that the
deny, revoke, or suspend the license of privi-
cost of health care is not raised unnecessarily
leges of any physician.
because of duplication of costly technology
PPOs, HMOs and Other Pooling Ar-
and services.
rangements of Providers.-The emergence of
The President's initiative includes legislation
managed care is creating new issues in health
to address the issue of the unnecessary
care. For instance, if physicians in an area
duplication of technology and the provision
band together to form a PPO, thus fostering
of guidance by the Federal government on
price reductions and managed care, it may be
the issue of the application of the Federal
alleged that they are nonetheless reducing the
antitrust laws to peer review and managed
number of competitors for physician services
care issues.
in the marketplace. At the same time, diligent
enforcement of the antitrust laws is necessary
Medical Technology.-Much of the in-
to prevent price fixing and illegal tie-ins in
creased cost of health care has resulted from
the provision of health care. Reducing the fear
the high costs associated with advanced tech-
of liability for certain beneficial activities while
nology. Often expensive equipment is dupli-
maintaining the deterrent effect of the anti-
cated by competing health care organizations
trust laws for traditional anticompetitive en-
because of concern over the application of the
deavors is the challenge for antitrust enforce-
antitrust laws to the sharing of equipment and
ment agencies, particularly the Department of
services. As a result, the acquisition of expen-
Justice and the Federal Trade Commission.
sive technology may far exceed what is needed.
To reduce the costs of high technology equip-
The Administration will clarify the antitrust
ment and services, the Administration will
standards that apply to provider pooling
again urge Congress to pass the joint produc-
arrangements such as PPOs and HMOs.
tion venture legislation, S. 1163, transmitted
Additionally, the Department of Justice will
by the Departments of Justice and Commerce
increase its enforcement efforts against those
on April 29, 1991.
in the health care industry who boycott
such provider organizations. Together with
Peer Review Activities.State disciplinary
the efforts of the Federal Trade Commission,
boards and hospital medical staffs often review
the actions of the Department should provide
physicians qualifications to determine whether
the guidance that these evolving entities
a license or hospital privileges for the physi-
need to prosper.
56
The President's Comprehensive Health Reform Program
F. Reducing Administrative and Paperwork Costs
Overview
duce the "hassle" factor for physicians,
focus review efforts on problem areas, and
Recent studies suggest that paperwork sav-
ings of $67 to $100 billion a year would
improve quality.
be possible if the United States shifted to
Use of electronic cards for billing and eligi-
a Canadian-style national health insurance
bility determinations will reduce paper-
program (GAO, 1991; Woolhandler and
work and confusion for consumers at the
Himmelstein, 1991). A critical review of avail-
point of service.
able information by OMB indicates that poten-
tial savings are much lower, at most $31
Development of computerized medical
to $49 billion (Director Darman, October
record systems will reduce paperwork bur-
1991, Testimony, House Ways and Means
dens for providers while improving qual-
Committee). Other analyses have concluded
ity.
that any administrative savings under a
Market reforms will reduce administrative
nationalized health plan would be more than
costs in the small group market by up to
offset by an increase in benefit costs. One
$9 billion a year by providing efficiencies
analysis estimated total savings in administra-
of scale through group purchasing for
tive costs in the United States under a
small businesses (HINs) and by eliminat-
Canadian-style system would be $47 billion;
ing medical underwriting costs.
however, these administrative efficiencies of
a common benefit package would be less
These reforms will bring the administration,
than the $78 billion increase in benefit costs
billing, and record-keeping in our health
that would come with the common package
care system into the twenty-first century,
(Sheils and Young, 1991).
through a system-wide movement to automa-
tion and more standardized billing, claims
Moreover, simple administrative cost com-
adjudication, eligibility determination, and
parisons are misleading because they fail
clinical information. The effective implementa-
to capture the value added by effective admin-
tion of market pooling mechanisms will con-
istrative measures. The United States spends
solidate consumers into more streamlined,
between $2 billion and $4 billion a year
better managed groups that have more lever-
on various quality assurance programs, meas-
age in the health market.
ures that improve health care and reduce
costly and potentially dangerous inappropriate
Background
care. And, as a recent study points out,
delays in treatment under the Canadian
Health care overhead is a diverse category
system lead to "hidden" costs of up to 0.6
that embraces a wide range of activities
percent of GDP-or more than $34 billion
including: claims processing costs for insurers,
dollars a year if translated to the United
billing costs for providers, utilization review,
States (Danzon, 1991).
quality assurance, maintenance of enrollment
and eligibility records, premium collection,
Nonetheless, significant administrative sav-
marketing costs, and profit. Public and private
ings are possible while maintaining choice
insurance and billing costs totalled almost
and diversity for our citizens. Moreover, paper-
$80 billion in 1991, or about 12.2 percent
work burdens, hassles, and confusion associ-
of total personal health spending. Insurance
ated with obtaining health care can be re-
administration accounts for $43.6 while pro-
duced. The reform proposal contains five
vider billing costs account for the remaining
initiatives to accomplish these goals:
$36.2 billion.
Electronic billing using standardized for-
Of the total of $43.6 billion for insurance
mats will dramatically reduce paperwork
administration in 1991, $32.8 billion is for
and reduce administrative costs.
private insurance, $5.7 in federal costs, and
Shifting from costly case-by-case medical
$5.0 billion in State and local costs. The
review to pattern of care review will re-
bulk of this spending (77.5 percent) is for
Making the System More Cost-Effective
57
Table 5-7. Insurance Administration and Provider Billing Costs in the
U.S., 1991
(Source: HCFA, OMB staff estimates)
Cost in
As Percent
As Percent
of Total
Billions
of Total
Personal
of
Adminis-
Health
Dollars
tration
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 Providers
$8.7
10.9%
1.3%
Total Insurance and Billing Costs
$79.8
100.0%
12.2%
claims processing, quality assurance, and gen-
of benefit payments, ranging from up to
eral administration. Marketing costs and prof-
40 percent of benefit costs for very small
its total $6.0 billion while taxes paid by
firms to under 6 percent for very large
private insurers account for the remaining
firms. This disparity in costs reflects the
$3.7 billion.
fact that large businesses enjoy efficiencies
of scale in the purchase and administration
Insurance administration costs have in-
of insurance benefits. Risk premiums are
creased from 5.3 percent of total personal
lower for large groups coverage because benefit
health spending in 1965 to 6.7 percent in
costs are much more predictable. Commissions
1991. This change primarily reflects an in-
for brokers also are higher for very small
crease in insurance coverage during the inter-
firms due to the retail nature of this segment
val. Out-of-pocket spending, as a percent
of the market.
of total personal health spending, decreased
from 55.9 percent in 1960 to 23.3 percent
Proposal
in 1990 (Levit et al, 1991). With this decrease,
administrative costs were bound to increase.
Administrative costs could be cut by as
much as 25 percent under five major reform
Private insurance administrative costs vary
initiatives. Four of the initiatives would
substantially with firm size as a percentage
streamline paperwork. The first four of these
Table 5-8. 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
As Percent
As Percent
of Total
Billions
of Total
Personal
of
Adminis-
Health
Dollars
tration
Spending
Total Public and Private Insurance Administrative Cost
43.6
100.0%
6.7%
Claims Processing, Quality Assurance and General Administration
(private and public)
33.8
77.5%
5.2%
Taxes Paid by Private Insurers
3.8
8.6%
0.6%
Marketing and Commissions
3.8
8.8%
0.6%
Profit
2.2
5.1%
0.3%
58
The President's Comprehensive Health Reform Program
Table 5-9. Health Insurance Overhead Cost as Percent of Benefit
Payments
(Source: CRS, 1989)
Claims
General
Interest
Risk
Com-
Premium
Firm Size
Adminis-
Adminis-
Credit
and
mis-
tration
tration
Profit
Taxes
Total
sions
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 more
3.0
0.7
-1.5
1.1
0.1
2.1
5.5
initiatives are already underway under the
tion and HCFA. Task Force participants in-
leadership of Secretary Louis Sullivan of
cluded representatives of every major third-
the Department of Health and Human Serv-
party payer. While use of the HCFA-1500
ices. These four paperwork reduction ini-
is voluntary, wide acceptance is expected.
tiatives could reduce administrative costs by
Similar efforts have led to near universal
as much as 8 percent, saving up to $4
acceptance of the UB-82, as the standard
billion a year. These initiatives would be
form for inpatient hospital bills.
complemented by reform of the small group
At Secretary Sullivan's recent Forum on
market. As described more fully in Chapter
Administrative Costs, Blue Cross/Blue Shield
3, health insurance market reform could
of America and the Travelers Insurance Com-
reduce administrative costs for small group
pany agreed to head up a public/private
coverage by as much as 40 percent, saving
group to increase electronic claims and to
up to $9 billion a year.
standardize data elements and electronic
Reducing Claims Processing and Billing
transmission rules. The group is meeting
Costs Through Standardization and Auto-
already. Its recommendations are expected
mation.-Paper claims are expensive. Esti-
soon.
mates suggest that providers and insurers
HCFA is actively working with the private
save up to $2 per claim through electronic bill-
sector to develop technical standards to pro-
ing, and more is saved when claims are re-
mote greater use of electronic billing. Cur-
viewed electronically. Since over three billion
rently, 75 percent of Medicare Part A and
claims are submitted on paper every year, sub-
42 percent of Part B claims are submitted
stantial savings are possible just by increasing
electronically. Electronic billing also reduces
electronic submission rates.
costs for providers and helps reduce clerical
Standardization of claims forms can reduce
errors. Comparable savings can be achieved
billing costs and reduce provider billing costs
for private sector claims. HCFA has set
to levels comparable to those that might
100 percent electronic submission for hospitals
be achieved under single payer systems. In
and 75 percent for others within three years-
the private sector must drive toward similar
December, 1990, the Health Care Financing
efficiencies.
