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Ronald Reagan Presidential Library
Digital Library Collections
This is a PDF of a folder from our textual
collections.
Collection: President, Office of the: Presidential
Briefing Papers: Records, 1981-1989
Folder Title: 01/15/1982 (Case File: 056754)
(2)
Box: 12
To see more digitized collections visit:
https://reaganlibrary.gov/archives/digital-library
To see all Ronald Reagan Presidential Library
inventories visit:
https://reaganlibrary.gov/document-collection
Contact a reference archivist at:
[email protected]
Citation Guidelines: https://reaganlibrary.gov/citing
A
UNPLUBLISHED
January 14, 1982
2:00 pm
THE WHITE HOUSE
WASHINGTON
THE PRESIDENT'S SCHEDULE
FRIDAY, JANUARY 15, 1982
9:00 am
Staff Time
Oval Office
(30 min)
(Baker, Meese, Deaver)
9:30 am
National Secruity Briefing
Oval Office
(15 min)
(Clark)
9:45 am
Senior Staff Time
Oval Office
(15 min)
10:00 am
Cabinet Council on Human Resources
Cabinet Room
(60 min)
(Fuller)
(Tab A)
11:00 am
Personal Staff Time
Oval Office
(55 min)
11:55 am
Photo with Max Binswanger
Oval Office
(5 min)
(Fischer)
(Tab B)
12:00 m
Lunch and Personal Staff Time
Oval Office
(60 min)
1:00 pm
Consultative Meeting with Senate GOP Leaders
(45 min)
RE 1983 Budget
Cabinet Room
(Duberstein)
(Tab C)
1:45 pm
Personal Staff Time
Oval Office
Remainder of Afternoon
5:30 pm
Staff Time
Oval Office
(30 min)
(Baker, Meese, Deaver)
A
THE WHITE HOUSE
WABHINGTON
January 14, 1982
MEETING WITH THE CABINET COUNCIL ON HUMAN RESOURCES
DATE:
JANUARY 15, 1982
TIME:
10:00 AM (60 MINUTES)
LOCATION: CABINET ROOM
FROM:
CRAIG L. FULLER
CC
I. PURPOSE
The meeting with the Cabinet Council on Human Resources
is to review the paper on a Pro-Competition Health
Plan. It was developed by a working group within the
Cabinet Council; however, it was not received in time
to circulate for views from departments and agencies or
White House Staff prior to the meeting.
II. BACKGROUND
The working group on pro-competition health care
developed a detailed options paper which is attached.
You will receive a comprehensive presentation. No
immediate decisions are required; however, guidance for
HHS will be needed in the near future in order to draft
the appropriate legislation.
III. PARTICIPANTS
A list will be attached to the agenda. It is a princi-
pals only meeting.
IV. PRESS PLAN
White House photographer only.
V. SEQUENCE
Secretary Schweiker, as the chairman pro-tempore of the
Cabinet Council on Human Resources will lead the
discussion.
THE WHITE HOUSE
WASHINGTON
CABINET COUNCIL ON HUMAN RESOURCES
January 15, 1982
10:30 AM
Cabinet Room
AGENDA
1. Pro-Competition Health Plan/CM141
THE WHITE HOUSE
WASHINGTON
MEMORANDUM FOR THE PRESIDENT
FROM:
ROBERT B. CARLESON, EXECUTIVE SECRETARY
CABINET COUNCIL ON HUMAN RESOURCES
SUBJECT:
Pro-Competition Health Proposals
The Working Group on Reforming Health Care Incentives chaired
by Robert J. Rubin, Assistant Secretary of Health and Human
Services for Policy and Evaluation, has submitted the following:
Background
In 1981, health care costs continued to spiral upward, consuming
an ever larger share of the GNP and the Federal budget. Hospital
costs, for example, have been increasing at an annual rate of
about 19 percent in contrast to the general inflation rate of
about 10 percent. Neither the industry's program of self-restraint
nor a tangled web of Federal and State regulations appears able to
stem this trend.
Industry self-restraint and government regulation have failed
because they have not addressed the most important cause of the
health cost spiral: the Federal government's poorly designed
tax and spending policies. Through the tax law and its health
programs, the government has fostered the growth of comprehensive
health insurance. The result is that a growing number of patients,
physicians, and hospitals are insulated from the cost of the
medical resources they consume. Because insurers and government
stand by to pay whatever bills are submitted, patients and health
care providers face economic incentives that tell them that more
health care is better and that money is no object. The inevitable
byproduct is inefficiency that can be eliminated without adversely
affecting the health of the American people.
In keeping with this Administration's overall philosophy, HHS and
this Cabinet Council Work Group have examined options that would
make workers, employers, insurers, public beneficiaries, physicians,
and hospitals more sensitive to the cost of medical care. Once
appropriate incentives are in place, the government could then
begin to reduce its role in this large and important sector of
the economy, allowing private citizens to adjust their behavior
in response to the incentives. Not only is this "market" or
"competition" approach more likely than regulation to succeed
in bringing the cost of medical care under control, it promises to
reverse the recent tendency to bureaucratize and politicize an
important and intensely personal service.
