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    "ocrText": "FOIA Number:\n2008-1238-F\nFOIA\nMARKER\nThis is not a textual record. This is used as an\nadministrative marker by the William J. Clinton\nPresidential Library Staff.\nCollection/Record Group:\nClinton Presidential Records\nSubgroup/Office of Origin:\nCouncil of Economic Advisers\nSeries/Staff Member:\nLaura D'Andrea Tyson\nSubseries:\nOA/ID Number:\n5055\nFolderID:\nFolder Title:\n10/19/93 (10:00 a.m.) Health Care Testimony - Senator Kennedy\nStack:\nRow:\nSection:\nShelf:\nPosition:\nS\n20\n6\n9\n1\nTestimony of Laura D'Andrea Tyson\nChair, Council of Economic Advisers\nSenate Labor and Human Resources Committee\nOctober 19, 1993\nTHE ECONOMIC EFFECTS OF HEALTH CARE REFORM\nThank you, Mr. Chairman, for the opportunity to come before your Committee to discuss\nthe economic effects of health care reform.\nThe United States is facing a health care crisis. The rapidly rising cost of health care\nhurts businesses, depresses wages, and contributes to fiscal imbalance. The average working\nAmerican will be charged, directly and indirectly, over $7,000 for health care in 1994. The lack\nof health security makes many individuals afraid to leave their current jobs, discourages others\nfrom working for small businesses or becoming self-employed, and keeps people on welfare\ninstead of working.\nReforming health care is a difficult challenge, but one that we must face. Let me first\noutline the problems that force us to take action, and then I will move on to the economic effects\nof the Health Security plan.\nWhy Reform Health Care?\nThere are five reasons why urgent health care action is needed.\nThe first problem is that our health care system does not provide security to individuals.\nWhen people get sick, the cost of their insurance can increase dramatically, or they can be\ndropped from coverage completely. This situation is a result of risk selection practices on the\npart of insurers. Insurers spend large amounts of money trying to select good health risks, and\navoid bad risks. This practice is profitable for any one insurer but is socially wasteful. After\nall, someone must cover the costs incurred by people who get sick. The result is that many\npeople cannot get coverage, and many more fear for their ability to get coverage in the future.\nThe second problem with our health insurance system is that it interferes with the\nemployment decisions of individuals. Almost 40 percent of insurers exclude pre-existing\nconditions from their coverage of newly insured people, thus locking many people into their\ncurrent insurance policies and jobs. Up to 30 percent of employees feel \"locked\" into their jobs.\nOthers do not form small businesses or become self-employed because of the difficulty of\nobtaining insurance. Finally, many people remain on welfare because they will lose their\n1\nMedicaid coverage if they take a job. If we are to adapt to changing domestic and international\neconomic circumstances, we must not penalize people every time they change or lose a job.\nThe third problem with our health care system is that the number of people who do not\nhave access to affordable insurance is large and expanding. Over 37 million people do not have\nhealth insurance. And this is not a predicament unique to the unemployed. Three-quarters of\nall uninsured people are in working families, and over one-third of the uninsured are in families\nwith at least one full-time year-round worker. We have a system in which millions of people,\nmany of them in working families, cannot afford the rising costs of health care coverage, and\nthey face the risk of being financially crippled by events beyond their control.\nIt is a myth that insured people do not need to worry about the uninsured. Under our\ncurrent system, when the uninsured face catastrophic costs, the insured pick up the bill.\nCurrently, the uninsured pay only 20 percent of the health care costs they incur, while the\nprivately insured pay 130 percent of their actual health care costs. According to recent estimates,\nthere will be about $25 billion of \"uncompensated care\" paid for by the insured in 1994.\nProviding health insurance for all Americans could therefore lower premiums for the currently\ninsured by over 10 percent.\nThe fourth problem with the health care system is that health care costs are high and\nrising. No other country in the world spends more than 10 percent of its GDP on health care.\nThe United States spends 14 percent. American consumers spend more on health care than on\nfuel oil, electricity, natural gas, other household operations, oil and gasoline, local transportation,\nfurniture, and other household equipment combined. Even though health care inflation has\nmoderated recently, during the last quarter it was still three times as rapid as overall consumer\nprice inflation.\nHealth care spending per working American will be over $7,000 in 1994. American\nworkers will, on average, pay $1,864 directly for health care in 1994. Their employers will pay\nan additional $3,409. And Federal, State, and local taxes for health care will total $2,149.\nEmpirical research suggests that businesses generally respond to higher health care costs\nby lowering the wages they pay to their employees. Similarly, the taxes required to pay for\ngovernment health spending are borne to some extent by workers in the form of lower wages.\nThus, if employer contributions to health insurance had remained constant at their 1975 share of\ncompensation through 1992, and if employers had passed these savings on to workers, real wages\nper worker would have been over $1,000 higher in 1992.\nThe fifth problem with our health care system is that it is riddled with waste, excess\nsupply, and inefficiencies. Despite our massive commitment of resources to health care spending,\nthe United States ranks 19th out of 26 countries in infant mortality and 18th in life expectancy.\nWe lose an estimated $80 billion a year to fraud and abuse. Over 5 percent of our total health\ncare spending--conservatively $45 billion in 1992--covers administrative expenses and paperwork.\nAs many as one-third of common medical procedures may be unnecessary and inappropriate.\n2\nHospital prices continue to rise even though hospital beds are in excess supply in many parts of\nthe country. HMO experience indicates that the cost of medical care can be cut by as much as\n10-20 percent without reducing the quality of care.\nThese diverse indicators paint a compelling picture of the inefficiency and waste in our\ncurrent health care system. Perhaps the most important economic reason for reform is to improve\nthe efficiency of this system. This in turn will make resources available to cover the uninsured\nand to address our other pressing economic and social needs.\nThe Economic Effects of Reform\nThe Health Security plan addresses these fundamental problems with the current system.\nIt will lower costs, provide security, increase job opportunities and increase the efficiency of the\neconomy. Many businesses will see their costs fall, and many others will have access to\ncoverage previously denied them. Slower cost growth will allow workers to enjoy faster growth\nin their real wages, and reduced job lock will increase workers' ability to find better jobs. Let\nme describe what I believe to be the important economic effects of health care reform.\nFirst, many employers who currently offer health insurance will see their costs fall\nimmediately. Under the Health Security plan, every individual will receive health insurance.\nEliminating uncompensated care in the current system will lower costs to businesses that provide\ncare, thereby making resources available for increased wages or additional hiring. Eliminating\ncorporate \"free riders\" will also reduce spending by companies that currently provide health\nbenefits for their employees and for their spouses who are not covered by their own employers.\nSecond, the Health Security plan gradually lowers aggregate business spending on health\ninsurance. Although the business sector as a whole will initially pay more for health insurance,\nthe reduction in health care cost growth lowers the growth of premiums over time. In fact, by\nthe end of this decade, preliminary estimates indicate that aggregate business spending on\nservices covered by the Health Security plan will fall by $10 billion.\nBusinesses can do many things with the resulting cost savings. They can: hire more\nworkers; raise wages or provide better benefits for existing workers; invest in more plant,\nequipment, education and training, and research and development; increase dividends to\nshareholders; or lower prices, thereby leaving consumers with more income to spend on other\ngoods. Each of these outcomes will have a stimulative effect on the economy and will increase\nemployment. Economic research has not reached clear conclusions about how to apportion the\nsavings among these effects. Almost all models suggest that wage increases are a likely\nresponse, but they differ about whether all of the savings will flow into wage increases.\nNevertheless, the effects of lower health care spending are clearly beneficial for the economy.\nSmall businesses will particularly benefit from the Health Security plan. Currently small\nbusinesses that provide insurance face administrative costs of up to 40 percent, while large\nbusinesses face costs of only 5 percent. Under reform, administrative costs for small firms will\n3\nfall by up to 25 percent. Additionally, many of those currently insuring small firms will receive\ndiscounts on their premiums.\nAlthough small businesses that do not currently provide insurance will pay more, they are\nlikely to receive discounts to make health care affordable. There is a common myth that small\nbusinesses cannot afford to pay anything for health insurance. In fact, many small businesses\nreport they would like to provide health insurance for their employees if it were more affordable.\nAccording to a recent study for the NFIB performed by Charles Hall of Temple University, 64\npercent of small business owners would like to provide some or better insurance for their\nworkers. When asked why they do not offer insurance, the most common response (65 percent)\nwas that premiums are too high. Ninety-two percent of small business owners agree that the cost\nof health insurance is a serious business problem. Under the Health Security plan, with\naffordable health insurance and discounts for small businesses, this will no longer be the case.\nThird, the Health Security plan will result in greater employment in the health care sector\nin the short run and a more efficient health sector in the long run. With the increase in the\nnumber of insured Americans and the decrease in the administrative burden of health insurance,\nthere will be a significant expansion of employment of health care providers and a decrease in\nemployment of health administrators and insurance workers. By 1996, as many as 400,000 net\nnew jobs will be created in the health sector. As the cost savings of the plan begin to accrue,\nemployment in the health sector will grow more slowly, although there will be no absolute\ndecline in the number of employees.