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Retiree Health Benefit Plans and FAS 106
Attached are materials prepared by the Employee Benefit
Research Institute regarding the issues surrounding retiree
health benefit plans and FAS 106.
Background. Several corporations have or are considering
terminating or cutting back on their retiree health benefit
plans. As the reason for this action, they cite the Financial
Accounting Standard Board's issuance of Statement 106 (FAS 106),
which becomes effective during the first quarter of 1993 for
large, public corporations and during the first quarter of 1995
for non-public firms.
FAS 106 requires that companies accrue on a current basis
their future costs associated with existing benefit packages.
Under current practice, most companies finance retiree health
benefits as they occurred. Because of rapidly increasing health
care costs, this practice left significant liabilities
undisclosed. FAS 106 requires disclosure of these "hidden"
liabilities.
Because FAS 106 will require the disclosure of increased
liabilities, a corporation faces lower net income and reduced
shareholders' equity. In response, firms have basically two
options to reduce their liabilities: (1) changing or terminating
their retiree health benefit plan, or (2) "prefund" the plan,
either by taking a one-time charge or by amortizing the
liabilities over 20 years. For example, General Motors announced
it was taking a $20.8 billion accounting charge to meet the new
standards. GM will also be taking an annual charge of $1.4
billion indefinitely to account for the unfunded liability.
Those firms that are eliminating or reducing their
liabilities are mostly in mature -- often unionized --
industries. Those workers that will be most affected are those
that retire or planned to retire before the age of 65 and are not
eligible for Medicare. Medicare eligible retirees may lose any
supplemental insurance provided by their former employers.
It should be noted that the impact of FAS 106 on multi-
employer plans and on public employee plans is not now clear.
Legislative Response To FAS 106. At this time, there has
been no legislative response to the reduction or termination of
retiree health benefits in response to health benefits. We and
the offices of Senators Kennedy and Metzenbaum are all at this
point working on responses but not yet collectively. You should
probably not speak about any of this activity during the forum.
FAS 106 and National Health Care: Solution and Problem. You
should note that the termination of retiree health benefit plans
could affect the development of a national health care system.
Plan terminations certainly highlight the weakness of the
employer-employee relationship to properly allocate health care
and will increase the call for national health care reform.
But, the plan terminations could also impact the financing
of a national health care system. A national system could
relieve firms of significant liabilities for their retirees'
health care. And presumably an equitable financing mechanism
would take into account the relief of those liabilities and cause
firms that are relieved to pay more into the system. But, it
comes down to a timing question if firms now terminate their
retirement obligations will they not have to contribute for their
retirees' health benefits in the future. If they do not, the
public costs of any program could increase dramatically.
JAMES M. MAUGHTON, Executive Edtier
Philadelphia
STEVEN M. LOVELADY, Managing Editor
RONALD PATEL Associate Managing Editor
SANDRA L WOOD. Associate Managing Editor
Unquirer
DAVID R. BOLDT. Eduor of the Educatial Page
DONALD KIMELMAN. Deputy Editorial Page Editor
ACEL MOORE. Associate Editor
A10
Tuesday, January 19, 1993
ACCOUNTING
Health-care future shock arrives
A new rule is forcing companies to
Accounting for FASB 106
account for the costs now. Some will
Selected companies that have taken a charge against their earnings to
show huge losses.
cover the cost of future health-care benefits for employees and retirees.
For some companies, the charge Includes amall amounts for other,
accounting changes in addition to FASB 106. Also, some companies
By Ian Johnson
are considering a reduction in future health-care benefits, which
RALTIMORKSUN
would lower the cost.
NEW YORK What's a fas-bee and why is it terrorizing
In millions
America's largest companies - and their retirees?
Ford Motor Co.
Just the Financial Accounting Standards Board, a body of
seven accountants that makes the rules governing corporate
$7,500
America But one new rule, FASB 106, has sparked turmoil by
Du Pont Co.
forcing companies to estimate future retiree health-care costs
$3,800
- and to put the astronomical expense on their financial
statements now.
Bell Atlantic Corp.
The Ford Motor Co., the Westinghouse Electric Corp. and
$1,500
other companies are shuddering from the effect of the rule.
Some have taken multibillion-dollar charges against earnings
Bosing Co.
- turning a year's profit into a record loss. And in response,
$1,000
"All the rule does is
many are slashing retiree health-care benefits or re-examin-
Monsanto Co.
ing early-retirement programs.
tell companies to put
in an age of global competition, the rule also highlights the
$1,000
unusual position of U.S. companies. Alone among major inter-
Mobil Corp.
down on paper the
national competitors, they provide health and retirement
$446
benefits to current and former employees. In other industrial-
cost of what they've
tzed countries, either government medical plans or private
PepsiCo Inc.
insurance covers medical costs.
$400-$550
promised their
The new rule crystallizes a problem ignored for decades:
Coming Inc.
Companies have long been promising health-care benefits to
employees. Most
retirees without any idea how to pay the increasingly expen-
$325
companies have no
sive tab.
Kellogg Co.
The FASB's response was simple enough. Its rule, which will
$270
idea what this
affect most financial statements in April. forces companies to
add up the costs of providing health care for retirees and for
Sun Co.
[amount] is."
current employees when they retire.
L
$261
Companies must treat the health-care cost as a liability on
their balance sheets. And although they do not have to set
Upjohn Co.
- Debbie Harrington,
aside money now to pay for It. they must subtract it as an
L
$224
FASB spokeswoman
expense when calculating profits.
Rohm & Haas Co.
Previously, companies had to show only how much they
were paying for retirees' health care.
L
$218
"All the rule does is tell companies to put down on paper the
Amstrong World Industries Inc.
cost of what they've promised their employees. Most compa-
nies have no idea what this (amount) is,' FASB spokeswoman
L
$185
Debbie Harrington said.
Unisys Corp.
The new rule is 8 blow to America's fading corporate stars.
L $170
Most of the new liabilities - estimates start at $400 billion -
ill hit older industries that led the way in providing millions
Quaker State Corp.
Americans with insurance coverage.
L
$115
In the most drastic case, the General Motors Corp. faces as
SOURCE: Companies leted
See FASB on D5
Che
MAXWELL E.P. KING. Editor
Executive Vice President
GENE FOREMAN, Deputy Editor and Vice President
JAMES M. NAUGHTON, Executive
Philadelphia
STEVEN M. LOVELADY, Managing Eduor
RONALD PATEL Associate Managing Editor
Unquirer
SANDRA L WOOD, Associate Managing Editor
DAVID R. BOLDT, Editor of the Editorial Page
DONALD KIMELMAN, Deputy Editorial Page Editor
ACEL MOORE, Associate Editor
A10
Tuesday, January 19, 1993
Some firms are slashing benefits
FASB from D1
Rating Group.
including the McDonnell Douglas
much as $24 billion in future retire-
Wall Street's critical eye also ex-
Corp. and the Unisys Corp.. have cut
ment health-care costs - two-thirds
tends to stock ratings and prices.
health-care benefits to retirees or
of the automaker's book value.
Although no brokerage firm has rec-
have told current employees not to
Ford has already announced that it
ommended selling a company's stock
expect health-care benefits after re-
will take a $7.5 billion charge for
because of the new liabilities, strate-
tirement.
1992, turning a profitable year into
gists say the new numbers should
This development has sparked an
the worst loss in U.S. corporate his-
wipe 9 percent to 13 percent off the
outcry against the new rule. Many
tory. And the Bethlehem Steel Corp.
book value of the 500
retirees say companies
could face a $1.6 billion charge to pay
most important stocks.
Bethlehem
were just using the rule
for its 68,000 retirees.
"It should influence
as an excuse to slash
Companies are allowed to account
their
[investors']
Steel could face
health-care expenses.
for the cost as a one-time charge. as
thought process. You're
But company execu-
Ford is doing. or spread the expense
acknowledging a liabil-
a $1.6 billion
tives say the rule has
over 20 years. Most companies, in-
ity, one that will keep
charge for its
forced them to look
cluding GM and Bethlebem Steel.
growing." said Robert
retirees.
hard to determine
have not announced what they are
Willens, a tax and ac-
whether they can af-
going to do.
counting specialist for
ford to pay for retirees'
Bond-rating agencies say the new
the brokerage of Shearson Lehman
health care.
liabilities will influence how they
Bros. Inc.
"I really think it is ridiculous for
rate companies. especially older ones
Although analysts and investors
us to account for this. The end result
with a lot of retirees and generous
should have known all along that
is that thousands lose their health
benefits.
GM. Westinghouse and other big
care at a time when we're worried
The Standard & Poor's Corp.,
companies had huge commitments to
which rates the ability of companies
pay retiree health benefits, they
about 36 million people being with-
to repay debts, has already down-
sometimes ignored what they didn't
out health insurance." said Robert
graded four companies because of
see on a financial statement. Willens
Ripston, the vice president for hu-
their future health-care liabilities,
said.
man resources at the Ingersoll-Rand
said Scott Sprinzen. a corporate fi-
To bolster their financial state-
Inc., a maker of construction equip-
nance analyst for Standard & Poor's
ments, about two dozen companies,
ment.
EBRI Special Report/Issue Brief
The Inevitable Happens: Making the Improbable Possible
by Selwyn Feinstein, EBRI Fellow
Uncertainties entangle retiree health benefits.
called a "throw-away benefit." For most companies, those
were plush times, with growing needs for workers and
Employers-along with investors and lenders-brood over
relatively few retirees. When Medicare took over much of
potentially staggering costs and ponder how to bring
the retiree health bill in 1966, the benefit became even
liabilities under control.
more appealing to employers.
Workers delay retirement until they earn postcareer
The coverage was far from universal. EBRI figured that
benefits, and then agonize whether promises will be kept.
only 43 percent of Americans aged 40 and over had
employment-based retiree health coverage in 1988.
Government officials weigh pleas for tax relief against
Currently, only one in three retirees, or some 7.8 million
demands for budget restraint.
people, benefit from the coverage, according to Nora
Super Jones of EBRI. "Typically, these retirees have
Policymakers deliberate a national health reform that
proportionately higher incomes than other retirees. They
could alter the premises on which all plans are built.
tend to work for large firms or public employers and are
more likely to be unionized," she said. Nearly three-
Amid the doubts, however, one point appears certain:
quarters of these workers also receive pensions, added
tomorrow's retirees will be asked to assume a larger share
Christopher J. Ruhm of the University of North Carolina
of their own and their families' health bills.
at Greensboro. However, large groups have been locked
out, he said. "Only 19 percent of female retirees,
+ of the participants in this EBRI-ERF forum made the
30.6 percent of Hispanics, and 14.2 percent
of
those
that economic necessity is forcing the benefit shift.
with 1988 household incomes below $7,500 received
1 ne Financial Accounting Standards Board's (FASB)
retiree health coverage," he said.
Statement No. 106, which requires companies to ac-
knowledge retiree health liabilities, simply accelerated the
For those covered, most plans a few years back simply
inevitable, the panelists said. Several participants outlined
carried the health benefits of active employees into
changes in benefit plans that they had already installed or
retirement years for workers and their spouses, said
were offering to clients. Most other companies were
Stewart Lawrence of Martin E. Segal Co. "There was a
expected to act soon.
promise of a service or a benefit, as opposed to the promise
of a cost or the promise of a current funding or contribu-
This inevitable recognition spurred by FAS 106 may have
tion level," he explained.
another even more pervasive consequence: the galvaniza-
tion of a constituency for change that could alter the
Length of employment rarely was a factor in deciding who
national health debate.
received full benefits. Workers, however, had to remain
with the company until retirement or lose it all.
How different from seven years ago, observed EBRI's
Dallas L. Salisbury. At an EBRI-ERF policy forum on
Few companies then asked retirees to help pay for the
retiree health benefits then, he recalled, the overriding
coverage, and none asked active workers to help prefund
sentiment was, "Why would anyone want to talk about
it, Lawrence said. Some firms even picked up the cost of
this?"
Medicare Part B, Supplementary Medical Insurance.
The coverage was financed pay-as-you-go from current
Background
operations. Few companies acknowledged the liabilities on
their books or set aside money for future needs. Unlike the
ee health coverage first started appearing in the late
requirement for pensions, the government did not require
OS and 1950s as what Diana J. Scott of Towers Perrin
prefunding, and the tax code offered few breaks.
Retirement Security
Environment
EBRI Special Report/Issue Brief
To Robert L. Clark of North Carolina State University,
Exacerbating the problem, said William W. Spievak of
"most employers appeared to be unconcerned with the
Ball Corp., was cost shifting, the "hidden tax" he put at
current and possible future costs" of the benefits they were
40 cents on the dollar that a local hospital was imposing
offering.
on Ball's health plan "to make up for Medicare, Medicaid
[and] indigent care." Hewitt Associates, he said, estimated
Consider the taxi driver encountered some years ago by
that cost shifting was responsible for "one-third of the
Howard A. Freiman of Fidelity Management Trust Co.
health plan premium increases between the years 1987
This cabby, Freiman said, had been given free medical
and 1988."
coverage for himself and his wife and four children as an
inducement to retire from a large manufacturing plant,
What had started out as a throw-away benefit had become
although he was only 31 years old at the time and had
a formidable commitment.
worked at the company for just 12 years.
"Companies have found they are no longer in the business
Asked Freiman in disbelief: "Did the company's actuaries
of merely making widgets. They are in the business of
calculate the cost" of providing that family with "medical
making widgets and also in the insurance business,"
benefits for the next 30 to 50 years?"
asserted William Reimert of Milliman & Robertson.
"What kind of risk are you really ready to put your com-
Many firms, Clark asserted, "seemed to believe that they
pany on the line for?" he asked.
could cancel retiree health plans whenever they chose."
FASB Issues Statement 106
What Clark called "a series of new realities" began intrud-
ing in the 1980s. Not the least of these was a string of
Enter FASB to force companies to assess just how large
court rulings, starting in 1983, that employers could
those retiree health benefit risks really were. Scott, who
amend or terminate retiree health benefits only if they
had specifically and publicly reserved that right. So the
served as a FASB project manager before joining Towers
Perrin, explained the board's mission, as assigned by the
promise could be binding.
Securities and Exchange Commission and the accounting
And it was proving a heavy load. Americans were getting
profession: to establish and improve accounting and
older and living longer, and they were retiring earlier,
reporting standards; to enhance the credibility, faithful-
ness and fairness of financial statements.
many under prodding from employers dangling retiree
health benefits designed to entice workers to leave in
what had become difficult times. The ratio of active
A decade of considering retiree health benefits led to the
workers to retirees dropped in some industries from eight
conclusion that pay-as-you-go accounting "ignores the
or nine to one in the late 1960s to as low as two to one,
measurement and recognition of the financial effects of
Donald P. Harrington of AT&T said.
promising to provide these benefits, and of the service that
employees are rendering in exchange for those benefits,"
Scott said.
The health benefits that retirees were carrying out with
them were sharply escalating in cost. From 1987 to 1989,
according to a Wyatt Co. survey, outlays for active and
The accrual accounting mandated by FAS 106 in Decem-
retiree medical benefit plans by the nation's largest
ber 1990, she continued, "attempts to remedy that situa-
industrial companies surged at an average annual rate of
tion by recognizing the effects of events as they occur,
21 percent. 1 That was twice as fast as the national health
even though the cash flows may not be affected for many
expenditure growth rate, which, in turn, was swelling
years after."
more than two percentage points faster than the Gross
National Product.
Without such a recognition, she said, "management
doesn't really have the relevant information with which to
manage the company. Creditors don't have relevant
¹The Wyatt Company, Managing a Changing Work Force: It's Time to
information on which to base credit decisions. Investors
Take a Look at Your Retiree Benefits (Washington, DC: The Wyatt
don't have the relevant information on which to base
Company, n.d.).
their investment decisions."
Retirement
rity in a P
FASB Environment
5
EBRI Special Report/Issue Brief
Such an accrual approach "certainly is not revolutionary,"
Harry Smith, a retiree who helped implement such
she emphasized. Companies must use it to account for
policies while at Sun Co., wondered aloud if "this situa-
other forms of deferred compensation, including, most
tion is really a failure of American industry, a failure of
notably, pensions.
consultants to advise what they were getting into as early
as 1974, 1975 perhaps.
