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ECONOMISTS
PHOTOCOPY
PRESERVATION
-
-
-
ECONOMIS TS
PHOTOCOPY
PRESERVATION
bc-Clinton-health-plan
fie- &
NEWS ADVISORY -- TO NATIONAL AND HEALTH/MEDICAL EDITORS:
A CRITIQUE OF THE ADMINISTRATION'S HEALTH CARE PLAN;
PRESS CONFERENCE JAN. 13;
MORE THAN 550 ECONOMISTS TO SEND OPEN LETTER TO PRESIDENT CLINTON
More than 550 economists from all 50 states and the District of Columbia
will send a letter to President Clinton next week about the administration's
health care plan. The group, organized by Professor John Lott of the Wharton
School at the University of Pennsylvania, will release the letter and a list
of signatories at a press conference on Jan. 13 at the National Press Club.
WHAT:
Press conference to release an open letter to President
Clinton signed by more than 550 economists
TOPIC:
Clinton health care plan
WHEN:
Thursday, Jan. 13, 10 a.m. (A)
WHERE:
National Press Club
Lisagor Room, 13th Floor
529 14th St. N.W.
Washington
SPEAKERS: -- John R. Lott Jr., Wharton School
-- William A. Niskanen, Cato Institute,
former member, Council of Economic Advisers
-- Other speakers TBA
(A) The Lisagor Room will be open at 9 a.m. for set up. Coffee will be
available at that time.
CONTACT: Cathi Smith, 202-543-1743, for Lott, or John Lott, 215-898-8920.
-0-
1/10/94
/PRNewswire -- Jan. 10/ CO: ST: District of Columbia IN: HEA SU: EXE
DC-DT -- DC004 -- 7781 01-10-94 10:41 EST
**** filed by:PR-F(--) on 01/10/94 at 10:46EST ****
**** printed by: WHPR (MMIL) on 01/10/94 at 14:02EST ****
Date: 01/10/94 Time: 13:35
US HEALTH: Economists to warn Clinton that plan will harm economy
Knight-Ridder
Washington--Jan 10--A group of 550 economists Thursday will send
a letter to President Bill Clinton warning that price controls in his
health-care plan will wreak economic havoc.
John Lott, of the Wharton School, said the plan's impact on the
economy and on the availability of health care would be roughly
analogous to the high prices and tight supplies that resulted from
the oil price controls in the 1970s.
Lott said he and the others who signed the letter believe the
underlying premise of Clinton's plan is based largely on a government
attempt to limit price increases.
Lott cited such provisions as authority for the state-chartered
health cooperatives to limit fees that doctors and hospitals can
charge for services, and the legally mandated limits on health-
insurance premiums.
Lott said he and some of the others who signed the letter will
explain their concerns more fully in a press conference Thursday. The
economists traverse the political spectrum, Lott said. End
(By Steve Marcy, Knight-Ridder Financial News)
The
INDEPENDENT
David J. Theroux
President
INSTITUTE
November 1, 1993
Professor David Cutler
Harvard University
Cambridge, MA 02138
Dear Professor Cutler:
I am writing to urge you to join with numerous prominent
economists and other scholars as a signer of a public letter to
President Clinton, critiquing his proposed health reform plan's
mandated use of price controls.
The letter will appear as a full-page ad in The Wall Street
Journal. The ad is being independently organized and sponsored by
a group of scholars seriously concerned with the Clinton proposal,
and I was asked to be of assistance.
As you may know, the proposed Clinton plan would control
prices charged by doctors and hospitals, cap annual spending on
health care, limit insurance premiums, impose limitations on new
and existing drugs, and much more.
The impact of such price controls would be extremely harmful
to any health care system, especially for the disadvantaged, as
health care quality would seriously decline and health care
services would become severely rationed.
As you may also know, the Independent Institute is a
scholarly, public policy research organization, and we are taking
a major interest in this issue through our health care policy
research program, the Center for Health Policy Innovation, under
the direction of Simon Rottenberg (Professor of Economics,
University of Massachusetts).
Time is of the essence since the ad is scheduled to run soon!
Please mail or FAX your response using the enclosed form to arrive
here no later than November 15.
I look forward to hearing from you. Thank you.
Sincerely yours,
Nath
DJT:js
Enclosure
134 Ninety-Eighth Avenue, Oakland. CA 94603 (510) 632-1366 FAX: (510) 568-6040
An Open Letter to President Clinton on Health Care Reform
Dear President Clinton:
Price controls produce shortages, black markets, and reduced quality. This has been the universal
experience in the four thousand years that governments have tried to artificially hold prices down using
regulations.
You insist that your health-care plan avoids price controls. We respectfully disagree. Your plan sets the
fees charged by doctors and hospitals, caps annual spending on health-care, limits insurance premiums, and
imposes price limitations on new and existing drugs.
In countries that have imposed these types of regulations, patients face delays of months and years for
surgery, government bureaucrats decide treatment options instead of doctors or patients, and innovations in
medical techniques and pharmaceuticals are dramatically reduced. Here in America, the threat of price
controls on medicines has already decreased research and development at drug companies, which will lead
to reduced discoveries and the loss of life in the future.
In the 1970s, government tried to regulate the price of a simple homogenous product, gasoline. The result
was a social and economic disaster. People were forced to waste hours waiting in lines to purchase
gasoline. Long waits for surgery and other medical care will have far more serious consequences.
Caps, fee schedules, and other government regulations may appear to reduce medical spending, but such
gains are illusory. We will instead end up with lower quality medical care, reduced medical innovation, and
expensive new bureaucracies to monitor compliance. These controls will hurt people, and they will damage
the economy. We urge you to remove price controls, in any form, from your health-care plan.
Please sign your name
Date
Please print your name
Telephone
Affiliation
Please sign your name
Date
Please print your name
Telephone
Affiliation
Please sign your name
Date
Please print your name
Telephone
Affiliation
file
Economist
Health Care
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Chapter 4: The Economics of Health Care Reform
Reforming America's health care system is vital for the health of our citizens and the
health of our economy. America's health care system is a curious mix of both the best and
the worst. People who are insured receive treatment that is the highest quality in the world.
At the same time, however, decades of medical cost increases two to three times as fast as
income growth have lead health insurance to take up a growing share of workers' benefits
packages, thus limiting wage growth, and have also burdened Federal and State and local
governments. Over 15 percent of Americans are without health insurance, and others face
exorbitantly high costs for insurance or are locked into their jobs because they or a family
member have a serious medical problem that might not be covered if they were to switch
insurers. On many measures of health outcomes, such as infant mortality or life expectancy,
the United States ranks among the lowest in the developed world.
The challenge that we face is to preserve the quality of health care while solving three
fundamental problems. First, we must provide real health care security. One essential
component of security is universal coverage. Individuals can never be fully secure if they
might lose their health insurance when they lose or change their job, or if a family member
gets sick. More importantly, however, insurance must guarantee affordable coverage for
those who do have insurance. This means an end to restrictions on pre-existing conditions,
lifetime limitations on spending, and experience rating.
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Second, health care costs must be brought under control. Firms that are constantly
paying more for health insurance cannot pay more in wages. Governments that pay more for
health care cannot invest in research and development, infrastructure, and human capital
formation. Families that pay more for health care cannot spend those resources on other
goods. Slowing the growth rate of health care spending is a necessary step in improving the
standard of living of the American people.
Third, we must make the health sector more efficient. High administrative costs
drive up spending needlessly. Up to one-third of many procedures are unnecessary, and
another one-third may be inappropriate. There is inadequate information on the quality of
different treatments, or of different health plans.
These problems are all a result of the organization of the current health care market.
In the current market, there is a lack of competition among health providers and health plans,
resulting in higher spending than is warranted. For many individuals, in fact, there is no
effective choice over medical utilization or over insurance plans. There is insufficient
information for consumers and providers to decide on appropriate care. Information about
the quality and price of different providers, for example, is almost never available to
consumers. Finally, incentives are distorted throughout the industry. Consumers have
incentives to overconsume care, because their direct payments are limited. Providers have
incentives to provide too much care, because they are reimbursed for each test or procedure
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performed. The Health Security Act is designed to address the problems above by
addressing the causes of poor information and misplaced incentives.
I. Health Care Security
The first problem with the current health care system is the issue of security. For
many individuals, the health insurance system promotes, rather than removes, insecurity.
The current system does not provide true insurance to those who are insured; it leaves a
large number of individuals uninsured; and it distorts individual employment decisions. In
an era of increasing economic change and dislocation, it is vital that our health insurance not
trap people into jobs or make job loss an even more terrifying prospect than it already is.
I.A
How Americans Receive Health Insurance
Chart 4-1 shows the sources of health insurance for Americans in 1992. Thirty-four
million Americans - largely the elderly - have Medicare as a primary source of coverage.
Among the remaining population, most people (159 million) are insured through an
employer-based policy. This includes 69 million people who have direct coverage through
their current or former employer, 69 million with other employer-sponsored insurnace, and
21 million with individual (non-group) coverage. Four million Americans are insured
through CHAMPUS or the VA, without employer or Medicare coverage. Of the remaining
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57 million Americans, 20 million have Medicaid coverage.
The remaining 37 million people (almost 15 percent of the population) are uninsured.
In no other industrialized country is the share of people uninsured above XX percent. In
addition, a large number of insured Americans are underinsured -- they have insurance
policies with very high deductibles or large out-of-pocket spending limits so that they are
subject to more spending risk that could lead them to become financially crippled. Estimates
suggest that about XX percent of people have insurance policies with deductibles above $yy
(get from Jim Mays).
I.B
Security for the Insured
Perhaps the most important problem with the current health care system is that it does
not provide true insurance for people who are insured.
Limitations on Covered Expenses: Many insurance policies exclude coverage of health
problems that existed prior to the beginning of the insurance policy. A typical rule, for
example, is to exclude for six months conditions present in the six months prior to joining
the plan. Up to 40 percent of insurers impose exclusions of this form.
In addition, most current insurance policies have limits on the maximum amount that
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the insurer will pay over the lifetime of the individual. The limits generally range between
$250,000 and $1 million. These limits are counter to the economic theory of insurance.
Economic theory suggests that insurance should cover these types of risks, since they are
generally unforcastable and rarely a result of individual choices.
The exclusion of pre-existing conditions coverage is a response of insurers afraid of
"adverse selection". Any insurer that offered to cover pre-existing conditions at the
actuarially fair price would find itself with the sickest risks, and thus higher costs than
expected. By raising prices to cover these additional costs, however, the insurer would drive
away people who are less likely to use these services. As a result, the fear of insuring only
high cost cases leads insurers to omit coverage for pre-existing conditions coverage.
Lack of Intertemporal Insurance: A second source of insecurity is the inability of groups to
guarantee a fixed price of insurance in future years. Most insurance is "experience rated,"
meaning that the group's premium is based on its expected cost that year. Since individuals
that are sick one year tend to be sick in subsequent years, insurers often increase the price
for a group, or drop the group entirely, if they suffer an adverse claims experience. This
kind of health insurance is not true insurance.
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I.C
Security for the Uninsured
Beyond the insecurity created for the insured, there is the additional problem of the
uninsured and underinsured. The uninsured are a very fluid population. Table 4-1 shows
how long people had health insurance coverage in the 28 month period from February 1987
through May 1989. In this period, over one-quarter of Americans were uninsured for at
least one month. Four percent were insured between 24 and 27 months. Twelve percent
were insured between 12 and 24 months, and 7 percent were insured at some point but for
less than 12 months. About 4 percent of the population was uninsured continuously over the
period.
The popular conception of America's 37 million uninsured is that they are
unemployed. In fact, however, most uninsured people have some connection to the labor
force. Fifty-three percent of the uninsured are in families with a full-time, full-year worker,
and 31 percent are in families with a part-time or part-year worker.
It is also a myth that insured people do not need to worry about the uninsured. In the
current system, the insured pick up the bill when the uninsured face catastrophic costs. As
Chart 4-2 indicates, the uninsured currently pay only 20 percent of the health care costs they
incur, while the privately insured pay 130 percent of their actual health care costs.
According to recent estimates, there will be about $25 billion of "uncompensated care" paid
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for by the insured in 1994. Providing universal coverage could therefore lower premiums
for the currently insured.
I.D Insurance and Labor Market Mobility
Because health insurance is closely tied to employment, the presence or absence of
health insurance can affect individuals' employment decisions. In many cases, this is
because individuals who change jobs may lose coverage for pre-existing conditions. In other
cases, individuals fear that a new employer will not offer the same benefits or the same
health plans. Empirical research suggests that the mobility rate of married men would be up
to one-third higher if health insurance was not tied to a specific job.
Other individuals do not form small businesses or become self-employed because of
the difficulty of obtaining insurance or the exorbitant prices in the current market. Empirical
research on this question is limited. In surveys, however, 64 percent of small business
owners report that they would like to provide some or better insurance for their workers, but
the cost of insurance in the current market prevents them from doing so.
Finally, many people remain on welfare because they will lose their Medicaid
coverage if they take a job. Some estimates are that one-quarter of the roughly 4 million
AFDC recipients would take a job if health insurance coverage were available continuously.