\nOver time, the health sector will become more productive. This benefits all of us. We\nwill be able to have the same or better health care as well as more investment, research and\ndevelopment, or just plain goods and services.\nFourth, the efficiency of the economy will also be increased by reducing job lock and\nwelfare lock. By providing health care security, the reform will give workers the freedom to\nmove to jobs where they might be more productive without having to worry about losing their\nhealth insurance. Small firms should particularly benefit from this, since they often have the\nhardest time attracting highly skilled workers. In addition, firms should be more willing to hire\nworkers with pre-existing conditions because the new system does not penalize individuals with\na prior illness. This allows for better, more efficient matches between employers and employees\nand increases the efficiency of the economy.\nSome workers may decide to leave the labor force completely when there is continuous\nhealth coverage. Evidence suggests that about 350-600,000 people will decide to retire early\nunder health care reform. This increase in voluntary retirement may increase employment\nopportunities for younger workers.\nThe Shortcomings of Existing Studies on the Employment Effects of Health Care Reform\nAs you know, some have claimed that the Health Security plan will cause substantial\n4\ndamage to the economy. There is no denying that some firms and individuals will pay more than\nthey did prior to reform. In particular, the Health Security plan will increase costs for some\nyoung, single individuals as well as for firms that did not previously offer health insurance. The\nvast majority of Americans, however, will benefit from the reduction in health insurance costs,\nthe portability of coverage, the lower administrative costs, the reduction of job lock, the lower\ncosts for small businesses and the self-employed, and the reduction in welfare lock. In addition,\nas already noted, many employers, both large and small, currently providing insurance will enjoy\nlower costs immediately and the business sector as a whole will enjoy lower costs within three\nyears of the plan's full implementation.\nThere are some studies, including an often cited study by June and David O'Neill, that\ncriticize the Health Security plan as a job-destroyer. I believe these studies are riddled with error\nand inaccuracies. First, they completely overlook the discounts for small and low-wage\nbusinesses provided by the Health Security plan. The lack of discounts -- coupled with the\nquestionable assumption that firms cannot shift any costs to workers earning less than $25,000\nper year -- lead directly to massively exaggerated estimates of job loss. Additionally, in the\nO'Neill study, employers are assumed to pay the full premium for all workers who work more\nthan 20 hours per week. In the Health Security plan, however, employers pay a much smaller,\npro-rated premium for part-time workers.\nSecond, the studies assume a premium for the benefits package that far exceeds the\npremium for the Administration's benefits package. The O'Neill study assumes that employers\npay a premium of $5,310 per worker with a family and $2,160 per single worker. Estimates for\nthe Health Security plan, however, suggest that employers will pay about $2,500 per worker with\na family, and about $1,500 per single worker. These estimates take into account the fact that\nmany families have two adults in the labor force, and that each working adult will have an\nemployer contributing to health care coverage for the family.\nThese studies also assume that business employment decisions are three to six times more\nsensitive to increases in the costs of hiring labor than most conventional estimates. The O'Neill\nstudy, for example, assumes that firms will lay off 3 percent of their workforce if employee\ncompensation rises by 10 percent. Summary estimates in the economic literature suggest that the\nemployment response might be only one-sixth to one-third as large.\nFinally, and most importantly, the existing studies do not allow for any new job creation\nin businesses whose costs will fall as an immediate or gradual consequence of reform.\nIn fact, real-world evidence from Hawaii suggests that the job loss claims in studies like\nthe O'Neill study are exaggerated. Hawaii imposed an employer health insurance mandate in\n1974. Since the 1970s, total private non-farm employment has grown by 80 percent in Hawaii,\ncompared to 54 percent in the Nation as a whole; and retail and wholesale trade employment\nhave grown by more in Hawaii than in the Nation as a whole. Although we cannot extrapolate\nfrom these results and make sweeping judgments about the national impact of an employer\nmandate, the experience of Hawaii appears to contradict the conclusions of studies suggesting that\n5\nsuch a mandate will destroy jobs.\nAdditional evidence from recent literature on the effects of increases in the minimum\nwage on employment also calls into question such conclusions. We estimate that under reform\nthe increase in health care costs for currently uninsured low-wage workers in small firms is\nequivalent to a very modest increase of $.15 to $.35 per hour in the minimum wage. This will\nleave the real compensation cost for minimum wage workers below its average level in the\n1980s. Research by Lawrence Katz at Harvard and Alan Krueger and David Card at Princeton\nfinds that recent increases in the minimum wage have had minimal or even positive effects on\nemployment. These results lead us to conclude that the O'Neill study greatly exaggerates the\neffects of reform on the employment prospects of minimum wage workers.\nSummary Conclusions on the Likely Economic Effects of Health Care Reform\nNeither the models nor the data are available to yield a precise estimate of the\nemployment effects of health care reform. In many other areas of economics, there are models\nthat have been tried and tested for decades, and economists generally place a good deal of faith\nin the outcomes they predict. Standard macroeconomic models, for example, can make\nreasonably precise predictions about how a tax increase or a spending cut will affect aggregate\noutput or employment.\nBut there are no existing models that allow us to predict the employment effects of health\ncare reform with the same degree of precision. This is because the appropriate model for such\nan exercise would have to make distinctions both between firms that currently provide insurance\nand those that do not and among the many ways that firms in either group might respond to a\nchange in their health care costs. Such a model would also have to predict how individuals\nmight respond to new incentives in the plan, particularly those affecting small business creation,\njob mobility, welfare lock, and retirement.\nIn the absence of an appropriately specified model, one can generate either small net\npositive or small net negative effects on employment with existing models depending on the\nassumptions one is willing to make--demonstrating the old adage that you get out what you put\nin. Not surprisingly, several private-sector economists have concluded, as we at the CEA have\nconcluded, that the net effect of our health care plan on the aggregate employment level is likely\nto be small--our internal estimates suggest a range of plus or minus one-half of 1 percent of the\naggregate employment level. This is because although there are some factors in the plan that will\ntend to decrease employment, there are others that will tend both to increase employment and\nto change its composition. These offsetting factors are likely to cancel each other out, although\nover time as business spending falls below baseline, the factors encouraging an increase in\nemployment are likely to strengthen.\n6\nOn balance, I am certain that the Health Security plan is good for American business and\nthe American people. It diminishes job lock and welfare lock and allows more people to become\nself-employed. It gets health care costs under control. It guarantees security to all Americans.\nAnd it reduces waste and inefficiency in one-seventh of our economy. Reorganizing our health\ncare system to use our scarce resources more efficiently will help us realize our goal of realizing\nhigher living standards for ourselves and our children.\nI will be delighted to answer any questions that you may have at this time.\n7\nTestimony of Laura D'Andrea Tyson\nChair, Council of Economic Advisers\nSenate Labor and Human Resources Committee\nOctober 19, 1993\nTHE ECONOMIC EFFECTS OF HEALTH CARE REFORM\nThank you, Mr. Chairman, for the opportunity to come before your Committee to discuss\nthe economic effects of health care reform.\nThe United States is facing a health care crisis. The rapidly rising cost of health care\nhurts businesses, depresses wages, and contributes to fiscal imbalance. The average working\nAmerican will be charged, directly and indirectly, over $7,000 for health care in 1994. The lack\nof health security makes many individuals afraid to leave their current jobs, discourages others\nfrom working for small businesses or becoming self-employed, and keeps people on welfare\ninstead of working.\nReforming health care is a difficult challenge, but one that we must face. Let me first\noutline the problems that force us to take action, and then I will move on to the economic effects\nof the Health Security plan.\nWhy Reform Health Care?\nThere are five reasons why urgent health care action is needed.\nThe first problem is that our health care system does not provide security to individuals.\nWhen people get sick, the cost of their insurance can increase dramatically, or they can be\ndropped from coverage completely. This situation is a result of risk selection practices on the\npart of insurers. Insurers spend large amounts of money trying to select good health risks, and\navoid bad risks. This practice is profitable for any one insurer but is socially wasteful. After\nall, someone must cover the costs incurred by people who get sick. The result is that many\npeople cannot get coverage, and many more fear for their ability to get coverage in the future.\nThe second problem with our health insurance system is that it interferes with the\nemployment decisions of individuals. Almost 40 percent of insurers exclude pre-existing\nconditions from their coverage of newly insured people, thus locking many people into their\ncurrent insurance policies and jobs. Up to 30 percent of employees feel \"locked\" into their jobs.