2
Options
Following are options for improving the efficiency of the health
care system. The options are grouped under the headings "Public
Sector" and "Private Sector.' The "Public Sector" options are
designed to improve Medicare, while the "Private Sector" options
deal with employment-based health insurance. The budget estimates
assume that the options are implemented in FY 1983.
Changes in Medicaid are not included in this package of options
because HHS believes that the Budget Reconciliation Act of 1981
gives the States substantial authority to revamp their programs
according to market principles. Before submitting new Medicaid
legislation, then, HHS would like to see how States implement the
existing law.
PUBLIC SECTOR
Under Medicare Part A (hospital insurance), most patient cost-
sharing is imposed late in a spell-of-illness (after the 60th
day) when the patient can least afford it and when it is least
likely to influence physician and patient behavior. Nor is there
a limit under Medicare on the out-of-pocket cost a seriously ill
patient can incur. In addition, Medicare's rules for paying
HMOs discourage Medicare beneficiaries from enrolling in such
plans. Under current law, conventional insurers cannot enroll
Medicare beneficiaries, except for "Medigap" coverage paid for
by the beneficiaries themselves.
Option 1: Combine improved incentives for Medicare beneficiaries
with added coverage for catastrophic illness.
This option would combine 10 percent coinsurance ($26
per day) on all hospital days after the first day with
a $2500 per year limit on beneficiary cost-sharing under
Part A (hospital insurance) and B (supplementary
medical insurance).
The existing limits on the number of covered hospital
days (90 days per spell of illness and 60 lifetime
reserve days) would be eliminated.
The $2500 limit on cost-sharing would be indexed to
increase with the rise in the medical care component
of the consumer price index (MCPI).
This proposal would reduce Medicare outlays by $500
million in FY 1983 and by $950 million in FY 1984.
Discussion
This proposal would redress the most significant shortcoming in
the existing Medicare benefit: the absence of adequate financial
protection against the high cost of serious illness. In arriving
3
at this proposal, a number of alternatives were studied,
including separate catastrophic limits on Medicare Parts A and B
and an income-related catastrophic cap. Separate catastrophic
limits on Parts A and B were rejected because separate limits are
more costly to Medicare. To achieve $500 million in Medicare
savings with separate Part A and B limits, beneficiaries would
have to be exposed to a risk of more than $2500 in out-of-pocket
costs. An income-related catastrophic cap was rejected because
it would be very costly to administer, thus reducing the
potential budget savings.
Decision:
Approve
Disapprove
Option 2: Offer Medicare beneficiaries the option of enrolling
in private health plans:
The Federal government would offer to pay 95 percent of
Medicare's adjusted average per capita (AAPCC) on
behalf of an aged or disabled beneficiary enrolling in
a private plan. The beneficiary would pay the difference,
if any, between the government's contribution and the
plan's premium.
The amount of the government's contribution toward a
private plan would be recalculated each year SO as to
reflect increases in the cost of the Medicare program.
Enrollment in a private health plan would be optional,
and all beneficiaries would retain the right to return
to Medicare during an annual open enrollment period.
Both HMOs and conventional insurers would be eligible to
participate in this "voucher" system. To qualify, a
plan would be required to offer benefits at least as
comprehensive as Medicare's Part A and B benefits.
Plans would also be free to offer added benefits as a
way of attracting enrollees.
This option would have only a small effect on Medicare
outlays in FY 1983 and FY 1984.
Discussion
When offering Medicare beneficiaries a choice of health plans,
the government would run the risk that the healthiest beneficiaries
would choose to enroll in private plans, leaving the less healthy
in Medicare. Since the amount of the "voucher" granted to
beneficiaries enrolling in private plans is tied to the per capita
cost in Medicare, such "adverse selection" against Medicare would
drive up the voucher amount and the total costs of Medicare.
4
It should be noted, however, that our proposal would reduce the
risk of cost-increasing adverse selection by:
adjusting the amount of the voucher for actuarial
factors, such as the beneficiary's age, sex, and
disability status;
paying only 95 percent of the AAPCC, thus allowing the
government a 5 percent offset against adverse selection;
requiring the participating private plans to have
benefits at least as comprehensive as Medicare's;
prohibiting the participating private plans from
discriminating against high risk beneficiaries; and
requiring that participating plans charge all Medicare
beneficiaries the same incremental premium.
Decision:
Approve
Disapprove
PRIVATE SECTOR
Unlike cash wages, an employer's contribution to an employee
health plan is not taxable income to the employee. The employer
may, however, deduct the contribution from its taxable income,
just as it can deduct other business expenses. The preferential
tax treatment for health insurance premiums encourages
comprehensive, employment-based insurance with few, if any,
controls designed to hold down the cost of medical care. In
addition, this tax preference drains the Treasury and the Social
Security Trust Funds of tax revenue. CBO estimates that in
FY 1982, the tax preference for employer-paid health benefits
will reduce Federal income tax revenues by about $20 billion and
Social Security tax revenues by about $8 billion.