I just wonder," he added
Under the board's edict, companies have until fiscal years
wistfully, "if a group of this type can't come up with
beginning after Dec. 15, 1992, to start recording on their
studies, ways of preventing these things from happening."
balance sheets those retiree health benefit liabilities that
have not been funded. Accumulated past obligations
While bewailing the liabilities, no one at the forum
could be charged off at once or spread out over as long as
faulted the FASB for prodding the projected cost onto
20 years.
center stage.
Even amortized, however, such liabilities could be an
Technical points were raised. Dale B. Grant of Segal
awesome jawfull for many companies to swallow.
suggested that a company with a fixed-dollar benefit
would "show up with a much lower FASB expense" than a
Douglas J. Elliott of J.P. Morgan said market analysts
company that asked retirees to pick up 25 percent of the
generally had figured a company's retiree health care
cost of an otherwise unchanged plan. "Yet," she said, "I
liabilities at 10 to 15 times its current pay-as-you-go
would bet over time that the one with the fixed-dollar
expense. Announcements to date, however, show "this
benefit is going to spend more in retiree health benefits."
number seems to be misleadingly low." The true figure, he
suggested, could be "20 times or more."
Michael J. Gulotta of Actuarial Sciences Associates
complained that differences allowed by FAS 106 for
Alcoa, whose liabilities had been estimated at
handling plan changes, past service liabilities and health
$538 million, said its figure was closer to $1 billion, Elliott
care projections could lead to results that would not be
related. General Electric said its liabilities were
comparable from company to company. Scott acknowl-
$2.7 billion, rather than the $1.77 billion that had been
edged the point but said that she "believes that, overall,
figured by the analyst rule-of-thumb. IBM, whose liabili-
the new accounting standard produces information that is
ties had been estimated at $1.89 billion, announced a
more credible and revelent than in the past."
figure of $2.3 billion but said 40 percent to 50 percent had
already been funded. Elliott said Lockheed's announced
Still, Gulotta said later, FASB "did us a service" in
liabilities of $1 billion more than doubled the estimated
forcing companies to address the cost of retiree health
$450 million. USX put its liabilities at $2 billion to
benefits.
$3 billion, although the analyst rule-of-thumb figured a
$1.95 billion hit.
Said Richard Ostuw of Towers Perrin: "FAS 106 has not
changed the cost of retiree welfare benefits; the change in
By EBRI's estimate, FAS 106 will force all private employ-
accounting rules merely accelerates the timing of recogni-
ers to recognize $241 billion as the present value of health
tion of this cost."
obligations due current retirees through 1988.
David Skovron of Kwasha Lipton agreed. "FAS 106 put
If all companies recorded their liabilities on their books
truth in packaging." But, he quickly added, "perhaps an
today, said Elliott, quoting a study by Mark Warshawsky
unintended effect has been the taking away of benefits
for the American Enterprise Institute, their net worth
that might not otherwise have occurred at the same point
would drop 15 percent. EBRI quoted a Towers Perrin
in time."
survey that FAS 106 would reduce pretax earnings of some
large employers an average of 10 percent.
Grant said that some employers were reducing retiree
health promises now to cut "FAS exposure as low as
"In retrospect," observed Clark, "it is very puzzling why
possible," with the expectation that they could always
the leaders of corporate America instituted such contracts
"worry about it later." But later may never come for
'ithout more forethought for the costs and liabilities
companies that encounter rough times, go bankrupt or are
associated with retiree health plans."
sold, she said.
6
Retirement Security In a Post-FASB Environment
EBRI Special Report/Issue Brief
uch benefit reductions are "unfortunate but probably
Code designation; 401(h) health benefit savings plans
very necessary," Scott stated.
and 401(k) retirement savings plans; and various forms
of corporate and trust owned life insurance. Each had
Companies' Response to FAS 106
some tax or other advantage; each was restricted in the
way it could ease the load.
For better or worse, FAS 106 has forced companies to
But the primary questions that companies must ponder
confront a new set of unappetizing options.
are: what retiree health commitments are appropriate for
Do they acknowledge unfunded accumulated liabilities
employers and how much of the cost and risk should
wich a single devastating write-off the first year that
workers be left to bear?
would slash net worth and overwhelm earnings? Or do
they amortize the obligations over 20 years and thus
erode accounts for the next generation?
"Two equally important but potentially incompatible
interests must be reconciled," Morgan declared.
"It's an emotional issue to write off, say, a billion
dollars.
Chairmen don't like to do that sort of
"1. Employers want flexibility to manage their finances—
thing," Elliott allowed. "But if you can see your way
including the power to terminate plans if the expense
clear to doing it, I think the stock market will reward
becomes financially crippling, and
you relatively for writing it all off in the beginning. It
basically removes an overhang of future earnings
2. Employees want security-they want to receive benefits
penalties that otherwise is going to exist for you for
that they have been promised."
20 years."
Ostuw looked at such options and concluded that most
Do employers strip cash from balance sheets, immedi-
employers "will reduce their commitment to retiree health
ately or over a period of years, to fund at least some of
care benefits within the next two years-if they have not
these obligations, a step that would both wipe away
already done so."
liabilities and assure workers that promises will be kept?
Clark presented data from the Bureau of Labor Statistics
Some companies will choose to prefund, predicted
to show that many medium and large firms already had
Ostuw, "because they think benefit security is appropri-
RIFed their retiree health plans. In 1986, he said,
ate, and/or they just think that it's tidy to match assets
63 percent of the full-time participants in employer health
and liabilities and keep them all off the balance sheet."
plans were enrolled in programs that offered coverage to
retirees under 65 years old. By 1989, however, the number
But others, said Elliott, may decide not to prefund
had dropped to 41 percent. For retirees over age 65, the
because they see more attractive ways to invest their
coverage rate sagged from 57 percent to 36 percent.
money. Or, suggested Grant, they may be wary that
national health insurance, if enacted, could reduce
Ostuw said companies will continue to reduce coverage
their retiree health liabilities. Then they would "be
because the cost, as measured by FAS 106, "will be
stuck with all those assets and look stupid," she said.
unaffordable"; because the current commitment is open-
ended, tied as it is to health care costs that are beyond the
If obligations are prefunded, how are the dollars to be
company's control; and because benefits now "are not
squirreled away? The Tax Code grants favored treat-
structured equitably," in that they make no distinctions
ment for money that companies set aside to finance
for length of service and retirement age or between
pensions. But it allows few tax breaks for advance
coverage for employees and their dependents.
payments that companies make for retiree health plans.
Fully 70 percent of major employers will make "fairly
Some limited funding options are available. Charles C.
significant changes," Ostuw predicted. "Maybe another
Morgan of Prudential Asset Management Co. listed 13.
20 percent will make relatively minor changes, and the
These included voluntary employee beneficiary associa-
balance will make little or no change." The restructuring
tions, (VEBAs), so-called 501(c)(9) plans for their Tax
will come, he said, even if Congress allows the same tax
Retirement Security In a Post-FASB Environment
7
EBRI Special Report/Issue Brief
eaks for funding retiree health programs that are cur-
their base pay, all after-tax dollars, for their post-career
ntly allowed for pension plans.
health needs.
Few companies will terminate their retiree health benefits,
So far, though, few workers have taken Ball up on its offer.
though some may make workers pick up the full cost,
Without a matching contribution from the company,
Ostuw said. Many employers will impose caps on pay-outs
which Ball is not now making, "you are not going to get a
by setting defined dollar benefits. Other will redefine their
lot of people," Spievak allowed.
commitment from a defined benefit to a defined contribu-
tion.
Whatever money is contributed by workers goes into a
group annuity contract that accumulates earnings tax free.
"We will see a fair amount of complaint. that companies
These earnings are then credited back to the individual
are cutting back on these benefits, shifting costs to retir-
contributor's account.
ees," Ostuw said. But, he quickly added, "An affordable
commitment is much more secure than an unaffordable
At retirement, the contributors have two choices. They or
commitment, and I think that's a healthy change."
their beneficiaries can submit medical bills or health
insurance charges for tax-free reimbursements until the
Meredith Miller of the AFL-CIO was less sanguine. "We
account runs dry. Or the retirees can buy an annuity that
are fearful that this reexamination of retiree health
makes periodic fully taxable payments. Workers who leave
benefits is going to lead to a reexamination of other
before retirement can withdraw their account balances as
benefits," she said. "I think we are heading towards a new
either a lump sum or annuity, with taxes due on accumu-
definition of necessary benefits, or a core set of benefits,
lated earnings. Beneficiaries of active workers get a lump
that employers are going to be willing to provide, and
sum.
those are the predictable ones, the capped ones, and more
manageable for them."
With such a plan, said William J. Miner of The Wyatt
Company, who helped design the program, workers get a
.e answer, the AFL-CIO asserted in a pamphlet distrib-
way to accumulate money that will be spared from taxa-
uted at the forum: "Keep benefits, cut costs."
tion if used to pay for postretirement health care. As a
nonqualified plan, the coverage is not subject to contribu-
Ball Corp., however, viewed the issue differently. Even
tion limits or to nondiscrimination requirements applied
though its retiree health payments were limited to lifetime
to highly compensated executives.
maximums of $30,000 each for employees and spouses,
Ball decided it could not afford to retain its retiree health
But most importantly, Miner suggested, the plan "facili-
benefits, Spievak said.
tates change.
You have a take-away from the employee
in terms of increased cost sharing, but, at the same time,
The company, he explained, had looked at placing more
you can offer this program to employees as a vehicle to
of the cost on retirees with bigger deductibles, co-pays or
save for some of those expenses."
increased contributions. It had considered curtailing some
of the coverage. It had pondered ways to reduce charges
Other companies will be following Ball's example, Spievak
imposed by providers. None of the approaches, however,
predicted. Big companies, he explained, have the clout to
offered "significant relief," he said.
negotiate "favorable arrangements" with health providers
that "minimize the impact of cost shifting" by federal,
"So we took steps that for many in this room would be
state and local health programs. But small companies will
very drastic. We said that anybody employed after 1/1/90
drop out. This will leave "a disproportionate share of cost
does not have access to a defined benefit retiree medical
shifting" on medium-sized employers, who "will see their
plan. We're out of the defined retiree medical plan
retiree health plan costs increase even more," he stated.
business at least for future hires," he stated.
"It is our belief that more and more employers are going to
stop providing retiree medical care."
-alled in its place starting 1991 was a voluntary con-
utory program that allowed salaried employees-both
Robert F. Seeman of American Airlines said the carrier
new and previous hires—to invest at least 2 percent of
also did "a lot of hand wringing" about its retiree health
Retirement Security In a Post-FASB Environment
EBRI Special Report/Issue Brief
care liabilities of nearly $800 million. FAS 106 was "the
The company devised a program, effective in 1989, that
straw that broke the camel's back," he said.
recognized length of service, incorporated cost controls
and provided broader coverage than the series of plans
Still, rather than eliminate retiree coverage or drastically
that the company had first started offering in 1955. Unlike
reduce it, which were considered, "we chose the alterna-
American Airlines, though, Quaker Oats asked employees
tive of trying to continue providing a reasonable level of
to contribute to the program after they had retired, not
retiree coverage," he said. "We want our employees to feel
while still on the active payroll.
good about the company."
Retirees with 30 years of service pay 5 percent of the plan
The carrier decided that retiree benefits would be retained,
cost for themselves and 10 percent for spouses. Retirees
but workers would have to prefund 30 percent of the cost,
with 10 years service pay 25 percent for themselves and
with after-tax dollars deducted from paychecks during
30 percent for spouses. Both pay 25 percent for each
their active work years. This was "more equitable," the
covered child. Because Medicare picks up most of the
company said, than "requiring employees to pay for retiree
health bills of retirees over age 65, these older participants
health care after they retire."
pay one-third as much as their younger colleagues for the
Quaker Oats plan.
Starting in 1990, all U.S.-based employees except pilots
and flight attendants must make monthly contributions for
Benefits also are linked to years of service, with each
at least 10 years prior to retirement if they want to partici-
retiree getting an annual health expense account equal to
pate in the company's retiree health program. Just about
$12.40 in 1991 for each year of qualified service. This pays
everyone accepted, Seeman said.
for deductibles and co-pays as well as vision, dental and
hearing care. Out-of-pocket limits also are keyed to years
Monthly contributions, all through after-tax payroll
of service.
deductions, initially were set at $10 for current eligibles
and at a sliding scale of $12 for 30-year olds to $91.50 for
"Employee acceptance has been excellent," Pheatt stated.
those aged 49 years or older who joined the plan later.
And results from cost-containment efforts in the first
The contributions go into separate 501(c)(9) trusts for
18 months of operation were "promising," she said.
union and nonunion employees, to take advantage of tax
code breaks for programs established through collective
John K. McMahon of TRW Inc. said a series of divesti-
bargaining. But Seeman said the company still was negoti-
tures forced that diversified company to come to grips
with its retiree health liabilities in 1985 and 1986. "Lo
ating with FASB to see if assets held by the trusts satisfied
and behold, we became startled at what we considered to
conditions imposed by FAS 106, a question raised because
the trusts will pay benefits at termination and death as
be the potential liability for the promises that were out
well as for retiree health.
there," he declared.
Did "allowing or actually requiring" employee contribu-
The present value of future medical benefits due 55-year-
tions to these trusts solidify a corporate "promise and
old retirees with 10 years service, McMahon explained,
commitment" to continue a retiree health program?
was half again larger than the pension liabilities for this
Reimert asked.
group. For retirees at age 65 after 30-year careers, by
contrast, medical benefits ran just one-seventh of the
"Certainly, on paper, we reserved the right to modify,
pension load. "We [were] doing it wrong. Providing these
amend, terminate, suspend the health programs," Seeman
benefits was inconsistent with our other reward systems
responded. But he agreed, "I think, in fact, we feel that we
like pensions, vacations, etc., which were based on long
have somewhat solidified that promise."
service," he asserted.
Quaker Oats Co., too, reassessed its coverage and con-
Effective with retirements after Aug. 1, 1988, TRW
cluded it was possible both to control liabilities and
adopted a defined dollar benefit plan linked to years of
provide "a good retiree medical plan," said Melanie
service that had the effect of requiring no contribution at
Pheatt.
all in the first year from retirees who had been with the
Retirement Security In a Post-FASB Environment
EBRI Special Report/Issue Brief
any for 20 years. Actually, this was the maximum
Prudential Insurance Co., for its part, started funding its
ed dollar amount plan. Each of TRW's constituent
postretirement health benefits back in 1986, Morgan said.
businesses was given the option of deciding how much of
Its current target is the FAS 106 accrual figure rather than
the maximum it would award.
the amount it can deduct. "We are motivated by the
employee security and the desire [to build] an asset more
Gulotta of Actuarial Sciences Associates, which is owned
than a lot of other issues that get addressed," he declared.
by AT&T, said the telephone company confronted two
The money gets invested in insurance continuance fund
issues when it evaluated its retiree health benefits: how to
and trust owned life insurance.
redesign its program to snap the link with health costs
that "automatically escalates benefits without the corpora-
At Phillips Petroleum Co., by contrast, "I don't think that
tion getting any credit, and whether money should be set
we.
would ever consider funding the medical plans,"
aside to fund these benefits."
Robert Nash said, citing "too many complications. and
the problem of excess funding potentially, getting it back
AT&T decided to set defined dollar benefits, or caps, to
or not getting it back, and not knowing where you go in
limit its "open-ended commitment" to finance retiree
the future."
health coverage. The decision won union assent in 1989.
Fidelity Investments knew all about the complications.
Anyone retiring after March 1, 1990, had to bear the
Freiman related how it had run into a stone wall when it
brunt of any cost increases over the caps, which ranged
had asked the IRS about using profit-sharing plans as
initially from $500 for single retirees eligible for Medicare
retiree medical funding vehicles.
to $5,650 for retired couples under 65. But no retiree
would have to pay anything before July 1, 1995.