\nOthers do not form small businesses or become self-employed because of the difficulty of\nobtaining insurance. Finally, many people remain on welfare because they will lose their\n1\nMedicaid coverage if they take a job. If we are to adapt to changing domestic and international\neconomic circumstances, we must not penalize people every time they change or lose a job.\nThe third problem with our health care system is that the number of people who do not\nhave access to affordable insurance is large and expanding. Over 37 million people do not have\nhealth insurance. And this is not a predicament unique to the unemployed. Three-quarters of\nall uninsured people are in working families, and over one-third of the uninsured are in families\nwith at least one full-time year-round worker. We have a system in which millions of people,\nmany of them in working families, cannot afford the rising costs of health care coverage, and\nthey face the risk of being financially crippled by events beyond their control.\nIt is a myth that insured people do not need to worry about the uninsured. Under our\ncurrent system, when the uninsured face catastrophic costs, the insured pick up the bill.\nCurrently, the uninsured pay only 20 percent of the health care costs they incur, while the\nprivately insured pay 130 percent of their actual health care costs. According to recent estimates,\nthere will be about $25 billion of \"uncompensated care\" paid for by the insured in 1994.\nProviding health insurance for all Americans could therefore lower premiums for the currently\ninsured by over 10 percent.\nThe fourth problem with the health care system is that health care costs are high and\nrising. No other country in the world spends more than 10 percent of its GDP on health care.\nThe United States spends 14 percent. American consumers spend more on health care than on\nfuel oil, electricity, natural gas, other household operations, oil and gasoline, local transportation,\nfurniture, and other household equipment combined. Even though health care inflation has\nmoderated recently, during the last quarter it was still three times as rapid as overall consumer\nprice inflation.\nHealth care spending per working American will be over $7,000 in 1994. American\nworkers will, on average, pay $1,864 directly for health care in 1994. Their employers will pay\nan additional $3,409. And Federal, State, and local taxes for health care will total $2,149.\nEmpirical research suggests that businesses generally respond to higher health care costs\nby lowering the wages they pay to their employees. Similarly, the taxes required to pay for\ngovernment health spending are borne to some extent by workers in the form of lower wages.\nThus, if employer contributions to health insurance had remained constant at their 1975 share of\ncompensation through 1992, and if employers had passed these savings on to workers, real wages\nper worker would have been over $1,000 higher in 1992.\nThe fifth problem with our health care system is that it is riddled with waste, excess\nsupply, and inefficiencies. Despite our massive commitment of resources to health care spending,\nthe United States ranks 19th out of 26 countries in infant mortality and 18th in life expectancy.\nWe lose an estimated $80 billion a year to fraud and abuse. Over 5 percent of our total health\ncare spending--conservatively $45 billion in 1992--covers administrative expenses and paperwork.\nAs many as one-third of common medical procedures may be unnecessary and inappropriate.\n2\nHospital prices continue to rise even though hospital beds are in excess supply in many parts of\nthe country. HMO experience indicates that the cost of medical care can be cut by as much as\n10-20 percent without reducing the quality of care.\nThese diverse indicators paint a compelling picture of the inefficiency and waste in our\ncurrent health care system. Perhaps the most important economic reason for reform is to improve\nthe efficiency of this system. This in turn will make resources available to cover the uninsured\nand to address our other pressing economic and social needs.\nThe Economic Effects of Reform\nThe Health Security plan addresses these fundamental problems with the current system.\nIt will lower costs, provide security, increase job opportunities and increase the efficiency of the\neconomy. Many businesses will see their costs fall, and many others will have access to\ncoverage previously denied them. Slower cost growth will allow workers to enjoy faster growth\nin their real wages, and reduced job lock will increase workers' ability to find better jobs. Let\nme describe what I believe to be the important economic effects of health care reform.\nFirst, many employers who currently offer health insurance will see their costs fall\nimmediately. Under the Health Security plan, every individual will receive health insurance.\nEliminating uncompensated care in the current system will lower costs to businesses that provide\ncare, thereby making resources available for increased wages or additional hiring. Eliminating\ncorporate \"free riders\" will also reduce spending by companies that currently provide health\nbenefits for their employees and for their spouses who are not covered by their own employers.\nSecond, the Health Security plan gradually lowers aggregate business spending on health\ninsurance. Although the business sector as a whole will initially pay more for health insurance,\nthe reduction in health care cost growth lowers the growth of premiums over time. In fact, by\nthe end of this decade, preliminary estimates indicate that aggregate business spending on\nservices covered by the Health Security plan will fall by $10 billion.\nBusinesses can do many things with the resulting cost savings. They can: hire more\nworkers; raise wages or provide better benefits for existing workers; invest in more plant,\nequipment, education and training, and research and development; increase dividends to\nshareholders; or lower prices, thereby leaving consumers with more income to spend on other\ngoods. Each of these outcomes will have a stimulative effect on the economy and will increase\nemployment. Economic research has not reached clear conclusions about how to apportion the\nsavings among these effects. Almost all models suggest that wage increases are a likely\nresponse, but they differ about whether all of the savings will flow into wage increases.\nNevertheless, the effects of lower health care spending are clearly beneficial for the economy.\nSmall businesses will particularly benefit from the Health Security plan. Currently small\nbusinesses that provide insurance face administrative costs of up to 40 percent, while large\nbusinesses face costs of only 5 percent. Under reform, administrative costs for small firms will\n3\nfall by up to 25 percent. Additionally, many of those currently insuring small firms will receive\ndiscounts on their premiums.\nAlthough small businesses that do not currently provide insurance will pay more, they are\nlikely to receive discounts to make health care affordable. There is a common myth that small\nbusinesses cannot afford to pay anything for health insurance. In fact, many small businesses\nreport they would like to provide health insurance for their employees if it were more affordable.\nAccording to a recent study for the NFIB performed by Charles Hall of Temple University, 64\npercent of small business owners would like to provide some or better insurance for their\nworkers. When asked why they do not offer insurance, the most common response (65 percent)\nwas that premiums are too high. Ninety-two percent of small business owners agree that the cost\nof health insurance is a serious business problem. Under the Health Security plan, with\naffordable health insurance and discounts for small businesses, this will no longer be the case.\nThird, the Health Security plan will result in greater employment in the health care sector\nin the short run and a more efficient health sector in the long run. With the increase in the\nnumber of insured Americans and the decrease in the administrative burden of health insurance,\nthere will be a significant expansion of employment of health care providers and a decrease in\nemployment of health administrators and insurance workers. By 1996, as many as 400,000 net\nnew jobs will be created in the health sector. As the cost savings of the plan begin to accrue,\nemployment in the health sector will grow more slowly, although there will be no absolute\ndecline in the number of employees.\nOver time, the health sector will become more productive. This benefits all of us. We\nwill be able to have the same or better health care as well as more investment, research and\ndevelopment, or just plain goods and services.\nFourth, the efficiency of the economy will also be increased by reducing job lock and\nwelfare lock. By providing health care security, the reform will give workers the freedom to\nmove to jobs where they might be more productive without having to worry about losing their\nhealth insurance. Small firms should particularly benefit from this, since they often have the\nhardest time attracting highly skilled workers. In addition, firms should be more willing to hire\nworkers with pre-existing conditions because the new system does not penalize individuals with\na prior illness. This allows for better, more efficient matches between employers and employees\nand increases the efficiency of the economy.\nSome workers may decide to leave the labor force completely when there is continuous\nhealth coverage. Evidence suggests that about 350-600,000 people will decide to retire early\nunder health care reform. This increase in voluntary retirement may increase employment\nopportunities for younger workers.\nThe Shortcomings of Existing Studies on the Employment Effects of Health Care Reform\nAs you know, some have claimed that the Health Security plan will cause substantial\n4\ndamage to the economy. There is no denying that some firms and individuals will pay more than\nthey did prior to reform. In particular, the Health Security plan will increase costs for some\nyoung, single individuals as well as for firms that did not previously offer health insurance. The\nvast majority of Americans, however, will benefit from the reduction in health insurance costs,\nthe portability of coverage, the lower administrative costs, the reduction of job lock, the lower\ncosts for small businesses and the self-employed, and the reduction in welfare lock. In addition,\nas already noted, many employers, both large and small, currently providing insurance will enjoy\nlower costs immediately and the business sector as a whole will enjoy lower costs within three\nyears of the plan's full implementation.