Administration's HCFA-1500 claims form was
finalized. This form-which is used for physi-
The combination of electronic claims submis-
cian and outpatient services-was developed
sion and standardization of the data elements
by the Uniform Claim Form Task Force,
required for claims will reduce provider cost
co-chaired by the American Medical Associa-
and frustration. Providers submitting claims
Making the System More Cost-Effective
59
electronically benefit from faster and clearer
to consumers through lower premiums and
resolution of claims. Moreover, electronic sys-
out of pocket costs. Eventually, electronic
tems will help avoid technical mistakes, such
cards could be used for storage of the card
as missing one line on a form, that often
holder's medical records. This would help
delay payment.
prevent duplication of tests, medication errors,
Streamlining Medical Review.-A third
and other quality of care problems.
area-improving medical review-can reduce
Developing Computerized Medical Rec-
the "hassle factor" for physicians while reduc-
ord Systems.-Secretary Sullivan also has ini-
ing costs for unnecessary care. The goal would
tiated a task force to accelerate development
be to shift away from claim-by-claim denials
of computerized medical record systems.
toward monitoring and encouragement of cost-
Computerization will facilitate rapid access
effective practice patterns. Claim-by-claim re-
to critical information regarding an individ-
view is burdensome and costly-sometimes the
ual's past medical record. Once computerized
cost of the review can exceed the potential sav-
patient records and related information net-
ings.
works are in widespread use, providers will
HCFA has developed and is now testing
have access to state-of-the-art information
the Uniform Clinical Data Set (UCDS) a.
on the effectiveness of various care paths
new system that would permit a shift to
as well as more complete, accurate patient
pattern review for inpatient hospital care.
medical records.
The UCDS is a state-of-the-art system for
abstracting critical medical information for
"Expert" systems can be built-in as part
hospital records. Once this information is
of these systems to alert physicians to poten-
tial problems, such as the need to follow-
abstracted and entered into a computerized
up on an abnormal test result. Computerized
system, "expert" system programs can identify
patterns of care that suggest a systematic
records will also strengthen quality assurance
problem that might warrant further targeted
by providing hospitals and health plans with
review and corrective action.
reliable statistical information regarding out-
comes and complication rates.
If the UCDS system proves to be successful
Health costs could be reduced as well.
in practice, it would serve as a model for
use by private insurers. In a complementary
Up to 20 percent of all medical care performed
effort, the Public Health Service is devoting
in the United States may be unnecessary
$130 million in 1991-1992 to outcomes re-
or harmful. Computerized patient records will
search to increase information about what
capture clinical data for effectiveness research.
patterns of care are most effective in improv-
This research will help physicians better
ing health outcomes and at what cost.
understand when certain costly therapies
should be used.
Developing Electronic Cards.-Secretary
Sullivan has launched an initiative to acceler-
Early reports are encouraging. The General
Accounting Office has reported that an auto-
ate development of electronic cards for use by
mated medical record system reduced hospital
consumers.
costs by $600 per patient in a Veterans
Electronic cards would be used by patients
Affairs hospital. Other studies have dem-
at the point of service to provide com-
onstrated reduced lengths of stay associated
prehensive insurance information to providers.
with computerized patient records. If broadly
This would eliminate the need for patients
implemented, computerized patient records
to repeatedly fill out confusing forms. Such
could reduce unnecessary care by about 5
cards also would streamline billing procedures
to 10 percent, saving $20 billion a year
for doctors and hospitals by providing imme-
by. the end of the decade. More significant
diate information regarding eligibility, cov-
savings are likely in later years.
erage, benefits, copayments and deductibles.
Reducing Overhead Costs Through
Dollar savings will accrue directly to insur-
Health Insurance Market Reform.-Finally,
ers and providers through more efficient
health insurance market reform will reduce
administrative procedures, and be passed on
administrative costs for small group coverage
60
The President's Comprehensive Health Reform Program
by an average of 40 percent. Savings will be
fewer than 100 workers will be provided
even higher for groups with 10 or fewer work-
through HINs.
ers. The bulk of this savings will be achieved
Even outside of HINs, substantial savings
through health insurance networks (HINs)-
will be achieved through elimination of costs
group purchasing associations for small busi-
associated with medical underwriting. More-
ness and individual coverage. It is projected
over, by refocusing competition on costs, the
that 67 percent of coverage sold to firms with
reforms will also help to reduce marketing
costs.
G. Making Public Programs More Efficient
Government health care programs at all
new transferable health insurance credit
levels account for 44 percent of national
system (see Chapter 4).
spending on personal health services. Costs
Coverage of all non-Medicaid poor for
for these programs have been increasing
basic services will be fully financed by the
even more rapidly than for the population
Federal Government. States would be able
as a whole. Accordingly, no comprehensive
health system reform proposal can be complete
to retain their share of savings from Med-
without measures to help make these pro-
icaid program reform. Federal savings
grams more efficient. Indeed, thoughtful re-
would revert to State residents to provide
health insurance for the non-Medicaid
form now is needed to prevent future problems
poor, without any State match.
that could threaten these programs.
Medicaid currently provides health insur-
1. Reforming the Medicaid Program By
ance benefits for 26 million low-income Ameri-
Enhancing State Flexibility
cans. Recently, Medicaid also has become
the primary vehicle for funding "uncompen-
Overview
sated care" provided by disproportionate share
The President's reform proposal would dra-
hospitals (DSH)-hospitals that have high
matically modernize the twenty-six year old
charity care case loads ($12 billion in federal
Medicaid program and provide States with
payments matched by the States-in 1993).
significant new flexibility for reform.
These DSH payments would not be affected
by this proposal.
Medicaid recipients will benefit from en-
hanced access and improved quality
Medicaid has been widely criticized as
through coordinated care plans.
providing fragmented, episodic, and often sub-
standard care. Moreover the program is viewed
States will have new flexibility to take ad-
as wasteful and inefficient. These problems
vantage of innovation, program efficiencies,
stem primarily from continued reliance on
and better methods for cost control. As
an outdated fee-for-service delivery system.
Medicaid costs have risen by over 23 per-
In addition, the program is overly rigid
cent a year since 1989 (from $61.2 billion
and bureaucratic.
to $92.1 billion in 1991), States have
strained to keep up. Thus, the federal and
Under the proposal, Medicaid would be
State governments must be partners in
restructured to rely primarily on delivery
cost containment and reform.
of health care through coordinated care sys-
tems. Moreover, States would have new flexi-
Enhanced State flexibility and greater use
bility to respond to local needs and concerns.
of coordinated care can reduce Medicaid
States would have the option of choosing
cost growth from a projected 16 percent
between two broad approaches.
a year and result in significant savings
that can help fund expanded insurance
A State could maintain existing Medicaid
coverage for an additional 24 million low
eligibility and benefit levels while shifting
and modest income Americans through the
enrollment into coordinated care pro-
Making the System More Cost-Effective
61
grams. Under this approach, the new
aid under current rules, no matter how
transferable tax credit (certificate) system
poor or how sick they are (non-disabled
would operate separately from the existing
single adults and childless couples, for exam-
Medicaid program, though States would
ple). Only about 45 percent of the poor
play an important role in qualifying indi-
are covered by Medicaid. Another 26 percent
viduals for the tax credit.
have other insurance. Twenty-nine percent,
Alternatively, a State could combine its ex-
therefore, are without insurance.
isting Medicaid programs with the new
Problems With the Current Program.-
health insurance credit system to develop
Most Medicaid recipients receive health care
a new universal access program covering
through traditional and costly fee-for-service
all State residents with incomes below
arrangements. Physicians, hospitals, and other
poverty. Under this approach, a State
providers are paid on the basis of itemized
could operate a single public insurance
bills for the services they render. As a result,
program or could provide credits for pur-
strong incentives exist to provide additional
chase of private coverage.
services regardless of benefit. Providers are not
Coincident with these reforms, federal fund-
paid on the basis of outcomes: no one is paid
ing for acute care for the non-elderly (exclud-
to keep patients in good health. Nor is there
ing DSH payments) would shift to a new
anyone responsible for coordinating services to
per capita payment to the States. This would
avoid duplication and to improve quality. As
provide States with new incentives to maxi-
a result of this perverse mismatch of incen-
mize program efficiencies through coordinated
tives and responsibilities:
care and other measures. Overall, the reforms
would improve quality and access for program
The care many Medicaid patients receive
recipients while greater efficiency would free
is often fragmented-too little, too much,
up funds to expand access for other low
inappropriate, or too late;
income individuals and families through the
Too many recipients use hospital emer-
new tax credit system.
gency rooms as their primary entry point
to the medical care system, often for non-
Background
emergency conditions; and
Medicaid currently is a joint federal/State
Too many people are deterred from seek-
program designed to meet the health insurance
ing treatment in the early stages of a med-
needs of certain low-income individuals. States
ical condition. Receiving treatment in the
set most program rules within broad federal
later stages often leads to hospitalization
guidelines, determine beneficiary eligibility,
and other care that could have been avoid-
and pay provider claims.
ed.
In general, Medicaid eligibility is linked
to other cash assistance programs such as
The Medicaid program also has been
Aid to Families with Dependent Children
strained due to frequently added service and
(AFDC) or Supplemental Security Income
eligibility mandates, increased caseloads, court
(SSI). In recent years, mandatory eligibility
mandated payment levels, and overall health
has been extended to certain groups with
care inflation. As a result of these forces,
incomes above the cash welfare program
Medicaid is the fastest rising portion of
standards (for example, poor and near poor
both federal and State budgets.
pregnant women and children). Optional cov-
Program Costs.-In 1993, combined fed-
erage extends to certain other groups, such
eral/State spending on Medicaid will surpass
as the "medically needy," whose illnesses
$158 billion, up from $61.2 billion in 1989-
force them to "spend-down" to meet Medicaid
a 250 percent increase. The federal con-
eligibility criteria.
tribution, based on State median income rang-
Current Medicaid eligibility requirements
ing from 50 to 83 percent of program expenses,
leave many poor without coverage. Certain
will exceed $84.5 billion in 1993, or a 245 per-
categories of persons cannot qualify for Medic-
cent increase since 1989 ($34.5 billion).
62
The President's Comprehensive Health Reform Program
Chart 19. GROWTH IN FEDERAL MEDICAID COSTS
$ BILLIONS
160
140
120
100
80
60
40
20
0
1980
1982
1984
1986
1988
1990
1992
1994
1996
SOURCE: HCFA Medical Bureau
As Table 5-10 shows, there are three
sible reforms can improve the health care
main components to federal Medicaid program
available to the disadvantaged while mod-
costs: (1) acute care for the non-elderly,
erating cost growth. Three examples under-
(2) long-term care and services to "dual
score this point:
eligibles" (those eligible for both Medicare
A Detroit-based health maintenance orga-
and Medicaid), and (3) program administra-
nization (HMO), Comprehensive Health
tion.