Fidelity had wanted to amend its profit-sharing
program to allow employees to allocate a portion of the
"The risk of future medical care was shifted" from the
company's contribution towards retiree medical insurance
pany to its retirees, Gulotta said. "It was now up to
premiums. When it went to the IRS to ask if profit-
union to bargain increases in benefits."
sharing plans could be used to fund retiree medical ben-
efits, "the IRS did issue a favorable determination letter,
On prefunding, AT&T saw a promise of reduced cash flow
and so we believe the answer is yes," Freiman said.
in later years that more than compensated for increased
cash flow in the near term, Gulotta said. Important, too,
Fidelity got less satisfaction, however, when it asked for a
funding secured promised benefits, enhancing the
private letter ruling on the tax issues, specifically: are
company's "reputation as a caring and concerned em-
company contributions to the plan tax deductible? Can
ployer."
earnings accumulate in the plan tax free? Do retirees have
to pay taxes on plan benefits paid out for medical insur-
As at American Airlines, separate 501(c)(9) trusts were
ance premiums?
established for union and nonunion employees. The tax
code favored funding the union plan, Gulotta explained,
Freiman said a district IRS office determined that em-
because contributions to collectively bargained trusts can
ployer contributions are deductible and plan earnings can
be unlimited, are deductible and accumulate tax free. A
accumulate tax free.
trust for nonunion workers was less favored by the tax
code, but management needed benefit security as much as
On the taxability of benefits to retirees, though, "the IRS
union workers, he said. This fund was invested in trust
declined to rule," Freiman said. Nonetheless, fortified by
owned life insurance.
an opinion from the law firm of Ropes & Gray, Fidelity
decided to go ahead.
In response to union concern about the security of health
benefits of current nonmanagement retirees, AT&T also
Navigating retiree health plans in the "post-FASB envi-
transferred assets from an overfunded pension program to
ronment" does, indeed, mean piloting through a morass
(h) plan.
clogged by unanswered questions. How will the IRS rule?
10
Retirement Security In a Post-FASB Environment
EBRI Special Report/Issue Brief
How will the financial community react? What will
has been embedded in the rules for years and years but is
workers do? What will Congress decide?
rather something of a novel or new creation within the
past decade," he contended. The regulations under section
Tax Implications of FAS 106
72, which date back to the 1960s, include an example of
an accident and health plan that qualifies as a flexible
Michael Thrasher, deputy assistant chief counsel at the
spending arrangement but does not have the risk-sharing
and distribution characteristics.
IRS for employee benefits and exempt organizations,
offered some insights into the tax issues in response to
"It seems to me," he continued, "what the Service has
questions posed by Harry J. Conaway of William M.
done here with this rule is really enact some legislation
Mercer, Incorporated.
without really any statutory change that would substanti-
ate it." It was a point to which Thrasher responded: "Any
His answers, Thrasher cautioned, were his "personal views.
time we do more than simply repeat the statute we can be
The Service, the Treasury and, in fact, the Congress
accused of that."
have not taken positions on a whole host of these issues.
It's cutting-edge stuff," he contended.
Thrasher also had little comfort for plan designers who
believe that contributions to 401 postretirement
With that caveat, they plunged ahead, with interpreta-
medical accounts attached to pension plans can amount to
tions that immediately proved contentious to some.
25 percent of the combined pension-401(h) contribution.
The old law did provide such a safe harbor, he said. But
When Conaway asked if section 72 granted a tax exclu-
the law passed in 1989 came up with a different definition.
sion for health benefits paid through an annuity, as Miner
"They didn't say 25 percent is okay. They just said over 25
had stated was the authority for Ball's plan, Thrasher
percent is not." In his view, the test is not 25 percent but
suggested, without talking specifically about Ball, that
whether the postretirement medical plan is subordinate to
such an "exclusion may not be available." Section 72-15,
the pension. "I think you have to be careful there," he
he said, "just sends you over to 105, 106 and so forth," and
warned.
105-2 "says if you are going to get the money anyway it's
not excludable."
FAS 106 and the Financial Community
The IRS official took a similarly hard line on flexible
spending accounts for health. The basic thrust of proposed
Plan designers need to be equally cautious in figuring how
section 125-2 regulations, he said, bars a carry-over of
the financial community will react to the liability require-
benefits from year to year.
ments imposed by FAS 106.
"Neither I nor anyone else legitimately knows what the
This was an interpretation that prompted Conaway to
stock market is going to do with these retiree health
observe: "Some of the retiree health plan designs that
numbers," Elliott asserted. "There simply haven't been
we've heard about today, even though they are not
enough announcements to have any sort of base, [and] I
fashioned as under a cafeteria plan, arguably would qualify
do not believe that analysts have made up their minds
as flexible spending arrangements under those regulations,
how to think about this number yet."
and, therefore, would become subject to the 12-month
period of coverage rule, the use-it-or-lose-it rule, and the
Still, he predicted the market will react to announced
uniform coverage rule, and that is an issue that people
liabilities that are surprises. It will react, too, to very large
need to be aware of."
numbers, even if anticipated. One large manufacturer's
estimate that its liabilities will be $4 billion to $6 million
Miner protested stoutly. "This concept that's being posited
"is likely" to have an effect "over time," Elliott said. "The
here, that a retiree health plan that would qualify as a
market is rational, but it's not that rational."
flexible spending arrangement has to. have these
risk-
sharing, risk-distribution characteristics and meet the use-
Even while emphasizing the massive imponderables,
it-or-lose-it rule and others, is really not something that
Elliott ventured what he called "a blatant guess," that
Retirement Security in a
Post-FASB
Environment
11
special
Report/Issue
Brief
aybe half the obligation is really reflected in the stock
Even less certain is how a change in retiree benefits will
ce."
affect the timing of a worker's decision to retire.
He had more confidence in predicting how debt markets
A survey conducted for EBRI by The Gallup Organiza-
will react. For the average company, the effect of FAS 106
tion, Inc. found that 55 percent of nonretired Americans
disclosures is going to be "fairly minimal," he declared.
would not retire without employer-provided health
"Sophisticated investors and the rating agencies are
insurance before they were eligible for Medicare. In
already aware of the problem." Most will look at cash
another EBRI/Gallup poll, 69 percent said they would
flows rather than the new liability numbers, he said. Then,
rather have employer-paid retiree health benefits than
too, the maturities of debt issues are shorter term than the
company stock that could be cashed out at retirement.⁴
retiree health obligations.
"In the absence of retiree health insurance, the high cost
As in the stock market, though, big negative surprises
of individual health insurance for persons aged 50 to 64 is
"could precipitate stronger reactions," including higher
an important factor discouraging many older workers from
costs on borrowings and a market reluctance to lend.
retiring," Clark said, adding: "I believe that economists
and other policy analysts have systematically overesti-
Companies would do well to make certain the market is
mated the importance of pensions in the retirement
prepared for whatever liabilities are reported, Elliott
decision and underplayed the role of retiree health insur-
advised. The firms need not rush to adopt FAS 106 before
ance."
the deadline; most would do better blending in with the
crowd, he said. But he would write off the full retiree
Still, said Clark, citing the 1988 Current Population
health liabilities immediately rather than let them nibble
Survey, 55 percent of all retirees over 55 years old had
away at profits for 20 years. "The stock market is basically
neither a pension nor retiree health benefits.
cted more by earnings than it is by book value," he
ained.
Ruhm offered a different perspective. "Very large financial
incentives are required to induce substantial changes in
Effects of Reduced Benefits on Work and
average retirement ages," he said. One study he cited
Retirement
calculated that a 30 percent reduction in Social Security
benefits for persons retiring at age 62 would raise average
retirement ages only three months. A 20 percent across-
Far more complex are decisions about work and retirement
the-board cut would keep workers around only two
and how they might be affected by FAS 106 and the
months longer.
certain curtailment of retiree health benefits.
"The financial impacts associated with changes" in retiree
A recent EBRI Issue Brief on retiree health benefits
health benefits, however, "are likely to be quite small," he
indicated that benefit cutbacks "may lower employee
declared. Assuming only one in three retirees receives the
morale and reduce a firm's ability to attract and hold
benefits and employers further limit their commitment,
employees."2 This has not happened at Ball Corp.,
"the increased annual expense to retirees
will average
however. "We have not, as yet, and I emphasize as yet,
only $257 a year," he said.
had the first rejection of an employment offer for lack of a
retiree medical plan," Spievak said. "Younger new hires
"Small average effects do not eliminate the possibility of
don't even want to hear it," he explained. "Their attitude
large impacts in individual cases," he acknowledged.
is, gee whiz, I never really expected it to be there. I don't
expect Social Security to be there. I'm not even sure that
[the] time when I'm going to retire is ever going to come."
3Employee Benefit Research Institute/The Gallup Organization, Inc.,
Public Attitudes on Medicare and Retiree Health, EBRI Report no. G-20
(Washington, DC: Employee Benefit Research Institute, 1991).
Jennifer Davis, "Retiree Health Benefits: Issues of Structure,
4Employee Benefit Research Institute/The Gallup Organization, Inc.,
liancing, and Coverage," EBRI Issue Brief no. 112 (Employee
Public Attitudes on Employee Ownership, EBRI Report no. G-4
Benefit Research Institute, March 1991).
(Washington, DC: Employee Benefit Research Institute, 1989).
12
Retirement Security In a Post-FASB Environment
EBRI Special Report/Issue Brief
Nonetheless, "changes of this magnitude are likely to have
With a graying population, she asserted, the coaxing out
nly slight impacts on retirement decisions, particularly
of older workers "may lead to a loss of skilled workers and
since [retiree health benefits are] typically provided to
production in the economy." Workers, moreover, may
relatively well-off workers, who are least often liquidity
need the added years to save. Keeping them active also
constrained."
could reduce the drain on Social Security and Medicare
and increase revenue from income tax.
Harrington, however, came to a different conclusion. He
laid out a series of scenarios to show how "alternatives in
Conversely, though, "It may not always be desirable to
employer-provided health benefits will impact retirement
force individuals to work until they reach age 65," she
ages and security."
said. Their jobs may be too demanding.
As for employers offering pensions and company-paid
Also at issue, said Jones, is whether "scarce tax dollars
retiree health benefits starting at age 55, he said, dropping
should be used to subsidize benefits concentrated among
the health plan could force would-be retirees to work
the higher income employees, or the middle-income
another five years to make up for the cost of buying their
employees, while doing nothing for the uninsured popula-
own replacement coverage.
tion as a whole."
For workers retiring at age 65 or older, however, the focus
EBRI estimated that granting tax breaks to companies to
shifts. With Medicare picking up a large share of a retiree's
prefund all their current and future retiree medical liabili-
medical cost, Harrington said, retiree health benefits cost
ties in one year would have cost the U.S. Treasury
companies considerably less. And retirees lose less if the
$37 billion in 1989. If amortized over 15 years, the first
employer benefits are terminated.
year tax loss would have been $9 billion in 1989. Tax
breaks such as these "would have to be offset by either a
If workers remain on the job after age 65, the company
tax increase or some reduction elsewhere," Jones said.
continues to be the primary medical payer, so it ends up
with higher medical bills, although it retains an experi-
This against a backdrop that includes 34.4 million Ameri-
enced worker and is spared a pension cost.
cans under age 65 with neither private health insurance
nor access to publicly financed care in 1989, and a federal
A company's response to such variables, he concluded,
budget deficit that is expected to swell to $348 billion in
rests largely on its employment needs: those companies
fiscal 1992.
with well-funded pension plans and surplus workers should
do "nothing with respect to changing the age at which
And, perhaps the most difficult problem to resolve: amid
retiree medical coverage commences." For companies that
cries for an overhaul of the entire U.S. health delivery
want workers to remain, however, "a change in the age at
mechanism, should retiree health benefits be treated
which retiree medical benefits begin is in order," he said.
independently or as a subset of the whole?
"Whether to continue to absorb full medical cost inflation
To David Hirschland of the United Auto Workers, the
is another issue." Employees will have to share in the cost,
answer was clear. "There is a fundamental problem with
he said.
how we provide health care to retirees in this country,
which warrants systemic reform," he said. Worrying about
funding "takes us off on the wrong track."
Public Policy Issues
Spievak agreed. "We need health care reform as a whole,"
Broader public-policy questions get bundled into the
he said. "We intend to support state and federal initiatives
retiree health issue, including the nation's labor force
aimed at providing universal access."
needs. As expressed by Jones of EBRI: "Companies have
often responded to economic downfalls by reducing their
While the general health debate has seethed,
work force through early retirement rather than layoffs.
policymakers have considered four options for retiree
But is this approach best for society as a whole?"
health care, according to Jones.
Retirement
tty In a
FI
Environment
13
EBRI Special Report/Issue Brief
`vefunding Incentives
"A lot of folks," he said, "would feel that if we're going to
spend the precious federal dollars that we have, it's better
Several proposals were introduced in the 101st Congress
off trying to increase access to the people who have no
to provide at least limited tax breaks to companies
health care coverage, and/or trying to reduce the overall
prefunding retiree health benefits. None garnered much
cost of the system, versus trying to provide a security
support, however, despite business backing, and no similar
blanket, or something akin thereto, to a group of people
legislation has been introduced in the 102nd Congress.
who may very well be covered by Medicare."
ERISAfication
Rather than broaden tax breaks for employer-provided
health care, "some people in Congress" would cut them
Some policymakers have suggested this as a quid pro quo
back, he said. "Right now, the tax expenditure for health
for prefunding incentives, Jones said. The Employee
benefits on the federal level is about $38 billion for 1991,
Retirement Income Security Act of 1974 set minimum
and on the state and local level it's potentially about
funding, participation and vesting requirements for
$20 billion," he stated, citing a Congressional Budget
pensions. Now some advocates would extend these to
Office study.
retiree health plans, as well.
"There are some people," he declared, "who would say
COBRA Extension
that we should take some of those dollars away from
people who are receiving what they would deem to be
The Consolidated Omnibus Budget Reconciliation Act of
better health benefits than most people get in the country,
1985 requires employers to allow workers, their families
and allocate that money to people who have no health
and beneficiaries to purchase health insurance for a
benefits and try to increase the access."
limited period after the employees leave their jobs or die.
The charge is usually 102 percent of the company's
Chris Jennings, deputy staff director of the Senate Special
emium. Proposals introduced in Congress in 1991 would
Committee on Aging, said that members of Congress and
expand the coverage to widowed, divorced and legally
their staffers recognize that retiree health benefits are a
separated spouses aged 50 and older until they attain other
problem. But, he said, they are "scared" of the issue
coverage or become eligible for Medicare.
because they do not have any answers, can find no offset-
ting revenue-raising possibilities and see more importance
Medicare Expansion
in helping the uninsured and containing costs.
Rep. Dan Rostenkowski (D-IL), Chairman of the House
On the specific policy initiatives advanced so far, Jennings
Ways and Means Committee, introduced a comprehensive
forecast that little progress would be made. The huge
health care reform proposal in 1991 that, among other
potential cost dooms prefunding tax incentives, he said.
features, would gradually reduce the Medicare eligibility
ERISAfication is unlikely unless there are some "major,
age from 65 to 60 by 1997. The proposal won the backing
major problems that are very visible to the Congress." A
of the AFL-CIO, to "level the playing field" for companies
COBRA extension would be cheap to the federal govern-
with a disproportionate number of retirees, Miller said.
ment but "business will hate it and retirees will say, what
But the federation still pushed for national health care
the hell is going on" when they see bills of $2,000 to
reform.
$3,000. Medicare expansion, too, is likely to get mired. He
did not see it moving without "a comprehensive reform
Three congressional staffers held out little chance that any
approach, which I don't see happening this year or next
legislation would emerge soon.
year."