\nThere are some studies, including an often cited study by June and David O'Neill, that\ncriticize the Health Security plan as a job-destroyer. I believe these studies are riddled with error\nand inaccuracies. First, they completely overlook the discounts for small and low-wage\nbusinesses provided by the Health Security plan. The lack of discounts -- coupled with the\nquestionable assumption that firms cannot shift any costs to workers earning less than $25,000\nper year -- lead directly to massively exaggerated estimates of job loss. Additionally, in the\nO'Neill study, employers are assumed to pay the full premium for all workers who work more\nthan 20 hours per week. In the Health Security plan, however, employers pay a much smaller,\npro-rated premium for part-time workers.\nSecond, the studies assume a premium for the benefits package that far exceeds the\npremium for the Administration's benefits package. The O'Neill study assumes that employers\npay a premium of $5,310 per worker with a family and $2,160 per single worker. Estimates for\nthe Health Security plan, however, suggest that employers will pay about $2,500 per worker with\na family, and about $1,500 per single worker. These estimates take into account the fact that\nmany families have two adults in the labor force, and that each working adult will have an\nemployer contributing to health care coverage for the family.\nThese studies also assume that business employment decisions are three to six times more\nsensitive to increases in the costs of hiring labor than most conventional estimates. The O'Neill\nstudy, for example, assumes that firms will lay off 3 percent of their workforce if employee\ncompensation rises by 10 percent. Summary estimates in the economic literature suggest that the\nemployment response might be only one-sixth to one-third as large.\nFinally, and most importantly, the existing studies do not allow for any new job creation\nin businesses whose costs will fall as an immediate or gradual consequence of reform.\nIn fact, real-world evidence from Hawaii suggests that the job loss claims in studies like\nthe O'Neill study are exaggerated. Hawaii imposed an employer health insurance mandate in\n1974. Since the 1970s, total private non-farm employment has grown by 80 percent in Hawaii,\ncompared to 54 percent in the Nation as a whole; and retail and wholesale trade employment\nhave grown by more in Hawaii than in the Nation as a whole. Although we cannot extrapolate\nfrom these results and make sweeping judgments about the national impact of an employer\nmandate, the experience of Hawaii appears to contradict the conclusions of studies suggesting that\n5\nsuch a mandate will destroy jobs.\nAdditional evidence from recent literature on the effects of increases in the minimum\nwage on employment also calls into question such conclusions. We estimate that under reform\nthe increase in health care costs for currently uninsured low-wage workers in small firms is\nequivalent to a very modest increase of $.15 to $.35 per hour in the minimum wage. This will\nleave the real compensation cost for minimum wage workers below its average level in the\n1980s. Research by Lawrence Katz at Harvard and Alan Krueger and David Card at Princeton\nfinds that recent increases in the minimum wage have had minimal or even positive effects on\nemployment. These results lead us to conclude that the O'Neill study greatly exaggerates the\neffects of reform on the employment prospects of minimum wage workers.\nSummary Conclusions on the Likely Economic Effects of Health Care Reform\nNeither the models nor the data are available to yield a precise estimate of the\nemployment effects of health care reform. In many other areas of economics, there are models\nthat have been tried and tested for decades, and economists generally place a good deal of faith\nin the outcomes they predict. Standard macroeconomic models, for example, can make\nreasonably precise predictions about how a tax increase or a spending cut will affect aggregate\noutput or employment.\nBut there are no existing models that allow us to predict the employment effects of health\ncare reform with the same degree of precision. This is because the appropriate model for such\nan exercise would have to make distinctions both between firms that currently provide insurance\nand those that do not and among the many ways that firms in either group might respond to a\nchange in their health care costs. Such a model would also have to predict how individuals\nmight respond to new incentives in the plan, particularly those affecting small business creation,\njob mobility, welfare lock, and retirement.\nIn the absence of an appropriately specified model, one can generate either small net\npositive or small net negative effects on employment with existing models depending on the\nassumptions one is willing to make--demonstrating the old adage that you get out what you put\nin. Not surprisingly, several private-sector economists have concluded, as we at the CEA have\nconcluded, that the net effect of our health care plan on the aggregate employment level is likely\nto be small--our internal estimates suggest a range of plus or minus one-half of 1 percent of the\naggregate employment level. This is because although there are some factors in the plan that will\ntend to decrease employment, there are others that will tend both to increase employment and\nto change its composition. These offsetting factors are likely to cancel each other out, although\nover time as business spending falls below baseline, the factors encouraging an increase in\nemployment are likely to strengthen.\n6\nOn balance, I am certain that the Health Security plan is good for American business and\nthe American people. It diminishes job lock and welfare lock and allows more people to become\nself-employed. It gets health care costs under control. It guarantees security to all Americans.\nAnd it reduces waste and inefficiency in one-seventh of our economy. Reorganizing our health\ncare system to use our scarce resources more efficiently will help us realize our goal of realizing\nhigher living standards for ourselves and our children.\nI will be delighted to answer any questions that you may have at this time.\n7\nTestimony of Laura D'Andrea Tyson\nChair, Council of Economic Advisers\nSenate Labor and Human Resources Committee\nOctober 19, 1993\nTHE ECONOMIC EFFECTS OF HEALTH CARE REFORM\nThank you, Mr. Chairman, for the opportunity to come before your Committee to discuss\nthe economic effects of health care reform.\nThe United States is facing a health care crisis. The rapidly rising cost of health care\nhurts businesses, depresses wages, and contributes to fiscal imbalance. The average working\nAmerican will be charged, directly and indirectly, over $7,000 for health care in 1994. The lack\nof health security makes many individuals afraid to leave their current jobs, discourages others\nfrom working for small businesses or becoming self-employed, and keeps people on welfare\ninstead of working.\nReforming health care is a difficult challenge, but one that we must face. Let me first\noutline the problems that force us to take action, and then I will move on to the economic effects\nof the Health Security plan.\nWhy Reform Health Care?\nThere are five reasons why urgent health care action is needed.\nThe first problem is that our health care system does not provide security to individuals.\nWhen people get sick, the cost of their insurance can increase dramatically, or they can be\ndropped from coverage completely. This situation is a result of risk selection practices on the\npart of insurers. Insurers spend large amounts of money trying to select good health risks, and\navoid bad risks. This practice is profitable for any one insurer but is socially wasteful. After\nall, someone must cover the costs incurred by people who get sick. The result is that many\npeople cannot get coverage, and many more fear for their ability to get coverage in the future.\nThe second problem with our health insurance system is that it interferes with the\nemployment decisions of individuals. Almost 40 percent of insurers exclude pre-existing\nconditions from their coverage of newly insured people, thus locking many people into their\ncurrent insurance policies and jobs. Up to 30 percent of employees feel \"locked\" into their jobs.\nOthers do not form small businesses or become self-employed because of the difficulty of\nobtaining insurance. Finally, many people remain on welfare because they will lose their\n1\nMedicaid coverage if they take a job. If we are to adapt to changing domestic and international\neconomic circumstances, we must not penalize people every time they change or lose a job.\nThe third problem with our health care system is that the number of people who do not\nhave access to affordable insurance is large and expanding. Over 37 million people do not have\nhealth insurance. And this is not a predicament unique to the unemployed. Three-quarters of\nall uninsured people are in working families, and over one-third of the uninsured are in families\nwith at least one full-time year-round worker. We have a system in which millions of people,\nmany of them in working families, cannot afford the rising costs of health care coverage, and\nthey face the risk of being financially crippled by events beyond their control.\nIt is a myth that insured people do not need to worry about the uninsured. Under our\ncurrent system, when the uninsured face catastrophic costs, the insured pick up the bill.\nCurrently, the uninsured pay only 20 percent of the health care costs they incur, while the\nprivately insured pay 130 percent of their actual health care costs. According to recent estimates,\nthere will be about $25 billion of \"uncompensated care\" paid for by the insured in 1994.\nProviding health insurance for all Americans could therefore lower premiums for the currently\ninsured by over 10 percent.\nThe fourth problem with the health care system is that health care costs are high and\nrising. No other country in the world spends more than 10 percent of its GDP on health care.\nThe United States spends 14 percent. American consumers spend more on health care than on\nfuel oil, electricity, natural gas, other household operations, oil and gasoline, local transportation,\nfurniture, and other household equipment combined. Even though health care inflation has\nmoderated recently, during the last quarter it was still three times as rapid as overall consumer\nprice inflation.\nHealth care spending per working American will be over $7,000 in 1994. American\nworkers will, on average, pay $1,864 directly for health care in 1994. Their employers will pay\nan additional $3,409. And Federal, State, and local taxes for health care will total $2,149.\nEmpirical research suggests that businesses generally respond to higher health care costs\nby lowering the wages they pay to their employees. Similarly, the taxes required to pay for\ngovernment health spending are borne to some extent by workers in the form of lower wages.\nThus, if employer contributions to health insurance had remained constant at their 1975 share of\ncompensation through 1992, and if employers had passed these savings on to workers, real wages\nper worker would have been over $1,000 higher in 1992.