Services, provides care for the 60,000 Med-
Coordinated Care.-While the current pro-
icaid recipients and has saved the Medic-
gram is exploding, causing a crisis at the fed-
aid program at least $6.9 million in 1990.
eral and State level, successful experience with
These savings are due to a reduction in
coordinated care programs show that respon-
unnecessary hospitalizations and in-
Table 5-10. Projected Federal Medicaid Costs Under Current Law
(Dollar amounts in billions, Federal Share)
1992
1993
1994
1995
1996
1997
1993-1997
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%
DSH Payments (non-add)
8.4
9.8
11.4
13.2
15.2
17.2
75.5
Long-Term Care and Dual-Eligibles
38.9
45.0
52.0
59.8
68.5
78.2
303.7
Administration
2.6
3.0
3.4
3.8
4.2
4.8
19.1
Making the System More Cost-Effective
63
creased attention to preventive care, par-
plans reflects a number of factors. Most
ticularly for high risk pregnant women
importantly, under current law, States must
and infants.
go through a waiver process to secure federal
Under Kentucky's Primary Care Case
approval to establish coordinated care pro-
Management (PCCM) program, each Med-
grams. Complex statutory waiver requirements
icaid recipient has a primary care physi-
are overly rigid and have blocked a number
cian responsible for providing or authoriz-
of initiatives that long have been underway
ing all non-emergency care. By emphasiz-
in the private sector. Moreover, State Medicaid
ing primary and preventive care through
programs are subject to political resistance
a single physician, cost and quality prob-
from entrenched interests, a factor that is
lems associated with overuse of emergency
not significant in the private sector.
rooms and duplication of medications or
It is important to note that Medicaid
tests have been avoided. As a result, the
also has become a vehicle for funding "uncom-
Kentucky program has reduced infant
pensated" or "charity" care provided by hos-
mortality rates and has achieved savings
pitals to individuals without Medicaid or
of $25 million a year, or approximately
other insurance coverage. Under recently en-
10 percent of program costs.
acted legislation, States will be able to provide
Until 1982, Arizona was the only State
higher Medicaid payments to "disproportionate
that did not participate in Medicaid. Coun-
share hospitals" (DSH) that provide care
ty governments provided acute and long-
to a disproportionate number of uninsured
term care for the poor. In 1982, Arizona
patients. Over the next five years, the Federal
established a Medicaid program and ob-
Government will provide $75.5 billion in
tained a waiver to operate this through
DSH payments.
the Arizona Health Care Cost Contain-
While this is a reasonable stop-gap ap-
ment System (AHCCCS).
proach, it has two disadvantages when com-
AHCCCS is unique in that all care is pro-
pared with a direct expansion of insurance
vided through coordinated care arrange-
coverage. First, there is no assurance that
ments. There is no fee-for-service option.
DSH payments are used exclusively for patient
Arizona contracts with participating
care. More importantly, DSH payments for
health care organizations (HCOs) through
inpatient hospital care fails to provide access
a bidding/negotiation process. Modest sav-
to ambulatory care and primary and preven-
ings have been achieved-estimated by
tive services that could avert the need for
HCFA at 5.7 percent in the fourth year
a disabling illness and costly hospital care.
of the program compared to fee-for-service
Proposal
alternatives.
The President's proposal focuses reform
While programs of this type hold promise,
on the acute care portion of Medicaid for
less than 3 million Medicaid recipients receive
the non-elderly. Long-term care and acute
care through coordinated care programs: 1.4
care programs under Medicaid for seniors,
million receive care through HMOs and other
including Medicare/Medicaid dual eligibles and
prepaid health plans, while an additional
qualified Medicare beneficiaries, would remain
1 million receive care through PCCM pro-
unchanged. Disproportionate share hospital
grams. The remaining 23 million (89 percent)
(DSH) payments under Medicaid also would
continue to receive care through fee-for-service
remain unchanged.
systems. In contrast, 27 percent of workers
and dependents with employment-based pri-
Federal financial participation for acute
vate insurance are covered through coordi-
care (excluding DSH) would be shifted from
nated care plans, and this percentage contin-
open-ended cost-based reimbursement to a
ues to grow rapidly (see Chart 15, Chapter
prospectively determined per capita payment.
5, section B).
This change would provide important incen-
tives for program efficiency. The resulting
The comparatively small share of Medicaid
savings reflect the potential for significant
recipients covered under coordinated care
improvements in efficiency through either
64
The President's Comprehensive Health Reform Program
of the two major reform options that the
per capita payment while still yielding the
States would have under the proposal.
same aggregate savings as those proposed.
The per capita payment would be State-
State Option 1.-Separate Medicaid and
specific, based on total per capita costs for
Tax Credit Programs.-As noted above,
the acute care portion of Medicaid in a
States would have two broad options regarding
State in 1992. Acute care costs related to
reform of their Medicaid programs for acute
Medicare recipients would be excluded from
care services provided to the non-elderly.
this calculation as would DSH payments.
Under the first option, States would shift all
The State's 1992 per capita cost would then
non-elderly Medicaid recipients into coordi-
be indexed for general inflation, using the
nated care programs, over a five year period.
percent increase in the consumer price index
Otherwise, program rules would remain sub-
for urban areas (CPI-U) plus an additional
stantially unchanged.
amount for medical cost inflation.
Coordinated care programs would include
From 1960 to 1990, per capita health
health maintenance organizations (HMOs),
care costs for the entire United States popu-
preferred provider organizations (PPOs), pri-
lation increased by about 4 percent a year
mary care case manager (PCCM) programs
faster than the CPI-U. Thus, an add-on
and other cost effective alternative delivery
of 2 to 4 percent in addition to the CPI-U
systems. Current restrictions that impede
for 1997 and future years seems reasonable.
access to coordinated care plans under Medic-
Savings of this magnitude should be possible
aid would be relaxed. Because enrollment
through coordinated care and increased flexi-
would be shifted to coordinated care, State
bility for State programs. A phase-in would
waivers to continue significant fee-for-service
provide time for States to take advantage
enrollment would be necessary.
of the new programmatic flexibility provided.
Eligibility rules would remain the same
Actual federal payments to a State would
as under the current Medicaid program. States
would be required to continue to cover all
equal the product of the total number of
Medicaid recipients in the State times the
current mandatory eligibility groups under
Medicaid, as well as any optional groups
inflation indexed State per capita acute care
costs times the Federal Matching Assistance
they covered as of January 1, 1992.
Percentage (FMAP). The FMAP formula would
States would continue to provide mandatory
remain unchanged from current law and
Medicaid benefits. States that currently pro-
is intended to reflect a State's relative need
vide optional Medicaid benefits would be
for federal assistance. (The federal matching
able to adjust these benefits, but would
assistance percentage (FMAP) = 100 - .45
be required to maintain the actuarial value
x [(State per capital income)/(U.S. per capita
of the total benefit package (e.g., an optional
income)]².) Different per capita payment
benefit could be dropped if another benefit
amounts could be used for different age-
of equivalent value is added). States also
sex or other groupings to adjust for changes
could modify the amount, duration, and scope
in the population covered by a State program
of mandatory or optional benefits subject
over the years.
to a requirement that the actuarial value
of the benefits be maintained. As under
Although the proposal does not affect DSH
current law, providers would be required
payments, the need for DSH payments would
to accept Medicaid rates as payment-in-full
decrease dramatically. With a projected in-
with no significant cost sharing or balance
crease in insurance coverage of 29 million
billing.
Americans resulting from tax credits and
other reforms, fewer uninsured patients would
Under this option, States would be respon-
burden hospitals with "charity" care costs.
sible for coordinating certain aspects of the
Thus, additional funds could be available
health insurance credit program. The tax
to further expand the credits. At State request,
credit would be used for the purchase of
the payment formula could be revised to
private insurance coverage. States would cer-
include DSH payments within the federal
tify eligibility for and the amount of the
Making the System More Cost-Effective
65
health insurance credit for those who wish
paid had it maintained a separate Medicaid
to obtain their tax credit prospectively.
program, as under option 1.
States also would be required to define
To help finance these programs, States
a "basic" benefit package with an actuarial
would receive a lump sum payment from
value equal to the tax credit amount. And,
the Federal Government. This payment would
if a sufficient number of insurers do not
equal the sum of federal per capita payments
offer the basic plan, States would be required
for those who meet Medicaid eligibility re-
to assure that at least two private health
quirements and health insurance credit pay-
plans offer this basic plan to credit recipients
ments for those who are eligible for them.
within the State. Federal/State quality assur-
Payments would be based on estimates of
ance programs would continue to assure prop-
the Medicaid and health insurance credit
er program administration, e.g, proper eligi-
eligible populations within the State. Esti-
bility determination for Medicaid and tax
mates would be base year eligibility rates
credit recipients and prevention of fraud
updated to reflect changes in population and
and abuse.
changes in unemployment and other factors
State Option 2-Unified Program.-
likely to influence the size of the eligible
population. Adjustments would be made to
Under this option, States could establish a uni-
reflect actual participation.
fied program that combines Medicaid with the
new federal health insurance credit to provide
To the extent practical, States would no
health insurance coverage for all State resi-
longer apply complex Medicaid eligibility
dents with incomes below poverty. Coverage
standards. Eligibility would be based simply
would be phased-in in tandem with the phase-
on individual or family income in relation
in for the health insurance credit.
to poverty. States would help to administer
the federal health insurance credit and would
States would have broad flexibility in estab-
lishing these programs. They could operate
assure availability of "basic" benefit coverage
from at least two private health plans, as
a unified public insurance program or estab-
under option 1.
lish a State health credit program to supple-
ment federal health insurance credit pay-
ments. Any eligible individual or family could
2. Phasing-Out Duplicate Subsidies and
opt-out of the State's public insurance program
Increasing Efficiency in Other Federal
to purchase private insurance. Those who
Health Programs
opt out would receive the full amount of
the federal health insurance credit that they
Medicare Program History
would otherwise be eligible to receive. The
credit could be higher if the State supple-
Since enactment in 1965, Medicare has
mented the health credit.
successfully reduced the financial burden of
health costs for the nation's elderly. However,
States that provide insurance directly would
the Medicare program also has experienced
cover all Medicaid mandatory benefits and
unsustainable increases in costs that have
as well as prescription drugs. States would
far outpaced both initial projections, and
have flexibility to modify the amount, scope,
inflation (far exceeding the CPI), and even
and duration of benefits and could add or
the medical component of the CPI.
drop optional benefits provided that the actu-
arial value of the benefit package is main-
Medicare outlays were $3.4 billion in 1967,
tained when spread over all individuals who
and at the time, projected 1990 outlays
are eligible to participate in the program.
were $15.7 billion. Actual 1990 Medicare
outlays totalled $110 billion. The average
States that operate a unified health insur-
annual rate of growth in Medicare expendi-
ance credit program would be subject to
tures between 1970 and 1990 was over 14.7
a maintenance of effort requirement. The
percent, well above the rate of inflation
State's financial contribution would be set
and beneficiary increases (about 8.2 percent).
to equal the amount the State would have
The following table compares actual Medicare
66
The President's Comprehensive Health Reform Program
growth rates to inflation and beneficiary
reasonable efficiencies must be found in Medi-
growth.
care growth to avoid draining American tax-
payer resources-regardless of the beneficial
Medicare has outpaced the Medical-Con-
private sector effects of the President's plan's
sumer Price Index (MCPI) and the Consumer
private market reforms.