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Providing universal, seamless health insurance coverage is a step towards more fundamental
welfare reform.
II. The Cost Problem
Health care is an enormous part of the American economy. In 1994, it is estimated
that the United States will spend $982 billion on health care, or $3,825 per person. This
represents one out of every 7 dollars spent in the economy. This compares to one out of
every 14 dollars in 1970, and one out of every 11 dollars in 1980. By comparison, the
entire automobile and steel industries account for only $yy billion.
II.A What is the Cost Problem?
The United States spends more of its income on health care than any other
industrialized nation. In 1991, we spent 13.2 percent of GDP on health care. Only two
other countries spent as much as 9 percent of GDP on health care -- Canada at 10.0% and
France at 9.1%. The average in other OECD countries was XX percent. In the absence of
reform, health care costs are likely to continue to increase. The Congressional Budget Office
forecasts that, without reform, real health care costs would rise by 7 percent annually
between 1993 and 2000.
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The fact that the United States spends more on health care than any other country is
partially attributable to its higher income. Empricially, countries with higher incomes spend
a larger fraction of their incomes on health care. Nevertheless, Chart 4-3 shows that the
United States spends more on health care than would be predicted just given higher per
capita income.
Add information about other sociodemographic factors.
The high level of spending is a problem for several reasons. To the extent that waste
and inefficiency are responsible for some of our high health care spending, consumers would
like to spend less on health care and more on other goods. In addition, high health care
costs burden governments that may be unable to shift spending to other areas. Finally, the
high cost of health care makes it difficult for poor people to purchase insurance.
The second concern over health care costs is that health care spending is rising more
rapidly in the United States than in other countries. In the 1980s, real per capita health
spending rose at an annual rate of 4.4 percent, compared to 3.2 percent in other G-7
countries. As Table 4-2 shows, in the 1960s and 1970s, health care cost increases in the
United States were below average compared to the G-7 countries. In the 1980s, however,
health care spending growth slowed in the other G-7 countries but not in the United States.
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Most of the increase in health spending over time is due to increases in the quantity of
care received, rather than in the price. In the 1980s, one-half of health care cost growth was
due to increase quantity of care, one-third was due to increased prices, and the remainder
was due to aging of the population. Even this degree of price increase is overstated,
however, because no adjustment is made for quality changes or for differences between
transactions and list prices. The importance of quantity growth in large part explains the
difficulty that public sector programs have had in controlling health care costs. In the 1980s,
prices paid by Medicare were constant in real terms, but quantity increases averaged over 4.5
percent annually. With no effective incentives to limit the volume of care, government
programs have been unable to address the underlying cause of health care cost growth.
II.B Who Pays for Health Care?
Table 4-3 shows who paid for health care in 1991, and where the money was spent.
The largest amount of health care spending (38 percent) is for hospital care. Spending on
physicians and other health care professionals is second largest, at 29 percent of total
spending. The remainder of personal health care is for home and nursing home care (9
percent), and drugs and other medical devices (12 percent). The costs of insurance
administration are estimated at 6 percent of health spending. Finally, there are public health
activities and research and construction that total 6 percent of spending. This care is
financed in three principal ways:
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Businesses: Businesses pay for health care directly through health insurance premiums ($153
billion), and workers compensation and disability insurance ($18 billion). Total business
spending was $171 billion in 1991, about 23 percent of total health spending and 6.4 percent
of total compensation.
Households: Households pay for health care through insurance premiums ($52 billion) and
out-of-pocket expenses and non-patient revenue ($178 billion). The total amount is $230
billion, or 31 percent of national health spending. The average household spent about $2,440
on health care in 1991.
Governments: Governments pay for 46 percent of health spending. Most of government
spending is for Medicare and Medicaid. There is additional spending on the Veterans
Administration and the Department of Defense, as well as spending on government
employees. Government spending on health care is $xx per person. Over yy percent of
Federal government spending and over ZZ percent of State and local government spending is
devoted to health care.
Governments also subsidize health care indirectly, through the exclusion of employer-
provided health insurance from individual income and social security taxes. Unlike wage and
salary payments, payments for health insurance are not taxable to the employee. The loss to
the government from this tax expenditure was estimated to be $63 billion in 1993. Many
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economists believe that the excludability of health insurance from taxes encourages
individuals to purchase excessive insurance coverage.
II.C Economic Explanations of Cost Increases
Economic research suggests several explanations for the high level and growth of
health care costs over time. These explanations result from poor incentives in the current
health care market. Therefore, the cost problem will not be solved without changing the
incentives facing individual patients and health care providers.
Box: Productivity growth and health care costs
Health care costs, like all service goods, have continually grown faster than the
economy as a whole. Some of the explanation for this comes from the lack of productivity
growth in the service sector. Many goods, such as manufacturing and agriculture, have
rapid productivity growth. When firms are more productive, they can lower the price of the
goods they sell. There is little measured productivity growth in service-oriented industries
such as health care, however. The time required by a doctor to see a patient has not changed
substantially over time. Therefore, the cost of producing each visit is not changing. Without
changes in the quantity of service goods demanded, relative prices would increase along with
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relative costs. This phenomenon is termed the "cost disease" of the service sector.
How important is this effect on health care costs? If there were no productivity
growth in health care, the relative price of health care, and thus spending on health care,
would increase at the rate of productivity growth in the economy as a whole. This is about
1.5 percent per year. Added to this is the fact that as society gets richer, we demand more
medical care. Empirical estimates suggest that each 10 percent increase in income raises the
relative demand for medical care by about 3 percent. Finally, there is a countering effect
that as the relative price of health care increases, demand for health care services will fall.
Evidence suggests that each 10 percent increase in the price of health care lowers demand for
health care by about 2 percent. The net of these three effects is that real per capita health
care costs should rise at about 1.1 times the rate of productivity growth in the economy as a
whole.
Empirically, health care costs have risen at about 4.4 percent annually, about 3
percentage points about the level predicted on the basis of cost disease alone. This additional
increase is likely due to changes in technology that have increased the cost of treating given
patients. Because we do not measure changes in mortality or morbidity in determining
productivity growth, however, changes in technology are not counted as productivity
improvements.
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Moral Hazard: The first explanation for the high level of health care costs is the role of
insurance in increasing demand. What a consumer normally pays for health care is usually
only a small percentage of the total bill. Once an insured consumer has used up his or her
deductible, the consumer faces only a share of the cost of medical care -- usually no more
than 20 percent. Once the out-of-pocket maximum is reached, there is no additional payment
for any services - the marginal cost to the individual of each additional service is zero. The
result is that individuals will choose to consume excessive amounts of health care. The
effect of insurance on increasing the amount of spending is referred to as "moral hazard".
Moral hazard is particularly acute for Medicare beneficiaries. Almost three-quarters
of Medicare beneficiaries have "Medigap" coverage - coverage that pays for the deductibles
and copayments required in Medicare. This coverage induces individuals to use more
medical care, however, and thus drives up Federal health care spending. Estimates are that
the presence of these policies raises Federal Medicare spending by 24 percent. The
government does not attempt to collect for this increased spending, however.
Incomplete information: One of the requirements for effective competition is that consumers
be sufficiently well informed to make price and quality comparisons. In the health care
market, there are substantial barriers to consumer information. Often, treatment is provided
on an emergency basis, where there is no ability to make comparisons across providers.
Even in non-emergency cases, many patients do not feel qualified to decide on the
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appropriate course of treatment. The inability to comparison-shop for health care makes
price competition less effective than it otherwise would be.
Lack of Choice: Even individuals who are not well enough informed to decide on the
appropriate treatment or provider can still choose among insurance plans. There are
substantial barriers to choosing among insurance plans in the current system, however.
Because different plans cover different services, consumers may be unaware of the exact
coverage when they choose a policy. In addition, there is no systematic information about
the quality of different plans. In the absence of quality information, many consumers seem
to assume that more expensive health plans must be of higher quality. Finally, many firms
do not offer their employees any choice of health insurance plans. In many cases, the
limitation of choice is a requirement of the primary insurer; in other cases, it is because the
transactions costs of establishing multiple health plans are too large. Fewer than 10 percent
of employees in firms of under 25 workers have a choice of health plans, and only a quarter
of employees in firms with 100 to 999 employees have a choice of plans. Overall 55 percent
of workers have a choice of plans.
Fee-for-service reimbursement: Providers who are reimbursed for each service they perform
have incentives to increase the volume of the services they provide. Patients, many of whom
do not have sufficient information to know which tests or procedures are appropriate for
them, and who are insulated from the true cost of the services anyway, are unlikely to put
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pressure on physicians to limit the quantity of services provided to them. As a result,
providers will perform excessive amounts of services. For a fully insured patient, providers
would have to perform all tests and procedures that are not iatrogenic. In addition, since
health care providers may be sued for failure to perform procedures or diagnose specific
diseases, there is an incentive for providers to do additional tests and procedures beyond the
appropriate level. This "defensive medicine" leads to unnecessary care.
Defensive Medicine: An additional factor leading to increased health care spending is the
malpractice system. Malpractice costs account for XX percent of the cost of health inputs. In
addition, since health care providers may be sued for failure to perform procedures or
diagnose specific diseases, there is an incentive for providers to do additional tests and
procedures beyond the appropriate level. This "defensive medicine" leads to unnecessary
care. While some defensive medicine is certainly present, defensive medicine does not
appear to explain a great deal of health care spending. Estimates of the amount of defensive
medicine are about $20 to $30 billion annually.
Technological Change: A final contributor to increases in health care spending is
technological change. The introduction of new types of technology may lead to increases or
decreases in health care spending, depending on whether the technology is a substitute or
complement for existing methods of treatment. In addition, however, some technological
change consists applying previously existing technologies to new patients. (Any quantitative
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measures of the importance of these?)
The role of technology in explaining long-term health care costs is a difficult
question. If technological change continues at its current pace and continues to increase
spending, there may be no reduction in the long-term rate of growth of health care spending.
On the other hand, if the form of technological progress responds to payment incentives,
health care reform may contribute to a reduction in the long run growth rate of health care
costs.
II.D Implications of Rising Health Care Costs
The rising cost of health care has implications for businesses and governments.
Businesses: In response to higher health care costs, businesses can do several things. They
can:
Lower workers' wages so that total compensation does not rise;
Lower returns to shareholders;
Reduce payments to other factors of production;
Reduce investment in plant, equipment, and research and development;
Raise prices to consumers.
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Economic theory suggests that most of the increase in health care costs should be
reflected in lower wages to workers. If employees value business spending on health
insurance at its cost, workers should be willing to trade lower wages for increased health
insurance premiums. Since wages are taxed and health insurance premiums are not, a dollar
of health insurance is worth more than a dollar of wages. At the margin, employees will be
willing to "buy" increased health insurance until each dollar of health insurance is worth the
equivalent of one dollar of wages after-tax, or about 65 cents for a typical family. At this
point, both the worker and the firm would be indifferent between contributing more to health
insurance or to wages.
In fact, empirical research suggests that the dominant long-run response of businesses
to rising health care costs has been to lower the rate of increase of workers' wages. Between
80 and 100 percent of increases in health care spending appear to be reflected in lower
wages. As Chart 4-4 shows, the share of GDP devoted to employee compensation -
including health insurance -- has been essentially constant in the post-war period, even as the
share of GDP devoted to business health insurance spending has increased markedly.
This wage response is both good and bad news for employees. By cutting back on
wage increases, firms limit the extent to which the costs of hiring labor increase, and thus
limit the job losses from rising health care costs. On the other hand, the reduction in wage
growth has led to slower increases in family incomes than would otherwise have occurred.
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If business spending on health care had remained the same share of compensation that it was
in 1975, real wages per employee could be over $1,000 higher than they currently are.
To the extent that increases in business spending are not entirely reflected in lower
wages, total compensation will rise. The higher compensation paid to labor may induce
firms to substitute capital for labor than to produce in other countries. To the extent that
rising health care costs limit firms' cash flow, it may have an effect on the amount of
investment. Economic research has not explored these types of responses in any detail.
Governments: Rising health care costs are a major cause of the fiscal crises in both the
Federal and State and local governments. Governments can respond to increasing health care
costs in several ways. They can:
Increase taxes;
Reduce other spending, such as education and research and development;
Borrow, in which case future taxes will need to be raised or future spending
will need to be cut.
Economic research suggests that the dominant effect of higher taxes is to lower the
take-home pay of workers. Thus, increasing taxes for health care are another contributor to
the slow growth of family incomes. To the extent that rising health care costs crowd out
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other forms of government spending instead, society loses the benefit from these projects.
Whether greater government health spending comes at the expense of higher taxes or lower
spending on other goods and services is not generally known.
Overall Burden: Total business, household, and government health care spending is a
substantial expense for insured families. As Table 4-4 shows, health care spending per
insured worker is expected to be over $7,000 in 1994. This includes almost $2,000 of
family premiums and out-of-pocket expenses, over $3,400 of employer contributions for
health insurance and workers compensation, and over $2,100 of taxes for government health
spending.