\nThe fifth problem with our health care system is that it is riddled with waste, excess\nsupply, and inefficiencies. Despite our massive commitment of resources to health care spending,\nthe United States ranks 19th out of 26 countries in infant mortality and 18th in life expectancy.\nWe lose an estimated $80 billion a year to fraud and abuse. Over 5 percent of our total health\ncare spending--conservatively $45 billion in 1992--covers administrative expenses and paperwork.\nAs many as one-third of common medical procedures may be unnecessary and inappropriate.\n2\nHospital prices continue to rise even though hospital beds are in excess supply in many parts of\nthe country. HMO experience indicates that the cost of medical care can be cut by as much as\n10-20 percent without reducing the quality of care.\nThese diverse indicators paint a compelling picture of the inefficiency and waste in our\ncurrent health care system. Perhaps the most important economic reason for reform is to improve\nthe efficiency of this system. This in turn will make resources available to cover the uninsured\nand to address our other pressing economic and social needs.\nThe Economic Effects of Reform\nThe Health Security plan addresses these fundamental problems with the current system.\nIt will lower costs, provide security, increase job opportunities and increase the efficiency of the\neconomy. Many businesses will see their costs fall, and many others will have access to\ncoverage previously denied them. Slower cost growth will allow workers to enjoy faster growth\nin their real wages, and reduced job lock will increase workers' ability to find better jobs. Let\nme describe what I believe to be the important economic effects of health care reform.\nFirst, many employers who currently offer health insurance will see their costs fall\nimmediately. Under the Health Security plan, every individual will receive health insurance.\nEliminating uncompensated care in the current system will lower costs to businesses that provide\ncare, thereby making resources available for increased wages or additional hiring. Eliminating\ncorporate \"free riders\" will also reduce spending by companies that currently provide health\nbenefits for their employees and for their spouses who are not covered by their own employers.\nSecond, the Health Security plan gradually lowers aggregate business spending on health\ninsurance. Although the business sector as a whole will initially pay more for health insurance,\nthe reduction in health care cost growth lowers the growth of premiums over time. In fact, by\nthe end of this decade, preliminary estimates indicate that aggregate business spending on\nservices covered by the Health Security plan will fall by $10 billion.\nBusinesses can do many things with the resulting cost savings. They can: hire more\nworkers; raise wages or provide better benefits for existing workers; invest in more plant,\nequipment, education and training, and research and development; increase dividends to\nshareholders; or lower prices, thereby leaving consumers with more income to spend on other\ngoods. Each of these outcomes will have a stimulative effect on the economy and will increase\nemployment. Economic research has not reached clear conclusions about how to apportion the\nsavings among these effects. Almost all models suggest that wage increases are a likely\nresponse, but they differ about whether all of the savings will flow into wage increases.\nNevertheless, the effects of lower health care spending are clearly beneficial for the economy.\nSmall businesses will particularly benefit from the Health Security plan. Currently small\nbusinesses that provide insurance face administrative costs of up to 40 percent, while large\nbusinesses face costs of only 5 percent. Under reform, administrative costs for small firms will\n3\nfall by up to 25 percent. Additionally, many of those currently insuring small firms will receive\ndiscounts on their premiums.\nAlthough small businesses that do not currently provide insurance will pay more, they are\nlikely to receive discounts to make health care affordable. There is a common myth that small\nbusinesses cannot afford to pay anything for health insurance. In fact, many small businesses\nreport they would like to provide health insurance for their employees if it were more affordable.\nAccording to a recent study for the NFIB performed by Charles Hall of Temple University, 64\npercent of small business owners would like to provide some or better insurance for their\nworkers. When asked why they do not offer insurance, the most common response (65 percent)\nwas that premiums are too high. Ninety-two percent of small business owners agree that the cost\nof health insurance is a serious business problem. Under the Health Security plan, with\naffordable health insurance and discounts for small businesses, this will no longer be the case.\nThird, the Health Security plan will result in greater employment in the health care sector\nin the short run and a more efficient health sector in the long run. With the increase in the\nnumber of insured Americans and the decrease in the administrative burden of health insurance,\nthere will be a significant expansion of employment of health care providers and a decrease in\nemployment of health administrators and insurance workers. By 1996, as many as 400,000 net\nnew jobs will be created in the health sector. As the cost savings of the plan begin to accrue,\nemployment in the health sector will grow more slowly, although there will be no absolute\ndecline in the number of employees.\nOver time, the health sector will become more productive. This benefits all of us. We\nwill be able to have the same or better health care as well as more investment, research and\ndevelopment, or just plain goods and services.\nFourth, the efficiency of the economy will also be increased by reducing job lock and\nwelfare lock. By providing health care security, the reform will give workers the freedom to\nmove to jobs where they might be more productive without having to worry about losing their\nhealth insurance. Small firms should particularly benefit from this, since they often have the\nhardest time attracting highly skilled workers. In addition, firms should be more willing to hire\nworkers with pre-existing conditions because the new system does not penalize individuals with\na prior illness. This allows for better, more efficient matches between employers and employees\nand increases the efficiency of the economy.\nSome workers may decide to leave the labor force completely when there is continuous\nhealth coverage. Evidence suggests that about 350-600,000 people will decide to retire early\nunder health care reform. This increase in voluntary retirement may increase employment\nopportunities for younger workers.\nThe Shortcomings of Existing Studies on the Employment Effects of Health Care Reform\nAs you know, some have claimed that the Health Security plan will cause substantial\n4\ndamage to the economy. There is no denying that some firms and individuals will pay more than\nthey did prior to reform. In particular, the Health Security plan will increase costs for some\nyoung, single individuals as well as for firms that did not previously offer health insurance. The\nvast majority of Americans, however, will benefit from the reduction in health insurance costs,\nthe portability of coverage, the lower administrative costs, the reduction of job lock, the lower\ncosts for small businesses and the self-employed, and the reduction in welfare lock. In addition,\nas already noted, many employers, both large and small, currently providing insurance will enjoy\nlower costs immediately and the business sector as a whole will enjoy lower costs within three\nyears of the plan's full implementation.\nThere are some studies, including an often cited study by June and David O'Neill, that\ncriticize the Health Security plan as a job-destroyer. I believe these studies are riddled with error\nand inaccuracies. First, they completely overlook the discounts for small and low-wage\nbusinesses provided by the Health Security plan. The lack of discounts -- coupled with the\nquestionable assumption that firms cannot shift any costs to workers earning less than $25,000\nper year -- lead directly to massively exaggerated estimates of job loss. Additionally, in the\nO'Neill study, employers are assumed to pay the full premium for all workers who work more\nthan 20 hours per week. In the Health Security plan, however, employers pay a much smaller,\npro-rated premium for part-time workers.\nSecond, the studies assume a premium for the benefits package that far exceeds the\npremium for the Administration's benefits package. The O'Neill study assumes that employers\npay a premium of $5,310 per worker with a family and $2,160 per single worker. Estimates for\nthe Health Security plan, however, suggest that employers will pay about $2,500 per worker with\na family, and about $1,500 per single worker. These estimates take into account the fact that\nmany families have two adults in the labor force, and that each working adult will have an\nemployer contributing to health care coverage for the family.\nThese studies also assume that business employment decisions are three to six times more\nsensitive to increases in the costs of hiring labor than most conventional estimates. The O'Neill\nstudy, for example, assumes that firms will lay off 3 percent of their workforce if employee\ncompensation rises by 10 percent. Summary estimates in the economic literature suggest that the\nemployment response might be only one-sixth to one-third as large.\nFinally, and most importantly, the existing studies do not allow for any new job creation\nin businesses whose costs will fall as an immediate or gradual consequence of reform.\nIn fact, real-world evidence from Hawaii suggests that the job loss claims in studies like\nthe O'Neill study are exaggerated. Hawaii imposed an employer health insurance mandate in\n1974. Since the 1970s, total private non-farm employment has grown by 80 percent in Hawaii,\ncompared to 54 percent in the Nation as a whole; and retail and wholesale trade employment\nhave grown by more in Hawaii than in the Nation as a whole. Although we cannot extrapolate\nfrom these results and make sweeping judgments about the national impact of an employer\nmandate, the experience of Hawaii appears to contradict the conclusions of studies suggesting that\n5\nsuch a mandate will destroy jobs.