The options that follow are designed to limit or offset the tax
law's distorting effect on the demand for private insurance. An
"employer deduction limit" is a limit on the amount of health
plan contribution that an employer may deduct as a business
expense. The employee's taxable income would be unaffected by an
employer deduction limit. In contrast, an "employee exclusion
limit" would limit the amount of employer health plan contribution
that is excluded from the employee's taxable income. The employer's
tax deduction for health plan contributions would be unaffected
by an "employee exclusion limit."
5
Option 3: Limit the employer deduction or the employee exclusion
for health insurance.
The limit would be a set dollar amount -- for example,
$150 per month per employee with family coverage and
$60 per month for individual coverage.
The dollar limit would be indexed so that it would
increase as prices rise.
Suboption 3A: Employer deduction limit.
HHS prefers this option for the following reasons:
A limit on the employer's business deduction would have
a more immediate impact than an employee exclusion
limit. Employers know more than employees about
health insurance and how costs can be cut. Moreover,
it is employers who bargain with health insurers.
If the tax limit is imposed on the employee, the
employer would have little direct incentive to incur
the start-up costs necessary to offer employees a
choice of plans. The employer deduction limit, on
the other hand, would give employers a more direct
incentive to offer lower cost options and encourage
employees to enroll in them. Creating health plan
choices is an important HHS objective.
The long run effect of an employer deduction limit and
an employee exclusion limit would be about the same. In
either case, the most common employer response would be
to stop making contributions higher than the limit,
leaving the employee to pay any excess out-of-pocket
with "after tax" dollars.
The individual tax cuts in the Economic Recovery Tax Act
will do little more than offset the inflation-induced
"bracket creep" in individual tax rates that is expected
over the next three years. In contrast, the corporate
tax cuts were much deeper and more enduring.
Although 25 to 40 percent of employees work for non-profit
organizations or government and would not be affected
by an employer deduction limit, these workers on average
do not have costly health benefits and would not be
affected by either form of limit.
6
Suboption 3B: Employee Exclusion Limit.
Treasury recommends this option for the following reasons:
A fraction of the labor force is employed by tax-exempt
organizations and corporations with no tax liability. A
cap on employer deductions would have no effect for at
least 25 percent and perhaps as much as 40 percent of
the labor force.
A limitation on the employer deduction would eventually
impact employee's wages, but, because it is less
visible, it would create less of a disincentive for
employees to demand excess amounts of health insurance
in wage bargaining.
Application of income tax principles indicates that an
employee's income, be it from insurance payments or
other sources, is taxable to the employee. By the same
token, all components of an employer's labor costs
should be deducted, or else his income is mismeasured.
The perception that a limitation on the employee exclusion
will appear to raise taxes on the "common man" is
incorrect. A cap of $150 a month or $1800 a year,
for instance, would generally affect those with generous
compensation packages. (Some relatively low income workers
would be affected if they are members of unions that
have bargained for expensive health benefits.) Even
then, only the excess over $1800 would be treated
as employee income and therefore taxable to the
employee. Generous grandfathering or phase-in rules
can also avoid any immediate impact on employees.
All bills proposed in Congress have placed the cap on
the employee's exclusion rather than the employer
deduction.
Discussion
In addition to deciding whether to impose a limit on the employer's
deduction or the employee's exclusion, decisions must be made
on the dollar amount of the limit, the rate at which the limit
increases over time, and whether to "grandfather" firms (individuals)
with employer health plan contributions higher than the limit in
the base year. In addition to recommending that an employer
deduction limit be used, HHS recommends that the limit be set
at $150 per family and $60 per individual; that the limit be
indexed to increase with the MCPI; and that firms exceeding
the limit in the base year be grandfathered. Such a proposal
would have no effect on tax revenues in FY 1983 and would increase
revenus by $1.3 billion in FY 1984 and by $3.0 billion in FY 1986.
7
Treasury concurs with HHS' recommendations on the level of the
limit, indexing, and grandfathering. An employee exclusion limit
with the same characteristics would have no tax revenue effect in
FY 1983 but would increase revenues by $2.4 billion in FY 1984
and by $5.9 billion in FY 1986.
Decision:
Employer Deduction Limit
Employee Exclusion Limit
Option 4: Reimburse employers for costs of offering a choice of
health plans.
Employers would be given subsidies to offset part of the
start-up costs that a firm incurs in switching from a
single health plan to a choice of health plans.
The amount of the subsidy would vary with firm size.
For example, the subsidy could be set at $5,000 per firm
plus $25 per covered employee, up to a maximum of
$100,000.