Price Index-Urban (CPI-U) by an average
annual rate of 6.3 percent and 8.4 percent,
Reforms will not affect benefits for sen-
respectively, over the 1970-1990 period. Over
iors.-Because important efficiencies are pos-
the next five years, if not reformed, it
sible in the Medicare program, no senior will
will continue to surpass general inflation
have any benefits reduced as part of health
rates, as indicated in the graph and chart
care reform. In fact, senior citizens could save
below.
money as a result of possible Medicare re-
With almost 12 percent a year growth
forms-due to the lower coinsurance payments
anticipated for each of the next five years,
and lower Part B premiums that automatically
Table 5-11. Average Annual Medicare Growth Compared to CPI-U and
Beneficiary Growth, 1970 through 1990
Excess over
Annual Growth
CPI-U and
Rate
Beneficiary
Growth
CPI-U + Beneficiary Growth
8.2%
-
14.7%
+80%
Medicare
Chart 20. GROWTH IN FEDERAL MEDICARE COSTS
AVERAGE ANNUAL INCREASE -- 11.5%
(OUTLAYS)
$ BILLIONS
240
220
200
PROJECTED MEDICARE SPENDING
180
160
140
120
100
1991
1992
1993
1994
1995
1996
1997
FISCAL YEARS
Making the System More Cost-Effective
67
result from many supplemental medical insur-
Medicare also makes graduate medical edu-
ance (SMI) reforms.
cation (GME) payments to help cover the cost
of intern and resident salaries and the cost
Hospital Insurance (HI) Reforms
of teaching physicians. GME payments should
Under current law, the Medicare Hospital
be reshaped to help ensure that teaching hos-
Insurance program will grow at 10.6 percent
pitals meet the Nations needs for primary care
per year from 1993 to 1997. Numerous policy
physicians in the next century. Teaching hos-
changes exist to reduce this high annual
pitals should be encouraged through payment
rate of growth-without affecting services.
policy to shift the primary care/specialist train-
ing mix back towards more sensible ratios that
Recapturing Unreimbursed/Uninsured
will produce more primary care physicians.
Care Subsidies as Health Insurance Tax
Credits Expand Access.-Many hospitals re-
Other Possible HI Reforms.-Other re-
ceive Medicare "disproportionate share pay-
forms could further reduce the excessive
ments" (DSH) to help cover the cost of the
growth rate in HI costs. These reforms would:
uncompensated care they provide to uninsured
ensure that Medicare pays only once for cer-
patients. Medicare DSH payments will total
tain hospital procedures; phase out unequal
over $2.3 billion in 1992. A significant portion
and special return on investment payments to
of the $3.2 billion provided to teaching hos-
for-profit skilled nursing facilities; create spe-
pitals in fiscal year 1992 through the "indirect
cific categories of payment to recognize more
medical education" (IME) adjustment also is
home health professions; and create additional
intended to help defray uncompensated care
incentives to Medicare beneficiaries to enroll
costs.
in coordinated care organizations.
As the new health insurance tax credits
Preventing Program Abuse
and tax deductions are phased-in-to ensure
that nearly everyone coming into a hospital
Other policy changes should be considered
has insurance-these subsidies would, for the
to address areas where there have been
most part, be unnecessary. With insurance,
documented abuses of the Medicare program.
low-income families will be able afford primary
Durable Medical Equipment.-A notable
care on an ambulatory basis-to maintain
example is in the area of durable medical
good health and prevent serious illnesses
equipment (DME). Numerous reports of fraud
that result in the need for costly hospital
and abuse have prompted calls for DME pay-
admissions. (Some indigent care subsidies
ment reform. Attempts to correct overcharges
could be retained as "gap fillers"-to provide
by instituting a fee schedule for DME have
for the small number of remaining cases
failed.
where people still fall through the cracks.)
A recent GAO (1991) study of six DME
Adjustment of IME payments is justified
suppliers found that the suppliers' average
on other grounds. Major studies by the Gen-
profit margin in 1988 was 19 percent for
eral Accounting Office (1991) and the Congres-
Medicare business, significantly more than
sionally-appointed Prospective Payment As-
for non-Medicare business. The GAO pro-
sessment Commission (ProPAC, 1990) have
jected that Medicare profits would be even
consistently shown that these payments are
higher in 1993-34 percent overall. The
excessive even under the existing system.
GAO study also found that Medicare pay-
Therefore, a phase-down in IME payments
ments in 1989 were 24 percent higher
to rates already recommended by ProPAC
under the new fee schedules than they
(on the basis of excessive payment under
would have been under the previous sys-
current law) should be possible without any
tem, which was based on reasonable
harm to teaching hospitals as the burden
charges.
of uncompensated care decreases with the
tax credit phase-in.
To bring these excessive payments under
control, the Secretary of the Department
Reforming Graduate Medical Education
of Health and Human Services should be
Payments.-In addition to IME payments,
authorized to revise DME payment rates
68
The President's Comprehensive Health Reform Program
to reflect market considerations, using such
interests (Florida Cost Containment Board,
procedures as competitive bidding to establish
1991). The result is a significant increase
payment rates for oxygen and oxygen products.
in public and private sector health care
costs.
Growth of Physician Payments and
In addition, self-referrals are viewed by
Related Services (SMI)
many as involving an unethical conflict of
Current projections of Supplementary Medi-
interest. The American Medical Association
cal Insurance (SMI) program costs (primarily
(AMA) has recognized self-referrals as an
doctor's fees) show it growing at an average
area of abuse in need of reform and has
annual rate of 14.6 percent from 1993 to
taken the position that self-referrals should
1997. Over the past decade, Medicare Part
generally be discouraged except in situations
B payments have grown at an average annual
where physician investment is needed to
increase of 15 percent-twice as fast as
make services available (AMA, 1991).
the Consumer Price Index for urban areas
Reform legislation should consider prohibit-
(CPI-U), adjusted to take into account bene-
ing Medicare payment in the case of "self-
ficiary growth.
referrals" in areas such as radiology, radiation
With the ongoing five-year phase-in of
therapy, durable medical equipment, home
physician payment reform, many physician
health, physical therapy, and rehabilitation
payments are in the process of being adjusted
where abuses have been found. Current law
significantly. While it is important to let
already prohibits Medicare payment for self-
this process proceed, the payment system
referrals involving clinical lab tests.
should be examined to remove inappropriate
A number of other policy options could
incentives.
be developed to help restrain growth of
A recent study done by the State of Florida
physician fees and other SMI expenses to
has focused attention on the abusive practice
a rate below 14.6 percent a year. Controlling
of physician "self-referrals." Physicians "self-
the costs of physicians payments and related
refer" when they order health care services
services (SMI) is critical. All seniors and
from a facility in which they have an invest-
general taxpayers are at risk when SMI
ment or other financial interest. The Florida
costs grow at 14.6 percent a year, because
study showed that physicians who self-refer
75 percent of SMI costs are borne by the
utilize services at a far higher rate than
general taxpayers and 25 percent from seniors'
physicians who do not have these financial
premiums.
Chapter 6
Problems with Alternative Approaches
Many of the proposals for health system
if they were adopted, they would have enor-
reform are patterned after one of two basic
mous consequences not only for our health
models: a centralized Canadian-style national
care system but for our way of life and
health insurance system or an employer "play-
or-pay" mandate. Both of these alternative
the fabric of American society. This chapter
analyzes these approaches.
approaches deserve careful analysis because,
A. The Canadian Model
Overview
Central planning inevitably wastes re-
While apparently successful in many re-
sources and places quality at risk.
spects and highly popular with the Canadian
These flaws are now increasingly apparent
people, the Canadian system-like all other
in the experience of the Canadian system:
universal public insurance systems-suffers
from two basic structural flaws that are
Costs have not been controlled effectively
bound to lead to serious long term problems
despite the enormous power that a single
with cost, access, and quality.
payer has under a universal public insur-
ance program. Indeed, Canadian health
First, there are no demand side incentives
care costs have risen slightly faster than
for efficiency. Because medical care is free
health care cost in the U.S.
to consumers, consumers do not play the
same role they play in normal markets.
Non-market means can moderate the
growth of costs, but with significant ineffi-
Market forces that normally produce
ciency. Resources are often wasted on low-
greater economic efficiency simply do not
priority care while blunt cost containment
exist. Moreover, consumers are unable to
measures limit spending where added re-
express their preferences through market
sources could make a real difference in
choices.
outcomes.
Second, major resource allocations are
Supply-side constraints have led to artifi-
made centrally through the political proc-
cial shortages of critical personnel and
ess. Health care is too complex and too
equipment.
sensitive to micro-level conditions, for cen-
tralized management to be effective.
Canadians have significantly less access to
state-of-the-art technologies and often
The Canadian system relies on blunt,
must wait weeks or months for treatments
macro-level, supply-side constraints such
that are readily available to Americans.
as an aggregate level of expenditures, lim-
And, certain procedures, such as coronary
its on high-tech equipment, and limits on
bypass surgery, appear to be rationed, es-
physician supply.
pecially for senior citizens.