III. An Inefficient Industry
The amount that consumers choose to spend on any particular good is not normally a
matter of public policy concern. Indeed, the level of health care spending would not be a
significant economic issue if the health care market were efficient and there were little waste.
There is substantial evidence, however, that the health care sector is not efficient and that
much of public and private money is not well spent.
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III.A High Administrative Expense
Administrative costs in the health care system are extremely high. As noted above,
the costs of insurance administration alone are estimated at more than the total amount of
public health service spending. Some of this administrative expense lowers the direct costs
of care and thus saves money overall. Estimates suggest, for example, that each $1 spent on
utilization review saves $9 in direct health care spending.
Some of the cost of insurance administration is a consequence of insurance companies
seeking to price each group at its expected cost, however - a process known as "risk
selection". Since large groups tend to have diverse workers, there is less need for insurance
companies to spend resources evaluating risks for them. In addition, many of the costs of
risk selection are fixed costs, leading to higher per capita administrative costs for small
groups. The result is that the "load" that firms pay - the difference between the costs of
insurance and the expected amount of claims - is much larger for small firms than for large
firms. A typical large firm may face administrative expenses as low as 5 percent of claims.
For very small groups, however, the administrative cost averages 40 percent of claims.
The administrative expense in selecting good risks bears private returns but is socially
wasteful. It is clearly profitable for any insurer to select healthy risks, since that insurer's
expected costs will be lower. For society, however, money spent selecting only the good
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risks is a waste. After all, someone must cover less healthy people. They will either obtain
private insurance; receive insurance through public sector programs; or use "uncompensated"
health care, the costs of which are passed on to the insured population through higher
premiums.
In addition to administrative costs in insurance companies, there are additional
administrative costs for hospitals and doctors that must deal with multiple insurance forms
and different sets of covered services. Estimates of these costs range from 1 to 10 percent of
hospital and physician expenses.
III.B Inappropriate and Unnecessary Care
The most important example of waste and inefficiency is the amount of inappropriate
and unnecessary care in the current system. Economically, care is inappropriate if the
benefits from the care are less than the cost of providing the care -- including the direct costs
to the patient as well as the costs paid by insurers.
In practice, studies that examine the amount of inappropriate or unnecessary care rely
on medical determinations of whether care is appropriate or inappropriate. Chart 4-5
presents estimates of inappropriate and unnecessary care for several common medical
procedures. Estimates suggest that up to one-third of many procedures are inappropriate,
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and another one-third may be unnecessary. It is estimated that up to $1 billion is spent on
unnecessary Cesarean sections each year.
Additional evidence comes from the sharp variation in health care utilization across
areas of the country. In different parts of the country, and in smaller regions within the
same area of the country, there are large differences in the amount of medical care that
people receive. In 1989, Medicare payments ranged from $822 per beneficiary in
Minneapolis to $1,874 in Miami.
At least some of the variation in care across areas of the country reflects patients that
need medical treatment. Studies have found, for example, that areas with greater spending
have more appropriate as well as more inappropriate medical care. Much of the
inappropriate or unnecessary care, however, is likely due to insufficient information on the
part of providers about what types of care are truly necessary. In a well-functioning market,
providers would observe these differences and adjust utilization patterns accordingly. One
sign of inefficiency in the current market is that such data is not commonly available.
IV. Principles of Reform
Three broad approaches to reform would address the problems noted above. The first
is to establish a single-payer health system in which everyone is insured through a
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government program. The government raises revenue, generally through a broad-based
income- or value-added tax, and uses the proceeds to provide private health insurance or pay
for medical care directly. Commonly, single-payer proposals in the United States involve
extending the Medicare system to the entire population. Thus, doctors would be reimbursed
on a relative value scale, and hospitals would be reimbursed on the diagnosis of the patient.
Single-payer systems succeed in achieving universal coverage. They also attempt to
control costs by limiting the increase in hospital and physician fees over time. Finally, to the
extent that the government supercedes insurance companies, they are not subject to adverse
selection or risk selection practices on the part of insurers. All of these are valuable features
of reform.
Single-payer systems have a number of drawbacks, however. First, they involve
more government control of private decisions, such as how much providers can be paid and
what type of care is provided. Second, there is more disruption in moving from the current
system to a single-payer system. New taxes need to be raised, and most existing health
insurance would be eliminated. Finally, government programs have not been particularly
successful at controlling health care costs. Even with the shifting of costs from Medicare
and Medicaid to private insurers that occurred in the 1980s, health care spending grew more
rapidly in public programs than in private programs.
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A second approach to reform is to foster more competition. There are a number of
variants on this theme. One common proposal is to create individual savings accounts,
where people would be allowed to put money away tax-free to be used for small medical
expenses. In exchange, individuals would be encouraged to purchase catastrophic coverage
for large expenses. These proposals clearly create incentives to limit health care utilization.
This type of plan, however, does not guarantee universal coverage, nor does it remove the
fear that individuals could be charged a higher price if they or a family member became sick.
A second variant on the competitive proposal is to focus on insurance market reform.
Insurers would be prohibited from excluding pre-existing conditions, and the government
would enforce community- or age-rating. Potentially, there would also be pools for small
firms and single individuals, although in many proposals these pools are optional. Insurance
reform proposals address most of the problems facing small firms that want to purchase
insurance. They fail to guarantee universal coverage, however, since insurance will never be
affordable for many people without government subsidies. In addition, if alliances are
optional rather than mandatory, there will be some adverse selection, which must be balanced
against the increased choice that these plans allow.
The Health Security Act attempts to blend the benefits of the competitive and single-
payer approaches to reform, through a proposal known as "managed competition". Like the
single-payer systems, the Health Security Act guarantees universal insurance with a
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comprehensive set of benefits. It also sets a. limit on insurance premiums, to guarantee cost
control if private incentives fail.
Like the more competitive systems, however, managed competition relies in the first
isntance on private market competition to control costs. Individuals are pooled into health
alliances, where they are given a wide variety of insurance choices and where the ability of
insurers to select risks is limited. Insurers thus have incentives to control costs and increase
quality, rather than just to select good risks. Consumer choice is relied on to judge quality
and choose coverage. The idea is that expanding choice and improving people's ability to
make decisions over health plans gives a natural incentive to individuals to limit the cost of
health care.
Economically, the Health Security Act is driven by five specific principles:
Principle 1: The government should guarantee universal coverage with a comprehensive set
of benefits.
Universal coverage is essential because security can never be fully realized without it.
If individuals are in danger of losing their insurance when they lose a job or leave the labor
force, people will feel locked into their current job. Comprehensive benefits are equally
important. Some plans promise universal insurance but only for catastrophic expenses. For
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many Americans, this implies that their insurance coverage will deteriorate if they lose their
job, just when their income is falling. Catastrophic insurance policies also encourage
individuals to postpone preventive care, potentially increasing future health care spending.
Finally, a large share of health care spending is above even high catastrophic limits, so that
catastrophic policies would not provide large incentives to everyone.
An important component of providing universal coverage is guaranteeing that
individuals will not be discriminated against because of age or health status when they
purchase insurance. In order to sell insurance in the regional alliance, insurers will be
required to:
Charge only one price (community rating);
Accept all people who want to join the plan, provided the plan is accepting
anyone (guaranteed issue);
Accept anyone who wants to renew membership (guaranteed renewability);
Eliminate pre-existing conditions exclusions;
Further, all non-workers and people employed in small firms will be required to
purchase insurance through a regional health alliance. Because there will be only one health
alliance in each geographic area, healthy people will naturally be pooled with sicker people.
While the healthy people will pay more for health care than is actuarially required, they will
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benefit from the knowledge that, if they become sick, they will still be able to obtain
insurance at an affordable price.
Box: How much money will insurance reform save?
Insurance reform will save money through lower underwriting costs. On average,
groups of fewer than 5,000 people face administrative costs of 18.2 percent in purchasing
insurance, while groups of more than 5,000 face costs of only 5.8 percent. About two-thirds
of employees now are in groups below 5,000 workers. Under reform, administrative costs in
the health alliances are expected to be 13.5 percent. For groups of over 5,000,
administrative costs are projected to increase by 1 percentage point, to account for the new
data and reporting requirements. On net, therefore, the cost of insurance administration
should decline by about 3 percentage points. Since current premiums for the population
covered by the reform are about $200 billion, the savings from insurance reform are
therefore about $6 billion annually.
Principle 2: There should be incentives to control costs, and an enforceable budget if the
incentives fail to work.
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The Health Security Act will affect costs by reforming the incentives in the health
care system. Under the Health Security Act, all people are in pre-paid health plans. Since
plans receiving fixed reimbursement have a greater incentive to control costs than open-ended
plans, the level of costs should fall.
Because benefits will be standardized across plans, individuals will know what type of
insurance they are purchasing. It is widely speculated that health plans in the current market
do not price aggressively, since cheaper plans are often perceived as lower in quality than
more expensive plans. In a market with standardized coverage, customers are less likely to
judge quality by price, and so plans may have more incentive to bid aggressively for
patients. Individuals will also be given better information about the quality and price of
different health plans, and a greater ability to choose among plans. Quality report cards
available within the Health Alliances will aid individuals in making cost-councious choices of
insurance policies.
Further, individuals will be given greater incentives to choose less expensive health
plans. In many firms, employers pay a fixed percentage (generally 80 percent) of whichever
plan is chosen by the employee. There is thus a considerable "tax" on choosing less
expensive plans: for each dollar the employee saves by choosing a less expensive plan, 80
cents is taken by the employer and only 20 cents is realized by the individual. In some
cases, even this 20 cents is taxed by Federal and State and local governments -- at up to 35-
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40 percent marginal tax rate -- making the effective savings only 10 to 15 cents on the
dollar. Employees naturally have little incentive to choose less expensive plans.
Under the Health Security Act, families will be required to pay all of the difference
between what their employer contributes and the cost of the plan they select. The family
thus gets to keep, subject to taxes, all of the savings from cost-conscious decisionmaking.
Further, if an employer contributes more than the required amount, they must give a rebate
to employees who choose a less expensive plan. The rebate has the effect of again allowing
families to realize the savings from choosing less expensive plans.
Box: The evidence on competition and costs
A number of governments and corporations have experimented with fixed contribution
rules for their employees. Empirical studies confirm a large effect on plan choice. The
State of Minnesota implemented a fixed-dollar contribution for public sector employees in
1988, for example. Within five years, the share of employees in the high cost plan fell from
42 to 17 percent, while the share in the lowest cost plan increased from 28 to 54 percent.
The State of Wisconsin implemented a similar system for its public employees in 1984, and
found that enrollment in the lowest cost plan increased from 15 to 60 percent in one year.
Similar changes have been observed in private sector companies like Alcoa, Xerox, and
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Digital Equipment. If these examples are extrapolated to the nation as a whole, estimates are
that health care costs could fall by about $50 billion annually by the end of the decade.
There is additional evidence that wide-ranging reform can affect costs for an entire
group of people. Discussion of California evidence.
Many economists have argued that the Federal government should tax employer
contributions for health insurance as if these benefits were paid as wages. Such a change in
the tax treatment would raise the price of more expensive health plans, thereby providing
incentives to limit health care spending. Several types of health benefits can be considered
for reformed tax treatment. First, employees can be prohibited from contributing to
"cafeteria" plans that allow them to deduct their insurance premiums from income. This
limitation is a part of the Health Security Act. Second, employer payments for services
beyond the basic benefit package - reduced cost sharing or additional services -- could be
considered taxable income. This limitation is set to occur in the year 2003 under the Health
Security Act. Finally, all or part of the cost of a basic benefit package above some level
could be considered taxable income. These benefits are not taxable under the Health
Security Act.
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Principle 3: Reform should minimize disruptions in moving from the current system to a new
system.
Any wholesale reform of one-seventh of the economy is bound to produce some
disruption. Nevertheless, the Health Security Act attempts to minimize the disruptions in
moving from the current system to the reform system. The most important step in this effort
is the employer mandate. There are three potential ways to pay for universal coverage: an
employer mandate; an individual mandate; or a broad-based tax such as a value-added tax.
Employer mandates require employers to pay for some health insurance - the same way
most people receive coverage now. Individual mandates require individuals to purchase
health insurance. The employer has no legal obligation to pay for coverage. Finally,
governments could impose large new taxes on consumption or income, and use the proceeds
to provide everyone health insurance.
Under an individual mandate or broad-based tax, however, there would be severe
transition problems in moving from the current employer-based system to the new system.
While employers that drop coverage are likely to pay higher wages to their workers, the
timing of the wage substitution is not generally known. Under an employer mandate, there
are far fewer changes in existing payments.
An additional step to minimize disruption is to allow large firms to continue operating
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self-insured plans. These firms generally provide good health benefits and have managed to
control health care spending. For workers in these firms, the change associated with the
Health Security Act will be small.
Principle 4: The health care system should maintain maximal choice at all levels - states,
providers, consumers, and firms.