To qualify for the subsidy, the employer would be
required to offer a plan with at least 20 percent
coinsurance on all services (except specified preventive
services) and, where available, a health maintenance
organization. To assure that workers have adequate
protection against the costs of catastrophic illness,
all plans would be required to limit a family's exposure
to out-of-pocket costs to no more than $3500 per year
(indexed to increase with the MCPI).
Employers who offer a choice of plans would have to
make the same premium contribution to them'all. As
an incentive to select cost-effective coverage, those
employees who chose a plan that cost less than the
employer contribution would get a cash rebate. To
reduce adverse selection against the comprehensive
plans, the rebate would be limited to some percentage
of the difference between the premium of the High Option
plan and the premium of the plan actually selected, up
to a maximum of $50 per month per family or $20 a month
per individual. The maximum rebate would be indexed
to the MCPI.
Discussion
HHS recommends that employers be given subsidies for offering a
choice of plans because:
An employer's start-up costs for moving from a single
health plan to multiple plans are significant. (For
example, PepsiCo spent about $300,000.)
8
Allowing employees to choose among health plans is
important for generating competition. In particular,
employee choice is necessary to create a market for
innovative plans.
Subsidies would hasten the development of employee
choice in response to the deduction limit.
Treasury opposes subsidies for offering a choice of plans because:
A cap by itself eventually will create a substantial
incentive for employers to offer a choice of plans and
to allow employees to save the difference in costs
between more expensive and less expensive plans.
The "tax credit" device requires regulation of which
plans qualify and which do not. Although regulation may
sound simple, it is not.
Treasury favors encouraging employers to offer employees
a choice of plans within the context of cafeteria plans,
only recently allowed by Congress. Such plans allow
employees to choose cash instead of high option fringe
benefits. As more of these types of plans are offered,
employees will again be presented with greater choices
of health plans, as well as other packages of fringe
benefits.
The precedent is bad. For instance, we do not offer tax
credits for employers to offer pension plans nor do we
give tax credits for meeting regulatory requirements.
OMB opposes subsidies for offering a choice of plans because:
The only justification for a subsidy is that the
HHS proposal, as presently drawn, establishes sub-
stantial rules and requirements on employers who choose
to exercise the choice option. The subsidy becomes,
in effect, compensation for complying with new Federal
mandates.
The need for the subsidy could be eliminated if the new
mandates were limited to the minimum necessary to
ensure effective competition between insurers and health
providers. In particular, the requirement that employers
offer certain specific choices of plans is unnecessary,
and may even have the perverse effect of limiting the
sort of innovation in the market that this proposal is
designed to foster.
OMB believes that, under a system where employees have
a financial incentive to choose cost-effective plans,
the normal operations of the free market will provide
an adequate range of product choices to the consumer.
9
It is not necessary to rig the rules of the game to
ensure that particular types of products are offered,
and then compensate employers for the cost of complying
with the rules. By contrast, the catastrophic requirement
is a sensible feature, and should be retained, as should
the equal contribution rule.
Decision:
Approve
Disapprove
If a subsidy is approved, a decision must be made on the form of
the subsidy.
Suboption 4A: Tax credit.
HHS recommends that the subsidy be in the form of a tax credit
for the following reasons:
A tax credit does not require new application forms or
a new bureaucracy.
Employers will be more likely to take advantage of the
subsidy if they can do so in the course of filing their
regular tax returns.
Suboption 4B: Grants to Employers.
If a subsidy is to be offered, Treasury recommends that it be a
direct grant to employers administered by HHS and included in
HHS' budget.
O
If credits are indeed appropriate for health policy reasons,
then they should be placed in the health budget where
they can be adequately examined and administered, as
well as through the budget process.
A tax credit would have little effect on plans offered
by the non-profit sector or by non-profitable corporations.
Decision:
Tax Credit
Grants to Employers
B
THE WHITE HOUSE
WAEHINGTON
January 14, 1982
MEETING WITH MAX BINSWANGER
DATE:
January 15, 1982
LOCATION:
Oval Office
TIME:
11:55 a.m.
FROM:
Michael K. Deaver
I. PURPOSE
Mr. Binswanger is leaving for Jamaica and has
requested the opportunity to say good-bye and
have a photo taken for display in his new office.
II. BACKGROUND
Mr. Binswanger will be the Country Director of
the Peace Corps for Jamaica.
III. PARTICIPANTS
Mr. and Mrs. Max Binswanger (Evelyn)
IV. PRESS PLAN
White House photographer only.
V. SEQUENCE OF EVENTS
Greet Max and Evelyn Binswanger.
C
THE WHITE HOUSE
WASHINGTON
January 14, 1982
MEETING WITH SENATOR HOWARD BAKER (R-TENNESSEE)
SENATOR ROBERT DOLE (R-KANSAS), AND
SENATOR PETE DOMENICI (R-NEW MEXICO)
DATE:
Friday, January 15, 1982
PLACE:
The Oval Office
TIME:
1:00 p.m. (45 minutes)
FROM:
Kenneth M. Duberstein ten D. D.