But, efficiency-high quality care at the
Lost productivity and other costs associ-
lowest possible cost-requires making opti-
ated with delays in surgery are estimated
mal decisions at the hospital bedside and
at 0.6 percent of Canadian GDP. These
in the physician's office.
losses could be even higher if delays for
69
70
The President's Comprehensive Health Reform Program
other medical services are taken into ac-
and physician care. The Canadian system
count.
itself, and American proposals to implement
a Canadian-style approach, share a number
Incentives for Canadian physicians and
of basic structural features:
hospitals often reward additional care re-
gardless of its appropriateness. As a re-
Health insurance is provided to all citizens
sult, utilization rates have increased rap-
through a centralized, publicly adminis-
idly wasting resources.
tered program. Health care services are
provided by private-sector hospitals, physi-
Reliance on crude global budgets as a
cians, and other providers. Private insur-
means of controlling costs has forced Ca-
ance is prohibited, except for services not
nadian hospitals to cut back on staffing
covered by the public program.
in critical areas. As a result, post-opera-
tive death rates in Canada are 40 percent
Covered benefits include hospital, physi-
higher than in U.S. hospitals for certain
cian, mental health, and preventive care.
high-tech, life-saving surgical operations.
(Some Canadian provinces also cover pre-
scription drugs and long-term care.) Care
Even if the Canadian system were an
is free with no cost-sharing at the point
unqualified success, its successful adoption
of service.
in the United States could not be assured.
Each Nation has its own unique political,
Hospitals and other institutional providers
cultural, and economic environment. Experi-
are paid on the basis of global budgets
ence with the Medicare and Medicaid pro-
that cover all patient care costs during a
grams in the United States suggests several
year. Global budgets are set annually by
difficulties in adopting a Canadian-style uni-
government authorities, through a process
versal public insurance system.
that involves some element of negotiation.
Over the past decade and a half, effective
Physicians and other non-institutional
management of Medicare and Medicaid
practitioners and providers are paid on a
has been stymied by increasing politiciza-
fee-for-service basis according to a govern-
tion. Virtually all payment rates are fixed
ment-established fee schedule. Overall
by law. Thus, an Act of Congress is needed
payments for physician services are lim-
to change the amount that Medicare pays
ited by a global budget or "expenditure
for a routine lab test or X-ray.
target."
As a result of this inflexibility, Medicare
To control costs, the supply of facilities,
and Medicaid per capita costs continue to
equipment, and providers is strictly regu-
grow more rapidly than per capita costs
lated. Hospitals are limited to govern-
for the remainder of the population.
ment-set budgets for capital expenses.
Construction projects and high-cost equip-
If the U. S. political process has been un-
able to control 30 percent of health spend-
ment purchases require special approval.
ing, there is little reason for optimism that
Physician supply is limited and the spe-
it could be more successful in controlling
cialty distribution is regulated to encour-
costs for the entire health system.
age general practice.
Indeed, the thought that as much as 16
Financing is primarily through broad
based taxes (including a payroll tax). Some
percent of the GDP by the year 2000 (32.7
Canadian provinces also require small pre-
percent if non health-related federal spending
is included) could be subject to direct political
mium payments. Others place a special
tax on employers.
control should give most Americans pause
for serious concern.
The Canadian system is administered
through the provinces with supplemental
Basic Features of the Canadian Model
Federal financing. A Canadian-style sys-
For the past two decades, the ten Canadian
tem in the U. S. could be jointly adminis-
provinces have operated government-based
tered by federal and State governments
health insurance plans that cover hospital
(as proposed by Senator Kerrey) or pri-
Problems with Alternative Approaches
71
marily by the national government (as pro-
ment arrangements that have been developed
posed by Congressman Russo).
in the United States over the past decades
Basic Structural Flaws in the Canadian
have taken root in Canada.
Model
Overall, Canadian citizens as individuals
Lack of Demand-Side Incentives.-The
are relegated to a diminished role in decision
Canadian system lacks effective incentives for
making in the health care system. Because
efficiency. Because medical care is free to con-
they cannot make their own choices in the
sumers, market forces that normally drive eco-
market, they are forced to rely on the
nomic systems to greater efficiency simply do
vagaries of the political process.
not exist. This flaw could be partly remedied
Supply-Side Controls.-Because incentives
by requiring some cost-sharing at the point
for needed, appropriate care only are poorly
of service. The RAND health insurance experi-
structured, the government is left with control-
ment has conclusively shown that modest lev-
ling costs through overall supply side controls.
els of cost-sharing reduce demand with little
There are at least three main problems with
or no measurable impact on health status
this approach.
(Brook et al., 1983). But, the flaw in the Cana-
dian system is much deeper than a simple lack
Macro-level supply side controls cannot
of cost-sharing.
achieve micro-level efficiency. Resources
are invariably wasted. Needed services are
Because consumers do not have a choice
often caught in the squeeze compromising
of alternative health plans and do not pay
quality and good medical care.
any portion of the premium cost, there is
no dynamic that could lead to the development
Every day, medical personnel make hun-
of more efficient systems for delivering high
dreds of decisions that affect resource allo-
quality care at low cost. It is no accident
cation. Should a particular test be pro-
that innovative health care delivery systems,
vided? What level of staffing should be
such as Kaiser Permanente or Group Health
provided in a busy emergency room? Con-
of Puget Sound, have emerged in the United
sumers also must make important deci-
States, but not in Canada.
sions regarding their care.
In the U.S., employers and individuals,
For efficient decisions to result, all of the
concerned about getting good value for their
participants must have appropriate incen-
health care dollars, have incentives to demand
tives and must have critical information.
better forms of health care delivery. This,
Macro-level budget constraints do nothing
in turn, creates a market for such systems,
to assure that proper incentives and accu-
and organized health plans then compete
rate information are brought to bear.
with one another for market share, leading
Supply side measures are often arbitrary
to progressive improvements in cost-effective-
and inflexible. Regulators must make
ness and quality. This consumer-driven process
thousands of decisions each year-deci-
of progressive improvement simply cannot
sions that involve billions of dollars to im-
occur in a Canadian-style system. All signifi-
plement global budgets, limits on high-
cant change in Canada requires legislation.
tech equipment, and similar measures.
As a result, the Canadian health care
Regulators must decide whether to in-
system is less dynamic, resembling the U.S.
crease a hospital's budget or to approve
health care system as it existed in the
the construction of a new cardiac surgery
mid-1960s. Medical care continues to be an
facility. A centralized allocation process
unorganized cottage industry. Physicians are
can be cumbersome, expensive and politi-
subject to little oversight to assure efficiency
cized, without resulting in an efficient allo-
and quality of care. And physicians continue
cation of resources. (Deber and Leatt,
to be paid exclusively on a fee-for-service
1987; Feeny et al., 1986).
basis despite clear evidence that this approach
Third, a centralized allocation process may
is inflationary. None of the improvements
be too removed or too politicized to effec-
in health systems delivery or innovative pay-
tively contain costs. Broad-based political
72
The President's Comprehensive Health Reform Program
support for cost-containment is unlikely.
pared with 10.5 percent in the U.S. (OECD,
Lobbying by providers and special interest
1990; Schieber et al., 1991).
groups, partisan disputes, and a host of
Cost-containment also has become more
other complications make success in con-
difficult in Canada in recent years. Rising
taining costs problematic, at best.
demands on the system resulting from free
universal access have placed increased finan-
Canada: The Evidence to Date
cial burdens on the government.
The preceding discussion suggests that the
Declining national contributions and cost-
design inherent in any centralized, govern-
containment measures have initiated a recent
ment-controlled health insurance scheme will
round of hospital staff layoffs and bed closings.
have adverse impacts on costs, access, appro-
Ontario, for example, the richest and most
priate use of resources, and quality. In fact,
populous province, where more than a third
a growing body of evidence strongly suggests
of the Canadians live, has lost nearly 5,000
these are characteristics of the current Cana-
hospital jobs and 3,500 beds over the last
dian system.
two years. In Toronto, the provincial capital,
Failure to Control Cost Growth-Even
2,900 of 15,000 acute-care beds have been
taken out of service (Media Digest, November
with strict global budgeting and some ration-
25, 1991).
ing of care, Canadian health costs continue to
grow faster than U.S. costs. Between 1970 and
To contain costs, Canada has cut payments
1980, Canada's annual compound rate of
to providers, making the yearly price negotia-
growth for per capita health expenditures was
tions more and more difficult. The rising
12.4 percent, compared with 11.9 percent in
Canadian costs, kept artificially under control
the U.S. Between 1970 and 1990, Canada's ex-
by government price and spending caps, have
penditures grew annually 10.8 percent, com-
been described as "a pressure cooker that
Chart 21. COMPOUND ANNUAL PERCENTAGE RATES OF
PER CAPITA NOMINAL GROWTH
PERCENT RATE OF GROWTH
16
14
12.4
11.9
10.8
12
10.5
10
8
6
4
2
0
1970-1980
1970-1990
CANADA / UNITED STATES
SOURCE: OECD, "OECD Health Systems: Facts and Trends" (Paris: OECD forthcoming)
Problems with Alternative Approaches
73
is building steam on a hot stove" (Iglehart,
has been estimated at 0.6 percent of Canadian
1986).
GDP (Danzon, 1991).
Treatment Delays.-Reliance on supply
Limited Access to Advanced Tech-
constraints to control costs inevitably leads to
nology.-Government control of hospital cap-
shortages and delays in treatment. Canadians
ital and operating budgets limits the adoption
must often wait to receive treatment. For ex-
of medical technology in Canada. For example,
ample, Canadians wait on average 4.9 months
U.S. citizens have access to more open heart
for open heart surgery, and 5.5 months for
surgery, cardiac catheterization, organ trans-
bypass surgery (Globerman, 1990).
plants, radiation therapy, extracorporeal shock
These waiting times for medical treatment
and lithotripsy, and magnetic resonance imag-
can have potentially adverse effects on a
ing.
patients' health. Patients not receiving timely
Data from Anderson et al. (1989) also
access to diagnostic procedures-such as MRIs,
suggest rationing of selected expensive proce-
CT scans and mammograms-can suffer set-
dures for older age groups. Heart valve
backs due to delayed treatment. Those waiting
surgery and bypass surgery for patients ages
for acute procedures-such as open heart
65-74 and 75+ were consistently performed
surgery-can risk death waiting for care.
less often in Canada. For patients age 75
Waiting for treatment also results in a
and above, a full 4 times as many bypass
direct economic loss. If unable to work while
procedures were performed in the U.S. as
waiting for care, individuals may face financial
in Canada for the same age group of patients.
setbacks. Some may even lose their jobs.