It is clear that no single system can work in every state. In many states, competition
is well developed and competing health plans are already a reality. In other states, providers
are too sparsely distributed to have much competition. The Health Security Act allows states
to form single payer systems or otherwise adjust the new system for particular local
circumstances.
Providers are free to choose the plans in which they will work. Indeed, they are
allowed to join more than one plan. Physicians might join a preferred provider network, for
example, while also treating patients in a fee-for-service plan.
To encourage consumer choice, the Health Security Act creates regional health
alliances where all non-working families and employees of firms with fewer than 5000
workers can buy insurance. Within the pools, there are choices of fee-for-service insurance,
HMOs, and PPOs. To avoid a situation where people cannot receive care outside of a
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predetermined site, HMOs will be required to have a Point-of-Service option allowing
recipients to use providers outside of the plan. Finally, while all employees of small firms
are required to be in a regional alliance, firms of over 5000 workers can either form their
own corporate alliance, or join the regional alliance.
Principle 5: Health care reform should be deficit neutral in the short run and deficit
reducing in the long run.
Long-term deficit reduction is a fundamental precept of reform. Even with the
President's economic plan, the federal budget deficit is expected to increase around the turn
of the century. The main reason is growing health care costs. Success in balancing the
federal budget is directly tied to success in reducing the growth rate of federal health
spending.
In the shert term, reform is dominated by new costs - for discounts, the drug benefit
for seniors, and long term care. The savings from slowing the rate of growth of health care
spending are also small. Over time, the revenues from reducing cost growth are larger. The
deficit reduction should thus increase accordingly.
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V. Architecture of the Health Security Act
The Health Security Act will change the way that health insurance is bought and sold.
There are three important features about the Health Security Act: the organization of the
health care market; payments for insurance; and system oversight and enforcement.
V.A The Organization of the Health Care Market
The organizing mechanism for health care under the Health Security Act is a health
alliance. Health alliances serve as brokers between individuals and health plans. On the
consumer side, alliances collect funds for health insurance and track the enrollment of
individuals in different plans. On the provider side, alliances accept bids from providers and
monitor compliance with insurance rules and the premium caps.
Alliances: The Health Security Act sets up two types of Alliances. Regional health alliances
are designed for non-workers, workers in firms with fewer than 5000 employees, and
Medicaid recipients. A firm with over 5,000 employees has the option of joining the
regional alliance or establishing its own corporate alliance. If the firm chooses to organize
its own corporate alliance, it must offer the same plan choices as the regional alliance, and
does not receive any subsidies.
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Each state will have one or more regional health alliances. However, only one will
cover any particular geographical area. Boundaries of the regional alliances are not allowed
to be drawn to segregate high cost people in one area.
Providers: Doctors will belong to one or more health plans. A typical doctor might be in a
managed care plan as well as see fee-for-service patients.
Health Plans: All of the health plans must offer a guaranteed set of benefits. Plans may
differ, however, in the cost sharing they impose and the way they deliver services. There
are three types of health plans. The first is a traditional fee-for-service plan. The Health
Security Act specifies a deductible of $400 for a family, with 20 percent cost sharing up to a
$3,000 maximum payment. The deductible and out-of-pocket maximum are in 1994 dollars
and are indexed in subsequent years by the rate of premium growth. The second type of
plan is a Health Maintenance Organization (HMO). HMOs have a $10 copayment for every
doctor's visit, but require gatekeepers or other forms of utilization management. Under the
Health Security Act, HMOs would have to offer a point-of-service option, which would
allow enrollees to seek care from providers outside of the plan for an additional fee. Finally,
individuals could choose a Preferred Provider Organization (PPO). PPOs generally have
some doctors in a network, for which the copayment is $10 per visit, but allow individuals to
see doctors outside of the network, with cost sharing is similar to the fee-for-service plan.
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Firms: For most firms, health reform will mean less attention paid to health care. Firms
with fewer than 5000 employees will stop providing coverage and their employees will join
the regional alliance. Firm with over 5000 employees can continue providing coverage or
join the regional alliance.
Firms will be required to pay at most 80 percent of the weighted average premium in
the alliance in their area. Firms will pay less if this exceeds a given share of their payroll,
but all firms will be required to pay something. Employers can supplement the basic
contribution if they wish. If they do so, however, they must offer the same contribution for
all employees in a given class, and must give a full rebate if an employee chooses a less
expensive plan than the employer pays for.
Consumers: Within an alliance, consumers have a choice of health plans. If the employer
contributes only the required 80 percent share, the price to the consumer is the amount by
which the plan exceeds 80 percent of the weighted average premium. For each dollar of
increased plan cost, the employee would be required to pay the full dollar for coverage.
There are subsidies for low-income families.
There is an annual open enrollment period during which the consumer can switch
health plans. To facilitate such switching, the alliance will publish price and quality
information for consumers. The quality information is intended to cover both consumer
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satisfaction and objective measures of quality such as morbidity and mortality.
Individuals or their employers are allowed to purchase health insurance for additional
benefits beyond the basic plan, or for wrap-around policies to reduce out-of-pocket payments.
The Health Security Act specifies a floor through which individuals should not fall, rather
than a ceiling on the generosity of health care an individual can receive.
V.B Paying for Insurance
The Health Security plan classifies people into four rating pools: single people;
couples with no children; families with 1 adult; and families with 2 adults. Table 4-5 shows
the estimated premiums in 1994 for these four policies. For a 2 adult family, for example,
the national average premium in 1994 is estimated to be $4,360. The average family
payment would be 20 percent of this amount, or $872.
The Employer Mandate: The required employer contribution is based on the number of
workers in each pool. For single individuals, there is one worker per family. An employer
of a single worker therefore pays 80 percent of the $1,932 premium cost, or $1,546. In the
case of couples, there are about 1.46 workers per family. Since 80 percent of the premium
is $3,092, the amount per worker is only $3,092/1.46, or $2,125. Workers in families with
children -- whether 1 adult or 2 adults -- are pooled. The alliance computes total
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requirements (roughly $3,500 per family) and divides this by the number of workers per
family (about 1.5). The employer payment for a family with children is therefore $2,479.
Self-employed people are treated like small firms. However, if the self-employed worker has
wage and salary income as well, payments from their employer are subtracted from the
amount they owe on self-employment income. Employer payments for part-time workers are
pro-rated, based on the share of a 30 hour week that the person works. No payment is
required if the individual works fewer than 10 hours per week.
At least one employer premium must be collected for each family. If members of the
family worked at least 12 months full-time during the year, the family does not owe any
additional employer share. If the family worked fewer than 12 full-time months, the family
owes the remainder of the employer share. For example, a family with only one half-time
worker would owe one-half of an employer premium as well as the family's share of the
premium. The employer share is to be paid out of income less wages and unemployment
benefits, but including tax-exempt interest receipts. The exception for labor income is
because this income is presumed to already reflect required employer contributions.
Providing Discounts: There are four types of discounts in the Health Security Act: discounts
to families on their share of the premium; discounts to families that owe some employer
payments; discounts to firms; and discounts for poor individuals faced with high out-of-
pocket payments.
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Low income families in the regional alliances receive a discount on their 20 percent
share of the premium. No payment at all is required on the first 1,000 of income. The
discount phases out at 150 percent of the poverty level. The $1,000 disregard and the
poverty line are indexed to the CPI. For families that owe part of an employer payment,
additional discounts are provided. No payment is required if the family earns below $1,000,
and full payment is expected at 250% of the poverty level. If the individual is between ages
55 and 64 and meets the Social Security earnings test, however, the government pays the
entire employer share. This retiree discount supplants any payment for the employers share
that the individual or their employer would have made. Total household discounts are $59
billion in the year 2000, including $47 billion of non-retirees, $7 billion as non-worker
subsidies to retirees, and $4 billion as additional payments to early retirees.
Firms may also receive discounts on their mandated payments. All firms in the
Alliance are capped at 7.9 percent of payroll. Small firms receive additional discounts - as
is detailed in Table 4-6. It is estimated that about yy percent of workers in firms with fewer
than 5000 employees will receive a discount. These discounts total $29 billion in 2000,
about three-quarters of which are for firms wth fewer than 25 employees.
Finally, low-income individuals who live in areas where there are no HMOs available
can receive discounts for their out-of-pocket payments. These discounts phase out at 150
percent of the poverty level. The total cost is $3 billion in the year 2000. Finally, there is a
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15 percent subsidy add-on designed to account for changes in behavior that would increase
the amount of money the government pays.
Sources of Premium Money: In total, the alliances receive revenue from three sources:
employer payments; family payments; and government discounts. Estimates are that about
59 percent of the money for the non-Medicaid population will come from employer
payments; 17 percent will come from family payments; and 24 percent will come from
government discounts.
V.C System Oversight
Health Alliances: The Health Alliance has four responsibilities. The first is to monitor the
practices of insurers. The health alliance enforces community rating, guaranteed issue and
renewability, and no pre-existing conditions. The alliances can also exclude any plan whose
premium is above than 120 percent of the average premium. Second, the alliance gathers
and disseminates quality and price information about the plans in the alliance.
The third responsibility is to implement a risk adjustment mechanism. While each
plan is required to charge a community rate, without any compensation plans with more sick
individuals would have to charge a higher premiums. As a result, plans would attempt to
avoid high cost people. One way to minimize this possibility is to make compensating
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payments to plans with sicker people. A system of "risk-adjustment" transfers from plans
with better risks to plans with worse risks. In a perfect risk-adjustment system, plans can
would price entirely at average cost, and there would be no incentive for plans to select more
or less health individuals.
Finally, the alliance is responsible for collecting on bad debt. Some allowance for
bad debt is allowed for in the premiums. If the actual amount is greater than anticipated,
however, the alliance imposes a premium surcharge on all payers to cover the shortfall.
National Health Board: Overseeing the health care system is the National Health Board.
The Board determines the premium targets for each alliance, given the national spending
total.
In addition, the Board enforces the premium caps. After the plans submit bids, the
alliance projects the weighted average premium, using its guess of enrollment in the next
year. If the weighted average premium is above the premium cap, the Board reduces the
premiums of plans above the average, so that the target is met. If, ex post, more people than
expected joined high cost plans, the Board reduces the allowed increase in future years so tha
the target is met.
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V.D Implications for National Health Expenditures
This section to be written.
V.E The Effects on the Federal Budget
The Health Security Act spends money in five major areas (see Table 4-7). The first
is new spending on Veterans Affairs, Public Health, and Administration. This totals $12
billion in 2000. The second area of spending is the drug benefit for Medicare recipients,
costing $16 billion in 2000. Related to this is long-term care spending, which will largely
benefit the elderly. This spending is $20 billion in 2000, most of which is for a new home-
and community-based long-term care program. Fourth, giving 100 percent tax deductibility
of health insurance premiums for the self-employed will cost $3 billion. Finally, there are
premium discounts and subsidies, totalling $43 billion in 2000. These discounts are the
difference between $104 billion in gross costs and $61 billion of Medicare and Medicaid
savings, as people leave these programs and receive private coverage. Total new spending is
$94 billion.
These new costs are covered through 6 sources of savings. First, there is a tobacco
tax and 1 percent payroll assessment on corporations who choose to remain outside the
regional alliance. These taxes raise $15 billion. There are also savings in public sector
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programs. Medicare savings are projected to $42 billion, and Medicaid savings are $28
billion. In addition, there are savings in other federal health porgrams, including the
Veterans Administration, the Department of Defense, and the Federal Employees program.
These total $14 billion. Fifth, the plan will raise $31 billion of additional revenue. Most of
this revenue is from slower health care cost growth leading to increased wages and salaries,
from removing health insurance premiums from "cafeteria plans" offered by employers, from
assessments on corporations benefitting from the early retiree provisions, and from dedicated
premium revenue for academic health centers. Finally, the plan generates $4 billion of lower
debt service.
In total, the plan raises $132 billion through these sources of savings. Since savings
are greater than new spending, there is $38 billion of deficit reduction.
VI. Economic Effects of the Health Security Act
Reforming one-seventh of the nation's economy has enormous economic effects.
Payments by almost all families and businesses will be affected by the reform. In such a
situation, there are bound to be both positive and negative economic effects of the program.
VI.A Changes in Wages
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As noted above, the dominant effect of increases in health care costs over time has
been a reduction in the real wages received by employees. As health care reform lowers
employer health insurance payments over time, there should be a corresponding increase in
workers wages. The estimates above suggested that after reform, employer payments for
health insurance would be $xx billion below their expected level in the year 2000. Wage and
salary compensation should therefore increase by .8*xx to XX billion, or about yy percent.
VI.B Employment Effects of Reform
An important concern about health care reform is its effect on employment.
Employer mandates increase labor costs to firms which are not now providing or are
underproviding insurance. This fact has led to fears that there will be a large amount of
involuntary job loss as a consequence of reform. It is clearly true that there will be
increased costs for firms that are not now providing insurance. But, there are also cost
reductions for firms that are currently offering coverage, however. These reductions come
from three sources. First, spreading the cost of universal coverage over all workers benefits
firms that are already providing insurance. Second, insuring the uninsured reduces the
markup over their costs that currently insuring firms face. Finally, slower cost growth over
time lowers payments for firms currently providing coverage.