I. PURPOSE
To discuss the Fiscal Year 1983 budget and consult with
the Senate Majority Leader, the Chairman of the Senate
Finance Committee, and the Chairman of the Senate Budget
Committee.
II. BACKGROUND
During the first session of Congress, Senate Majority
Leader Howard Baker assembled a small group of Republican
Senators to work with Administration officials in devising
a consensus on the budget and other economic plans. This
economic working group consists of Majority Leader Baker,
Assistant Majority Leader Ted Stevens, Senator Paul Laxalt,
Finance Committee Chairman Robert Dole, Appropriations
Committee Chairman Mark Hatfield, and Budget Committee
Chairman Pete Domenici.
Prior to adjournment of the first session, OMB Director
Dave Stockman met twice with this group with respect to
the Fiscal Year 1983 budget. These discussions were general
in nature. The only meeting involving the President took
place on December 18, two days after adjournment of the
first session of Congress.
The purpose of today's meeting is to allow one more oppor-
tunity for consultation with these Senate leaders prior to
finalizing decisions on the budget package.
III. PARTICIPANTS
See Attachment A.
IV. PRESS PLAN
White House photographer only.
-2-
V.
SEQUENCE OF EVENTS
The Senators will enter through the Northwest Gate to
the West Lobby where they will be escorted to the
Oval Office for a 45-minute meeting with the President.
Attachments: Participants (Attachment A)
Talking Points (Attachment B)
ATTACHMENT A
PARTICIPANTS
The President
Vice President Bush
Secretary of the Treasury Regan
OMB Director Stockman
Senator Howard Baker, Majority Leader
Senator Robert Dole, Finance Committee Chairman
Senator Pete Domenici, Budget Committee Chairman
Invited, but unable to attend
Senator Ted Stevens, Assistant Majority Leader
Senator Paul Laxalt
Senator Mark Hatfield, Appropriations Committee Chairman
Staff
Edwin Meese III
James Baker III
Michael K. Deaver
Martin Anderson
Richard Darman
Kenneth M. Duberstein
Pamela J. Turner
ATTACHMENT B
TALKING POINTS FOR
PRESIDENT'S
FRIDAY, JANUARY 15 MEETING
WITH REPUBLICAN SENATORIAL
LEADERSHIP
-- Contrary to what you may have read in the press, the major
budget decisions are still being resolved. I would welcome
your candid advice and thoughtful guidance at this point in
the process.
-- The budget we will propose must show steady downward
progress in reducing projected deficits year after year.
-- I am aware that this coming budget season will be even
more difficult than the last one. Yet I think we should
all be encouraged by the results we've achieved so far.
We've already cut the rate of spending growth in half.
The budget we will send to the Hill next month will be
a balanced package of additional savings to further
restrain the growth of government.
-- I want to assure you that I will never retreat from the
essential elements of the program which, working together,
we've put into place -- personal and business tax rate
cuts, continued spending restraint, and adequate resources
for our national defense. The proposals that we put
forward in this budget will be consistent with the progress
we've already achieved.
THE WHITE HOUSE
WASHINGTON
January 14, 1982
MEETING WITH THE CABINET COUNCIL ON HUMAN RESOURCES
DATE:
JANUARY 15, 1982
TIME:
10:00 AM (60 MINUTES)
LOCATION:
CABINET ROOM
FROM:
CRAIG L. FULLER CC
I. PURPOSE
The meeting with the Cabinet Council on Human Resources
is to review the paper on a Pro-Competition Health
Plan. It was developed by a working group within the
Cabinet Council; however, it was not received in time
to circulate for views from departments and agencies or
White House Staff prior to the meeting.
II. BACKGROUND
The working group on pro-competition health care
developed a detailed options paper which is attached.
You will receive a comprehensive presentation. No
immediate decisions are required; however, guidance for
HHS will be needed in the near future in order to draft
the appropriate legislation.
III. PARTICIPANTS
A list will be attached to the agenda. It is a princi-
pals only meeting.
IV. PRESS PLAN
White House photographer only.
V. SEQUENCE
Secretary Schweiker, as the chairman pro-tempore of the
Cabinet Council on Human Resources will lead the
discussion.
THE WHITE HOUSE
WASHINGTON
CABINET COUNCIL ON HUMAN RESOURCES
January 15, 1982
10:30 a.m.
Cabinet Room
AGENDA
1. Pro-Competition Health Plan/CM141
THE WHITE HOUSE
WASHINGTON
January 14, 1982
MEMORANDUM FOR THE PRESIDENT
Reh.
FROM:
ROBERT B. CARLESON, EXECUTIVE SECRETARY
CABINET COUNCIL ON HUMAN RESOURCES
SUBJECT:
Pro-Competition Health Proposals
The Working Group on Reforming Health Care Incentives chaired
by Robert J. Rubin, Assistant Secretary of Health and Human
Services for Policy and Evaluation, has submitted the following:
Background
In 1981, health care costs continued to spiral upward, consuming
an ever larger share of the GNP and the Federal budget. Hospital
costs, for example, have been increasing at an annual rate of
about 19 percent in contrast to the general inflation rate of
about 10 percent. Neither the industry's program of self-restraint
nor a tangled web of Federal and State regulations appears able to
stem this trend.