Limited availability of medical technology
There is the additional social loss of productiv-
has prompted the Canadian government to
ity. The overall cost of delays in surgery
send some patients to the U.S. to seek
advanced medical care. For example, the
Chart 22. AVERAGE WAITING TIMES IN BRITISH COLUMBIA
Cystoscopy
23.5
Cataract Removal
18
Myringatomy Tonsillectomy
13.8
Prostatectomy
30.5
Rhinoplasty Septal Surgery
32.5
Hand Surgery
11.5
Disk Surgery
12
Coronary Artery Bypass
24.1
Mammoplasty
19.2
Menisectomy
12
Laparoscopy
13.5
Tubal Ligation
16
Hysterectomy
16.9
Tbnsillectomy
16
Tympanoplasty
19.2
D&C)
6
Rhinoplasty
19.1
Scar Revision
13
Bladder Fulguration
29.5
Elective Cranial Bone Flaps, etc.
16
Other
15.8
0
2
4
6
8
10
12
14
16
18
20
22
24
26
28
30
32
34
36
WEEKS
SOURCE: Steve Globerman, Waiting Your Turn: Hospital Waiting Lists in Canada (Vancouver: Fraser Institute, 1990)
74
The President's Comprehensive Health Reform Program
Chart 23. ACCESS TO MODERN MEDICAL TECHNOLOGY
UNITED STATES (1987) VS. CANADA (1989)
PER MILLION PEOPLE
6
UNITED STATES
5.06
5
CANADA
3.97
4
3.69
3.26
3
2
1.5
1.31
1.23
1.06
0.94
1
0.54
0.46
0.16
0
OPEN-HEART
CARDIAC
ORGANTRANS-
RADIATION
EXTRACORPOREAL
MAGNETIC
SURGERY CATHETERIZATION PLANTATION
THERAPY
SHOCK WAVE
RESONANCE
LITHOTRIPSY
IMAGING
SOURCE: Dale A. Rublee, "Medical Technology in Canada, Germany and the United States," Health Affairs, Fall 1989, Table 1, p. 180
British Columbia Health Association has con-
Ineffective Use of Resources Resulting
tracted with Seattle hospitals for coronary
from Inappropriate Incentives.-Because
bypass surgeries (Washington State Hospital
Canada continues to rely primarily on fee for
Association, 1990), and Ontario and Alberta
service payment, physicians are rewarded for
have similarly contracted with U.S. hospitals
additional care regardless of need or quality.
for high technology care (Goodwin, 1990;
As a result, utilization per physician increased
Sherlock, 1990).
by 25.1 percent in Canada between 1971 and
1985, compared with only 7.0 percent in the
While these instances may be rationalized
United States (Barer et al., 1988). Overall, Ca-
as temporary problems, the Canadian system
nadian physicians provide a much higher vol-
is able to use access to U.S. technology
ume of services than U.S. physicians. While
as a "safety valve." Since the U.S. provides
data is not available on rates of appropriate-
an available supply of medical technology
ness, these substantially higher levels of medi-
just across the boarder, Canada may have
cal utilization raise concerns about the amount
an incentive not to invest in sufficient supply.
of inappropriate and unnecessary care being
If the U.S. were to adopt a Canadian system,
delivered and paid for by the Canadian tax-
this safety valve would no longer exist for
payer.
Canada, nor would one exist for Americans
(HIAA, 1990).
Hospitals also face perverse incentives. Be-
cause hospitals are paid a fixed aggregate
Limited hospital budgets for capital improve-
budget, they have a financial incentive to
ments also have meant that the physical
use available beds for patients with the
plant and equipment in many hospitals is
lowest cost. As a result, Canadian hospitals
nearing obsolescence (Iglehart, 1986). This
are filled with chronically ill, but low cost,
lessens some Canadian hospitals' ability to
patients, termed "bed blockers."
provide the highest quality care.
Problems with Alternative Approaches
75
Table 6-1. Relative Use of Physician Services in Canada
and the United States
(Services per capita)
Canadian Rate
Service Type
as Percent of
U.S. Rate
Diagnostic and Therapeutic Procedures
120
Office Visit and Consultations
156
All Physician Services
139
Source: Fuchs, 1990.
These incentives affect quality and hospital
atively undeveloped in Canada compared with
staffing decisions. Canadian hospitals have
the United States. Similarly, Canadian hos-
lower average staff-to-patient ratios than do
pitals have few incentives to compete on
U.S. hospitals, (1.87) versus (3.47) (Newhouse
increased quality of care. Because of tight
et al., 1988). Quality for high-risk patients,
budgets, hospitals in Canada do not invest
however, can suffer as a result of these
to any significant level in data collection
staffing patterns (see below).
and quality review.
Pressures on Quality.-Roos et al. (1989).
recently compared Canadian and U.S. post-op-
Could a Canadian-Style System Be
erative mortality rates. Interestingly, Cana-
Successfully Implemented in the United
dian hospitals did as well as U.S. hospitals
States?
on low risk surgical procedures. Post-operative
Critical Differences Between the United
mortality, however, is 44 percent higher in
States and Canada.-The notion of simply
Canada than in the U.S. for high risk proce-
adopting the Canadian system is simplistic.
dures including heart surgery. This outcome
Each nation has its own unique political, cul-
may result from hospital budgeting practices
tural, and economic environment and history.
which encourage lower staff-to-bed ratios. This
means that patient care resources might not
One major difference between the United
be available when critically needed.
States and Canada is our form of government.
We rely on a system of checks and balances,
Quality assurance activities such as peer
with independent executive, legislative, and
review, second opinion, utilization manage-
judicial branches. Canadians, in contrast, have
ment and outcomes information also are rel-
a parliamentary form of government, which
Table 6-2. Comparison of Hospital Care in Canada and the United
States
(Use rates for people aged 65 and older)
Canadian
Unites States
Canada
Rate as
Percent of
U.S. Rate
Admissions Per Capita
0.33
0.35
106
Length of Hospital Stay (in days)
7.96
13.32
167
Hospital Days Per Capita
2.63
4.66
177
Hospital Staff Per Occupied Bed
3.47
1.87
54
Source: Newhouse, 1988.
76
The President's Comprehensive Health Reform Program
Chart 24. POST-OPERATIVE MORTALITY FOR HIGH RISK SURGICAL PROCEDURES
FOR PATIENTS 65 AND OLDER
DEATHS PER 100
12
10
8.4
8
5.8
6
4
2
0
30-DAY MORTALITY
MANITOBA NEW ENGLAND
SOURCE: Roos, et al., JAMA, Vol. 263, No. 18, May 9, 1990
effectively combines legislative and executive
prehensible only to a handful of Congressional
functions. There is less potential in Canada
staff and executive branch experts.
for the political deadlock that has character-
With the increasing complexity of the legis-
ized health policy in the United States over
lation, few Members of Congress even have
the past decade.
an opportunity to vote on the issues involved.
Experience with the Medicare and Med-
Over the past decade, the full House and
icaid Programs.-Experience with the Medi-
Senate have only had a handful of opportuni-
care and Medicaid programs suggests that a
ties to debate and vote on critical pro-
Canadian-style universal public insurance pro-
grammatic issues.
gram could not be translated successfully into
the United States. While these programs have
Micromanagement of program details by
succeeded in expanding access to the elderly,
legislators may be inevitable because it ex-
the disabled and many low income Americans,
tends the political power and influence of
these programs have become increasingly po-
key committee members. The technical details
liticized over the past 10 years thwarting effec-
of payment policy often are highly arcane
tive program management.
but of great monetary significance. Many
payment policies are somewhat arbitrary.
When enacted in 1965, Congress delegated
broad responsibility for management of Medi-
Per capita health care costs for Medicare
care and Medicaid to the executive branch
and Medicaid recipients have grown consist-
and to the States. Congress legislated only
ently faster than per capita health care
the broad outlines of the programs and
costs for the remaining population.
limited its role to oversight. Today, virtually
If the political process has been unable
every detail of operation of Medicare and
to control 30 percent of health spending,
Medicaid is dictated in hundred of pages
there is little reason for optimism that it
of dense legislative language that are com-
Problems with Alternative Approaches
77
Chart 25. ANNUAL GROWTH IN PER CAPITA HEALTH CARE
EXPENDITURES
ANNUAL GROWTH RATE
16
14
13
12
11.1
9.1
10
8.7
8
6
4
2
0
1970'S
1980'S
GROWTH PERIOD
MEDICARE/MEDICAID / PRIVATE
SOURCE: HCFA, Office of the Actuary, Office of National Health Statistics
could be more successful in controlling costs
rise by the same amount. Using 1992 dollars
for the entire health system.
or cost controls would have to cut enlisting
Potential for Massive Transition Costs
problems and expenditures by an equivalent
and Disruptions.-Establishing a universal
amount. Either tax increases or program costs
public insurance program in the United States
of this magnitude would have devastating ef-
would involve massive transition costs and dis-
fects. If coverage is financed through a payroll
ruptions. Either taxes and government spend-
tax that would increase the cost of employ-
ment, job losses could exceed two million work-
ing (federal and/or State) would have to in-
crease by $250 to $500 billion per year, and
ers. Millions of people currently satisfied with
their current insurance arrangements would
either taxes or government borrowing would
be forced to switch their coverage.
B. Problems with "Play-or-Pay"
Overview
and by Representative Rostenkowski, among
others.
"Play-or-pay" is a widely discussed approach
for expanding health insurance access. Em-
While "play-or-pay" would expand insurance
ployers would be required to "play", e.g.,
coverage, it suffers from four serious draw-
provide private insurance for workers and
backs. "Play-or-pay" would:
dependents, or "pay" a payroll tax to fund
public insurance for their workers and depend-
Hurt workers by reducing jobs and by forc-
ents. Variants of this approach have been
ing employers to cuts wages to offset man-
proposed by Senators Mitchell and Kennedy
date costs. While "play-or-pay" seems to
put the burden on employers, this is large-
78
The President's Comprehensive Health Reform Program
ly an illusion. Employers will inevitably
force would have a strong incentive to opt
shift the burden to employees. Between
into the public plan, further undermining
350,000 and 750,000 jobs could be lost in
the solvency of the plan.
the short-run, with a long-term potential
as high as two million. These job losses
How Play-or-Pay Plans Operate
are about 50 percent to 100 percent of
those endured during the recession. More-
"Play-or-pay" employer mandates are de-
over, cash wages for many of the "bene-
signed to provide coverage for workers and
ficiaries" of the mandate would decrease
their dependents with little direct cost to
by 7 to 9 percent depending on the payroll
government. Employers are required to provide
tax rate, and would fall by about another
coverage directly or pay a payroll tax. Man-
1 percent as newly unemployed workers
dates typically apply for all workers employed
compete for increasing scarce jobs.
more than 17.5 hours a week.