Table 4-8 shows changes in average contributions for firms in the year 2000. Firms
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not currently offering insurance will see costs increase by $1,281 on average. This is well
below average premiums because of the discounts available to these firms. Firms that are
now offering insurance to their workers will see an average spending decline of $391 per
worker, from $2,887 without reform to $2,496 with reform. Any analysis of the
employment effects of reform must take all of these changes into account.
A second employment issue is that reform may induce some individuals to leave the
labor force entirely. Some individuals who work mainly to obtain health insurance coverage
may voluntarily leave the labor force after health reform is passed. The most important form
of voluntary labor force reduction is retirement. Evidence from Continuation of Coverage
(COBRA) laws passed by the Federal government and many state governments suggests that
about 1 percent more individuals decide to retire when they have the option to purchase
coverage through their former employer after retirement. Increasing these estimates to
account for the lower price of insurance under reform, about 350,000 to 600,000 people
could decide to retire early because of the Health Security Act.
A final employment issue is that some welfare recipients will decide to enter the labor
force when health benefits are universal. For a welfare recipient who is currently receiving
Medicaid benefits, taking a job can amount to a tax of two-thirds or more on earnings
because of the reduction in AFDC benefits, food stamps, and Medicaid benefits that
accompany entering the work force. When health care is available continuously, however,
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the average "tax rate" associated with leaving welfare should fall by up to 10 percentage
points. A number of studies suggest that many more welfare recipients will decide to work
in response to these lower implicit tax rates. One estimate, for example, is that up to one-
quarter of the 4 million welfare recipients would leave welfare because of health care reform.
Box: Will health care reform lead to job loss?
Existing models do not allow us to predict the employment effects of health care
reform with great precision. In many other areas of economics, there are models that have
been tried and tested for decades, and economists generally place at least some faith in the
outcomes they predict. Such models do not exist in health care, however. The appropriate
model for such an exercise would have to make distinctions both between firms that currently
provide insurance and those that do not and among the many ways that firms in either group
might respond to a change in their health care costs. Such a model would also have to
predict how individuals might respond to new incentives in the plan, particularly those
affecting small business creation, job mobility, welfare lock, and retirement.
In the absence of an appropriately specified model, one can generate either small net
positive or small net negative effects of the Health Security Act on employment, depending
on the assumptions one is willing to make in existing models. Not surprisingly, several
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private-sector economists have concluded, as has the Council of Economic Advisers, that the
net effect of health reform on the aggregate employment level is likely to be small -- plus or
minus one-half of 1 percent of the aggregate employment level. This is because there are
factors in the plan that will tend to both decrease and increase employment, as well as
change its composition. These offsetting factors are likely to cancel each other out.
However, as me move through time and business health care spending falls further and
further below baseline, the factors encouraging an increase in employment and wages are
likely to strengthen.
VI.C Changes in Firm Behavior
In order to limit the adverse effects of the mandate on small firms, the Health
Security Act subsidizes firms with low-wages. The subsidies create incentives for some
firms to alter their behavior to collect a subsidy, however. Any firm that has high enough
wages so that its costs are below 7.9 percent of payroll will pay the full cost of insurance for
each of its low-wage workers. If the firm splits into a high-wage and a low-wage firm,
however, the new low-wage firm can receive employer subsidies. The high-wage firm can
then purchase the services of the low-wage firm and together, the two firms will produce the
same amount of output but will have saved premium money. This type of "outsourcing" has
the potential to split apart a number of current firms.
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Incentives for outsourcing are also created by the employer subsidy. Any employee
earning a high wage in a capped firm may be contributing more than the actuarial cost of the
premium, since 7.9 percent of payroll can be greater than the required employer
contribution. If the high-wage individual moves to a high-wage firm, therefore, that person's
health insurance payments would decline. The person could then contract out their services
to the original firm and output could be the same, but with lower insurance costs.
The ability to outsource is a cause of both economic and financial concern.
Outsourcing would clearly raise the subsidy costs to the Federal government. In fact, this is
one of the reasons for the subsidy cushion implicit in the Administration's estimates. In
addition, outsourcing could cause segregation of the labor force into "high-wage" and "low-
wage" firms. The extent to which outsourcing will occur, however, has not been effectively
analyzed in the economic literature.
VI.D Labor Supply and Tax Evasion
A related behavioral concern is that individuals in capped firms will have incentives
to work less hard or to shelter income. For workers in these firms, the cap is similar to a
payroll assessment -- for each dollar of earnings, the firm pays 7.9 percent more in health
insurance. In response to this, labor supply might fall, or tax evasion may rise.
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Labor supply effects are unlikely to be large, however. Most estimates of labor
supply elasticities suggest they are relative small, about 0.2. More importantly, however, for
many individuals the cost of health insurance will fall under reform, leading to wage
increases and a greater incentive to work. Finally, tax evasion is unlikely to be large. For
very wealthy people, there is some evidence that reporting elasticities are larger, although
this evidence is still debated. For people below the top of the income distribution, however,
there is little evidence to suggest a large evasion response.
VI.E Effects in the Health Sector
Health care reform will have two effects on the health sector. First, reform will
result in greater health care employment in the short run. In the first few years, reform is
characterized by increased spending on the uninsured and underinsured. Estimates are that
universal coverage by itself would create over 400,000 net new jobs in the health care sector.
These jobs are not all new jobs in the economy, however. Many of these additional workers
will move from other industries and occupations. Over time, as the growth rate of health
spending falls, employment in health care will grow less rapidly. The number of employees
still increases, since spending on health care is still increasing.
Over time, the other factor affecting the health sector is increased productivity in the
provision of care. Eliminating administrative expense and inappropriate or unnecessary care
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will increase the productivity of this part of the economy. As the health sector becomes
more productive, the economy will be able to produce more output than it could before re-
form. We will be able to consume the same amount of health services, as well as more of
other goods and services. This productivity increase will raise living standards.
VII. Summary
Health care reform is both a social and economic issue. Socially, one of the goals of
reform is to provide universal coverage and guarantee health security.
Economically, health care reform is vital to increasing the standard of living of
American families, containing the growth of government spending, and increasing the
mobility of the American workforce. One-seventh of our nation's economy is characterized
by incomplete competition, inadequate information, and distorted incentives. By changing
these incentives, increasing competition, and increasing the availability of information,
reform can contribute to cost savings and universal coverage.
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Table 4-1: Health Insurance Coverage For a 28 Month Period
Months of Coverage (Public or Private)
Percent
28 months
73.5%
Less Than 28 Months
26.5%
25-27 Months
3.6%
13-24 Months
12.3%
7-12 Months
3.7%
1-6 Months
3.0%
0 Months
3.9%
Source: Commerce Department.
Period is February 1987 through May 1989.
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Table 4-2: Growth of Real Per Capita Health Care Spending
1960-70
1970-80
1980-85
1985-90
United States
6.0%
4.2%
4.1%
4.6%
Canada
6.1
3.7
5.0
3.6
France
7.8
5.3
3.3
3.2
Germany
5.6
6.3
1.9
1.0
Italy
8.9
6.2
1.6
4.8
Japan
14.0
7.1
3.1
4.4
United Kingdom
3.7
4.4
2.6
3.6
Average (non-US)
7.7
5.5
2.9
3.4
Source: OECD.
Average for non-US countries is weighted by GDP per capita (in U.S. dollars) in 1990.
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Table 4-3: Sources and Uses of Health Care Funds, 1991
Private Spending
Government
Business
Household
Workers
Out-of-
Uses of Funds
Total
Premiums
Comp.
Premiums
pocket
Medicare
Medicaid
Employer
Other
Total
$752
$153
$18
$52
$178
$123
$101
$40
$89
Hospital
289
102
8
25
73
43
38
Physician
142
67
7
26
33
7
3
Other Profes-
73
29
1
34
4
4
1
sional, Dentist
Home Health,
70
1
1
29
7
31
1
Nursing Home
Drugs, Vision,
87
10
1
54
3
12
7
Other
Administration
44
35
1
1
3
4
0
Public Health
25
0
0
0
0
0
25
Research and
23
0
0
9
0
0
14
Construction
Source:
Note: Breakdown of business premiums includes household and employer premiums.
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Table 4-4: Health Care Spending Per Insured American, 1994
Category
Amount
Total
$7,423
Health Insurance
4,132
- Employer Share
3,163
- Employee Share
969
Medicare Payroll Tax
926
Workers Compensation/Disability/Industrial Implant
246
Out-of-pocket
782
Other Spending at Health Facilities
113
Federal Taxes, Fees and Other Payments
654
- Federal Employees' Health Premiums
53
- Federal Contribution to Medicare HI
11
- Medicare (general revenue)
169
- Medicaid
246
- Other Federal Health Programs
174
State and Local Taxes, Fees and Other Payments
569
- State/Local Employees' Health Premiums
149
- State/Local Contributions to Medicare HI
24
- Medicaid
186
- Hospital Subsidies
81
- Other Programs
130
Source: ASPE.
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Table 4-5: Estimated Premiums in the Regional Alliance, 1994
Payments By:
Average
Rating Pool
Premium
Family
Employer
Singles
$1,932
$386
$1,549
Couples (No Children)
3,865
773
2,125
1 Adult Family
3,893
778
2,479
2 Adult Family
4,360
872
2,479
Source: HCFA.
National averages; will differ by alliance.
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Table 4-6: Schedule of Small Firm Discounts
Firm Size
Averge Wage
<25 workers
25-50 workers
50-75 workers
<$12,000
3.5%
4.4%
5.3%
$12,000 - $15,000
4.4
5.3
6.2
$15,000 - $18,000
5.3
6.2
7.1
$18,000 - $21,000
6.2
7.1
7.9
$21,000 - $24,000
7.1
7.9
7.9
>$24,000
7.9
7.9
7.9
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Table 4-7: Sources and Uses of Health Care Funds, Year 2000
(billions of dollars)
Sources of Funds
Uses of Funds
Source
Amount
Use
Amount
Tobacco Tax/Corporate
$15
Veterans, Public Health,
$12
Assessment
Administration
Medicare
42
Medicare Drug Benefit
16
Medicaid
28
Long-term Care
20
Other Federal Programs
14
100% Tax Deduction for
3
Self-employed
Other Revenue Effects
31
Subsidies
43
Debt Service
2
Total
$132
Total Spending
$94
Deficit Reduction
$38
Source: White House
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Table 4-8: Employer Payment for Health Care, Baseline and Reform
Year 2000
(billions of dollars)
Number of
Average Spending
Workers
Insurance Status of Firm
(millions)
Current
Reform
Change
All
122.7
$2,267
$2,214
-$53
Currently Offers Insurance
96.3
2,887
2,496
-391
Does Not Offer Insurance
24.4
0
1,281
1,281
Among Firms That Offer Insurance:
< 25 employees
13.4
$2,470
$1,908
-562
25-99 employees
13.5
2,206
2,101
-105
100-499 employees
17.2
2,641
2,315
-326
100-999 employees
7.0
2,953
2,420
-533
1000-4999 employees
25.4
3,091
2,582
-409
> 5000 employees
21.8
3,238
2,938
-300
Source: Urban Institute. These data are still preliminary.
Sources of Health Insurance, 1992
27.2%
Medicare
13.4%
Employer-based
Employer-sponsored
Individual,non-group
CHAMPUS/VA
Medicaid
14.6%
Uninsured
27.2%
7.9%
8.3%
1.6%
20
Privately Insured People Pay for Inadequate
Reimbursement in the Public Sector and for the
Uninsured
Share of costs
3
140
129.7
120
100.1
100
88,4
81.6
80
60
40
19.6
20
O
Uninsured
Medicaid
Medicare
Other government
Private insurers
Per Capita Total Expenditures on Health Care vs.
GDP (in U.S. Dollars), 1990
Per Capita Health Spending
3,000
U.S. (12.1)
2,500
2,000
Canada (9.3)
+
Germany (8.1)
1,500
Switzerland
(7.7)
1,000
U.K. (6.2)
Greece (5.5)
500
Turkey (6.2)
XI
O
O
5,000
10,000
15,000
20,000
25,000
Per Capita GDP
Note: Numbers in parentheses are percent of GDP spent on health care.
Source: OECD.
Chart 4-3
Employee Compensation and Business Spending on
Health Insurance as a Share of GDP
Employee Compensation as a percent of GDP
Business Spending on Health as a percent of GDP
70
7
60
6
50
5
40
4
30
3
20
2
10
1
O
O
60
62
64
66
68
70
72
74
76
78
80
82
84
86
88
90
92
Employee Compensation
Business Spending on Health
Insurance
Source: Department of Labor.
Careful Studies Document High Rates of Unnecessary Care for Five Major Procedures
100%
74%
72%
56%
50%
44%
36%
35%
32% 32%
28%
20%
16%
17%
17%
11%
8%
0%
Coronary
Coronary
Pacemaker
Carotid
Upper G.I.