Industry self-restraint and government regulation have failed
because they have not addressed the most important cause of the
health cost spiral: the Federal government's poorly designed
tax and spending policies. Through the tax law and its health
programs, the government has fostered the growth of comprehensive
health insurance. The result is that a growing number of patients,
physicians, and hospitals are insulated from the cost of the
medical resources they consume. Because insurers and government
stand by to pay whatever bills are submitted, patients and health
care providers face economic incentives that tell them that more
health care is better and that money is no object. The inevitable
byproduct is inefficiency that can be eliminated without adversely
affecting the health of the American people.
In keeping with this Administration's overall philosophy, HIIS and
this Cabinet Council Work Group have examined options that would
make workers, employers, insurers, public beneficiaries, physicians,
and hospitals more sensitive to the cost of medical care. Once
appropriate incentives are in place, the government could then
begin to reduce its role in this large and important sector of
the economy, allowing private citizens to adjust their behavior
in response to the incentives. Not only is this "market" or
"competition" approach more likely than regulation to succeed
in bringing the cost of medical care under control, it promises to
reverse the recent tendency to bureaucratize and politicize an
important and intensely personal service.
2
Options
Following are options for improving the efficiency of the health
care system. The options are grouped under the headings "Public
Sector" and "Private Sector.' The "Public Sector" options are
designed to improve Medicare, while the "Private Sector" options
deal with employment-based health insurance. The budget estimates
assume that the options are implemented in FY 1983.
Changes in Medicaid are not included in this package of options
because HHS believes that the Budget Reconciliation Act of 1981
gives the States substantial authority to revamp their programs
according to market principles. Before submitting new Medicaid
legislation, then, HHS would like to see how States implement the
existing law.
PUBLIC SECTOR
Under Medicare Part A (hospital insurance), most patient cost-
sharing is imposed late in a spell-of-illness (after the 60th
day) when the patient can least afford it and when it is least
likely to influence physician and patient behavior. Nor is there
a limit under Medicare on the out-of-pocket cost a seriously ill
patient can incur. In addition, Medicare's rules for paying
HMOs discourage Medicare beneficiaries from enrolling in such
plans. Under current law, conventional insurers cannot enroll
Medicare beneficiaries, except for "Medigap" coverage paid for
by the beneficiaries themselves.
Option 1: Combine improved incentives for Medicare beneficiaries
with added coverage for catastrophic illness.
This option would combine 10 percent coinsurance ($26
per day) on all hospital days after the first day with
a $2500 per year limit on beneficiary cost-sharing under
Part A (hospital insurance) and B (supplementary
medical insurance).
The existing limits on the number of covered hospital
days (90 days per spell of illness and 60 lifetime
reserve days) would be eliminated.
The $2500 limit on cost-sharing would be indexed to
increase with the rise in the medical care component
of the consumer price index (MCPI).
This proposal would reduce Medicare outlays by $500
million in FY 1983 and by $950 million in FY 1984.
Discussion
This proposal would redress the most significant shortcoming in
the existing Medicare benefit: the absence of adequate financial
protection against the high cost of serious illness. In arriving
3
at this proposal, a number of alternatives were studied,
including separate catastrophic limits on Medicare Parts A and B
and an income-related catastrophic cap. Separate catastrophic
limits on Parts A and B were rejected because separate limits are
more costly to Medicare. To achieve $500 million in Medicare
savings with separate Part A and B limits, beneficiaries would
have to be exposed to a risk of more than $2500 in out-of-pocket
costs. An income-related catastrophic cap was rejected because
it would be very costly to administer, thus reducing the
potential budget savings.
Decision:
Approve
Disapprove
Option 2: Offer Medicare beneficiaries the option of enrolling
in private health plans:
The Federal government would offer to pay 95 percent of
Medicare's adjusted average per capita (AAPCC) on
behalf of an aged or disabled beneficiary enrolling in
a private plan. The beneficiary would pay the difference,
if any, between the government's contribution and the
plan's premium.
The amount of the government's contribution toward a
private plan would be recalculated each year so as to
reflect increases in the cost of the Medicare program.
Enrollment in a private health plan would be optional,
and all beneficiaries would retain the right to return
to Medicare during an annual open enrollment period.
Both HMOs and conventional insurers would be eligible to
participate in this "voucher" system. To qualify, a
plan would be required to offer benefits at least as
comprehensive as Medicare's Part A and B benefits.
Plans would also be free to offer added benefits as a
way of attracting enrollees.
O This option would have only a small effect on Medicare
outlays in FY 1983 and FY 1984.