Cascade into a form of national health in-
To "play," employers would be required to
surance. "Play-or-pay" is inherently unsta-
provide "basic" health coverage. Typical
ble. According to the Urban Institute, 60
employers could require workers to pay up
million workers and dependents who now
to 20 percent of premium costs as well
have private coverage would be shifted
as make modest copayments upon the re-
into the public plan. Overall, 58 percent
ceipt of health care.
of Americans would be insured publicly.
Employers not providing health benefits
At this point, the public could use its near-
directly would be required to pay a payroll
monopsony position to gain deep discounts
tax to cover a portion of the cost of bene-
from providers resulting in a massive cost-
fits provided through a public insurance
shift that would rapidly price the remain-
program. Estimated payroll tax rates are
ing private coverage out of the market.
in the range of 7 to 9 percent. Generally,
Hurt small business. While the $30 billion
there is no cap on the taxable wage base.
cost of the mandate will be shifted to
"Play-or-pay" mandates usually are accom-
workers, in the near-term, employers will
panied by an expanded public insurance pro-
bear the burden. Some employers may try
gram to replace Medicaid and provide sub-
to pass this added cost on to consumers
sidized coverage on a sliding-scale basis for
in the form of higher prices. But many
those without employer-paid coverage or Medi-
businesses that do not currently provide
care. Some form of price regulation also
coverage have low profitability, are en-
generally accompanies "play-or-pay" proposals
gaged in competitive markets and may fail
as a means of restraining costs. The regulation
as a result of the higher costs. Small busi-
may involve some form of payer/provider
ness will suffer disproportionately.
negotiations or may be administered directly
Increase costs for government over and
by a regulatory agency.
above the new payroll tax receipts. "Play-
or-pay" is not self-financing. A federal sub-
Characteristics of the Working Uninsured
sidy would be needed to fund the gap be-
tween payroll tax receipts and actual
The working uninsured are the intended
costs, and this gap is likely to grow rap-
beneficiaries of "play-or-pay" mandates. In
idly. Although premium costs average 7
1987, almost half (47.4 percent) of uninsured
percent of payroll, actual costs vary wide-
workers earned $5 or less an hour. Sixty
ly. Low-wage firms incur costs well in ex-
percent were employed in small establish-
cess of 7 percent. These firms will dis-
ments with 25 or fewer workers. Most worked
proportionately opt to "pay," but the tax
in low-skilled occupations and in industries
will be inadequate for health coverage for
that are characterized by intense competition
these firms. This problem will be
and comparatively low profitability. Many
compounded by the fact that premium
of these low-wage workers will be those
costs also vary widely. Firms with higher
who would lose their jobs under play-or-
premiums due to an older or sicker work
pay.
Problems with Alternative Approaches
79
Consequences of "Play-or-Pay"
billion for employers with a 9 percent tax.
Effects on Insurance Coverage.-From
Premiums paid by individuals would increase
the standpoint of expanding insurance cov-
by less than $1 billion, while uncompensated
erage "play-or-pay" appears to be a success.
hospital care would decrease by $15 billion.
According to a simulation conducted by ana-
The Effects on Wages and Employment.-
lysts at the Urban Institute, an estimated 33
"Play-or-pay" mandates appear to put the bur-
million uninsured Americans and their de-
den on employers, but in the long-run, the bur-
pendents would receive insurance coverage as
den falls primarily on workers. The effects are
a result of the mandate-22 percent through
two-fold: lower real take-home pay and fewer
their employer and 78 percent through the
jobs.
new public plan.
The reason is straightforward. At the mar-
Assuming a 7 percent "play-or-pay" tax,
gin, the total compensation an employer is
insurance costs would increase by $30 billion
able to pay (including wages and fringe
for employers, in 1989 dollars, and by $37
benefits) must equal the marginal value to
Table 6-3. Shifts In Insurance Coverage for the Under 65 Population
Employer
Govern-
Sponsored
Private
ment
Insurance
Nongroup
(Excluding
Uninsured
Medicare)
Number of People Covered in Millions:.
Current System
142
18
23
33
Under Pay-or-Play:
With a 7 percent tax
105
0
112
0
With a 9 percent tax
132
0
85
0
Percentage of Population Covered:.
Current System
66
8
11
15
Under Pay-or-Play:
With a 7 percent tax
48
0
52
0
With a 9 percent tax
61
0
39
0
Table 6-4 Insurance Costs
(Billions of 1989 dollars)
Total
Individ-
Govern-
Employers
uals
ment
Total Insurance Costs:
Current System
202
129
46
28
Under Pay-or-Play:
With a 7 percent tax
269
159
46
64
With a 9 percent tax
272
173
46
53
Added Insurance Costs:
With a 7 percent tax
67
30
0
36
With a 9 percent tax
70
44
0
26
Less Savings from Reductions in Uncompensated Care:
With a 7 percent tax
15
-
-
-
With a 9 percent tax
15
-
-
-
Net Added Insurance Costs:
With a 7 percent tax
52
-
-
-
With a 9 percent tax
55
-
-
-
80
The President's Comprehensive Health Reform Program
the employer of the labor that is provided.
A review of the characteristics of the unin-
If an employer is forced by a government
sured workers makes these predictions seem
mandate to increase benefits, the employer
even more realistic. Most of uninsured workers
will reduce employment or reduce cash wages.
are low-wage, low-skilled workers. These work-
A mandate simply cannot force an employer
ers have little ability to command costly
to pay more in compensation than the value
fringe benefits.
of the labor to the employer. This conclusion
is supported by a number of empirical studies
A better approach is to provide direct
analyzing other mandates (see, e.g., Gruber
assistance for low-income workers through
and Krueger, 1990).
tax credits, as the President has proposed.
This approach is more "progressive" in terms
For uninsured workers, the cost of keeping
of income distribution. Income is transferred
their jobs with a 7 percent "play-or-pay"
directly to assist low-income workers, without
payroll tax would be a 7 percent reduction
the risk of job loss or a reduction in wages
in gross wages, and a larger proportionate
that a mandate inevitably involves.
drop in after-tax income. In addition, wages,
corrected for inflation, would fall by about
"Play-or-pay" has other disadvantages for
workers as well.
another 1 percent as newly unemployed work-
ers compete for fewer jobs. The burden would
With a 7 percent payroll tax, 52 million
be particularly great because most of the
currently insured workers and dependents
working uninsured are low-wage workers al-
with employer-based plans would be forced
ready struggling to make ends meet. For
to change coverage. Another 14 million
example, the mandate would result in-
Americans would be forced to give up their
private insurance and would be forced into
A pay cut of $1,680 a year for the average
a "one size fits all" public insurance plan.
30 year old- male high-school graduate,
These shifts in coverage are illustrated in
currently earning $24,000 a year in wages;
Table 6-5.
and
Families that depend on supplemental in-
A pay cut of $1,260 a year for the average
come from part-time employment of a
30 year old male high-school dropout, cur-
spouse could be hurt. If the mandate ap-
rently earning $18,000 a year in wages.
plies to part-time work. Employers will cut
For other workers, 350,000 to 700,000 jobs
back on part-time jobs because of the
would be lost. Moreover, if the "play-or-
added cost. On the other hand, if the man-
pay" mandate evolves into a universal public
date does not apply, it would fail to close
insurance program, available to all regardless
an important gap in coverage and govern-
of employment, job losses could reach two
ment would be forced to pick up the costs
million.
through the back-up public plan.
Table 6-5. 66 Million Lose Choice of Plan Under Play-or-Pay
(Coverage under new public plan in millions)
Workers
Dependents
Nonworkers
Total
With a Pay-roll Tax of 7 Percent
Former Source of Coverage:
Employer
37
15
0
52
Private Insurance
6
2
6
14
Government
2
4
13
19
Uninsured
12
6
8
26
Total
57
27
28
112
Problems with Alternative Approaches
81
A Backdoor to National Health Insurance
In the absence of other reforms, health
care costs are likely to increase much more
Advocates present "play-or-pay" as means
rapidly than wages. As a result, the public
of providing universal coverage while avoiding
plan will become increasingly underfunded
national health insurance with all of its
unless the payroll tax is increased to keep
shortcomings. (See Chapter 6.A.) But, this
up with health care inflation. But, due to
argument is flawed. "Play-or-pay" is inherently
political pressures, the Congress is unlikely
unstable and will likely collapse into a full
to let this happen. So, the Congress is
blown national health insurance system.
likely to turn increasingly to general revenues
Many employers who now provide private
to subsidize the public plan. Or the Congress
health insurance to their workers will have
may try to use some form of blunt price
strong incentives to shift coverage to the
regulation to hold down public plan costs.
public plan "pay" option because a 7 or
Either way, the public plan would gain
even 9 percent payroll tax will be significantly
an increasing competitive advantage over pri-
less costly than private coverage. The incen-
vate health plans, and private health plans
tives are particularly great for small firms
would rapidly lose market share.
with comparatively low average wages. A
recent study conducted for the Labor Depart-
Effects on Employers
ment by policy analysts at the Urban Institute
reaches some startling conclusions on the
In the short-run, employers will not be
potential size of such a shift.
able to react fully to the mandate by reducing
wages or employment. As a result, the initial
With a 7 percent payroll tax, total enroll-
harmful effects of the mandate will fall
ment in public insurance (including Medicare)
mainly on employers. Small firms would
would be 144 million or 58 percent of the
be especially hard hit.
population. Sixty-six million Americans with
private coverage would be shifted to the
Health insurance costs for employers
new public plan. Twenty-six million of the
would increase by $30 billion under a
33 million who are currently uninsured would
mandate with a 7 percent payroll tax-
end up in the public plan. Only 7 million
a 23 percent increase in current health
would actually receive health insurance
insurance costs. With a 9 percent tax, the
through their employers.
added cost for employers would be $44 bil-
For workers in small firms, private health
lion-a 34 percent increase in insurance
costs.
insurance would quickly become a thing of
the past under "play-or-pay". At a 7 percent
The largest proportional increases would
tax, 81 percent of the workers in firms
be for small employers. For firms employ-
with 25 workers or less would be enrolled
ing fewer than 25 workers, costs would
in the public plan. Even with a 9 percent
rise by 71 percent with a 7 percent payroll
payroll tax 117 million, or 47 percent of
tax rate, and by 101 percent with a 9 per-
the total population would be covered by
cent tax. As noted, 60 percent of currently
public insurance. Thirty-two million Americans
uninsured workers are employed in estab-
who currently have private employer-paid
lishments with 25 or fewer workers.
coverage would shift into the new public
plan as would 22 million of the currently
In the short run, a "play-or-pay" mandate
uninsured.
will lead to somewhat higher prices and
an increase in the inflation rate. For firms,
It is important to note that the Urban
that cannot pass on increases in costs through
Institute study focused only on the "static"
higher prices, there would be a fall in
effects of a "play-or-pay" mandate. Once a
profits. Assuming the monetary authorities
"play-or-pay" system is in effect, however,
maintain their existing targets for inflation,
dynamic forces will be set in motion that
the effect of the mandate would be to lower
drive the system further toward universal
employment and lower real GDP.
public coverage.