\nAdditional evidence from recent literature on the effects of increases in the minimum\nwage on employment also calls into question such conclusions. We estimate that under reform\nthe increase in health care costs for currently uninsured low-wage workers in small firms is\nequivalent to a very modest increase of $.15 to $.35 per hour in the minimum wage. This will\nleave the real compensation cost for minimum wage workers below its average level in the\n1980s. Research by Lawrence Katz at Harvard and Alan Krueger and David Card at Princeton\nfinds that recent increases in the minimum wage have had minimal or even positive effects on\nemployment. These results lead us to conclude that the O'Neill study greatly exaggerates the\neffects of reform on the employment prospects of minimum wage workers.\nSummary Conclusions on the Likely Economic Effects of Health Care Reform\nNeither the models nor the data are available to yield a precise estimate of the\nemployment effects of health care reform. In many other areas of economics, there are models\nthat have been tried and tested for decades, and economists generally place a good deal of faith\nin the outcomes they predict. Standard macroeconomic models, for example, can make\nreasonably precise predictions about how a tax increase or a spending cut will affect aggregate\noutput or employment.\nBut there are no existing models that allow us to predict the employment effects of health\ncare reform with the same degree of precision. This is because the appropriate model for such\nan exercise would have to make distinctions both between firms that currently provide insurance\nand those that do not and among the many ways that firms in either group might respond to a\nchange in their health care costs. Such a model would also have to predict how individuals\nmight respond to new incentives in the plan, particularly those affecting small business creation,\njob mobility, welfare lock, and retirement.\nIn the absence of an appropriately specified model, one can generate either small net\npositive or small net negative effects on employment with existing models depending on the\nassumptions one is willing to make--demonstrating the old adage that you get out what you put\nin. Not surprisingly, several private-sector economists have concluded, as we at the CEA have\nconcluded, that the net effect of our health care plan on the aggregate employment level is likely\nto be small--our internal estimates suggest a range of plus or minus one-half of 1 percent of the\naggregate employment level. This is because although there are some factors in the plan that will\ntend to decrease employment, there are others that will tend both to increase employment and\nto change its composition. These offsetting factors are likely to cancel each other out, although\nover time as business spending falls below baseline, the factors encouraging an increase in\nemployment are likely to strengthen.\n6\nOn balance, I am certain that the Health Security plan is good for American business and\nthe American people. It diminishes job lock and welfare lock and allows more people to become\nself-employed. It gets health care costs under control. It guarantees security to all Americans.\nAnd it reduces waste and inefficiency in one-seventh of our economy. Reorganizing our health\ncare system to use our scarce resources more efficiently will help us realize our goal of realizing\nhigher living standards for ourselves and our children.\nI will be delighted to answer any questions that you may have at this time.\n7\nTestimony of Laura D'Andrea Tyson\nChair, Council of Economic Advisers\nSenate Labor and Human Resources Committee\nOctober 19, 1993\nTHE ECONOMIC EFFECTS OF HEALTH CARE REFORM\nThank you, Mr. Chairman, for the opportunity to come before your Committee to discuss\nthe economic effects of health care reform.\nThe United States is facing a health care crisis. The rapidly rising cost of health care\nhurts businesses, depresses wages, and contributes to fiscal imbalance. The average working\nAmerican will be charged, directly and indirectly, over $7,000 for health care in 1994. The lack\nof health security makes many individuals afraid to leave their current jobs, discourages others\nfrom working for small businesses or becoming self-employed, and keeps people on welfare\ninstead of working.\nReforming health care is a difficult challenge, but one that we must face. Let me first\noutline the problems that force us to take action, and then I will move on to the economic effects\nof the Health Security plan.\nWhy Reform Health Care?\nThere are five reasons why urgent health care action is needed.\nThe first problem is that our health care system does not provide security to individuals.\nWhen people get sick, the cost of their insurance can increase dramatically, or they can be\ndropped from coverage completely. This situation is a result of risk selection practices on the\npart of insurers. Insurers spend large amounts of money trying to select good health risks, and\navoid bad risks. This practice is profitable for any one insurer but is socially wasteful. After\nall, someone must cover the costs incurred by people who get sick. The result is that many\npeople cannot get coverage, and many more fear for their ability to get coverage in the future.\nThe second problem with our health insurance system is that it interferes with the\nemployment decisions of individuals. Almost 40 percent of insurers exclude pre-existing\nconditions from their coverage of newly insured people, thus locking many people into their\ncurrent insurance policies and jobs. Up to 30 percent of employees feel \"locked\" into their jobs.\nOthers do not form small businesses or become self-employed because of the difficulty of\nobtaining insurance. Finally, many people remain on welfare because they will lose their\n1\nMedicaid coverage if they take a job. If we are to adapt to changing domestic and international\neconomic circumstances, we must not penalize people every time they change or lose a job.\nThe third problem with our health care system is that the number of people who do not\nhave access to affordable insurance is large and expanding. Over 37 million people do not have\nhealth insurance. And this is not a predicament unique to the unemployed. Three-quarters of\nall uninsured people are in working families, and over one-third of the uninsured are in families\nwith at least one full-time year-round worker. We have a system in which millions of people,\nmany of them in working families, cannot afford the rising costs of health care coverage, and\nthey face the risk of being financially crippled by events beyond their control.\nIt is a myth that insured people do not need to worry about the uninsured. Under our\ncurrent system, when the uninsured face catastrophic costs, the insured pick up the bill.\nCurrently, the uninsured pay only 20 percent of the health care costs they incur, while the\nprivately insured pay 130 percent of their actual health care costs. According to recent estimates,\nthere will be about $25 billion of \"uncompensated care\" paid for by the insured in 1994.\nProviding health insurance for all Americans could therefore lower premiums for the currently\ninsured by over 10 percent.\nThe fourth problem with the health care system is that health care costs are high and\nrising. No other country in the world spends more than 10 percent of its GDP on health care.\nThe United States spends 14 percent. American consumers spend more on health care than on\nfuel oil, electricity, natural gas, other household operations, oil and gasoline, local transportation,\nfurniture, and other household equipment combined. Even though health care inflation has\nmoderated recently, during the last quarter it was still three times as rapid as overall consumer\nprice inflation.\nHealth care spending per working American will be over $7,000 in 1994. American\nworkers will, on average, pay $1,864 directly for health care in 1994. Their employers will pay\nan additional $3,409. And Federal, State, and local taxes for health care will total $2,149.\nEmpirical research suggests that businesses generally respond to higher health care costs\nby lowering the wages they pay to their employees. Similarly, the taxes required to pay for\ngovernment health spending are borne to some extent by workers in the form of lower wages.\nThus, if employer contributions to health insurance had remained constant at their 1975 share of\ncompensation through 1992, and if employers had passed these savings on to workers, real wages\nper worker would have been over $1,000 higher in 1992.\nThe fifth problem with our health care system is that it is riddled with waste, excess\nsupply, and inefficiencies. Despite our massive commitment of resources to health care spending,\nthe United States ranks 19th out of 26 countries in infant mortality and 18th in life expectancy.\nWe lose an estimated $80 billion a year to fraud and abuse. Over 5 percent of our total health\ncare spending--conservatively $45 billion in 1992--covers administrative expenses and paperwork.\nAs many as one-third of common medical procedures may be unnecessary and inappropriate.\n2\nHospital prices continue to rise even though hospital beds are in excess supply in many parts of\nthe country. HMO experience indicates that the cost of medical care can be cut by as much as\n10-20 percent without reducing the quality of care.\nThese diverse indicators paint a compelling picture of the inefficiency and waste in our\ncurrent health care system. Perhaps the most important economic reason for reform is to improve\nthe efficiency of this system. This in turn will make resources available to cover the uninsured\nand to address our other pressing economic and social needs.\nThe Economic Effects of Reform\nThe Health Security plan addresses these fundamental problems with the current system.\nIt will lower costs, provide security, increase job opportunities and increase the efficiency of the\neconomy. Many businesses will see their costs fall, and many others will have access to\ncoverage previously denied them. Slower cost growth will allow workers to enjoy faster growth\nin their real wages, and reduced job lock will increase workers' ability to find better jobs. Let\nme describe what I believe to be the important economic effects of health care reform.\nFirst, many employers who currently offer health insurance will see their costs fall\nimmediately. Under the Health Security plan, every individual will receive health insurance.\nEliminating uncompensated care in the current system will lower costs to businesses that provide\ncare, thereby making resources available for increased wages or additional hiring. Eliminating\ncorporate \"free riders\" will also reduce spending by companies that currently provide health\nbenefits for their employees and for their spouses who are not covered by their own employers.\nSecond, the Health Security plan gradually lowers aggregate business spending on health\ninsurance. Although the business sector as a whole will initially pay more for health insurance,\nthe reduction in health care cost growth lowers the growth of premiums over time. In fact, by\nthe end of this decade, preliminary estimates indicate that aggregate business spending on\nservices covered by the Health Security plan will fall by $10 billion.