Discussion
When offering Medicare beneficiaries a choice of health plans,
the government would run the risk that the healthiest beneficiaries
would choose to enroll in private plans, leaving the less healthy
in Medicare. Since the amount of the "voucher" granted to
beneficiaries enrolling in private plans is tied to the per capita
cost in Medicare, such "adverse selection" against Medicare would
drive up the voucher amount and the total costs of Medicare.
4
It should be noted, however, that our proposal would reduce the
risk of cost-increasing adverse selection by:
adjusting the amount of the voucher for actuarial
factors, such as the beneficiary's age, sex, and
disability status;
paying only 95 percent of the AAPCC, thus allowing the
government a 5 percent offset against adverse selection;
requiring the participating private plans to have
benefits at least as comprehensive as Medicare's;
prohibiting the participating private plans from
discriminating against high risk beneficiaries; and
requiring that participating plans charge all Medicare
beneficiaries the same incremental premium.
Decision:
Approve
Disapprove
PRIVATE SECTOR
Unlike cash wages, an employer's contribution to an employee
health plan is not taxable income to the employee. The employer
may, however, deduct the contribution from its taxable income,
just as it can deduct other business expenses. The preferential
tax treatment for health insurance premiums encourages
comprehensive, employment-based insurance with few, if any,
controls designed to hold down the cost of medical care. In
addition, this tax preference drains the Treasury and the Social
Security Trust Funds of tax revenue. CBO estimates that in
FY 1982, the tax preference for employer-paid health benefits
will reduce Federal income tax revenues by about $20 billion and
Social Security tax revenues by about $8 billion.
The options that follow are designed to limit or offset the tax
law's distorting effect on the demand for private insurance. An
"employer deduction limit" is a limit on the amount of health
plan contribution that an employer may deduct as a business
expense. The employee's taxable income would be unaffected by an
employer deduction limit. In contrast, an "employee exclusion
limit" would limit the amount of employer health plan contribution
that is excluded from the employee's taxable income. The employer's
tax deduction for health plan contributions would be unaffected
by an "employee exclusion limit."
5
Option 3: Limit the employer deduction or the employee exclusion
for health insurance.
The limit would be a set dollar amount -- for example,
$150 per month per employee with family coverage and
$60 per month for individual coverage.
The dollar limit would be indexed SO that it would
increase as prices rise.
Suboption 3A: Employer deduction limit.
HHS prefers this option for the following reasons:
A limit on the employer's business deduction would have
a more immediate impact than an employee exclusion
limit. Employers know more than employees about
health insurance and how costs can be cut. Moreover,
it is employers who bargain with health insurers.
If the tax limit is imposed on the employee, the
employer would have little direct incentive to incur
the start-up costs necessary to offer employees a
choice of plans. The employer deduction limit, on
the other hand, would give employers a more direct
incentive to offer lower cost options and encourage
employees to enroll in them. Creating health plan
choices is an important HHS objective.
The long run effect of an employer deduction limit and
an employee exclusion limit would be about the same. In
either case, the most common employer response would be
to stop making contributions higher than the limit,
leaving the employee to pay any excess out-of-pocket
with "after tax" dollars.
The individual tax cuts in the Economic Recovery Tax Act
will do little more than offset the inflation-induced
"bracket creep" in individual tax rates that is expected
over the next three years. In contrast, the corporate
tax cuts were much deeper and more enduring.
Although 25 to 40 percent of employees work for non-profit
organizations or government and would not be affected
by an employer deduction limit, these workers on average
do not have costly health benefits and would not be
affected by either form of limit.
6
Suboption 3B: Employee Exclusion Limit.
Treasury recommends this option for the following reasons:
A fraction of the labor force is employed by tax-exempt
organizations and corporations with no tax liability. A
cap on employer deductions would have no effect for at
least 25 percent and perhaps as much as 40 percent of
the labor force.
A limitation on the employer deduction would eventually
impact employee's wages, but, because it is less
visible, it would create less of a disincentive for
employees to demand excess amounts of health insurance
in wage bargaining.
Application of income tax principles indicates that an
employee's income, be it from insurance payments or
other sources, is taxable to the employee. By the same
token, all components of an employer's labor costs
should be deducted, or else his income is mismeasured.
The perception that a limitation on the employee exclusion
will appear to raise taxes on the "common man" is
incorrect. A cap of $150 a month or $1800 a year,
for instance, would generally affect those with generous
compensation packages. (Some relatively low income workers
would be affected if they are members of unions that
have bargained for expensive health benefits.) Even
then, only the excess over $1800 would be treated
as employee income and therefore taxable to the
employee. Generous grandfathering or phase-in rules
can also avoid any immediate impact on employees.
All bills proposed in Congress have placed the cap on
the employee's exclusion rather than the employer
deduction.