Bypass
Angiogram
Insertion
Artery
Endoscopy
Surgery
Surgery
Appropriate
Equivocal
Unnecessary
(-II
II
Appropriateness Graph
TEL:
Oct 04'93
0:01 No.001 P.01
DO THE PRESIDENT'S NUMBERS ADD UP?
Uwe E. Reinhardt, Ph.D.
James Madison Professor of Political Economy
Princeton University
October 2, 1993
In the spring of 1993, the Congressional Budget Office forecast that, at current trends, the
United States will spend 19% of our GNP on health care in the year 2000. "Impossible!" shouted
America's pundits. That level of health spending would bankrupt America.
In the fall of 1993, President Clinton proposed to take that projected growth down to "only"
17% of the GNP by the year 2000. "Impossible!" shouted America's pundits. Projecting such a
steep decline in spending would lead to "rationing" of care.
While Americans are, thus, meandering from despair over the prospect of physical
deprivation at 17% of the GNP to despair over the prospect of financial collapse at 19%, no other
industrialized nation would even contemplate spending as much 17% of its GNP on health care
by the year 2000, and none of them spend as much as 10% of their GNP on health care today.
Why, then, should President Clinton be made to show cause that it is plausible to project a
"decline" in American health spending from the current 14% of GNP to 17% by the year 2000?
Why should not the shoe be on the other foot, that is, why should not the President's critics be
made to demonstrate that 17% is unattainable?
Let us examine, for example, the projected "cuts" in spending on Medicare, the health-
insurance program for America's elderly. For that program, the President would allow annual
spending to increase from $ 128.8 billion in 1993 to as much as $ 207.8 billion in the year 2000.
That represents an average annual compound growth rate of +7.1%. Can America's physicians
really look the American taxpayer straight in the eye and argue that, for "only" $ 207.8 billion, they
could not possibly treat America's elderly properly In the year 2000?
To put that question in perspective, let us review some fascinating data published in The
New England Journal of Medicine of March 4, 1993. In that study Its authors found that, in 1989,
after adjusting for differences In age and gender, Medicare spending on physician services, per
beneficiary, varied from lows of $ 822 In Minneapolis, $872 in San Francisco, and $ 954 in New
York City to highs of $1,493 in Detroit, $ 1,637 in Fort Lauderdale and $ 1,874 in Miami. Among
policy wonks such enormous and inexplicable differentials in spending have been well known for
some time.
Should not America's physicians, and the legislators from the high-cost states, be made
to defend these differentials to the tax-paying public? If the spending level for Florida were
TEL:
Oct 04'93
0:02 No.001 P.02
2
appropriate, are we to infer that physicians in Minneapolis, New York and San Francisco routinely
subject their elderly patients to brutal "rationing"? Altematively, If the elderly in New York and San
Francisco are being properly treated by their physicians, why then must the federal government
budget over twice as much money for the treatment of elderly Americans in Detroit and in
Florida?
Suppose Congress arbitrarily slashed Medicare reimbursements for Miami physicians by
a global 20%. Could these physicians really argue that their patients would be harmed thereby?
If so, how would these physicians explain that to their colleagues in San Francisco, in Minneapolis
or In New York? After all, even after this budget cut, Miami physicians would still be absorbing
57% more Medicare dollars per beneficiary than would their colleagues in New York, and over
80% more than would their colleagues in Minneapolis.
One could raise similar questions for private-sector spending, where similar variations
occur; but the point has surely been made. Cries of "rationing" in response to the President's plan
hide something else. They hide a pervasive sense of impotence. Read carefully between the
critics' lines. None of them is saying that spending 19% of the GNP on health care is reasonable,
or that spending only 17% is unreasonably low. These critics are saying that, even if these
spending levels are unreasonably high, during the next seven years or so neither the private
sector nor the United States Congress will muster the courage to challenge the providers of
health care on the issue of "rationing," and that neither payer will have the moxy to constrain
American health spending to levels that would still be judged ludicrously high by any other nation.
Now, the President does propose to bring some 37 million currently uninsured Americans
into the fold of comprehensive insurance. Many critics argue that so many additional people could
not possibly be accommodated by our health system at spending levels of "only" 17% of the
GNP. Oddly enough, many of these same critics also calm the champions of the uninsured with
the soothing assertion that uninsured Americans merely lack health insurance, but not health
care, for they allegedly receive adequate treatment at the expense of paying patients to whom
the cost of that charity care is shifted. But how can both arguments be true? If the uninsured
already do get the care they need, why then should extension of insurance to these people all
of a sudden break the national bank? On this point, too, the President's critics should try harder
to get their stories straight.
The President's proposal Is complex enough to offer any would-be critic many targets of
opportunity. It Is puzzling that his spending forecast is chief among those targets. Sure, the
President could explain his cost forecast better than he has so far. The secrecy surrounding the
underpinnings of his numbers is a bit puzzling. But the burden of proof on this issue ought not
to rest with the President. It rests on the shoulders of his critics, for it is they who have much
explaining to do.
OCT-04-1993 13:56 FROM ECONOMICS DEPT
TO
9120245625573392340
P.02
NEW YORK UNIVERSITY
FACULTY OF ARTS & SCIENCE
C.V. STARR CENTER FOR APPLIED ECONOMICS
William Baumol
Director
(212) 998-8943
Charles Wüson
October 4, 1993
Co-Director
(212) 998-8954
Mrs. Hilary Rodham Clinton
PAM
1993
The White House
Cindy Heilberger
Washington, D.C. 20500
Administrator
Fax #: (202) 456-2557
(212) 998-8936
Attention: Ms. Pam Barnett
West Wing, 2nd Floor
Writer's phone #:
(212)998-8943
Dear Mrs. Clinton:
Thank you once more for the very nice note you sent me by way of Ira
Magaziner. I really don't get much mail from the White House. I am, of course,
an enthusiastic supporter of your very valuable health-care initiative, and will do
everything I can to help in its promotion, as I have been doing with the reporters
who call almost daily.
This letter is, I suppose, a last attempt to dissuade you from advocacy of your
demanding cost growth containment goal, though I agree fully that there is plenty
of room for once-and-for-all and continuing savings. These should be pursued
avidly, and here your program offers very substantial promise.
There is, however, a crucial difference between the reduction in cost level that
these savings can achieve and the goal of zero growth in real costs thereafter, once
these savings are achieved. What that target requires is a set of new and
cumulative savings every year. Manufacturers of computer chips reap the rewards
of increased productivity consistently and cumulatively year after year. In health
care, there is absolutely no evidence that there can be year after year reductions in
the number of labor hours expended per illness, yet it is this miracle that is
needed for health care to achieve the average rate of productivity growth in the
U.S. economy. Without it, zero real cost growth is unattainable. Once one has
simplified administration, cut litigation and eliminated duplication of equipment,
where are these annual added improvements in productivity to come from? The
vast majority of the world's free market economies have failed to come even close
to achievement of your goal.
It seems to me that you have little to gain and everything to lose by promising to
achieve zero real cost growth. The media report widespread skepticism about this
part of the plan. Why feed that skepticism?
There is another serious danger, which is becoming an unfortunate reality all over
Europe. As health-care cost increases exceed political promises, the uniform
269 Mercer Street
New York, N.Y. 10003
Telephone: (212) 998-8936
Fax: (212) 995-3932
OCT-04-1993 13:56 FROM ECONOMICS DEPT
TO
9120245625573392340
P.03
response is to cut services, reduce quality and turn to rationing. Why can we be
an exception? Surely, one should not implant a time bomb that can one day
undermine the health-care system.
To sum up, there is plenty of evidence that there are opportunities for substantial
reductions in the level of costs, which in the U.S. is probably the highest in the
industrial world. I have seen no evidence that any way is known to reduce the
long-run growth rate of costs, in which U.S. performance is just about average.
With credibility of the figures being one of the toughest tasks facing proponents of
the program, it seems to me that much more-guarded public statements on
prospects for long run cost growth under the program have much to recommend
them.
I apologize for this letter's length; my excuse is the importance and complexity of
the issue.
With warmest regards,
William J. Baurnol
WJB/jar
SENT BY:Xerox Telecopier 7020 :10- 1-93 : 3:16PM :
6092581418-
202 456 7739:# 1
Princeton University Woodrow Wilson School
of Public and International Affairs
Robertson Hall
Princeton. New Jersey 08544-1013
Tel: (609) 258-4781 (Office) (609) 924-7625 (Home)
Fax: (609) 258-2809 (Office) (609)924-6083 (Home)
Uwe E. Reinhardt
James Madison Professor
of Political Economy
September 30. 1993
Post-It™ brand fax transmittal memo 7671
, of pages 2
Mr. Larry Levitt
To L. Levitt
From U, Reinhardt
Old Executive Office Building
Co.
Co.
17th and Pennsylvania Ave., NW
Dept.
Phone #
Washington DC 20500
Fex 202-456-7739
Fax 609-258-2809
Dear Mr. Levitt:
The Woodrow Wilson School of Public and International Affairs of Princeton University and
Project Hope's lealth Affairs are jointly organizing a policy workshop on President Clinton's health-
reform proposal. The workshop will be held on October 29-31, 1993 on the campus of Princeton
University. The workshop is supported through a grant from the Robert Wood Johnson Foundation.
A number of independent health economists have been asked to present their assessment
of the President's plan, as it has been set forth in the President's Working Group Draft dated
September 7, 1993. At this time, the following economists have been asked to present first drafts
of their papers at the workshop:
Henry Aaron of the Brookings Institution
Stuart Altman of Brandeis University
Alain Enthoven of Stanford University
Martin Feldstein of Harvard University
Victor Fuchs of Stanford University
Joseph Newhouse of Harvard University
Mark Pauly of the University of Pennsylvania
Uwe Reinhardt of Princeton University
Gail Wilensky of Project Hope
Although all authors will act as discussants of the other authors' papers, the debate on
each paper will be initiated by a discussant who, typically, will not be an economist. All of the
papers will be published in an early-spring volume of Health Affairs. The discussants may have
their (shorter) statement published along with the corresponding paper. if they wish. It is planned
to ask a panel of health-care providers to offer their reactions to the papers and to the President's
reform proposal in general. Finally, we would like to invite representatives of the Administration
as well as bi-partisan representation from Congress to react to the commentary offered by the
economists and by the panel of health-care providers.
SENT BY:Xerox Telecopier 7020 :10- 1-93 : 3:16PM :
6092581418-
202 456 7739:# 2
John Iglehart of Project Hope's Health Affairs and I would be delighted if you could join us
at this workshop.
Space at the workshop is limited. Would you therefore please let us know at your earliest
convenience, by telephone (609-924-7625), fax (609-924-6083) or mail, whether you will be able
to join us. We have reserved 8 block of rooms at the Nassau Inn in Princeton. The hotel will hold
these reservations only until October 6. Would you please make your hotel reservation directly
with the Nassau Inn (tel. 609-921-7500, fax 609-921-9385) if you do intend to join us.
Looking forward to hearing from you, and with John's and my best regards,
Sincerely,
Uwe E. Reinhardt
Progressive
POLICY INSTITUTE
POLICY BRIEFING
July 26, 1993
Health-Care Reform and the Laws of Economics
Robert J. Shapiro
President Clinton's plans to reform America's health-care system can
succeed, but only if he does not try to accomplish everything at once and only if
the plan's economic logic is sound. To ensure universal coverage and reduce
medical-care inflation without damaging the economy, the reforms will have to
be implemented gradually, foster more economic competition among providers,
and demand more economic responsibility from every patient.
At the heart of the issue is one of the oldest problems in economic policy:
What should government do when people want more of some good than the
economy will produce at prices they are willing or able to pay? Presidents facing
this problem can look for ways to balance the people's desires with the laws of
supply and demand, or try to satisfy them and risk injuring the economy. The
test of leadership for this President, elected to cure both the economy and the
health-care system, will be his ability to shape a package that provides everyone
a measure of security while respecting the manner and pace of economic change.
Facing the Problem
So far, both health-care reformers and skeptics have demonstrated that
it is easier to identify problems than to find sound solutions. The most
ambitious reformers are clearly correct that fundamental change has to come
soon. In no other advanced country does one of every seven persons have to
manage without routine care -- one of the reasons why life expectancy in the
U.S. now ranks 15th in the world. Furthermore, the enormous costs of the
medical system producing these dismal results injure the American economy.
For nearly a decade, health-care costs have been the principal factor driving both
federal borrowing and federal spending. Rising insurance costs have cut the
wage gains of most workers. Moreover, the doubling of the share of the nation's
resources claimed for medical services, from barely seven percent of GNP in 1970
to roughly 14 percent today, has dampened investment and growth elsewhere in
the economy by reducing the profits of nearly all firms and bidding-up the price
of capital and skilled labor. Put another way, so long as health care grows much
faster than the rest of the economy, the rising bill can't be paid without
sacrificing investment, productivity and income growth for most Americans.