\nBusinesses can do many things with the resulting cost savings. They can: hire more\nworkers; raise wages or provide better benefits for existing workers; invest in more plant,\nequipment, education and training, and research and development; increase dividends to\nshareholders; or lower prices, thereby leaving consumers with more income to spend on other\ngoods. Each of these outcomes will have a stimulative effect on the economy and will increase\nemployment. Economic research has not reached clear conclusions about how to apportion the\nsavings among these effects. Almost all models suggest that wage increases are a likely\nresponse, but they differ about whether all of the savings will flow into wage increases.\nNevertheless, the effects of lower health care spending are clearly beneficial for the economy.\nSmall businesses will particularly benefit from the Health Security plan. Currently small\nbusinesses that provide insurance face administrative costs of up to 40 percent, while large\nbusinesses face costs of only 5 percent. Under reform, administrative costs for small firms will\n3\nfall by up to 25 percent. Additionally, many of those currently insuring small firms will receive\ndiscounts on their premiums.\nAlthough small businesses that do not currently provide insurance will pay more, they are\nlikely to receive discounts to make health care affordable. There is a common myth that small\nbusinesses cannot afford to pay anything for health insurance. In fact, many small businesses\nreport they would like to provide health insurance for their employees if it were more affordable.\nAccording to a recent study for the NFIB performed by Charles Hall of Temple University, 64\npercent of small business owners would like to provide some or better insurance for their\nworkers. When asked why they do not offer insurance, the most common response (65 percent)\nwas that premiums are too high. Ninety-two percent of small business owners agree that the cost\nof health insurance is a serious business problem. Under the Health Security plan, with\naffordable health insurance and discounts for small businesses, this will no longer be the case.\nThird, the Health Security plan will result in greater employment in the health care sector\nin the short run and a more efficient health sector in the long run. With the increase in the\nnumber of insured Americans and the decrease in the administrative burden of health insurance,\nthere will be a significant expansion of employment of health care providers and a decrease in\nemployment of health administrators and insurance workers. By 1996, as many as 400,000 net\nnew jobs will be created in the health sector. As the cost savings of the plan begin to accrue,\nemployment in the health sector will grow more slowly, although there will be no absolute\ndecline in the number of employees.\nOver time, the health sector will become more productive. This benefits all of us. We\nwill be able to have the same or better health care as well as more investment, research and\ndevelopment, or just plain goods and services.\nFourth, the efficiency of the economy will also be increased by reducing job lock and\nwelfare lock. By providing health care security, the reform will give workers the freedom to\nmove to jobs where they might be more productive without having to worry about losing their\nhealth insurance. Small firms should particularly benefit from this, since they often have the\nhardest time attracting highly skilled workers. In addition, firms should be more willing to hire\nworkers with pre-existing conditions because the new system does not penalize individuals with\na prior illness. This allows for better, more efficient matches between employers and employees\nand increases the efficiency of the economy.\nSome workers may decide to leave the labor force completely when there is continuous\nhealth coverage. Evidence suggests that about 350-600,000 people will decide to retire early\nunder health care reform. This increase in voluntary retirement may increase employment\nopportunities for younger workers.\nThe Shortcomings of Existing Studies on the Employment Effects of Health Care Reform\nAs you know, some have claimed that the Health Security plan will cause substantial\n4\ndamage to the economy. There is no denying that some firms and individuals will pay more than\nthey did prior to reform. In particular, the Health Security plan will increase costs for some\nyoung, single individuals as well as for firms that did not previously offer health insurance. The\nvast majority of Americans, however, will benefit from the reduction in health insurance costs,\nthe portability of coverage, the lower administrative costs, the reduction of job lock, the lower\ncosts for small businesses and the self-employed, and the reduction in welfare lock. In addition,\nas already noted, many employers, both large and small, currently providing insurance will enjoy\nlower costs immediately and the business sector as a whole will enjoy lower costs within three\nyears of the plan's full implementation.\nThere are some studies, including an often cited study by June and David O'Neill, that\ncriticize the Health Security plan as a job-destroyer. I believe these studies are riddled with error\nand inaccuracies. First, they completely overlook the discounts for small and low-wage\nbusinesses provided by the Health Security plan. The lack of discounts -- coupled with the\nquestionable assumption that firms cannot shift any costs to workers earning less than $25,000\nper year -- lead directly to massively exaggerated estimates of job loss. Additionally, in the\nO'Neill study, employers are assumed to pay the full premium for all workers who work more\nthan 20 hours per week. In the Health Security plan, however, employers pay a much smaller,\npro-rated premium for part-time workers.\nSecond, the studies assume a premium for the benefits package that far exceeds the\npremium for the Administration's benefits package. The O'Neill study assumes that employers\npay a premium of $5,310 per worker with a family and $2,160 per single worker. Estimates for\nthe Health Security plan, however, suggest that employers will pay about $2,500 per worker with\na family, and about $1,500 per single worker. These estimates take into account the fact that\nmany families have two adults in the labor force, and that each working adult will have an\nemployer contributing to health care coverage for the family.\nThese studies also assume that business employment decisions are three to six times more\nsensitive to increases in the costs of hiring labor than most conventional estimates. The O'Neill\nstudy, for example, assumes that firms will lay off 3 percent of their workforce if employee\ncompensation rises by 10 percent. Summary estimates in the economic literature suggest that the\nemployment response might be only one-sixth to one-third as large.\nFinally, and most importantly, the existing studies do not allow for any new job creation\nin businesses whose costs will fall as an immediate or gradual consequence of reform.\nIn fact, real-world evidence from Hawaii suggests that the job loss claims in studies like\nthe O'Neill study are exaggerated. Hawaii imposed an employer health insurance mandate in\n1974. Since the 1970s, total private non-farm employment has grown by 80 percent in Hawaii,\ncompared to 54 percent in the Nation as a whole; and retail and wholesale trade employment\nhave grown by more in Hawaii than in the Nation as a whole. Although we cannot extrapolate\nfrom these results and make sweeping judgments about the national impact of an employer\nmandate, the experience of Hawaii appears to contradict the conclusions of studies suggesting that\n5\nsuch a mandate will destroy jobs.\nAdditional evidence from recent literature on the effects of increases in the minimum\nwage on employment also calls into question such conclusions. We estimate that under reform\nthe increase in health care costs for currently uninsured low-wage workers in small firms is\nequivalent to a very modest increase of $.15 to $.35 per hour in the minimum wage. This will\nleave the real compensation cost for minimum wage workers below its average level in the\n1980s. Research by Lawrence Katz at Harvard and Alan Krueger and David Card at Princeton\nfinds that recent increases in the minimum wage have had minimal or even positive effects on\nemployment. These results lead us to conclude that the O'Neill study greatly exaggerates the\neffects of reform on the employment prospects of minimum wage workers.\nSummary Conclusions on the Likely Economic Effects of Health Care Reform\nNeither the models nor the data are available to yield a precise estimate of the\nemployment effects of health care reform. In many other areas of economics, there are models\nthat have been tried and tested for decades, and economists generally place a good deal of faith\nin the outcomes they predict. Standard macroeconomic models, for example, can make\nreasonably precise predictions about how a tax increase or a spending cut will affect aggregate\noutput or employment.\nBut there are no existing models that allow us to predict the employment effects of health\ncare reform with the same degree of precision. This is because the appropriate model for such\nan exercise would have to make distinctions both between firms that currently provide insurance\nand those that do not and among the many ways that firms in either group might respond to a\nchange in their health care costs. Such a model would also have to predict how individuals\nmight respond to new incentives in the plan, particularly those affecting small business creation,\njob mobility, welfare lock, and retirement.\nIn the absence of an appropriately specified model, one can generate either small net\npositive or small net negative effects on employment with existing models depending on the\nassumptions one is willing to make--demonstrating the old adage that you get out what you put\nin. Not surprisingly, several private-sector economists have concluded, as we at the CEA have\nconcluded, that the net effect of our health care plan on the aggregate employment level is likely\nto be small--our internal estimates suggest a range of plus or minus one-half of 1 percent of the\naggregate employment level. This is because although there are some factors in the plan that will\ntend to decrease employment, there are others that will tend both to increase employment and\nto change its composition. These offsetting factors are likely to cancel each other out, although\nover time as business spending falls below baseline, the factors encouraging an increase in\nemployment are likely to strengthen.\n6\nOn balance, I am certain that the Health Security plan is good for American business and\nthe American people. It diminishes job lock and welfare lock and allows more people to become\nself-employed. It gets health care costs under control. It guarantees security to all Americans.