82
The President's Comprehensive Health Reform Program
Chart 26. SOURCE OF HEALTH INSURANCE
COVERAGE FOR U.S. POPULATION
CURRENT SYSTEM
UNINSURED
13.3%
PRIVATE
64.5%
PUBLIC
22.2%
PAY-OR-PLAY WITH A 7% TAX
PRIVATE
PUBLIC
42.2%
57.8%
SOURCE: The Urban Institute, "Pay or Play Employer Mandates: Effects on Insurance Coverage and Costs," January 8, 1992
Problems with Alternative Approaches
83
The Cost to the Government of "Play-or-
to a Canadian-style system in relying on
Pay"
supply-side constraints to control costs. Nei-
A "play-or-pay" mandate would give rise
ther approach addresses the dynamic factors
to a vast new federal health insurance pro-
that are driving up health care costs.
gram, four times as large as Medicaid and
In the absence of meaningful reforms, impos-
inadequately funded.
ing price controls is like putting lid on
The Urban Institute estimates that a pay-
a pressure cooker. If the heat remains, the
or-play mandate with a 7 percent payroll
lid eventually blows off and the pot boils
tax would not be adequately funded. The
over. The disadvantages of the Canadian
new payroll tax would not cover the full
system are discussed in detail elsewhere.
cost of the new public plan. A subsidy
Problems with all-payer rate setting are briefly
of $37 billion would be needed from general
summarized here (see Table 6-6).
revenue. A 9 percent payroll tax would lower
the subsidy to $25 billion. The subsidy is
Although advocates often argue that all-
likely to grow over time for reasons noted
payer rate setting would encourage coordi-
previously.
nated care plans, the opposite seems more
likely to be the case. All payer rate setting
"Play-or-Pay" Fails to Address Cost-
robs coordinated care plans of their cost-
Control Effectively
savings advantage relative to traditional fee-
Play-or-pay proposals are often coupled with
for-service arrangements by artificially holding
"all-payer" price regulation schemes that at-
prices down.
tempt to limit aggregate payments by all
The more rate setting succeeds in controlling
public and private insurers to hospitals, physi-
costs, the less incentive that consumers (and
cians, and other providers to pre-set global
therefore providers) will have to switch to
budget targets. These schemes are closely
coordinated care. So, all-payer rate setting,
related to Canadian-style national health in-
like Canadian-style national health insurance,
surance plans and share the same drawbacks.
seems likely to preserve inefficient forms
All-payer rate setting preserves a role for
of service delivery.
private insurers, but is otherwise idéntical
Table 6-6. Potential Problems with All-Payer Rate Setting
1.
Supply constraints will lead to shortages and waiting lines. Tight global budgets will
force hospitals to cut back on personnel in critical areas-jeopardizing the quality of
patient care.
2. Rate setting fails to reward efficient physicians while creating incentives for
overutilization.
3. Rate setting fails to reform incentives/structure/organization at the micro-level and SO
will lose effectiveness with time.
4. Rate setting will reduce the competitive edge of coordinated care-thereby retarding
critically needed change in the delivery system.
5. Primary reliance on all-payer regulation to control costs opens up a broad range of is-
sues to political interference and manipulation.
poor person
gets every it, even A
if thing walk in E. Room
plan pools poor people
soith busic plan, lower
them what s currently
available to individual
plans gets people out of E. Room
and into cheaper primary care
Chapter 7
Examples of Impacts on Individuals and Families
The President's plan will allow all Ameri-
another private plan) when they no longer
cans to have access to affordable health
qualify for Medicaid.
insurance. The following are illustrative exam-
ples of how the President's plan would work. 1
The President's plan removes the current
incentive for AFDC families to remain on
Case #1
welfare because they fear losing Medicaid
coverage-the President's plan will ensure
A family of two parents and a child with
continued coverage for welfare recipients
one working parent without employer cov-
who return to work.
erage, and a total family income of $10,000
(just below the poverty level):
Case #3
[Full Credit of $3,750]
A family of four with a modified adjusted
gross income of $60,000 (in which the filer
Under the current system, this family is
not eligible for Medicaid and cannot afford
is married and filing jointly), and no employer
sponsored health insurance:
private health insurance.
[Full Health Care Deduction of $3,750 and
Under the President's plan, this family
would qualify for a $3,750 transferable
Access to Group Coverage]
credit to buy basic health insurance
Under the current system, they often can-
through the State designed group health
not find affordable coverage.
plan (or another of their choice).
Under the President's plan they would re-
Case #2
ceive a $3,750 tax deduction (a benefit of
approximately $1,050) to help with the
A mother with two children who was
purchase of insurance.
on welfare (AFDC) in the past, and has
returned to a job earning $8,500 per year.
In addition, their employer(s) would pro-
No employer health insurance is provided:
vide information and arrange access (but
not be required to contribute) to group cov-
[Full Credit of $3,750]
erage. For example, the employer could ar-
Under the current system, a mother re-
range coverage through a Health Insur-
ceiving AFDC who returns to work contin-
ance Network (HIN), SO that the family
could buy more affordable coverage
ues to receive Medicaid for six months;
after the six-month period, the family may
through a large group-with larger risk
be charged three percent of the family in-
pools rather than costly individual cov-
erage.
come as a Medicaid premium in this case,
$255 for six months of coverage. After one
Case #4
year, the family is no longer eligible for
Medicaid.
A single individual with intermitent income
at the minimum wage and not eligible for
Under the President's plan, the family
Medicaid (e.g. most males or a woman who
would qualify for a $3,750 transferable
is not a mother):
credit to buy basic health insurance
through the State group health plan (or
[Individual Credit of $1,250]
1 The examples presented assume the fully-phased in program,
Under the current system, this individual
and use 1993 income thresholds.
has no access to health insurance, and
85
86
The President's Comprehensive Health Reform Program
usually receives "unreimbursed care"
Under the current system, small employ-
through hospital emergency rooms.
ers have difficulty finding affordable cov-
erage. The problem becomes worse when
Under the President's plan, this person
would receive a $1,250 transferable credit
one member of a small group has a poor
medical history or current high medical
for the purchase of group health insurance
costs.
through the basic State health plan, or
some other private plan.
Under the President's plan, small employ-
ers would have access to larger group cov-
Case #5
erage through Health Insurance Networks
(HINs) spurred by major insurance and
A family of four with a modified adjusted
ERISA reform. Large group coverage is
gross income of $50,000, and a $1,000 em-
less expensive and more efficient, since in-
ployer contribution to health insurance:
surance administrative costs are much
[Health Care Deduction]
lower and risk is more effectively distrib-
uted.
Under the President's plan, this family
would receive a health care tax deduction
In addition, the plan would set limits on
of $2,750 ($3,750 minus employer con-
the variation of premiums insurers could
tribution of $1,000), making their health
charge to different groups. Insurers would
insurance much more affordable.
not be able to deny coverage to any indi-
vidual, or drastically increase premiums
Case #6
when one member of a group becomes ill.
An individual with a serious health problem
Case #8
is considering changing jobs, but is afraid
of giving up current employer coverage:
A small employer with an employee just
diagnosed with a serious health problem
[Portability and Security of Health Care]
applies for health insurance for the first
Under the current system, a person chang-
time:
ing jobs may not be covered under a new
[Guaranteed Coverage Issue]
employer's policy because of health status.
A pre-existing condition exclusion may
Under the current system, uninsured per-
also apply, interrupting coverage.
sons with serious health problems are
often denied health insurance-at any
Under the President's plan, regardless of
price.
the employee's health status, the new in-
surer would be required to offer unre-
Under the President's plan, insurers would
stricted access to the new employer's
be required to offer coverage to any group,
group coverage.
regardless of health status. Premium lev-
els would be limited SO that costs would
In addition, insurers would not be per-
not be prohibitive.
mitted to deny coverage due to health sta-
tus, and persons with previous health ben-
Case #9
efits could not be denied coverage of pre-
existing conditions. (So long as no insurer
A family of four with a modified adjusted
can avoid pre-existing conditions, and all
gross income of $17,000 has no employer
must accept new risks, no insurer will be
coverage and currently cannot afford health
disadvantaged.)
insurance:
[Partial Health Credit]
Case #7
Under the President's plan, this family
An employer of a small firm of 20 workers
would receive a partial health tax credit
would like to offer employees health insurance,
towards the purchase of health insurance
but cannot find affordable coverage:
(or a $3,750 deduction-whichever pro-
[Small Market Reforms]
vides the greater benefit) because their in-
Examples of Impacts on Individuals and Families
87
come faces between 100 percent and 150
included in the plan-or of the relative
percent of the tax threshold.
quality of local hospitals and doctors.
Affordable group coverage would be made
Under the President's plan, comparative
available through a State coordinated
information on quality and price of health
"basic plan" pool that would guarantee ac-
care will be available to consumers and
cess to basic health insurance coverage.
large purchasers of care. State insurance
commissioners will collect information on
Case #10
area providers, and also on individual pro-
viders such as physician, hospitals, labs
An individual is planning on choosing a
and other facilities-both on price and
health plan and wants to get the best
quality. This information will be made
quality plan for the best price. But he
available by employers. A type of local
is unsure of which plan to choose:
health care market "blue book" will allow
consumers to identify the best health
[Consumer Information]
plans, and providers. As a result, consum-
Under the current system, consumers have
ers will be better equipped to choose the
limited knowledge of the relative prices of
health plan or provider best suited to their
insurance an health care services. Nor are
needs and the best value for their health
they aware of the hospitals and doctors
care dollar.
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