The Progressive Policy Institute 316 Pennsylvania Avenue, SE, Suite 555, Washington, D.C. 20003 202/547-0001
Reform is imperative; but the skeptics are also correct that no government
or group of experts have the knowledge or means to reform, all at once, an
extraordinarily complex, $900 billion-a-year sector that accounts for one-seventh
of the largest economy in the world. In such an industry with billions of
annual transactions carried out at tens of thousands of facilities, using millions
of workers and hundreds of thousands of different goods to produce tens of
thousands of services -- sensible reforms must proceed incrementally and in
ways that do not conflict with the normal operations of the economy. Further,
they must take into account differences among regions and states.
Two of the basic laws of economics are at issue here. The first is that
prices rise when demand increases and supply does not expand as quickly.
Simply extending or mandating insurance coverage for the 35 million people who
lack it today will inevitably spark faster-rising medical prices and costs. If this
coverage includes long-term care, prescription medicines, mental-health, dental
treatments and more -- as many reformers want medical-care inflation will
rise even faster.
The second law confronting health-care reform is that economic demand
for most things responds to prices. So long as conventional insurance and the
current health-care system let most Americans use medical services without
paying directly for them with little practical recognition of the costs -- demand
for health care will never be disciplined and prices will continue to rise. These
arrangements not only encourage the demand for routine medical treatment,
they also guarantee a broad market for expensive new medical technologies.
Once developed, costly new technologies quickly become generally available and
broadly applied, greatly intensifying cost pressures.
If these economic forces did not matter, the President and Congress could
simply tell business and government to cover everyone for every condition right
away. But they do matter, as our current problems with medical care
demonstrate. Public and private insurance for elderly and poor people, and for
most workers and their families, has vastly expanded demand for health-care
services, pushing up the costs for those paying the bills. As a result, insurers
and businesses have been forced to exclude more workers and more conditions
from basic coverage, especially small firms expanding their payrolls and mature
companies obliged to cover large numbers of older employees. The paradox for
health-care reform is that in our current "cost-unconscious" medical
marketplace, universal coverage tends to price itself out of the reach of those
guaranteed it.
The principles of economic competition can begin to resolve this paradox
by creating powerful economic inducements to discipline the demand for medical
treatment and increase the supply of efficiently-delivered care. Managed
2
competition, the most prominent policy strategy based on these principles, would
try to restructure our health-care markets by creating new incentives that (1)
force insurers to compete more on the basis of value and price; (2) require
everyone to assume more personal economic responsibility for their health-care
choices; and (3) constrain providers to meet people's basic needs more efficiently,
principally through health maintenance organizations (HMOs).
Pointing a Way
Over several years, we can provide basic coverage for everyone without
injuring the economy. No one should doubt that we must do so. It will require
that we extend coverage gradually, and even then the additional demand will
raise health-care prices for everyone. It also will require that the President and
Congress resist appeals to add new benefits to basic insurance. By most
estimates, adding benefits for mental-health and dental services, medicines and
long-term care could increase the nation's health-care bills by as much as $100
billion a year. Ensuring basic coverage for everyone will mean reforming the
basic ground rules of our health-care markets so that there, as everywhere else
in the economy, consumers bear more of the costs of their own choices, forcing
health-care businesses to become more efficient in order to survive. In short, it
requires a new medical-care marketplace that satisfactorily can balance supply
and demand.
If we choose this path, its incentives should reorganize the practice of
medicine. Most of us will have to accept treatment less often from doctors and
more often from nurses and other non-physicians. All but the truly poor will
have to pay more for insurance and more for every service; everyone will have
to forgo any prospect of a huge malpractice award. Most physicians will have
to practice through HMOs; but, if high-quality medicine is part of the equation,
they will still retain control over their own professional decisions.
This asks a lot of the vast majority of Americans who already are insured.
Yet it is this majority, not the uninsured minority, driving the demand for
universal coverage covering virtually any medical condition. According to
surveys, most of us want a guarantee that we always will have the services we
need, now and when we are older. We want to be certain that whatever our
medical condition or job status, we and our families can get all the medical care
we need.
Among the legions of health-care reformers, the proponents of market
competition are challenged by those who see government mandates and price
regulation as the only practical means of extending coverage and controlling
costs. This alternative, however politically expedient it may seem, can only
defer the remorseless logic of supply and demand at great economic cost.
3
The Shape of Tough-Minded Managed Competition
The strategy for managed competition has two basic parts, addressing in
turn patients and providers. First, discipline demand for medical services by
compelling people to pay more for them. For years, the standard proposal has
been to limit the deduction that businesses can claim for insurance premiums
they pay for their workers in order to raise the pressure on firms to search for
more efficient coverage. But raising the cost of insurance coverage for business
will not be enough to restrain demand, judging from the fact that a decade of
determined insurance-shopping by most companies has not slowed health-care
inflation.
This approach should be taken two steps further. First, limit the amount
that companies can deduct for providing health insurance to the cost of the
least-expensive package of basic benefits on the market, thereby providing a
direct incentive for firms to select the most lean and competitive health plan.
Second, heighten the pressure on everyone by counting as part of a person's
taxable income any premiums exceeding this minimum amount paid in his or
her name by an employer.
The object is not to increase anyone's financial burdens, but to use tax
policy to promote an insurance marketplace where consumers weigh the
purchase of economical coverage against other plans and insurers have stronger
incentives to compete for their business on the basis of price and value. This
can happen by maintaining the current taxpayer subsidies, both the deduction
for business and the income-exclusion for their employees, but only up to the
cost of the lowest-priced package of basic benefits. At first, these incentives
could attract more business for the most-efficient insurers and providers than
they could handle; but, this tax reform can be phased-in over several years.
Building competitive health-care markets requires reforms affecting
demand for particular medical services as well as insurance. Under managed
competition, everyone but the poor pays part of the cost of nearly every service
they choose so that people have to assess the value of every health-care choice.
To be sure, choice means nothing when your life is at stake, and people will
always look to medical insurance for the security that life-saving treatment will
always be available. But if people accept more economic responsibility for the
rest of their care -- if copayments for most routine medical treatments are more
like auto-insurance deductibles for collision damage -- prices for these routine
services should rise at rates more like those for other goods and services.
Mandating Coverage
The principle challenge to this view comes from some reformers who want
4
to piggyback an employer mandate requiring every company to insure every
worker onto reforms requiring that most people pay more of the costs of
insurance but not most treatments. The leading proposal would require that all
employers contribute either 7 percent of their annual payroll costs to cover most
of the cost of basic insurance for every employee (80 percent of the basic
premium). In addition, to cover the rest of the cost of basic coverage, workers
would pay either about 2 percent of wages or the remaining 20 percent of the
premium.
The economics of a mandate are equivocal, at best. With more than three-
fourths of U.S. companies now voluntarily including insurance coverage in their
employees' market compensation, evidence that an employer mandate would
devastate business is not strong. Why doesn't normal market competition for
workers compel the rest to offer coverage? From the worker's perspective, the
pool of low-skilled people seeking jobs is large enough so they usually cannot
bargain effectively for health-care benefits. By most employers' calculations, the
productivity of most low-wage workers cannot justify health-care coverage that
would, in effect, substantially raise their total compensation. Far from
guaranteeing benefits to all low-skilled workers, therefore, the economics of a
rigid employer mandate would probably cost many of them their jobs. Forced
to make the choice, many companies would replace many, newly-expensive low-
skilled workers with equipment or contracts to foreign facilities.
Until a stronger economy and managed competition make coverage more
economical for these firms, reform should move cautiously on any employer
mandate. On both economic and equity grounds, there is a strong case for
making the federal government the financier of last resort for universal
coverage, using revenues from a progressive income tax, rather than forcing
companies to trade off health-care costs against job creation and using the
regressive payroll tax. This could be achieved by providing either a substantial
subsidy for small firms employing low-wage workers or a refundable tax credit
for uncovered individuals to purchase their insurance.
The problem with a direct public subsidy for universal coverage -- whether
the mandate falls on the firm or the individual, and whether the government
subsidizes small employers or their low-paid workers is the incentive it would
create for some firms to eliminate their current benefits. Until a more
competitive health-care marketplace lessens the problem, it should help if both
the subsidy and any mandate are phased in over several years, beginning with
families with small children, and the subsidy phased out as a family's income
rises. As labor conditions vary greatly across the country, each state could be
allowed to choose which form of subsidy is best suited for its economy. With
these limits, the costs could be covered by the revenues derived from limiting the
business deduction and employee exclusion for employer-paid premiums.
5
Reforming the Health-Care Industry
The second part of a market-based strategy involves reforms of the health-
care industry itself, driven principally by powerful statewide or regional
insurance-purchasing pools called health alliances. These organizations would
operate something like the New York Stock Exchange, bringing together buyers
and sellers and setting rules of trade that, in effect, compel insurers to compete
more on the basis of price and value.
To begin, the health alliances would collect most people's insurance
premiums and help consumers choose among competing insurers and plans by
publishing simple, standard information about the benefits and outcomes of
every plan. It is vital that consumers be able to genuinely evaluate the benefits
and performance of every plan since the powerful tax incentives for purchasing
the lowest-priced coverage will encourage some insurers and providers to try to
compete by cutting-back on basic benefits and reducing quality.
In addition, the alliances' new rules of trade for insurance would end the
price discrimination that today can deny people coverage or set their premiums
on the basis of their pre-existing conditions. Instead, the alliances would define
a standard package of basic benefits that all insurers would have to offer
everyone at prices unaffected by a person's health status. Insurers would have
to agree to these terms or lose the right to sell coverage through the alliances -
- a serious threat when nearly everyone is paying their premiums through them.
By agreeing, an insurer will have to compete with rivals offering the standard
package at less cost or with better outcomes, or face the commercial
consequences.
The health alliances must have the authority to maintain a transparent
and non-discriminatory marketplace for insurance without broader regulatory
powers that could stifle competition or even evolve to a government-managed
single-payer system. Like a stock exchange, the alliances would be chartered
not to regulate insurance prices or micro-manage the operations of medical
providers, but only to oversee the terms of trade for the health-insurance
market.
These reforms, however, would quickly bring about a major shakeout in
the insurance industry. To compete and survive, insurers would have to
contract with providers that find ways of delivering basic services more
efficiently. There is no mystery about where these cost-saving efficiencies would
be found. Managed competition will produce a fierce rush to HMOs, which offer
blanket coverage for a per-person price by staffs of doctors, nurses and other
assistants paid by salary or on a per-patient basis, instead of fee-for-service
medicine by physicians and specialists of patients' own choosing. (It may also
6
spur the growth of preferred provider organizations, or PPOs, a variant on the
HMO in which groups of doctors combine for a collective practice. Thus far,
PPOs have not demonstrated the HMO's potential for efficiency gains and cost
restraint.)
In theory, this strategy packs real economic power; by one reasonable
estimate, a doctor in an HMO can cover two to three times the patient-load of
private, fee-for-service physicians. Yet to date HMOs have not spread quickly.
Most Americans prefer choosing all of their own doctors, and most doctors prefer
conducting their own practices -- and for most people, the incentive to change
has been modest since most HMOs still price their services only a whisker under
fee-for-service. In short, so far HMOs have not achieved (or perhaps not passed
on) the cost savings required to make universal coverage work without injuring
the economy.
There is some evidence, drawn from recent experience with health
coverage for California public workers and for Minnesota state employees, that
HMOs can deliver medical care more efficiently and cheaply when they are part
of a managed-competition system. More intense competition will help. In
addition, economics can help identify incentives not only for HMOs to contain
costs, but also for HMO doctors and nurses to recommend fewer and less costly
services.
To achieve this, reform has to confront the high level of uncertainty
characteristic of the practice of modern medicine. Doctors and nurses often
cannot be certain how much testing and treatment a patient needs or, more
precisely, what services a patient positively does not need. Many physicians
over-prescribe expensive procedures whether or not they practice in HMOs to
avoid being sued for not ordering more services that might prove helpful. They
also bear no cost for ordering services that prove unnecessary. To drive-up the
average HMO's cost-effectiveness, health-care reform has to include broad
malpractice protection for physicians practicing standard but not extraordinary
medicine, and perhaps incentives for employee ownership or profit-sharing by
HMO physicians and nurses.
Uncertainty for patients takes a different form: How will the quality of
their care be protected as its quantity and costs are reduced? The only answer
is to rely on the independent judgment of highly-trained and well-paid
physicians, nurses and other health professionals. Insurance premiums and co-
payments have to be set sufficiently high to maintain ample incomes for medical
professionals, and doctors and nurses have to retain the independent decision-
making that all professionals expect -- or American medicine will have to settle
for people less equipped or inclined to ensure high-quality care.
7
The Regulatory Alternatives
The laws of economics apparently demand a great deal of everyone -- too
much for those urging the President to simply mandate universal coverage and
then contain health-care costs by federal regulation. By all the evidence and
theory we know, this political fix would injure both the economy and the health-
care system.
The two chief regulatory options are a "global budget" and price and wage
controls. With the first, the government would determine what share of the
nation's income could go to health care by controlling the price of all insurance
premiums. If businesses and workers are required to pay government-set fees
to the health alliances to cover all insurance, and these fees are allowed to rise
year by year according to a set measure such as payroll costs or the consumer
price index, medical providers would have to make do with the resources allowed
them by government. Everyone involved -- doctors and nurses, HMOs and
hospitals, insurers and suppliers -- would negotiate or contend for their shares.