\nAnd it reduces waste and inefficiency in one-seventh of our economy. Reorganizing our health\ncare system to use our scarce resources more efficiently will help us realize our goal of realizing\nhigher living standards for ourselves and our children.\nI will be delighted to answer any questions that you may have at this time.\n7\n394 JUDICIARY\n1993 CONGRESSIONAL Staff Directory\nSHOB: Senate Hart Office Building, Washington DC 20510-6282\nBuilding\nRoom\nDirect Dial\nHaubrich, Joel\nStaff Assistant\nSHOB\n305 (202) 224-4933\nHandelman, Michael\nStaff Assistant\nSHOB\n305 (202) 224-4933\nLeibowitz, Jonathan D.\nChief Counsel, Staff Director\nSHOB\n305 (202) 224-4933\nMcCoy. Matt\nCounsel\nSHOB\n305 (202) 224-4933\nRenwanz, Marsha E.\nProfessional Staff Member\nSHOB\n305 (202) 224-4933\nSavitt. Robert\nMinority Clerk\nSHOB\n305 (202) 224-4933\nSUBCOMMITTEE ON PATENTS, COPYRIGHTS AND TRADEMARKS\nJurisdiction: All trademark, patent and copyright legislation, including: home audio and video taping; financial\nsyndication and intellectual property rights.\nSen. Dennis DeConcini (D AZ), Chairman\nMAJORITY (5 D): Senators DeConcini, Kennedy, Leahy, Heflin, Feinstein.\nMINORITY (4 R): Senators Hatch, Simpson, Grassley, Brown.\nSHOB: Senate Hart Office Building, Washington DC 20510-6286\nBuilding\nRoom\nDirect Dial\nBurke, Dennis K.\nCounsel\nSHOB\n327\n(202) 224-8178\nLong, Janis\nCounsel\nSHOB\n327 (202) 224-8178\nMagner, Mary\nStaff Assistant\nSHOB\n327 (202) 224-8178\nRobb, Karen\nChief Counsel\nSHOB\n327 (202) 224-8178\nSwensen, Cecilia\nLegislative Assistant\nSHOB\n327 (202) 224-8178\nSouth, Rebecca\nMinority Clerk\nSHOB\n327 (202) 224-8178\nSUBCOMMITTEE ON TECHNOLOGY AND THE LAW\nJurisdiction: All laws related to information policy, electronic privacy and security of computer information; over-\nsight of technology, trade and licensing; Freedom of Information Act.\nSen. Patrick J. Leahy (D VT), Chairman\nMAJORITY (3 D): Senators Leahy, Kohl, Feinstein.\nMINORITY (2 R): Senator Specter, Pressler.\nSDOB: Senate Dirksen Office Building, Washington DC 20510-6288\nSHOB: Senate Hart Office Building, Washington DC 20510-6288\nBuilding\nRoom\nDirect Dial\nCoffin, Tristram\nCounsel\nSHOB\n518 (202) 224-3407\nHarkins. Ann M.\nChief Counsel\nSHOB\n518\n(202) 224-3407\nCounsel\nSHOB\n518 (202) 224-3407\nSchmalz, Peter\nLegislative Correspondent\nSHOB\n518 (202) 224-3407\nStern, Todd D.\nCounsel\nSHOB\n518 (202) 224-3407\nWaxman, Debra\nStaff Assistant\nSHOB\n518 (202) 224-3407\nWhitney, Maggie\nStaff Assistant\nSHOB\n518 (202) 224-3407\nCaldwell, Barry H.\nMinority Counsel\nSDOB\n161 (202) 224-6791\nHertling, Richard A.\nMinority Chief Counsel\nSDOB\n161 (202) 224-6791\nPerez, Melissa\nMinority Chief Counsel\nSDOB\n161 (202) 224-6791\nWilliams. Staci\nMinority Counsel\nSDOB\n161 (202) 224-6791\nCOMMITTEE ON LABOR AND HUMAN RESOURCES\nto consist of 17 Senators; to which committee shall be referred all proposed legislation, messages, petitions,\nmemorials, and other matters relating to the following subjects: 1. Measures relating to education, labor, health, and\npublic welfare. 2. Aging. 3. Agricultural colleges. 4. Arts and humanities. 5. Biomedical research and development. 6.\nChild labor. 7. Convict labor and the entry of goods made by convicts into interstate commerce. 8. Domestic activities\nof the American National Red Cross. 9. Equal employment opportunity. 10. Gallaudet College, Howard University, and\nSaint Elizabeths Hospital. 11. Handicapped individuals. 12. Labor standards and labor statistics. 13. Mediation and\narbitration of labor disputes. 14. Occupational safety and health, including the welfare of miners. 15. Private pension plans.\n16. Public health. 17. Railway labor and retirement. 18. Regulation of foreign laborers. 19. Student loans. 20. Wages and\nhours of labor. (2) Such committee shall also study and review, on a comprehensive basis, matters relating to health,\neducation and training, and public welfare, and report thereon from time to time.\"\nSen. Edward M. Kennedy (D MA), Chairman\nMAJORITY (10 D): Sen. Edward M. Kennedy (D MA); Sen. Claiborne Pell (D RI); Sen. Howard M. Metzenbaum (D OH);\nSen. Christopher J. Dodd (D CT); Sen. Paul Simon (D IL); Sen. Tom Harkin (D IA); Sen. Barbara A. Mikulski\n(D MD); Sen. Jeff Bingaman (D NM); Sen. Paul D. Wellstone (DFL MN); Sen. Harris Wofford (D PA).\nsee biographical section\nC Copyright 1993, Staff Directories Ltd Reproduction prohibited in whole or in part.\nSTAFF OF THE SENATE COMMITTEES\nLABOR AND HUMAN RESOURCES\n395\nMINORITY (7 R): Sen. Nancy L. Kassebaum (R KS); Sen. James M. Jeffords (R VT); Sen. Dan Coats (R IN); Sen. Judd\nGregg (R NH); Sen. Strom Thurmond (R SC); Sen. Orrin G. Hatch (R UT); Sen. Dave Durenberger (IR MN).\n[The Chairman and Ranking Minority Member are ex officio members of all subcommittees\nof which they are not regular members.]\nDirect Dial, Majority\n(202) 224-5375\nDirect Dial, Minority\n(202) 224-6770\nSDOB: Senate Dirksen Office Building, Washington DC 20510-6300\nSHOB: Senate Hart Office Building, Washington DC 20510-6300\nBuilding\nRoom\nDirect Dial\nLittlefield, Nick\nStaff Director and Chief Counsel\nSDOB\n428 (202) 224-5465\nMcGattey, Richard\nChief Economist\nSHOB\n404 (202) 224-5441\nChildress, Mark B.\nCounsel\nSDOB\n420 (202) 224-0767\nNexon, David\nDirector of Health Office\nSHOB\n527 (202) 224-7675\nDunn, Van H., M.D.\nSenior Health Policy Adviser\nSHOB\n527 (202) 224-5331\nFiske, Mary Beth\nHealth Policy Adviser\nSHOB\n527 (202) 224-5307\nWeich, Ronald\nChief Counsel for Drug Control Policy\nSHOB\n527 (202) 224-3657\nIskowitz, Michael E.\nCounsel for Poverty and Disability Policy\nSHOB\n440 (202) 224-6572\nSimon, Marsha\nSenior Policy Advisor for Health and Poverty\nSHOB\n440 (202) 224-6745\nvon Zinkernagel, Deborah\nHealth Policy Analyst\nSHOB\n440 (202) 224-6060\nFox, Sarah M.\nChief Labor Counsel\nSHOB\n404 (202) 224-5441\nGuiney, Ellen\nChief Education Policy Advisor\nSHOB\n632 (202) 224-5501\nRamos, Suzanne G.\nCounsel for Education\nSHOB\n632 (202) 224-5501\nHarewood, Anita\nProfessional Staff Member\nSHOB\n320 (202) 224-4654\nArrington, Nadine R.\nAdministrative Assistant\nSDOB\n428 (202) 224-3656\nChichester, Angela\nStaff Assistant\nSHOB\n527 (202) 224-6065\nHubert, Jeanne\nStaff Assistant\nSHOB\n527 (202) 224-6065\nJohnston, Robert E.\nStaff Assistant\nSHOB\n132 (202) 224-4150\nNorton, Kevin\nStaff Assistant\nSDOB\n428 (202) 224-6062\nWinnick, Beth\nLegislative Clerk\nSDOB\n428 (202) 224-5407\nWescott, David\nStaff Assistant\nSHOB\n440 (202) 224-2236\nCahir, William\nStaff Assistant\nSHOB\n404 (202) 224-5363\nTurner, Sharon\nStaff Assistant\nSHOB\n527 (202) 224-7751\nWilliamson, Charlene\nStaff Assistant\nSHOB\n632 (202) 224-5306\nGurkin, Harry W.\nComputer Systems Administrator\nSHOB\n132 (202) 224-7172\nWinston, Kevin\nAssistant Press Secretary\nSDOB\n424 (202) 224-0749\nTimpke, Uwe\nEditor\nSHOB\n132 (202) 224-7657\nHattan, Susan K.\nMinority Staff Director\nSHOB\n835 (202) 224-6770\nBolen, Daniel P.\nMinority General Counsel\nSHOB\n835 (202) 224-6770\nStokes, Bob\nMinority Investigator\nSHOB\n835 (202) 224-6770\nPatzman, Andrew\nMinority Health Policy Coordinator\nSHOB\n833 (202) 224-3191\nSieg-Ross, Martin\nMinority Health Policy Advisor\nSHOB\n833 (202) 224-3191\nWilliams, Jane\nMinority Health Policy Advisor\nSHOB\n833 (202) 224-3191\nBrown, Annie\nMinority Health Research Assistant\nSHOB\n833 (202) 224-3191\nVerheggen, Ted\nChief Minority Labor Counsel\nSHOB\n725 (202) 224-6770\nSola, Stephen A.\nMinority Labor Counsel\nSHOB\n725 (202) 224-6770\nWidener, Carla\nAssistant Minority Labor Counsel\nSHOB\n725 (202) 224-6770\nRoss, Lisa A.\nChief Minority Education Counsel\nSHOB\n835 (202) 224-6770\nBarnes-O'Connor, Kimberly L.\nMinority Children's Policy Coordinator\nSHOB\n835 (202) 224-6770\nLarson, Mary Elizabeth\nMinority Children's Policy Research Assistant\nSHOB\n835 (202) 224-6770\nCramer, Wendy R.\nMinority Professional Staff Member\nSHOB\n835 (202) 224-6770\nOlsen, Pat\nMinority Office Administrator\nSHOB\n725 (202) 224-6770\nNickel, Sondra\nMinority Executive Assistant\nSHOB\n835 (202) 224-6770\nVulevich, Jan\nMinority Receptionist\nSHOB\n835 (202) 224-6770\nLeonard, Fred\nMinority Staff Assistant\nSHOB\n835 (202) 224-6770\nMartin, Jodie\nMinority Staff Assistant\nSHOB\n833 (202) 224-3191\nSUBCOMMITTEE ON AGING\nSen. Barbara A. Mikulski (D MD), Chairwoman\nMAJORITY (5 D): Senators Mikulski, Pell, Metzenbaum, Dodd, Wofford.\nMINORITY (3 R): Senators Gregg, Coats, Durenberger.\nSHOB: Senate Hart Office Building, Washington DC 20510-6302\nBuilding\nRoom\nDirect Dial\nLipner, Robyn\nStaff Director\nSHOB\n402\n(202) 224-3239\nShaw, Fredric E., Jr., M.D.\nMinority Staff Director\nSHOB\n625 (202) 224-0136\nSpaulding. Kimberly\nMinority Staff Assistant\nSHOB\n625 (202) 224-0136\nSUBCOMMITTEE ON CHILDREN, FAMILIES, DRUGS AND ALCOHOLISM\nSen. Christopher J. Dodd (D CT), Chairman\nMAJORITY (7 D): Senators Dodd, Pell, Mikulski, Bingaman, Kennedy, Wellstone, Wofford.\nMINORITY (6 R): Senators Coats, Kassebaum, Jeffords, Gregg, Thurmond, Durenberger.\nSHOB: Senate Hart Office Building, Washington DC 20510-6304\nFlanagan. Sarah\nBuilding\nRoom\nDirect Dial\nStaff Director\nSHOB\n639 (202) 224-5630\nsee biographical section\nD Copyright 1993, Staff Directories, Lid. Reproduction prohibited in whole or in part.\nOctober 1,1993\nFrom:\nThomas P. O'Donnell (ODONNELL_T)\nTo:\ntyson 1, blinder a, cutler d, oneill k, williams_a,\nDate:\nTuesday, September 28, 1993 10:09 am\nSubject: Health Care Testimony\nDavid Nexon of Senator Kennedy's office called today to request\nLDT's testimony before the Senate Labor and Human Resources\nCommittee on the economic impact of the Health Security Act. A\nhearing is scheduled for Tuesday, October 19 at 10:00 A.M. I\nhave a call in to Steve Richetti at Congressional Affairs to\nbring him into the loop. I think we need to do the following:\n1. Internal CEA meeting on Monday, October 4, 1993 to discuss\nhow to proceed. Attendees: LDT, AB, JS, TPO'D, DC, KO.\nSchedule\n2. Internal WH meeting on Tuesday, October 12, 1993 to discuss\nhow to proceed. Attendees: LDT, TPO'D, DC, Ko, Steve Richetti,\nBob Boorstin and Kevin Anderson (and possibly someone from Mrs.\nClinton's staff) C hris Jennings, 224-7675\n3. Meeting with David Nexon and others from Kennedy's staff on\nThursday morning, October 14, 1993 to review and refine LDT's\ntestimony and Q & As.\n4. On Friday morning, October 15, 1993, LDT's testimony should\nbe submitted to OMB and WH Communications for review. On Monday\nmorning, October 18, we will forward LDT's testimony to Kennedy's\noffice.\n[Alice - please begin to set up these meetings.]\nThank you.\nBoarBonstic bleve X7151 - Le Itmsg re meeting 6:05Pm\nRichetti X6493- Hmegle will unce\nthay Chris Kevin Jenne anderson X2566 645 - setting Left msy re re Dealy\nCare Testinery"
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