Rick Grafmeyer, tax counsel for the Senate Finance
Tricia Neuman, on the professional staff of the House
Committee, said it would be "real difficult, real difficult"
Ways and Means Committee, made it unanimous for the
for any prefunding tax incentives to pass in the next
congressional aides. Citing a preliminary estimate from
uple of years.
the General Accounting Office, she said that the Medi-
14
Retirement Security In a Post-FASB Environment
EBRI Special Report/Issue Brief
care expansion bill could reduce a company's health costs
are uninsurable," she said. "Suddenly, uninsurables can
"up to 60 percent per retired employee" over the lifetime
very well become virtually the majority population," all
of the retiree. But this is a break, she indicated, that
pushing for private insurance reform, she said.
probably will elude employers for a while. "This year
it's highly unlikely that there will be any legislation that
And there is yet a third constituency, Chollet said, this
would even make incremental improvements in health
one for a "global solution" for medical cost inflation, by
coverage."
people suddenly placed at risk.
Deborah J. Chollet, of Georgia State University and an
"Employers say that they themselves can't control health
EBRI Fellow, sensed, however, that pressure is building for
care costs. It is not an unreasonable thing for people to
change that could smash through the legislative bottle-
conclude that [if] their employer is not willing to bear that
neck.
risk, and not capable of managing increasing health care
costs, how in the world are they going to be capable of
The very retirees who forced the repeal of the Medicare
doing that?" she asked.
Catastrophic Coverage Act in 1988-because they felt
the government was unfairly charging them for benefits
"It's likely," she said, "that people will look even more
their former employers already were providing-are the
strongly to the federal government for a cost control
same people who are likely to leap into action again if
solution, and that is likely to be a regulatory action."
they see their employer-based retiree health benefits slip
into jeopardy, she said.
Miller, too, saw pressure for change not evident before
FAS 106 and the resultant redrafting of retiree health
Many of these are middle-income retirees, most with
plans. Prefunding tax incentives would not be coming
annual earnings between $35,000 and $50,000, a minority
from Congress "this year, next year, or in the next few
in the general population, she said. But "the poor in this
years," she said. But, she reported, the retiree health issue
country are not the people who drive public policy," she
has prompted employers and workers to sit down together,
asserted. "It's middle-income voters who drive public
in committees established through collective bargaining,
policy." In Chollet's view: "The political and policy
to look at the broader issue of national health care reform.
impact of this group of people is highly disproportionate to
their numbers."
So, at the very least, FAS 106 has forced employers to
acknowledge retiree health care liabilities. It has acceler-
And these people, Chollet said, are "going to be spectacu-
ated the inevitable recognition that some of these costs
larly unhappy" at the realization that they are being asked
will have to be shed.
to carry more of both the absolute cost of retiree health
care and the risk of inflation. "Just as they defeated
But, more than that, the accounting standard has fueled
Medicare Catastrophic, my guess is they will be right there
the debate for change, of not just retiree health benefits
ready to bring it back when, in fact, the baby boom is at
but of our national health care system.
risk of inadequate insurance benefits in retirement."
It still is far too early to predict how this debate will
Early retirees, she said, also will press for change as they
evolve. Dragging new politically potent constituencies
increasingly find themselves, first, abandoned by employ-
into the deliberation, however, almost certainly is going to
ers and, then, unable to purchase health insurance on the
produce actions on a timetable unimaginable before FAS
private market.
106 burst onto the scene.
A minority of the population always has found itself
uninsurable, she explained. Now, however, this group is
expanding with "a growing baby boom, who, in larger and
larger numbers, are going to find that they themselves are
medically underwritten out of insurance plans, that they
Retirement Security In a Post-FASB Environment
15
FINANCING OPTIONS
Premiums, taxes, or savings from the system are the three
basic options for financing the system. Either of these
mechanisms must cover not only the cost of coverage now being
paid through the employer-based system, but also the costs of
expanding coverage to those currently uninsured. Financing must
also cover the administrative structures to run the system (local
boards) and for the national data system and infrastructure to
monitor and improve practice patterns (PPRC staff paper).
Issues/Options
Paul Starr believes that a premium-based approach to
financing is preferable to taxes, since it keeps the funds out of
government revenue streams and is more likely to be politically
feasible.
In this approach, employers and employees would pay toward
the costs of a community-rated premium tied to the low-cost plan.
Paul Starr (statement to Labor Committee) suggests that employers
would pay some minimum share -- perhaps 75 percent; employees,
the remainder. The self-employed, unemployed, and others would
be required to pay the premium--but within limits. For persons
with incomes below poverty, they would pay little or nothing; if
above, they would pay some percentage of income in excess of the
poverty line.
Washington
Post
Feb
3
Managed Competition' No Cure-All
CBO Sees Little Change in Health Care Outlays Under Proposal
By Dana Priest
would probably be forced to join
longer afford every kind of treat-
Washington Post Staff Writer
super HMOs, which would remain
ment. Doctors and hospitals, on the
under the control of private com-
other hand, could not charge the
"Managed competition," a type of
panies. Critics assert the health
prices they believe they deserve.
health care change favored by Pres-
care market would become oligo-
At yesterday's hearing, Republi-
ident Clinton, could allow up to 20
polistic with fewer, but much larg-
can members of the committee came
144
million Americans who are now un-
er, health plans in operation.
to the defense of managed compe-
K
insured to be covered but "would
Managed competition attempts
leave national health care expend-
tition, as did Rep. Michael A. An-
for
to change the behavior of consum-
itures at approximately the same
drews (D-Tex.), a co-author of Coop-
isn
ers and providers; to break what
er's bill.
level they would reach" without the
Bue
many believe to be the incentives in
change, Congressional Budget Of-
"I hope Congress is not seduced by
INC
the current system for hospitals,
fice director Robert D. Reischauer
budget numbers that will look good
doctors and other health care pro-
said yesterday.
on paper but that will not stand up to
(on
viders to spend money on often un-
The CBO's preliminary assess-
the real world," said Rep. William M.
necessary care and technology. But
ment of a managed-competition bill
Thomas (R-Calif.).
critics say HMO patients some-
introduced last year by Rep. Jim
times find it hard to see'a doctor
Cooper (D-Tenn.) is that health ex-
penditures would increase at first
when they want to and that access
as the uninsured move into the sys-
to specialists and some type of tech-
tem, Reischauer told a House Ways
nology is harder than under the cur-
and Means subcommittee.
rent system.
Cost increases would then grad-
During the campaign, Clinton
ually slow because most people
endorsed the concept of managed
would receive medical care from
competition with some type of cost
Health Maintenance Organizations,
controls, which he has not defined.
whose prices are 10 to 15 percent
Reischauer yesterday acknowl-
lower than in the traditional fee-for-
edged that the CBO is unable to
service system of private doctors
fully analyze the potential savings
used now by most people.
from such a sweeping reorganiza-
Reischauer said the savings from
tion of the health care system.
HMOs-which generally charge
"The devil in health reform may
members a flat yearly rate and have
very well be in the estimates as well
most of their providers on salary-
as the detail," said Reischauer. Con-
would eventually offset the cost of
gress uses CBO's cost estimates to
covering more uninsured individ-
determine how much a law would
uals.
cost the federal budget.
Cooper's bill would establish a
As a result, Congress might find
national health board that would
it difficult to decide whether to
define a standard package of health
adopt a new and unproven revision
benefits for all Americans. Health
whose potential savings cannot be
insurance cooperatives would ne-
entirely calculated, or to move to
gotiate prices from competing
health care systems that exist now
health plans, and individuals and
and can be judged, such as the one
businesses would buy coverage
in Canada.
from the cooperatives.
The CBO staff believes that the
The board would also set stan-
most successful way to limit costs is
dards for collecting information on
with a national "single-payer" sys-
price, health outcomes and custom-
tem, like Canada's, coupled with
er satisfaction with each health plan
limits on an individual's ability to
that customers could use to decide
buy health care outside the national
which plan to purchase. The tax
system and price controls on hos-
code would be changed to limit the
pitals, doctors and other providers.
amount of tax-free health benefits
But, said Reischauer, "cost con-
that employers could provide to the
trols restrain the freedom of con-
cost of the lowest-priced health plan
sumers and providers." Under such
in a given region. Now most health
plans, consumers would get more
benefits are tax-free to employees.
limited medical care because HMOs,
Under the plan, most people
for example, theoretically could no
CBO
STAFF
MEMORANDUM
THE POTENTIAL IMPACT OF
CERTAIN FORMS OF MANAGED CARE
ON HEALTH CARE EXPENDITURES
August 1992
(Revised)
CONGRESSIONAL BUDGET OFFICE
SECOND AND D STREETS, S.W.
WASHINGTON, D.C. 20515
INTRODUCTION
Managed care has attracted considerable interest as a possible way to curb
rapidly rising health care expenditures without encountering some of the
difficulties that more radical changes in the health care system could entail.
Managed care seeks to modify the delivery and financing of health care in an
attempt to eliminate unnecessary and inappropriate care, thereby improving
quality and reducing costs. The current health care system already uses it
extensively. Among employees who in 1990 were covered by private insurance
based on employment, fully 95 percent were in plans that incorporated some
form of managed care.¹ These diverse forms include several kinds of health
maintenance organizations (HMOs), numerous forms of utilization review
(UR), and various arrangements--sometimes optional for consumers--that are
based on specified networks of providers. There is evidence that some forms
reduce costs, but there is no such evidence for others.²
Advocates of managed care hope that channelling a greater share of
health care services through the more effective forms of managed care might
significantly reduce expenditures on health care. Advocates note that various
forms of managed care have been incorporated into both indemnity and
prepaid insurance arrangements and that they are compatible with a
predominantly private health care system. Further, strong evidence exists that
some reduce the costs of care.
People who counsel against expecting too much from managed care
observe that its existing forms vary widely in their apparent effectiveness at
reducing costs. Moreover, to be effective, policies to expand managed care
would need to include enough constraints or incentives to induce consumers
and providers who would not otherwise have done so both to participate and
to change their behavior in ways that reduce costs. In addition, expanding
managed care would not, on its own, address other concerns--such as access to
health care services--that are a focus of more radical proposals for change.
This memorandum is an illustrative exercise designed to provide a sense
of the order of magnitude of the reductions in national health expenditures
(NHEs) that might result from universal adoption of two specific forms of
managed care. One is staff- and group-model HMOs--the forms of managed
care for which demonstrated cost savings are greatest. The other is "effective"
forms of UR, which the Congressional Budget Office (CBO) interprets to mean
utilization review that incorporates precertification and concurrent review of
1.
See Elizabeth W. Hoy, Richard E. Curtis, and Thomas Rice, "Change and Growth in Managed Care," Health
Affairs, vol. 10, no. 4 (Winter 1991), pp. 18-36.
2
See Congressional Budget Office, "The Effects of Managed Care on Use and Costs of Health Services,"
CBO Staff Memorandum (June 1992). The memorandum reviews available evidence about the effectiveness
of managed care and contains a glossary.
inpatient care. CBO does not present similar estimates for HMOs modelled
on independent practice associations (IPAs) because there is no reliable
evidence about their effects.
The illustrative analysis in this memorandum suggests that, if all health
care services for people who are insured were delivered through staff- or
group-model HMOs, NHEs might be lower by almost 10 percent.
Alternatively, if all such health care services were instead delivered through
arrangements that embodied relatively effective forms of UR, the resulting
reduction in NHEs might be no more than about 1 percent.
For several reasons, these illustrative estimates should be interpreted
with considerable caution. The results presented are CBO's best estimates of
the potential that staff- and group-model HMOs, and effective forms of UR,
have to reduce NHEs; they should not be generalized to other forms of
managed care for which there is no evidence. By necessity, the analysis
incorporates a large number of assumptions, but the data or evidence
supporting many of them have significant limitations.
Another important qualification is that managed care might have quite
different effects if it were applied to all consumers, providers, and services--
rather than just to part of the health care system. One possibility is that the
effects of universal managed care arrangements could be larger than those
reported here. As Alain Enthoven has noted, if the change to universal
managed care were part of a comprehensive restructuring of the health care
system that included incentives to choose efficient arrangements, the managed
care component of the package might have a larger impact than if it were
adopted on its own.³ That is because, under the present structure of
competition among insurers, managed care arrangements may not be delivering
all of the cost savings that they could potentially yield.
Currently, managed care organizations compete with traditional insurers
for enrollments. Enrollments in these managed care organizations would have
declined under this system if effective managed care had resulted in consumers
perceiving either that they received fewer services that they wanted--whether
beneficial or not--or that they waited longer for services because of prior
authorization requirements. Declining enrollments among consumers insured
through their work place would have been especially likely where employees
who opted for unmanaged, traditional insurance plans were not required to pay
3.
Alain Enthoven, "Multiple Choice Health Insurance: The Lessons and Challenge to Employers," Inquiry,
vol. 27, no. 4 (Winter 1990), pp. 368-375; and Alain Enthoven and Richard Kronick, "Universal Health
Insurance Through Incentives Reform," Journal of the American Medical Association, vol. 265, no. 19 (May
15, 1991), pp. 2532-2536.
2
the excess of these plans' higher premiums over those of less costly plans
incorporating effective managed care. Because of the nature of competition
in this market, HMOs could have been less aggressive in attempting to limit
unnecessary care than they would have been in a market where consumers
faced strong financial incentives to choose more efficient insurance
arrangements. HMOs may also have used savings they achieved by managing
care to broaden the range of services that their plans cover.
It is at least as likely, however, that mandating universal adoption of
managed care might have smaller effects than estimates based on past
experience would suggest. That could result because, if all consumers and
providers were required to adopt managed care arrangements, the new
participants' levels of commitment to the processes and values implicit in
managed care approaches might be less than those of the current participants,
who have voluntarily chosen these arrangements. Furthermore, extending
managed care arrangements could increase administrative costs, offsetting
some of the savings in the costs of health care services. (Because of data
limitations, any increases in administrative costs are not included in the
analysis.)
An additional reason for caution when interpreting the estimates
presented here is that they relate to the level of--rather than the rate of
increase in--health care costs. The limited available evidence suggests that
=
managed care does not affect the underlying rate of growth in those costs; we
assume that mandating managed care would not affect the rate.4 It might slow
that growth, however, if it were introduced as part of a comprehensive
restructuring of the health care system that incorporated strong incentives to
choose efficient arrangements. In such a setting, universal managed care could
facilitate greater control over the adoption of new technology--for example, if
it led to better ways to identify new technologies and to develop guidelines for
their use. However, under the present system, with its recent high rates of
costs increase, even a reduction of about 10 percent in NHEs would be offset
by approximately one year's increase in health care spending. Thus, universal
adoption of some forms of managed care could yield substantial one-time
savings; but in the absence of substantial restructuring of the health care
system, that would not address the longer-term issue of the underlying rate of
growth in health care costs.
Against this background of rapidly rising costs and of diverse forms of
managed care that vary widely in their apparent effectiveness, the
memorandum outlines the assumptions that underlie the analysis and presents
4.
See, for example, Joseph Newhouse and others, "Are Fee-for-Service Costs Increasing Faster than HMOs'
Costs?" Medical Care, vol. 23 (August 1985), pp. 960-966.
3
the estimates obtained. An appendix describes the data and provides
additional technical information.
BACKGROUND
Managed care represents one approach to reining in health care costs that
continue to climb rapidly in both the federal budget and the nation as a whole.
Real spending per person for health care grew at an average rate of about 4 1/2
percent a year between 1980 and 1990, substantially outstripping the 1 1/2
percent annual growth in real gross domestic product per person over the same
period.
Partly because of that rapid growth, the share of federal spending
devoted to health care grew from 10.5 percent in 1980 to 13.4 percent in 1990.
CBO has projected that, under current policies, spending on health care would
climb to nearly 22 percent of the federal budget by 1997 and to 28 percent by
2002.
Forms of Managed Care
Managed care is one of numerous strategies that have been advocated to
contain rising costs, although its supporters also see it as a way to assure the
appropriateness--and thus the quality--of care. Managed care comprises any
type of intervention in the delivery and financing of health care that is intended
to eliminate unnecessary and inappropriate care and thereby to reduce costs.
The best known form of managed care involves HMOs, which combine
insurance coverage with defined delivery systems and which ordinarily pay
benefits only when the insured population uses the organization's delivery
system. Another common form of managed care is utilization review. Various
other forms that have been developed--for example, preferred provider
organizations and hybrid plans that offer managed care choices to patients at
the "point of service"--are not discussed in this section.