Discussion
In addition to deciding whether to impose a limit on the employer's
deduction or the employee's exclusion, decisions must be made
on the dollar amount of the limit, the rate at which the limit
increases over time, and whether to "grandfather" firms (individuals)
with employer health plan contributions higher than the limit in
the base year. In addition to recommending that an employer
deduction limit be used, HHS recommends that the limit be set
at $150 per family and $60 per individual; that the limit be
indexed to increase with the MCPI; and that firms exceeding
the limit in the base year be grandfathered. Such a proposal
would have no effect on tax revenues in FY 1983 and would increase
revenus by $1.3 billion in FY 1984 and by $3.0 billion in FY 1986.
7
Treasury concurs with HHS' recommendations on the level of the
limit, indexing, and grandfathering. An employee exclusion limit
with the same characteristics would have no tax revenue effect in
FY 1983 but would increase revenues by $2.4 billion in FY 1984
and by $5.9 billion in FY 1986.
Decision:
Employer Deduction Limit
Employee Exclusion Limit
Option 4: Reimburse employers for costs of offering a choice of
health plans.
Employers would be given subsidies to offset part of the
start-up costs that a firm incurs in switching from a
single health plan to a choice of health plans.
The amount of the subsidy would vary with firm size.
For example, the subsidy could be set at $5,000 per firm
plus $25 per covered employee, up to a maximum of
$100,000.
To qualify for the subsidy, the employer would be
required to offer a plan with at least 20 percent
coinsurance on all services (except specified preventive
services) and, where available, a health maintenance
organization. To assure that workers have adequate
protection against the costs of catastrophic illness,
all plans would be required to limit a family's exposure
to out-of-pocket costs to no more than $3500 per year
(indexed to increase with the MCPI).
Employers who offer a choice of plans would have to
make the same premium contribution to them all. As
an incentive to select cost-effective coverage, those
employees who chose a plan that cost less than the
employer contribution would get a cash rebate. To
reduce adverse selection against the comprehensive
plans, the rebate would be limited to some percentage
of the difference between the premium of the High Option
plan and the premium of the plan actually selected, up
to a maximum of $50 per month per family or $20 a month
per individual. The maximum rebate would be indexed
to the MCPI.
Discussion
HHS recommends that employers be given subsidies for offering a
choice of plans because:
O An employer's start-up costs for moving from a single
health plan to multiple plans are significant. (For
example, PepsiCo spent about $300,000.)
8
Allowing employees to choose among health plans is
important for generating competition. In particular,
employee choice is necessary to create a market for
innovative plans.
Subsidies would hasten the development of employee
choice in response to the deduction limit.
Treasury opposes subsidies for offering a choice of plans because:
A cap by itself eventually will create a substantial
incentive for employers to offer a choice of plans and
to allow employees to save the difference in costs
between more expensive and less expensive plans.
The "tax credit" device requires regulation of which
plans qualify and which do not. Although regulation may
sound simple, it is not.
Treasury favors encouraging employers to offer employees
a choice of plans within the context of cafeteria plans,
only recently allowed by Congress. Such plans allow
employees to choose cash instead of high option fringe
benefits. As more of these types of plans are offered,
employees will again be presented with greater choices
of health plans, as well as other packages of fringe
benefits.
The precedent is bad. For instance, we do not offer tax
credits for employers to offer pension plans nor do we
give tax credits for meeting regulatory requirements.
OMB opposes subsidies for offering a choice of plans because:
The only justification for a subsidy is that the
HHS proposal, as presently drawn, establishes sub-
stantial rules and requirements on employers who choose
to exercise the choice option. The subsidy becomes,
in effect, compensation for complying with new Federal
mandates.
The need for the subsidy could be eliminated if the new
mandates were limited to the minimum necessary to
ensure effective competition between insurers and health
providers. In particular, the requirement that employers
offer certain specific choices of plans is unnecessary,
and may even have the perverse effect of limiting the
sort of innovation in the market that this proposal is
designed to foster.
OMB believes that, under a system where employees have
a financial incentive to choose cost-effective plans,
the normal operations of the free market will provide
an adequate range of product choices to the consumer.
9
It is not necessary to rig the rules of the game to
ensure that particular types of products are offered,
and then compensate employers for the cost of complying
with the rules. By contrast, the catastrophic requirement
is a sensible feature, and should be retained, as should
the equal contribution rule.
Decision:
Approve
Disapprove
If a subsidy is approved, a decision must be made on the form of
the subsidy.
Suboption 4A: Tax credit.
HHS recommends that the subsidy be in the form of a tax credit
for the following reasons:
A tax credit does not require new application forms or
a new bureaucracy.
Employers will be more likely to take advantage of the
subsidy if they can do so in the course of filing their
regular tax returns.
Suboption 4B: Grants to Employers.
If a subsidy is to be offered, Treasury recommends that it be a
direct grant to employers administered by HHS and included in
HHS' budget.
O If credits are indeed appropriate for health policy reasons,
then they should be placed in the health budget where
they can be adequately examined and administered, as
well as through the budget process.
O A tax credit would have little effect on plans offered
by the non-profit sector or by non-profitable corporations.
Decision:
Tax Credit
Grants to Employers