By itself, a global budget would not contain health-care inflation for long,
because it does not address the market pressures driving up prices. If
government tried to limit the resources, in effect, by decree, people would
continue to demand levels of costly services that could not be covered by the
revenues allowed by government. When these resources run out in the eleventh
or twelfth month of the global budget -- when the government guesses wrong
about the revenues required to cover quality treatment at a particular hospital
or HMO, in a particular year, for a particular city -- something important would
have to give. People would go untreated so that universal coverage contracts,
or premiums would increase by more than promised and so bust the global
budget, or reimbursements would fall the following year and the squeeze on
revenues and treatment would recur in more virulent form.
In contrast to a global cap, a more plausible case can be made for a very
limited version to discourage price increases during the transition to managed
competition and universal coverage. As with a global budget, a limited budget
cap would depend on the government determining by some measure how much
insurance premiums should increase. The crucial difference is that the cap
would apply only to premiums for basic coverage and only while the mandate for
universal coverage was being phased in -- and the cost pressures on the cap
would be eased by the economic incentives of a more competitive health-care
system.
Still, the economics for even a limited cap remain dubious. Government
experts cannot know in advance what markets can determine only in practice -
- namely, the cost over the coming year for the most efficient insurers and
8
providers to deliver their basic services. Health-care reform itself will make
such determinations truly impossible, since it will quickly bring about countless
changes in medical practices and treatment protocols, and upheavals in the
insurance and provider markets themselves. When the government's health-care
accountants guess wrong and the rates they allow cannot cover basic costs, the
resulting pent-up price pressures will reignite medical inflation once the
temporary cap is lifted. If the cap mechanisms were to become permanent, it
would amount to government price controls for basic insurance, limiting the
power of economic competition to drive down insurance prices.
Price and Wage Controls, versus Quality Health Care
The second regulatory alternative is broad price and wage controls. There
is no sound economic theory or evidence to support the hope that these controls
could work in health care. To begin, price and wage controls are virtually
impossible to enforce in a industry like medical care, with tens of thousands of
separate facilities where billions of annual transactions are carried out,
providing thousands of different services and using tens of thousands of different
goods. Already, health-care businesses have demonstrated a protean capacity
to preserve their revenues and profits in the face of such controls. When the
government froze Medicare Part-B doctors' charges in the mid-1980s, physicians
reported visiting their patients more frequently, shifting to more highly-
reimbursed treatments, and ordering more tests that required little of their own
time -- and total costs continued to rise rapidly.
The current Medicare cost controls -- the Prospective Payment System,
which reimburses hospitals at set rates for each illness rather than each
procedure -- have not been much more effective. Over several years, this system
has modestly slowed the growth in Medicare costs, but total medical costs have
not been restrained because hospitals offset their losses by raising charges on
everyone else. Today, hospitals recover about 90 percent of the costs of treating
Medicare patients -- and charge privately insured people 128 percent for the
same treatments. If government tried to control the entire system in this way,
total costs would still depend on diagnosis -- over which hospitals, doctors and
HMOs will always retain control.
Moreover, price and wage controls would virtually cripple the effectiveness
of managed competition. The conflict comes from the squeeze they would impose
on an HMO's operating margins. As the forces of managed competition enable
HMOs to provide more, efficiently delivered health care, controls would prevent
the most efficient ones from negotiating with their suppliers and doctors for
favorable terms. This would reduce their savings and undercut their competitive
edge, and so inhibit their growth just when the system requires their expansion.
More generally, by targeting controls only to health care, the "reform" would
9
channel labor and other resources to industries paying higher, uncontrolled
prices and wages, producing shortages of medical services when more are
needed.
To work, price and wage controls need fixed targets to regulate, but
health-care reform, if it is to work, will drive continuous changes in medical
services and the practices of medical personnel.
If we are serious about providing universal coverage and slowing the
growth of health-care costs -- and without injuring the economy -- government
controls cannot be part of the solution. Instead, we will have to change the ways
we consume and provide medical care -- once again, reorganizing the practice of
medicine, receiving treatment less often from doctors and more often from
nurses and other non-physicians, paying more of the cost of insurance and of
nearly every procedure and foregoing the ability to win large judgments for
malpractice.
Even so, health-care costs will continue to rise faster than other goods and
services for some time -- and not only because insurance will always be there.
In addition, the numbers of Americans who are elderly and so require costly
routine care will continue to increase. The extraordinarily costly AIDS epidemic
will continue to spread. And technological advances in medicine will continue
to be phenomenally expensive and, under almost any imaginable reform, every
costly advance will continue to be available under standard insurance and at
nearly every large facility.
The President's clear task is to teach Americans that it is not the
government's duty to preserve the current system nor is it right to replace it
with controls. Rather, we must reform the system's basic ground rules so that,
over some years, we can achieve universal coverage while satisfactorily
balancing health-care supply and demand. Even with market-based reforms,
most Americans will pay more than they do today, for years to come. But if the
President and Congress will respect the laws of economics as they carry out
these reforms, the additional burden could help keep everyone's coverage secure
and the economy sound.
*
Dr. Robert J. Shapiro is the Vice President of the Progressive Policy Institute.
10
Economists' Advice for Clinton
Caution Is Urged
A Suprisingly Weak Recovery
On Tax Proposals
SLOW GROWTH Annual percentage rate of change in the gross
domestic product, based on 1987 dollars. seasonally adjusted
By SYLVIA NASAR
4.7
Forecast:
by Merrill
Bill Clinton's promise to focus on
3.4
Lynch
the economy "like a laser beam"
created great expectations among
the nation's economists. But in the six
1.8
months since his inauguration, many
of them have been sounding increas-
0.7
ingly disenchanted with his policies.
Some say the President promised
and did not deliver. Others, who
III
IV
I
=
thought his can-do approach would
92
93
bolster confidence and provide the
economy with a catalyst, complain
FEW NEW JOBS Grown of nonfarm
that uncertaintles, backpedaling and
payroll, in thousands
300
prospects of much higher taxes have
sown fear and confusion among busi-
ness and consumers.
200
"We've moved from one President
who seemed to be out of touch to
another President who is also out of
100
touch with what's needed in the econ-
omy," said Stephen F. Hiebsch, man-
ager of economic research at the
Oklahoma Gas and Electric Compa-
ny in Oklahoma City, who said he
92
voted for President Clinton because
THAT SINKING FEELING
of campaign promises to focus on
Overall consumers
business investment, education and
confidence
the nation's roads, bridges and other
support systems.
(Confer Board
index.
A Program Off Track?
While some economists defend the
budget now on Capitol Hill as a big
step toward taming the Federal defi-
cit, many complain that the economic
program - from the budget to health
care to trade - has veered seriously
off track
To be sure, economists are no less
fickle than other Americans Some of
the unhappiness probably reflects
The New York Times
disappointment in the President's
fects of overbuilt real estate, military,
limited power to get things done: to
What do the economists want the
date, the Administration has found
cuts and feeble growth in the rest of
President to do? Three themes
the world.
trouble getting its way dn Congress
emerge over and over again: pare or
Still, said Richard T. Curtin at the
Paul Samuelson of the Massachusetts
postpone tax increases while pushing
University of Michigan, who tracks
Institute of Technology, a Nobel lau-
for tougher, more enforceable spend-
reate in economics and à longtime
consumers' moods, "It's the lost op-
ing caps; go slower on health-care
Democrat, has said, "You've got a
portunity that's frustrating." He ac-
changes, and push harder for the
knowledged that the President cannot
President with no influence."
free-trade agreement with Mexico
deliver fast-paced, 1960's-style eco-
Further. the Administration is
and Canada.
nomic growth, but said there was
stuck with an economy that, while.
What many of them say they do not
enough room "to move from a stop-
expanding at a medest pace, is strug-
and-go expansion to one that pro-
gling to overcome the lingering ef-
ceeds more steadily."
Continued on Page C3
THE NEW YORK TIMES, MONDAY, JULY 19, 1993
Page 10l 2
Disenchanted Economists Have Advice
Still, few economists are willing to
Continued From First Basiness Page
go so far, largely because they fear,
that interest rates would jump if the
want. even if politically feasible, is to
Administration failed to get a deal.
revive the $30 billion stimulus plan
And because the broad outlines of
for Clinton
that was supposed to give the econ-
both bills - higher top income-tax
omy an immediate shot in the arm
rates and a 35 percent corporate tax
but was shot down by Congress earli-
- are similar, they urge the Adminis-
er this year.
tration to tinker around the edges.
rector of economic research at
"Hands off would be better." said
"The most important thing is to get
Rand's National Defense Institute in
the budget passed, and erase the un-
Santa Monica, Calif., said he would
Alan Sinai, managing director of Leh-
certainty," said Laurence H. Meyer,
favor a bill from the conference com
man Brothers. "Let the economy
who runs an economic consulting
mittee that "has more of the invest
work out the kinks. We're simply go-
ing to have to live with what growth
firm with that name in St. Louis.
ment incentives and less of just rais
the economy can produce."
You don't turn back."
ing taxes."
Donald Ratajczak, director of the
In fact, he and others said the Pres-
At the same time, some economists
Economic Forecasting Center at
ident's biggest impact on the econ-
are pushing for toughening the pro-
cedures in the budget for enforcing
Georgia State University, said, "Most
limits on spending growth. "It will
economists don't want the Adminis-
help to have a President who says ne
ration to prime the pump, to just go
Fears persist that
supports the concept of spending caps
out and spend."
and I'll be faithful to them." Mr
On the budget, the concern is not
higher taxes will
Meyer said. "That would increase
only that a big tax increase could hurt
dramatically the credibility of the
economic growth next year, but that
it would fail to bring the deficit under
fail to shrink the
whole thing."
control.
Caution on Health Care
Of course, the President's options
deficit.
are limited because the House and
Many economists say a Clinton
Senate have already passed their ver-
health-care program is an even big.
ger source of uncertainty for most
sions of the budget. But as the differ-
ences between the two versions are
businesses because it may involve
omy so far has come not from pro-
hammered out, he does have some
higher payroll taxes. There is grow-
grams themselves, but from the wait-
ing sentiment among economists that
room to press for smaller tax in-
ing.
creases that would take effect at a
the Administration should go slower
"There's no question Clinton confu-
later date than in the House version
on the issue - and proceed with far
of the bill.'
sion is slowing the economy," said
greater care.
Mr. Ratajczak at Georgia State.
"This is too important to do fast,"
Calling the Whole Thing Off
Worried that higher corporate tax-
Mr. Meyer said. "We're changing
Some economists take an even
es will undermine business invest-
health care. This is one of the most
stronger stand, urging the Adminis-
ment in new plant and equipment, one
important bills in recent history, and
tration to forget the current budget
of the few sources of strength in the
it's only reasonable that it be a con-
package. "The best thing they can do
economy, several economists want
sensus solution."
for the economy is to figure out a
the Administration to minimize in-
Referring to the Administration's
politically acceptable way to walk
creases in the tax burden on smaller
tough talk on health-care changes,
away from the program even if it
businesses.
Rudolph Penner, an economist at
meant less deficit reduction," said Ed
"Even if it means a little less defi-
KPMG Peat Marwick and a former
Yardeni, chief economist at C.J.
cit reduction, the best package may
director of the Congressional Budget
Lawrence. Raising taxes, said Mr.
be one that restores some of the
Office, said: "Their first rule should
Yardeni, is likely. to weaken the eco-
growth provisions," said Jerry Jasin-
be 'thou shalt do no harm.' People
nomic recovery without necessarily
owski, an economist who is president
have been particularly careless; they
solving the deficit problem.
of the National Association of Manu-
have not been sensitive to the damage
Many of the economists in this
facturers. "If you have to make
they can cause to businesses with
camp, however, did not buy the origi-
trade-offs at the margin, you are bet-
remarks about price controls here.
nal Clinton plan, and remain opposed
ter off not increasing business taxes
and payroll taxes there."
as much for ideological reasons as for
that will stifle growth and jobs."
Some economists also spoke of the
fear that the recovery is unaccepta-
Charles Wolf, dean of the Rand,
potentially stimulative effects of in-
bly weak.
Corporation's graduate school and di-
creased trade, saying the President
should be pressing harder for the
North American Free Trade Agree-
ment.
"I would like to see this free-trade
agreement pushed real hard," said-
Mr. Hiebsch of Oklahoma Gas and
Electric. "If free trade is good be-
tween Texas and New York and be-
tween Kansas and Oklahoma, 1 can't
believe free trade wouldn't be good
between Mexico, Canada and the
U.S."
Diane Swonk, senior regional econ-
omist and vice president of the First
National Bank of Chicago, agreed.
"Nafta is our insurance policy that
Mexico doesn't back off from its re-
forms," she said. "Without it, medi-
um and small exporters get locked
out. What we're hearing from our
customers is that the uncertainty has
already slowed a lot of momentum."
THE NEW YORK TIMES. MONDAY, JULY 19, 1993
Page
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