Health Maintenance Organizations. HMOs can be structured in various ways.
A staff-model HMO owns the clinical facilities that the insured population must
use and employs salaried physicians to serve the HMO's members exclusively.
Staff-model HMOs, along with group-model HMOs, have integrated their
systems for financing and delivering care. In this way, they differ from the
majority of today's managed care organizations.
4
CBO
TESTIMONY
Statement of
Robert D. Reischauer
Director
Congressional Budget Office
before the
Subcommittee on Health
Committee on Ways and Means
U.S. House of Representatives
February 2, 1993
NOTICE
This statement is not available for
public release until it is delivered
at 10:30 a.m. (EST), Tuesday,
February 2, 1993.
CONGRESSIONAL BUDGET OFFICE
SECOND AND D STREETS. S.W.
WASHINGTON, D.C. 20515
Mr. Chairman, I appreciate the opportunity to appear before this
Subcommittee. My testimony today will cover the Congressional Budget
Office's (CBO's) methods for examining the effects that cost containment
provisions in health legislation would have on national health expenditures.
These methods will be illustrated using two bills that were introduced in the last
Congress.
THE EFFECTS OF COST CONTROL
PROVISIONS ON HEALTH EXPENDITURES
Over the past two decades, both public and private payers have made
concerted efforts to apply many cost control strategies to the current health
care system. As a result, there is evidence of how at least some types of cost
containment approaches affect health care spending.
To give you an understanding of CBO's estimating methods, let me
describe several options for controlling health care costs and the issues that
these options raise for cost estimating. Where possible, I will also indicate the
magnitude of the potential reduction in national health expenditures that might
be estimated for each proposal.
Increased Cost Sharing for Health Services
Strategies that would raise the out-of-pocket costs of health care for consumers
are predicated on the assumption that consumers would become more cost-
conscious if they paid more. In other words, they would be more likely to
consider whether the value of an additional visit to the doctor was worth the
extra cost or they would seek out providers who were more economical or
charged less. In considering this strategy, however, it is worth noting that
average cost sharing in this country is continuing to decline. Consumers paid
27 percent out-of-pocket for their health care in 1980, but only 22 percent in
1991.
Cost sharing for health services could be increased in a number of
ways. One could mandate minimum cost-sharing requirements for private
insurance, eliminate dual insurance coverage that offsets cost-sharing
requirements of individual policies, or prohibit the use of flexible benefit
accounts to pay deductible amounts and coinsurance requirements.
As an example, if mandated cost sharing had been set at a level that
increased out-of-pocket costs for the population with private fee-for-service
health insurance by 40 percent in 1990, then national health expenditures
would have been about 1 percent to 3 percent lower. This effect would be
2
relatively small because consumers are not particularly sensitive to changes in
their out-of-pocket costs. The reason is, in part, that they lack knowledge
about alternative treatments, their costs, and their efficacy and, therefore, they
delegate decisionmaking to physicians and other providers.
Expanded Controls on the Use of Services
Managed care can reduce inappropriate or unnecessary health care. Overall,
however, the evidence of its effectiveness in reducing costs-other than through
fully integrated health maintenance organizations (HMOs) with their own
delivery systems--suggests that substantial savings could not be achieved by
extending it to more people. Some reduction could occur, however, if
expanded controls on the use of services were concentrated on populations
with above-average hospital use.
One legislative approach might be to provide federal financial incentives
to expand enrollment in HMOs. Incentives, however, would not necessarily
elicit the desired increase in voluntary enrollment in HMOs unless the
incentives were very large. Further, because only some types of HMOs are
effective at reducing use and expenditures, only a portion of any new enrollees
would actually use fewer services. Finally, the federal costs of the financial
3
incentives to expand enrollment in HMOs could be as high or higher than the
savings.
Another legislative approach would be to require that all consumers
receive care through managed care organizations. For example, if everyone
were required to enroll in a staff or group model HMO-the only type of
managed care that has to date been demonstrated to achieve substantial
savings-CBO estimates that national health expenditures could decline by as
much as 10 percent. This is not an insignificant amount of savings; in 1991,
national health expenditures were $752 billion, and a 10 percent drop would
be $75 billion. Since there is no evidence, however, that even effective HMOs
have been successful at reducing the rate of growth of health spending, and
health care has been increasing recently at a 10 percent to 12 percent annual
rate, we would still face the problem of higher health care costs in every
subsequent year after these savings occurred.
Price Controls
Price controls could be effective in reducing both the level and the rate of
growth of spending, but their impact would be partially offset because
providers would increase the volume of services (or change billing practices)
4
to recover lost revenues. In addition, price controls applied to only one
segment of the market would generally result in higher spending in other
segments of the market.
For example, if the prices of physician services under the Medicare
program were reduced 10 percent, CBO estimates that Medicare's spending for
these services would drop 5 percent. This estimate reflects our assumption that
physicians would offset about half of their potential revenue loss through
increased Medicare volume. If providers attempted to keep their overall
revenues constant, spending on physician services by the non-Medicare
population could also rise. As a result, although Medicare's spending for
physician services would decline 5 percent, that reduction might not
significantly affect the level of national health spending.
Stringent price controls may also affect access to care in some segments
of the market. Access to care by Medicaid beneficiaries, for instance, has been
adversely affected by the much lower prices that providers are offered in some
states for serving this population.
Alternatively, government regulation could set maximum prices for
physician services that all payers would have to follow. In other words, insurers
would not be allowed to pay more, and physicians would not be allowed to bill
5
patients for amounts above the regulated prices. Under such an all-payer
system, providers could increase volume to offset some, but probably not all,
of their lost revenue. Administrative costs would decline somewhat, since
providers would not have to maintain and monitor many separate price
schedules and claim forms. In addition, the authority that determined prices
would also control their rate of increase. If the legislation included rules that
would limit the growth in prices to less than the projected rate, then price
controls in an all-payer system could generate lower national health
expenditures than would otherwise occur.
Price controls carried out through a single-payer system could also
reduce reimbursements and sharply cut administrative costs for insurers and
providers. In fact, the one-time drop in the cost of administration could have
been around $30 billion to $35 billion in 1991, under the conservative
assumption that only the administrative costs related to billing and processing
of claims would be reduced, if a single-payer system had been fully in place that
year. National health expenditures would, however, have fallen by this full
amount only if prices paid to providers had been reduced to reflect the lower
administrative costs that they would have incurred.
In both an all-payer and a single-payer system, legislation that included
provisions for uniform monitoring of providers' patterns of care would have an
6
even greater impact than price controls alone. Such monitoring could reduce
the magnitude of the response in volume and would allow the rate-setting
process to take any volume increase into account in determining the next year's
reimbursement rates.
Limits on the Tax Exclusion for
Employer-Paid Health Insurance Premiums
In 1993, federal income and payroll tax revenues will be about $70 billion lower
because health insurance received through employment and health care costs
paid through flexible benefit accounts are not treated as taxable income.
Limiting the tax exclusion for employer-paid health insurance coverage could
reduce health spending by inducing employers and employees to change the
provisions of their insurance policies. If the new policies incorporated higher
cost sharing by consumers, for example, the number of services used would fall.
Alternatively, consumers might join effective HMOs, with the same result.
One way to limit the exclusion would be to treat some tax-exempt
employee health benefits as taxable income. In 1990, for example, employer
contributions averaged about $110 a month for individual coverage and $270
for family coverage. If the tax exclusion had been capped at those levels, the
implicit federal subsidy for health insurance would have been reduced by about
7
$10 billion in that calendar year. National health expenditures would also fall
in response to the lower subsidy, but by less than the reduction in the subsidy.
If such limits were enacted, workers who currently have coverage above
the limits would have two choices. They could continue their current coverage
and pay federal income and payroll taxes on the excess coverage.
Alternatively, they could negotiate with their employers to cut back some, or
all, of the coverage above the limit in exchange for higher wages, thereby also
raising their taxable incomes. (Most employers would probably be indifferent
between continuing current health benefits or substituting higher wages for
them because both are tax-deductible business expenses.)
Lower amounts of coverage could be accomplished in several ways that
would also help to control health care costs. First, traditional insurance could
be replaced with effective HMOs. Second, higher copayments could be used
to lower the cost of coverage. Third, coverage for some benefits (for example,
chiropractic and dental care) might be dropped or scaled back. Finally,
insurers could reduce the level of their reimbursement to providers, although
this possibility would either limit the insured consumers' choice of providers or
increase their out-of-pocket costs.
8
Limits on Expenditures
Legislation that provided for prospective budgets for hospitals, expenditure
targets for physicians, or caps on overall national health spending would involve
major changes in the existing U.S. health care system, but it could substantially
reduce the rate of increase in health spending. The legislation would, however,
have to include specific details of the mechanisms for setting, monitoring, and
enforcing the limits.
For example, suppose legislation was passed that established prospective
budgets for hospitals, with specific formulas for setting and updating them.
Assume also that there was no leeway to increase the budget for a hospital
when overruns occurred. In such a case, the impact on national health
spending would be the difference between total spending for hospital services
under the budgets and projected spending without the legislation. Similarly, if
legislation set caps on expenditures for various segments of the health care
sector, specified the formulas to determine the annual rate of increase in the
caps, provided for monitoring performance under the caps in a timely way, and
put in place enforcement mechanisms that would either make it impossible to
exceed the cap or would make it possible to fully recover excess spending after
it occurred, then one could estimate the savings by comparing the caps with
projected spending in their absence.
9
Based on our assessment of the evidence on the effectiveness of limits
on expenditures as they have been applied in the United States and in other
countries, CBO believes the likelihood of success increases with a single
payment mechanism or clearinghouse, restrictions on the ability to purchase
health care outside the regulated system, and global budgeting for hospitals and
other institutions. In addition, a continuously adjusting payback mechanism for
physicians, as has been used in Germany and in some Canadian provinces, and
budgeting or rate setting that applies to all providers and services would be
effective in enforcing the limits. A good data system with uniform reporting by
all providers to allow quick feedback would also be an important component
of an effective strategy for limiting expenditures.
CBO's approach to estimating the potential impact of limits on
expenditures in legislative proposals is to examine the proposal with respect to
both the stringency of the limits and the specified enforcement mechanisms.
Based on our best judgment, we then assign a rating for effectiveness, with a
fully effective limit receiving a 100 percent rating and a completely ineffective
proposal receiving a rating of zero. The estimated savings for any expenditure
limit would equal the difference between the projected costs without the limit
and the expenditure limit, multiplied by the effectiveness rating.
10
To illustrate the effect on national health spending of a fully effective
cap, assume that legislation had been put in place beginning in 1986 that
included a cap constraining the increase in national health expenditures to the
rate of population growth (1 percent a year) plus 2 percentage points above
the rate of general inflation. If such a cap were fully enforced, we estimate that
national health expenditures would have been only $651 billion in 1991, or
about 13 percent lower than the approximately $752 billion that was actually
spent that year.
If, however, limits on expenditures were applied selectively to some
groups and not others, then providers could increase prices and the volume of
services for other groups in order to maintain revenues, without incurring
penalties for exceeding the limits for the covered population. Although the
market segment subject to the limits would realize savings, national health
expenditures might not fall much.
Managed Competition
Managed competition is the central feature of proposals to restructure the
health care market in ways that would create incentives for consumers to be
more cost-conscious in their insurance and health care decisions. Increased
11
cost-consciousness by consumers would give insurers and providers, in turn, the
incentives to become more cost-conscious and efficient.
Many different proposals have been put forth under the "managed
competition" umbrella. Some proposals of this kind could reduce health care
costs, and others would have little effect. CBO is currently preparing a paper
on managed competition. It will identify features that would help maximize the
savings in national health expenditures under that approach. These elements
include:
o
The creation of regional organizations (for example, health
insurance purchasing cooperatives, or HIPCs) that would
oversee and operate the restructured insurance market and help
consumers make better-informed choices;
o
Limitations on the tax-exempt amount of employee. health
benefits and a requirement that employers contribute no more
than a fixed dollar amount toward their employees' health
benefits;
12
Standardized benefits and copayment rules, with a prohibition on
supplemental insurance that would cover out-of-pocket costs
under the standard package;
0
The availability of uniform, reliable data on costs, outcomes, and
quality;
Universal insurance coverage;
The requirement that all insurers offer open enrollment periods
and base premiums on community rating;
An accurate method to adjust for differences among insurers in
the health status of their enrollees; and
o
A significant reduction in the number of insurers and the
creation of insuring organizations that would offer substantially
nonoverlapping networks of affiliated providers.
In combination, these changes to the current system could result over time in
a reduction in the rate of increase in national health spending. Omitting some
of these elements from a proposal for managed competition would significantly
13
lessen its potential effectiveness. Even if all these elements were included,
however, it would be extremely difficult for CBO to estimate the magnitude
and the timing of the effects on national health spending, because of the
complexities of analyzing a dramatic restructuring of the markets for health
insurance and health services.
Two aspects of these proposals do provide some indication of the
direction CBO's cost estimates will take. First, we have consistently taken the
position that savings could be achieved by moving people from fee-for-service
medicine into group or staff model HMOs. Thus, estimated savings would
depend on the extent that a particular proposal would shift people into these
types of managed care organizations. In addition, most proposals for managed
competition would limit in some manner the tax-exempt amount of employee
health benefits. Federal revenues would be increased to the extent that the
limits are tightened. If employees then chose insurance with more limited
benefits and higher cost sharing because there was less subsidy to health
insurance, there could also be a further impact on national health expenditures.
Assessing the full effect of restructuring the entire health insurance
market, however, is much more difficult. Little information from either the
United States or abroad is available on the time that it would take for all the
changes to occur or on the magnitude of the impacts of these changes once
14
they were fully implemented and all behavioral responses had occurred. We
are convinced, however, that even if a managed competition approach with all
the critical elements described above were carried out, its effects would occur
over an extended period of time. Significant savings in national health
expenditures would probably not occur within the usual five-year time horizon
of CBO cost estimates.
A PRELIMINARY ASSESSMENT OF THE COSTS
OF TWO LEGISLATIVE PROPOSALS
Estimating the potential costs or savings of health reform proposals is one of
the most difficult tasks CBO has attempted. First, health expenditures are
currently about 14 percent of gross domestic product and are projected to rise
to at least 18 percent by the year 2000. The effects of changes in this large a
system must be uncertain. It is often difficult even to forecast spending in
current federal health care programs, as CBO has found in recent years when
Medicaid spending increased by 19 percent in 1990, 28 percent in 1991, and 29
percent in 1992, far exceeding projections. Moreover, many of the health
reform proposals under consideration include provisions for which there is no
actual experience and no solid evidence to be used as the basis for our
estimates.
15
The task of estimating costs becomes even more complex since five
years-the usual time frame for cost estimates-is not a long enough period for
forecasting the impact of some health reform proposals. Some of them might
require longer than five years to be fully carried out, and cost estimates that
stop at five years would not provide the information that is needed to assess all
their effects.
In addition, CBO is being asked not just to estimate the impact of these
proposals on the federal government's budget, but also to examine their effect
on national health expenditures and on the number of people with health
insurance. National health reform involves important interactions between the
private sector and the federal budget, but analyzing these interactions and their
impacts is extremely difficult. As a result, estimating the costs and savings
associated with health reform proposals requires more thought, more
coordination and consultation with other federal offices such as the Joint
Committee on Taxation, and more time than most cost estimates.
To illustrate the estimating issues and principles, CBO is providing a
preliminary assessment of two health reform bills introduced in the 102nd
Congress: H.R. 5936, the Managed Competition Act of 1992, and H.R. 5502,
the Health Care Cost Containment Act of 1992. Although they are not current
bills, the proposals represent different approaches to health reform and
16
illustrate the complexity of making cost estimates in this area. CBO has not yet
completed year-by-year estimates for the two bills, but it is possible to give you
an outline of their probable effects on national health expenditures.
Our analysis reflects H.R. 5936 as introduced and H.R. 5502 as reported
by this subcommittee. For both bills, we have delayed the implementation
dates by one year to reflect possible enactment in late 1993. The
Congressional Budget Office and the Joint Tax Committee have worked
together in examining the effects of changes in the tax law.
The Managed Competition Act of 1992
H.R. 5936 would attempt to control costs and expand access to health
insurance by restructuring the way health insurance is provided. The bill would
establish a National Health Board to define a standard health plan; to establish
standards for reporting prices, health outcomes, and measures of consumer
satisfaction; and to provide information to consumers on the quality of care.
Plans that met board standards would be defined as Accountable Health Plans
(AHPs).
17
Changes in the tax code would encourage the use of AHPs, because
employers paying more than the cost of the lowest priced AHP in the area
would be required to pay a 34 percent excise tax on the costs above this
amount. The self-employed would be allowed to deduct 100 percent of the
costs of the lowest priced AHP. In each state, Health Plan Purchasing
Cooperatives (HPPCs) would be established, and all individuals except those
working for businesses with more than 1,000 employees (up to 10,000
employees at each state's option) would be required to purchase their health
insurance through the HPPC to receive the favorable tax treatment. Individual
contributions for health insurance could be deducted for tax purposes only up
to the cost of the lowest priced AHP.
Finally, H.R. 5936 would replace the Medicaid program with a new
federal program that would help purchase health insurance coverage through
HPPCs for low-income individuals. Individuals and families with incomes below
the poverty level would be eligible to join AHPs with no premium and only
nominal copayments. Individuals and families with incomes between 100
percent and 200 percent of poverty would be responsible for paying a portion
of premiums, based on a sliding scale.
CBO's preliminary assessment is that, after a few years, H.R. 5936
would leave national health expenditures at approximately the same level they
18
would reach otherwise. Initially, however, national health expenditures would
increase. This result stems in large measure from the assumption that the
National Health Board would select a comprehensive set of benefits for its
AHP. Because these benefits would be available to a larger group than is
currently covered by health insurance, national health expenditures would be
higher in the first few years.
The growth in per capita health expenditures would gradually slow,
however. Because group model or staff model HMOs can provide health care
more efficiently than other organizational forms, they would probably be the
lowest priced bidders in many HPPC areas. Based on past performance, we
expect their prices would be 10 percent to 15 percent below the price of similar
fee-for-service plans, and the cost of enrolling in these HMOs would be fully
tax-deductible. Thus, enrollment in them would probably rise more rapidly
under managed competition than under current law, thereby slowing the
growth in national health expenditures. After a number of years, these savings
could offset the increased health care costs resulting from extending access to
those who currently lack health insurance.
19
The Health Care Cost Containment Act of 1992
H.R. 5502, the Health Care Cost Containment Act of 1992, would attempt to
control health costs by establishing limits on national health expenditures.
Separate limits would be applied to Medicare spending and to national health
expenditures. Limits would be enforced through rate setting, although states
with approved programs and federally qualified HMOs would be exempt from
the maximum rates. Access would be extended by expanding Medicaid
coverage for pregnant women and children with family incomes below 200
percent of poverty and for all nonaged individuals with incomes below 100
percent of poverty. Medicaid payment rates would also be increased, and a
new federal health insurance program for children would be started. Finally,
Medicare would expand its coverage of certain prevention benefits and add a
new prescription drug benefit.
CBO estimates that H.R. 5502 would reduce national health
expenditures about 5 percent by the year 2000. Our preliminary assessment is
that the Medicare expenditure limits would be 75 percent effective. We have
a great deal of experience with rate setting and potential volume offsets in the
Medicare program, which indicates that expenditure limits could be reasonably
effective in controlling Medicare spending. At the same time, we are much less
sanguine about the effectiveness of limits on other health spending. States
20
would be permitted to operate their own systems as long as the growth in
health care spending did not exceed what it would have been under the
maximum rates. This calculation would be very difficult to make, and specific
data on states would not exist in usable form for several years. Finally, the bill
exempts federally qualified HMOs from rate setting. Federally qualified
HMOs are more broadly defined than group or staff model HMOs and include
organizational forms that have not been shown to be cost-effective. Because
of these and other potential sources of leakage, we have assumed that the
limits on expenditures for non-Medicare spending would be only 25 percent
effective. It is our understanding that H.R. 200, the Health Care Containment
Act of 1993, would limit the HMO exemption to group or staff model HMOs.
While we have not completed an assessment of H.R. 200, we expect that its
expenditure limits will be more effective than those in H.R. 5502.
The savings from the limits on Medicare and national health
expenditures would be partially offset by provisions in H.R. 5502 that would
expand insurance benefits and extend the population covered by health
insurance. Overall, however, we estimate that H.R. 5502 would result in
national health expenditures falling about 5 percent below the level they would
otherwise reach by the turn of the century.
21
CONCLUSION
In the past, most health care legislation changed payment methods or levels in
relatively small, discrete ways or expanded eligibility for existing programs.
Thus, CBO has considerable experience estimating the impact on costs of such
changes to Medicare and Medicaid. In general, reasonably good data and
research studies permit us to develop well-founded estimates.
The task we are facing today, however, is a much more difficult one.
Reform of the health care system is likely to involve massive changes in current
health care financing and delivery systems and perhaps comprehensive
restructuring of the markets for health insurance and health services.
Estimates of the effects of such sweeping changes on overall health care
spending, as well as on individual components such as federal health spending,
will be much less precise than estimates of changes in Medicare and Medicaid.
For one thing, past experience does not encompass changes of this magnitude.
Although there is some evidence from other countries, these findings must be
used cautiously, because the substantial differences in cultures, politics, and
economic systems mean that the responses of citizens, providers, and insurers
in other nations may have only limited relevance to the United States.
22
In addition, it is likely that any health reform policy would require a
number of years of development and would be phased in over a period of time.
Moreover, it might take a few more years before it would be possible to discern
the behavioral responses of all the participants in the health care and health
insurance markets who would be affected. At the same time, of course, many
other things will be changing, including overall economic conditions, the
introduction of new technologies for diagnosis and treatment of illness, and--as
our experience with AIDS and the recurrence of tuberculosis in recent years
has shown--even the health status of the population. Thus, considerable
uncertainty surrounds any estimates of the longer-term effects of health reform
proposals on national health expenditures and on the federal budget.
Nonetheless, estimates of the effects of different health reform approaches will
provide useful comparative information on the relative costliness of, or the
potential savings to be gained from, alternative proposals.
23
TAX CAP
Managed competition "purists" argue that in order to make
consumers fully price sensitive, we must cap the amount of
employer-paid health insurance that can be excluded from income
tax purposes. They would argue that the exclusion is inequitable
and promotes health care cost inflation by lowering the real cost
of insurance.
Alain Entoven supports the tax cap. Other managed care
proponents, however, are less emphatic about the tax cap than
they are with the structure of managed competition. Paul Starr,
for example, when asked whether he thought that the tax cap was
critical to the success of managed competition had this reply,
"Entoen places hnearly his whole emphasis on individual costs and
quality consciousness. I think those are very important, but I
place an equal emphasis on the countervailing power of the
purchasing cooperative, its ability to bargain and negotiate on
behalf of large blocks of subscribers. And the tax issue would
in no way affect that element of countervailing power. I see a
lot to be gained from this with or without the cap."
Arguments against the tax cap:
1.
Raising taxes on millions of middle-class Americans is not a
preferable way to solve the cost problem.
2. The only reason the exclusion is inequitalbe is because
people who have no health insurance do not benefit. This will
not be true if comprehensive health care reform is passed. For
people who have health insurance today, lower-income workers
actually benefit more than upper-income people.
3. There is no evidence that imposition of the cap will reduce
health care costs. The theory behind the cap as a cost-control
device is that raising the cost of health insurance to
individuals will give them the incentive to buy more cost-
effective health insurance policies. But it is hark to see why
more incentives are needed when health care costs have more than
tripled since 1980, from $250 billion to $840 billion. And, in
most cases, it it businesses who decide what insurance policy to
offer to workers, anyway.
4. A tax cap would be unfair to the old, the sick, women, those
who live in high-cost areas, and those who work in risky
industries. All those factors raise health care costs and would
result in higher taxes for these groups than someone else buying
an absolutely identical policy. Anyone hwo thinks the current
policy is unfair should take a close look at the alternative.
15/93
16:58
412 562 0537
SENATOR WOFFORD
HW DC
004
Beauer County Times
Decemen 29, 1992
A BETTER WAY
Another option on
current employer-financed system
isolates consumers from the cost of
health-care reform
their heath-care decisions. Even if
employees pay for part of the pre-
THE ISSUE: Major business
mium, there is little reward for
groups are pushing for the taxa-
economizing. Under these condi-
tion of health benefits.
tions, it is difficult to control
heath-care costs.
WE SUGGEST: This proposal
"Back when doctors were paid
could lead to a breakthrough in
out of patients' pockets, there were
health-care reform
natural brakes on the amount of
Although much of the attention
medical services provided and the
on health-care reform has been
fees charged," Moos wrote. "Physi-
concentrated on Washington, cor-
cians knew their decisions could
porate America could very well be
devastate a family's finances.
the driving force in this area.
Nowadays, though, insurance has
The Wall Street Journal reports
become a blank check"
that an influential committee of
The savings could be used to pay
the Business Roundtable is pushing
for covering the 35 million Ameri-
for the taxation of some health
cans who are uninsured, Moos re-
benefits. When the Roundtable
ports.
speaks, people listen. Its member-
Least anyone think this is some
ship includes executives of some of
wild-eyed liberal scheme to raise
the largest corporations in the
taxes, Moos points out the Heritage
United States.
Foundation, a conservative, Wash-
The Roundtable isn't alone. The
ington-based think tank, was one of
insurance industry's reform propos-
the early proponents of curbing the
al is similar.
tax exemption for employer-paid
The paper reported the Roundta-
health insurance.
ble committee recommended sup-
Here's how the proposal would
porting caps both on the level of
work. according to Moos. If a basic
benefits excluded from employees'
package of health-care benefits
taxable income and on how much
cost $3,000 per year but an em-
of the cost of providing health cov-
ployer has been paying $4,000 for a
erage employers can write off.
more generous package, the em-
Currently, all employee health
ployee would begin paying income
benefits are exempt from workers'
taxes on that additional $1,000. Be-
taxable income and companies can
cause his money is now involved,
deduct the entire cost of the cover-
the employee will be more inclined
age from their taxable income.
to question costs and look for the
But the current system is flawed
best deal
because neither patients nor doc-
This proposal isn't perfect. It
tors have any reason to control
doesn't address the rising costs of
costs. "Many economists have com-
Medicare and Medicaid, and it re-
plained that such tax breaks reduce
Lies too heavily on an over-idealiza-
the incentive to question health
tion of the free market.
care prices and to shop for better
Still, the proposal is worth pursu-
deals," The Journal reported
ing because it keeps government
Why should people shop around?
out of the health-care business and
Under the current system, an anon-
empowers employers and employ-
ymous "somebody else" is picking
ees. These two points alone give it
up the tab. It's time we understood
a huge advantage over most of the
that "somebody else" is US.
other proposals (pay-or-play, the
As Bob Moos, a columnist for the
Canadian plan) that have been
Dállas Morning News, wrote, "the
floating around the nation's capital.
Copyright © 1992 The New York Times
NEW YORK, TUESDAY, DECEMBER 22, 1992
A Tax Cap for Health Reform
Tax cap. These two words could mean political
The unlimited deduction is doubly wrong. The
dynamite. They could mean successful health care
subsidy favors the rich: It's worth twice as much to
reform. They could mean both, which is why, by
a family in the 31 percent tax bracket as to one ir
endorsing them, President-elect Clinton now sends
the 15 percent bracket. And by offsetting 30 or 4(
such a positive message. It suggests he has the
percent of the extra cost of lavish policies, the
policy sense - and the political courage - to push
subsidy encourages wasteful coverage.
worthwhile reform through Congress.
With a tax cap in place, consumers would
The tax cap in question applies to health insur-
pocket the saving from choosing cost-effective
ance premiums paid by employers. Commonly, this
plans. That's important if managed competition -
form of compensation is not taxed, no matter how
the reform plan endorsed by the President-elect -
extravagant the coverage. But unless unlimited
is to work.
coverage can be capped, runaway health care costs
Under the plan, consumers would join together
cannot be controlled.
into large purchasing cooperatives. The coopera-
With a tax cap, premiums in excess of a set
tives would negotiate with providers, forcing them
would be counted as taxable income to
to compete for enrollees by offering quality care at
And that's what Mr. Clinton endorsed, in
attractive prices.
an
interview with The Wall Street Journal - even
The key to passing a tax-cap is to set it high
though a tax cap would mean some people would
enough so that every American could, tax free, buy
have to pay higher taxes.
a generous package of basic health benefits. People
To see why a tax cap is necessary, consider the
who insist on more lavish coverage would pay the
two ways to control skyrocketing medical costs.
extra cost without subsidy by other taxpayers. In
Government could impose price controls on doctors
recent weeks the National Governors' Association,
and hospitals - an option Mr. Clinton rightly re-
business groups and health insurance companies
jects. Price controls would create an administrative
have endorsed a tax cap.
nightmare and rob providers of any incentive to
That should make Mr. Clinton's reform task
innovate and improve.
easier. It also helps that a tax cap will generate tens
A better option is to rely on competition to
of billions of new revenue. The still-more-important
control costs by impelling consumers to choose
purpose of a tax cap, however, is to unleash the
plans that keep premiums low. But under current
powerful competitive forces that will equip the
taw, consumers have little incentive to choose low-
consumer, and thus society, to make sensible
cost plans because premiums are tax-deductible.
choices about health care.
aje Abusijungton Post
THURSDAY, JANUARY 7, 1993
Draft CBO Report Backs Tax on
Here's how the tax change might
politically charged. Both Clinton
By Dana Priest
work:
and President Bush avoided the
Washington Post Staff Writer
Company X currently pays the
question during the campaign.
Taxing some employee health
full premium for Worker Y's family
Since the election, employer coali-
benefits is a "critical element" of
health insurance-$4,743 a year
tions, industry trade groups and a
health care overhaul without which
(the average cost of a family pre-
coalition of the nation's governors
the new system advocated by Pres-
mium). If the cost of the least ex-
and local elected officials have
ident-elect Clinton will be "ineffec-
pensive standard benefit package in
backed limiting the tax preference
tive," according to a draft Congres-
the worker's region is $4,020 (the
for health benefits.
sional Budget Office report.
average cost of a family HMO pol-
The CBO's analysis will likely
The CBO, which is analyzing the
icy), then the worker would be
lend credibility to the idea. The fi-
"managed competition" model of
taxed on the difference: $723. If the
nal report is expected to be re-
health reform embraced by Clinton
worker is in the 15-percent tax
leased at the end of the month and
and many political and industry
bracket, the tax would amount to
will contain the office's estimate of
groups, recommended that govern-
$108.45 a year.
cost savings from managed compe-
ment tax the amount by which em-
tition.
Proponents of managed compe-
player-provided health premiums
Critics believe the model cannot
tition believe the worker would
exceed the cost of a "standard" ben-
change to a plan that costs $4,020
produce sufficient savings to lower
efit package that would be estab-
the rise in health care spending,
rather than pay the tax. Health in-
lished as part of the plan.
which climbed 11.5 percent last
surers also would realize this and
year and now accounts for 14 per-
The goal is to use the tax code to
would try to offer plans at or near
cent of the nation's total economic
change consumer behavior. Unlike
the tax-exempt amount.
output. Advocates argue managed
salaries, employer-provided bene-
"The most powerful incentive is
competition is the best way to cut
fits to employees are not subject to
the tax code," said Bernard Tres-
costs while preserving quality.
tax. Taxing those benefits, many
nowski, president of the Blue Cross
Cost information was not includ-
economists say, would force em-
Blue Shield Association, whose 72
ed in the draft obtained by The
ployees to choose less expensive
plans insure more Americans than
Washington Post. CBO's deputy
insurance plans and push more peo-
any other company. "We've been
assistant director for health, Kath-
pie into health maintenance organ-
through five decades of teaching
ryn Langwell, declined to comment
izations (HMOs), the most cost-ef-
the individual that health care is a
on the draft.
fective form of health care.
free good. If you're going to change
Managed competition aims to
At present, many of the 140 mil-
that, "you're going to have to go
make health care available to every-
lion Americans whose health pre-
where the rubber meets the road. I
one regardless of health status and
miums are largely paid for by em-
can't think of anything better than
to restructure the current system
ployers have no incentive to choose
changing the tax code."
so that the providers of health care
less expensive insurance plans.
The idea of taxing premiums is
services are forced to compete for
Some Employee Health Benefits
consumers' business and to be more
package of benefits required of all
health insurance options," the draft
accountable to patients.
insurers; federal oversight of the
says. Such an incentive can only
The CBO draft says that for man-
cost, quality and efficiency of health
exist if employer-paid premiums
aged competition to work, it must
service providers; additional com-
over the amount needed to pur-
include eight elements that "appear
pensation for plans that happen to
chase a national standard benefit
particularly critical to achieving the
enroll a disportionate number of
package are "included in employees'
maximum potential savings." They
sick people; limiting the number of
taxable personal incomes."
are: insurance purchasing cooper-
health plans for which most doctors
Taxing benefits is opposed by
atives that negotiate with health
could
EXCERPT FROM GOVERNOR'S PROPOSAL
THE STATE'S ROLE
States are in a position to influence significantly the delivery and financing of health
services within their borders. State governments finance health care for many medically
indigent families, provide health care benefits to their employees, regulate insurance
providers, license health practitioners and facilities, train health care professionals,
allocate capital resources and deliver health services.
In Pennsylvania, the state government plays an important role in several areas
central to the health care market. The major functions of state government include:
PAYING FOR AND DELIVERING HEALTH CARE. The Medical Assistance Program
administered by the Department of Public Welfare pays for health care services
for about 1.6 million low-income Pennsylvanians. The Pharmaceutical Assistance
Contract for the Elderly (PACE) administered by the Department of Aging assists
elderly Pennsylvanians in paying for prescription medications. The Department of
Health has several public health functions, including drug and alcohol treatment,
state health centers and school health.
COLLECTING AND DISSEMINATING HEALTH DATA. The Health Care Cost
Containment Council collects, analyzes and disseminates health care costs and
quality information to purchasers, providers and consumers. The State Health
Data Center coordinates the collection and dissemination of health statistics in
the Commonwealth.
REGULATING AND LICENSING THE HEALTH CARE MARKET, FACILITIES AND
PRACTITIONERS. The Department of Insurance has regulatory responsibility over
health insurers. The Departments of Insurance and Health regulate Health
Maintenance and Preferred Provider Organizations. The Department of Health
also regulates the construction of and licenses health care facilities. The
Department of State licenses health practitioners.
ANN BACHARACH
Executive Director
PA Healthy Mothers / Healthy Babies Coalition
Bryn Mawr, PA
Ann Bacharach is the director of a statewide organization that is very
active is trying to ensure adequate coverage for pregnant women and
infants.
Questions
1.
If you were designing a health system around managed care, what
specific kinds of consumer protections would you build into the system?
2.
Are there any lessons you have learned from your experience in
Pennsylvania concerning adequate coverage of benefits under managed
care plans that you think would be relevant to national legislation?
Monthly
For each
Income
additional
Before Taxes
FAMILY OF 6
person add
FAMILY OF 6+
$ 3,118
$ +397
per month
CHAPS/MSP
CHAPS/MSP
$ 2.339
$ +298
per month
$ 2.074
$ +264
per month
HEALTHY
CARING/MSP
HEALTHY
CARING/MSP
BEGINNINGS
BEGINNINGS
$ 1.559
$ +198
per month
$ 702
$ +89
MEDICAID
per month
MEDICAID
EPSDT
EPSDT
$
0
$ 0
0- 5
6- 7 8 - 9*
10 17
18
19- 20
0- 5
6-7 8-9* *
10 17
18
19 20
Years (or pregnant of any age)
Years (or pregnant of any age)
*Any child born after 9/30/83.
*Any child born after 9/30/83.
FPG
FOR MORE INFORMATION OR TO ENROLL IN A PROGRAM
UNIFORM ELIGIBILITY
200%/185%
CHILD HEALTH WATCH can help you enroll in the right program:
PCCY (Philadelphia)
563-5848
CHAPS/MSP
WNAC (Germantown)
843-9748
NSCA (North Philadelphia)
426-8734
150%
Medical Assistance (DPA, Medicaid)
560-2547
133%
Healthy Beginnings
560-2547
Early Periodic Screening
HEALTHY
CARING/MSP
Diagnosis and Treatment (EPSDT)
800/543-7633
BEGINNINGS
The Caring Program for
100%
Children (Caring)
800/464-5437
Children's Access to
Primary Services (CHAPS)
563-5848
Maternity Services Project (MSP)
985-3300
45%
MEDICAID
EPSDT
Family size is parent(s) or guardian(s) plus children.
For example, 1 grandparent with 2 children is a family of 3.
0%
0 - 5
6-7 8.9*
10- 17
18
19- 20
Years (or pregnant of any age)
*Any child born after 9/30/83.
Monthly
For each
Income
additional
Before Taxes
FAMILY OF 6
person add
FAMILY OF 6+
$ 3,118
$ +397
per month
CHAPS/MSP
CHAPS/MSP
$ 2.339
$ +298
per month
$ 2.074
$ +264
per month
HEALTHY
CARING/MSP
HEALTHY
CARING/MSP
BEGINNINGS
BEGINNINGS
$ 1.559
$ +198
per month
$ 702
$ +89
MEDICAID
per month
MEDICAID
EPSDT
EPSDT
$
0
of to
$ 0
0 - 5
6-7 8-9*
10- 17
18
19 20
0- 5
6-7 8-9*
10 - 17
18
19 - 20
Years (or pregnant of any age)
Years (or pregnant of any age)
*Any child born after 9/30/83.
*Any child born after 9/30/83.
FPG
FOR MORE INFORMATION OR TO ENROLL IN A PROGRAM
UNIFORM ELIGIBILITY
200%/185%
CHILD HEALTH WATCH can help you enroll in the right program:
PCCY (Philadelphia)
563-5848
CHAPS/MSP
WNAC (Germantown)
843-9748
NSCA (North Philadelphia)
426-8734
150%
Medical Assistance (DPA, Medicaid)
560-2547
133%
Healthy Beginnings
560-2547
Early Periodic Screening
HEALTHY
CARING/MSP
Diagnosis and Treatment (EPSDT)
800/543-7633
BEGINNINGS
The Caring Program for
100%
Children (Caring)
800/464-5437
Children's Access to
Primary Services (CHAPS)
563-5848
Maternity Services Project (MSP)
985-3300
45%
MEDICAID
EPSDT
Family size is parent(s) or guardian(s) plus children.
For example, 1 grandparent with 2 children is a family of 3.
0%
0- 5
6- 7 8- 9*
10- 17
18
19 20
Years (or pregnant of any age)
*Any child born after 9/30/83.
Monthly
For each
Income
additional
Before Taxes
FAMILY OF 6
person add
FAMILY OF 6+
$ 3,118
$ +397
per month
CHAPS/MSP
CHAPS/MSP
/
$ 2,339
$ +298
per month
$ 2.074
$ +264
per month
HEALTHY
CARING/MSP
HEALTHY
CARING/MSP
BEGINNINGS
BEGINNINGS
$ 1.559
$ +198
per month
$ 702
$ +89
MEDICAID
per month
MEDICAID
EPSDT
EPSDT
$
0
$ 0
0- 5
6-7 8.9*
10 17
18
19-20
0- 5
6-7 8 9*
10 17
18
19 20
Years (or pregnant of any age)
Years (or pregnant of any age)
*Any child born after 9/30/83.
*Any child born after 9/30/83.
FPG
FOR MORE INFORMATION OR TO ENROLL IN A PROGRAM
UNIFORM ELIGIBILITY
200%/185%
CHILD HEALTH WATCH can help you enroll in the right program:
PCCY (Philadelphia)
563-5848
CHAPS/MSP
WNAC (Germantown)
843-9748
NSCA (North Philadelphia)
426-8734
150%
Medical Assistance (DPA, Medicaid)
560-2547
133%
Healthy Beginnings
560-2547
Early Periodic Screening
HEALTHY
CARING/MSP
Diagnosis and Treatment (EPSDT)
800/543-7633
BEGINNINGS
The Caring Program for
100%
Children (Caring)
800/464-5437
Children's Access to
Primary Services (CHAPS)
563-5848
Maternity Services Project (MSP)
985-3300
45%
MEDICAID
EPSDT
Family size is parent(s) or guardian(s) plus children.
For example, 1 grandparent with 2 children is a family of 3.
0%
0- 5
6-7 8-9*
10 17
18
19 20
Years (or pregnant of any age)
*Any child born after 9/30/83.
Monthly
For each
Income
additional
Before Taxes
FAMILY OF 6
person add
FAMILY OF 6+
$ 3.118
$ +397
per month
CHAPS/MSP
CHAPS/MSP
$ 2.339
$ +298
per month
$ 2.074
$ +264
per month
HEALTHY
CARING/MSP
HEALTHY
CARING/MSP
BEGINNINGS
BEGINNINGS
$ 1.559
$ +198
per month
$ 702
$ +89
MEDICAID
per month
MEDICAID
EPSDT
EPSDT
$
0
$ 0
Y
0 - 5
6-7 8.9*
10 17
18
19 20
0 - 5
6- 7 8 - 9*
10 17
18
19 20
Years (or pregnant of any age)
Years (or pregnant of any age)
*Any child born after 9/30/83.
*Any child born after 9/30/83.
FPG
FOR MORE INFORMATION OR TO ENROLL IN A PROGRAM
UNIFORM ELIGIBILITY
200%/185%
CHILD HEALTH WATCH can help you enroll in the right program:
PCCY (Philadelphia)
563-5848
CHAPS/MSP
WNAC (Germantown)
843-9748
NSCA (North Philadelphia)
426-8734
150%
Medical Assistance (DPA, Medicaid)
560-2547
133%
Healthy Beginnings
560-2547
Early Periodic Screening
HEALTHY
CARING/MSP
Diagnosis and Treatment (EPSDT)
800/543-7633
BEGINNINGS
The Caring Program for
100%
Children (Caring)
800/464-5437
Children's Access to
Primary Services (CHAPS)
563-5848
Maternity Services Project (MSP)
985-3300
45%
MEDICAID
EPSDT
Family size is parent(s) or guardian(s) plus children.
For example, 1 grandparent with 2 children is a family of 3.
0%
() - 5
6- 7 8.9*
10 17
18
19 20
Years (or pregnant of any age)
*Any child born after 9/30/83.
MATERNITY CARE COALITION
OF GREATER PHILADELPHIA
NATIONAL HEALTH CARE REFORM: INCLUDING WOMEN AND CHILDREN
Any Health Care Reform Plan must include:
Guaranteed coverage for all families regardless of age, income, employment status, citizenship status
or family composition with no period of ineligibility for care. Coverage must be portable and not
restricted as a result of preexisting conditions or poor health status. There will be no eligibility
requirements and one identification card for services, the same for all persons.
Elimination of all financial barriers: No co-payments, no deductibles and no means tests.
A comprehensive benefit package including all preventive, primary, reproductive, acute and
rehabilitative care with both high-touch and high-tech services available. Benefit package must include
prenatal and pediatric care and all diagnostic services, social work services, nutrition counseling, care
coordination, patient education, parenting education, home health services, home visiting services,
genetic screening and treatment, comprehensive family planning services including pregnancy
termination counseling and services, smoking cessation services, and durable medical goods. Also
included must be dental care, vision services, prescription drugs, mental health services and alcohol
and drug addiction treatment and services. HIV screening, counseling and AIDS treatment and services
must be covered in this system.
Provision of community-based, family-centered, culturally sensitive, prevention-oriented health care
with involvement of consumers at all levels of the service delivery system and inclusion of women and
children in the health research agenda.
Development of a system of care infrastructure that includes assessing needs, planning for resources,
developing adequate capacity, evaluating impact and assuring quality at all levels. Included in this is
the need to promote clearly the role of the federal, state and local public agencies and providers and
providing the necessary resources.
Establishment of reimbursement rates that adequately cover the comprehensive services of a wide
range of health care professionals including midwives and nurse practitioners and that accommodate
client choice of provider. Training of all health providers to emphasize health promotion and prevention
in addition to treatment of disease. Special attention must be paid to assuring adequate resources for
traditionally underserved populations.
Establishment of streamlined administrative, billing and enrollment procedures to maximize the funding
and provision of patient care.
Development of comprehensive outreach programs and public education campaigns targeted to policy
makers and the general public.
A mechanism for assisting families which have suffered adverse perinatal events or other health
outcomes and a system to address liability concerns of providers while maintaining consumer
protection.
Special thanks to the following organizations and/or publications whose work contributed to this document: "A Pound of Prevention: The Case for Universal Maternity
Care in the U.S.*, March of Dimes Birth Defects Foundation, Children's Defense Fund, Association of Maternal and Child Health Programs, Campaign for Women's Health,
Institute of Medicine, Foundation for Public Health Policy, National Women's Health Network, American Public Health Association, Alan Guttmacher Institute, League of
Women Voters, Women's Institute for Childbearing Policy.
511 NORTH BROAD STREET/9TH FLOOR
PHILADELPHIA. PENNSYLVANIA 19123
(215) 922-6300: FAX (215) 922-6416
INCLUDING CHILDREN AND PREGNANT WOMEN IN HEALTH CARE REFORM
From:
Including Children and Pregnant Women in Health Care Reform:
Summary of Two Workshops
National Research Council Institute of Medicine
HEALTH INSURANCE: Access and Benefits
Goal 1:
All children and pregnant women have continuous access to health insurance.
Goal 2:
Personal expenditures for the health care of pregnant women and of children, including
insurance premiums, deductibles, and other co-payments, are affordable.
Goal 3:
Coverage is provided for a continuum of services that emphasizes primary and
preventive care and includes the diagnosis and management of a variety of diseases
and conditions, as well as specialized care to handle complex health problems.
Goal 4:
An objective process is established for refining and updating the benefits package to
accommodate changes in the health care needs of children and pregnant women, in the
ability of health care to address these needs, and in available funds.
RESOURCE DEVELOPMENT: Services and People
Goal 5:
Health services are provided by qualified providers in a wide variety of settings that are
effective in caring for children and pregnant women, especially the medically
underserved.
Goal 6:
The number and diversity of qualified providers caring for children and pregnant women
is increased, particularly for those who are poor, high-risk, or living in inner-city or
isolated rural areas.
ADMINISTRATION
Goal 7:
The administrative complexity of the health care system is substantially reduced from
the perspective of both providers and consumers.
Goal 8:
Cooperative, complementary administrative structures are established spanning public
and private sectors to monitor and improve the health care system used by children
and pregnant women.
Goal 9:
The future role of existing government grant programs in maternal and child health is
explicitly considered in reforming the health care system, with regard to both the
personal health services supported by these grant programs and to their planning,
evaluation and training functions.
COST MANAGEMENT AND QUALITY ASSURANCE
Goal 10:
Cost management measures accommodate the special needs of children and pregnant
women.
Goal 11:
Vigorous, well financed systems of quality assurance and research are supported.
DEBORAH BECK
President
Drug and Alcohol Service Providers Organization of PA
Harrisburg, PA
Deborah Beck is a very active consumer advocate on the issue of
coverage for alcohol and drug treatment. She was one of the principle
lobbyists for enacting mandatory coverage for alcohol and drug treatment.
Deborah is concerned that managed care is destroying coverage for drug
treatment services--and that under managed care you have to build in
strong consumer protections.
Questions
1.
If you were designing a health system around managed care, what
specific kinds of consumer protections would you build into the system?
2.
Are there any lessons you have learned from your experience in
Pennsylvania concerning adequate coverage of benefits under managed
care plans that you think would be relevant to national legislation?
The Washington Post
FRIDAY, JANUARY 15, 1993
Health Care Organizations Back National
By Dana Priest
anisms be set up to audit the information.
methodology for collecting it. Consumer
Washington Post Staff Winter
The initial information collection would be
and business groups have argued that the
completed by March and the first data
data are crucial to making educated deci-
Thirty major managed-care health organ-
would be available to the public by 1994.
intions yesterday agreed to support the
The 30 companies include such industry
creation of a national data-collection system
heavyweights as Kaiser-Permanente, Blue
that would produce a consumer "report
Cross and Blue Shield and US Healthcare.
Revolution in health
card" on the quality of medical care in dif-
Information on quality of care "is abso-
ferent health plans.
lutely critical," said Richard I. Smith, public
care will be in
In a letter to President-elect Clinton, the
policy director for the Washington Business
group said that the report card would allow
Group on Health, a coalition of 175 Fortune
"accountability."
consumers to compare data on factors in-
500 companies that buys health coverage
-Richard L Smith,
cluding how effective each health plan is in
for members' employees. "The real revo-
of Washington Business Group on Health
treating chronic illnesses such as asthma
lution that is going to occur in health care
and diabetes and success rates for surgical
reform is accountability."
sions about which hospitals and doctors to
operations. It would also score health plans
The agreement marks a departure from
use.
7 patient satisfaction.
the longstanding reluctance of many health
Providing consumers with quality and cost
The group proposed that the system be
care companies to disclose detailed infor-
data is also a key part of Clinton's health care
eveloped and implemented by health care
mation on medical outcomes publicly-in
overhaul proposal known as "managed com-
companies along with business, labor and
part because they feared the scrutiny, and
petition." During the campaign, he called for
consumer groups, and that external mech-
in part because they could not agree on a
the creation of a national database to collect
Database to Rate Their Plans
and analyze quality and price information that
quality of their care by identifying the most
could be used by consumers when they chose
successful ways to treat certain maladies and
a health care provider.
specific areas where they need to improve.
The agreement yesterday is a way for
The group has been meeting with the as-
these companies, most of whom are well
sistance of the National Committee for Qual-
positioned to prosper under Clinton's plan,
ity Assurance, a nonprofit external review
to back the idea.
organization for managed-care companies.
"Managed care" refers to health care pro-
The companies have asked the committee to
vided by health maintenance organizations
develop performance measures and methods
as well as companies that contract with hos-
to collect the data and audit the findings.
pitals and doctors to create looser networks
The managed-care plans that endorsed
of providers for members. Managed-care
the proposal yesterday have 55 million
companies closely scrutinize the type and
health care subscribers among them.
frequency of procedures used in an effort to
A number of large businesses also en-
be more cost-efficient.
dorsed the plan, among them Bank of Amer-
While there are many critics of managed
ica, Chrysler Corp., General Electric and
competition, most advocates of health care
Xerox Corp.
overhaul favor the disclosure of price and
Consumers would get the report card dur-
quality data.
ing their annual "open enrollment" period in
In its letter to Clinton, the group said the
which they have the chance to change health
data would also help health plans improve the
plans.
02/10/93
16:13
SEN. WOFFORD
002
ILD 10 IS 15.56 CBL CS00 ELMERTON
P.2/4
DRAFT--PENNSYLVANIA HEALTH CARE CONFERENCE
Lee Van Valkenburgh, Capital Blue Cross
In The Public Use of Private Interest, Charles Schulze argued that
government can often achieve its best results by actions that channel private
economic interest to meet public needs, rather than through "command and
control" strategies or direct government operations.
That, we believe, is the right model for government's role in health
care reform. Here's an example.
In Pennsylvania, there is theoretically no problem of access to health
insurance. Blue Cross and Blue Shield will sell comprehensive individual
or group coverage to anyone. We do not underwrite based on health
conditions, and in the individual and small group markets we spread the
cost equitably by community rating.
But other insurers in the individual and small group markets do
select which risks they will accept and which they will not. This has meant
that more and more bad risks come to us, and in the individual market it
has driven our rates to the point where many people can no longer afford
our coverage. So there's no access problem--but the affordability problem
creates the same result.
02/10/93 16:13
SEN. WOFFORD
4.
003
FEB 10 '93 15:58 CBC 2500 ELMERTON
P.3/4
2
Federal reforms, with state enforcement, could create standards for
Accountable Health Plans. such as open enrollment, equitable rating
methods, managed care options, portability of benefits and active quality
assurance programs. Only plans that meet these standards could market a
Basic Health Care Plan that would be available to every American. To do
business at all, insurers would have to compete based on their ability to
accept and manage risk, not on their ability to avoid risk. More people
would have more options, at more equitable rates.
This is an example of "the public use of private interest," but it is
only one. Similarly, tax incentives could be created for employers to
purchase coverage only from Accountable Health Plans and to move an
increasing percentage of their employees into managed care plans. Other
incentives could increase the number of primary care physicians or
encourage state experimentation.
There are other essential roles for government. For instance, as a
partner with private organizations in outcomes research, so doctors,
hospitals, insurers and patients would all have a better basis for
determining what works best in health care; or in funding technology
assessment activities to help avoid costly and inappropriate uses of
technology.
02/10/93 16:14
SEN. WOFFORD
004
CLIERTUN
P.4/4
3
We believe what the federal and state governments can do best is to
set standards and goals and create the incentives, positive or negative, that
will drive private activities toward the attainment of public goals. On the
other hand, the least practical role for government is to try to manage and
control the thousands of subsystems and millions or interactions that occur
daily in something as complicated as health care delivery.
Senator, we have appreciated your continuing interest in hearing our
views on these critical issues in health care reform. We at Capital Blue
Cross and throughout the Blue Cross and Blue Shield system share your
belief that reform is essential, and we want to help bring it about. Thank
you.
MARY KAY PERA
PA Association of Home Health Agencies
Lemoyne, PA
Attached are Ms. Pera's comments and a statement of home health
services as a part of health care reform.
Background
The Pennsylvania Association of Home Health Agencies (PAHHA) is a
statewide membership association that represents nearly 250 Medicare-
certified home care agencies, hospices, private care, homemaker/home
health aide organizations, and affiliated professionals. PAHHA members
provide professional and paraprofessional care and support services, at
home, to persons who need help during as acute or long term illness.
Some of the services which are now available through home care,
include: nursing, physical, occupational and speech therapies; home care
aide services; specialty services, such as intravenous antibiotics,
chemotherapy, AIDS care, homemaker services, and medical social services,
etc.
Medical technology now allows services heretofore available only in a
hospital to be safely carried out at home, at significantly less cost.
Questions
1.
As you know, most public assistance available for long-term care is
currently spent on coverage for nursing home care. With growing
public support for increased coverage for home and community-based
care, what do you think is the appropriate role of government in
redirecting public dollars toward this kind of care?
2.
Most managed competition proposals fold the acute care portion of
Medicaid into the new proposed purchasing cooperatives. This would
leave untouched many programs under Medicaid, such as nursing
home coverage and special programs for persons with disabilities.
Given the difficulty in financing expanded long-term care, what role
do you think the state and Federal governments can and should play
in reforming these "residual" Medicaid programs? What other
measures should the state and Federal government consider as
incremental pieces toward comprehensive coverage of long-term
care?
02/09/93
17:06
717 975 9456
PAHHA
002/009
The Role of Government in Health Care Reform
from the Perspective of Home Health Care
My name is Mary Kay Pera, Executive Director of the Pennsyl-
vania Association of Home Health Agencies (PAHHA), and I am
pleased to participate today. It should come as no surprise to
you that my perspective is biased toward provision of health care
in the community and particularly at home. In fact, I believe
that part of the solution to the health care crisis lies in home
health care. Let me elaborate.
Home care is rooted in a strong tradition of community
service, begun in this country in the mid-1800s. The health and
well-being of individuals, families and the community have always
been at the heart of home care, and home health agencies adapted
their services over the years to community needs as they arose.
This commitment to service and improved community health
continues today. As our nation seeks to build a more efficient
and responsive health care system, PAHHA believes that the basic
principles upon which home care was founded apply. Government
should exercise the necessary leadership to refocus the provision
of health care, based on these principles:
1.
The individual and family are the center of health service
delivery and health promotion.
2.
The objective of care is to promote, maintain, and/or re-
store health; to minimize the effect of illness and dis-
ability; and to provide care to terminally ill patients and
their families during the dying process.
3.
Everyone should have access to appropriate and necessary
care no matter what their age, financial status or where
they live.
4.
When feasible, treatment for acute and chronic illness is
preferable through primary care and home care. Home care
permits earlier discharge from the hospital or eliminates
institutionalization altogether. Home care allows tech-
nology-dependent infants and children to come home. Home
care keeps families together, fosters independence, control
and security and, comparatively speaking, costs less.
These tenets are so basic but bear mentioning, because we
have moved so far away from community service and improved health
in our preoccupation with technology, bricks and mortar, cutting
costs and fierce competition for health care dollars.
02/09/93
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PAHHA
003/009
In addition to refocusing the health care system, there are
other major roles for government in the necessary reformation of
the health care system. Government should:
1.
Define the basic acute care benefit package, which should
emphasize community and home-based health services.
2.
Develop a comprehensive long term care component which
provides an array of coordinated home care services.
2.
Establish minimum standards of acceptable quality of care
and mechanisms to insure adherence to those standards.
3.
Develop standards in managed care systems which provide for
both appropriate utilization and assurance of necessary
services to those who need them. The Medicare hospice
benefit is a good example of a capitated managed program,
under the care management of the hospice provider, which
incorporates home care and institutional care, according to
patient need.
5.
Set a payment methodology which is fair to both the consumer
and provider.
6.
Establish accountabilities that hold providers responsible
for certain outcomes of care and the improved health of the
population being served.
7.
Provide a mechanism to give patients information for deci-
sion-making with regard to treatment.
7.
Provide leadership to reduce the costly and duplicative
paperwork associated with multiple billing systems.
"Making a reformed system happen" will take great commitment
and courage on the part of you, our political leaders. We want
to help you in every way we can. We ask only that you give us
the flexibility to receive health care at home, where appro-
priate. It makes sense in every respect of the word. Thank you.
Mary Kay Pera
Executive Director
Pennsylvania Association
of Home Health Agencies
February 11, 1993
02/09/93
17:07
717 975 9456
PAHHA
005/009
National Home Health Services Alliance
c/o 1320 Fenwick Lane
Silver Spring, MD 20910
"An) Health Care Reform Mass Include Floror Care as a Con Benefit -
Because Home Health Care is Part of the Solution
Phone: 301/588-1454 of 703/636-9863
FAX : 301/588-4732 or 703/836-9866
HEALTH CARE REFORM: HOME HEALTH IS PART OF THE SOLUTION
The National Home Health Services Alliance urges the Clinton
Administration and Congress to recognize home health services as a
key component in reform of our nation's health care system.
Home health care is much more affordable than inpatient care and a
majority of Americans now have access to home care as a basic
benefit. Home care is an existing foundation on which a reformed
health care system can be built.
Inclusion of home health as a key cost-saving component of most
insurance plans indicates that home health care makes good economic
sense to the private sector. It should also make economic sense to
the new Administration and Congress to maintain home care as an
essential part of the nation's health care system. This means that
home care must be part of any mandated minimum benefits package
contained in managed competition legislation or any other health
care reform legislation.
Americans Prefer Home Health Care
Home health care is the choice of consumers and is the preferred
modality of care. In many rural and underserved areas of the
country, home care is the health care delivery infrastructure, the
only access to health care services, even for patients who are not
homebound. Home health is preferred because it is humane. It
maximizes independence and dignity for those unable to leave home
for services.
Home care keeps our parents and grandparents out of nursing homes.
It brings our at-risk babies home from the hospital, and it enables
families to care for chronically ill children in the home. It
enables disabled family members and neighbors to remain
independent, at home, and in their communities.
Home health care is preferred because it permits earlier discharge
from the hospital or eliminates hospitalization altogether, and
facilitates an earlier return to work. Most importantly, studies
show that individuals recover more quickly and their potential is
maximized at home, whether they are being treated for an acute,
chronic, or catastrophic illness.
03/09/93
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PAHHA
006/009
-2-
Home Health Is Ready to Respond
Home health care constitutes the most viable opportunity for
curbing our nation's bill for health care in the coming years as
access to health care coverage is extended to more Americans.
Because of their large numbers, baby boomers will require more
health care services as they age. More low birthweight babies will
survive, but with disabilities, and in need of continuous
preventive care. The HIV infected population will increase
exponentially. Technology development has enabled home care to
respond by making possible provision of services in the home which
were available only in hospitals ten years ago. These services
include:
- chemotherapy
- IV antibiotic therapy
- parenteral and enteral nutrition therapy
- respiratory therapy
- AIDS treatment
- premature and low birthweight infant care
- high risk pregnancy monitoring
- head and spinal cord injury care
- hospice care for the terminally ill
Home Health Is Already a Key Component of our Health Care System
Employers and private insurers recognize the cost effectiveness
and quality of home health care through its inclusion as a standard
benefit in health insurance plans:
- The Blue Cross and Blue Shield Association of America reports
that 90 percent of Blue Cross Blue Shield plans included home
health in traditional benefit packages in 1990, up from only 46
percent in 1974.
- The Health Insurance Association of America found that in 1990
home care coverage existed for 83 percent of insured employees
in conventional health plans and 86-89 percent in HMOs and
PPOs.
- Data from the Bureau of Labor Statistics indicate that 75
percent of insured employees of medium and large employers had
home health coverage in 1990 compared to 46 percent in 1984;
BLS also found that 79 percent of covered employees in small
businesses had home health coverage in 1990.
The Blue Cross and Blue Shield Association states that its
members' policies contain home health services because such care
reduces hospital stays, leads to shorter recovery time, and
produces a better patient psycho-social outlook. Business and
Health magazine, published by the Washington Business Group on
02/09/93
17:08
717 975 9456
PAHHA
007/009
-3-
Health, reported in April, 1992, that "Savvy employers can
save thousands of dollars by judiciously using home health care
instead of hospital care Employers and insurers are taking
advantage of home health care benefits as never before by
expanding home care's traditional role of being used only for
after-hospital care to using it to prevent hospitalization."
The Federal government recognizes the vital role of home health
care. Medicare has included home care as an acute benefit since
its inception in 1965. Congress expanded availability in 1980 by
eliminating the prior hospitalization requirement and limit on
the number of visits. Medicaid has required states to include
home care services since 1970. Federal requirements for HMOS have
mandated provision of home health since 1973.
Home care has strong bi-partisan support in Congress. Republicans
and Democrats both recognized the role of home health care in
health care reform legislation introduced in the 102nd Congress.
Key committee and subcommittee chairmen in the House of
Representatives, including Congressmen Dan Rostenkowski, Pete
Stark, John Dingell, and Henry Waxman, included home health as a
core benefit in their respective bills.
Home Health Care is Cost Effective
The cost effectiveness of home health care is indicated by a number
of studies, including the following:
- The Visiting Nurse Service of New York has an average daily
census of 1,150 AIDS patients in its At Home Options Program
(AHOP) for Empire Blue Cross Blue Shield subscribers. A
preliminary study indicates that while receiving home care,
AHOP participants each incurred $5,068 less for inpatient
admissions, $720 less in outpatient institutional claims, and
$347 less in hospital-related home care costs than non-
participants.
- A 1991 Lewin/ICF found considerable savings per episode for
three different diagnoses when hospital care is used in
conjunction with home care rather than without it. The home
health/hospital savings per episode are as follows:
hip fracture - $2,300
amyotrophic lateral sclerosis with pneumonia - $300
chronic obstructive pulmonary disease - $520
The study indicated that annual savings for just these three
diagnoses would be $624 million.
- U.S. News & World Report, on January 25, 1988, reported
dramatic savings for a number of types of patients through use
of home care services, including the following costs per
patient:
02/09/93
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PAHHA
4
008/009
chemotherapy - $10,500 per month in the hospital versus
$3,500 per month at home
tube feeding - $16,600 per month in the hospital versus
$6,000 per month at home
spinal cord injury - $23,800 per month in the hospital versus
$13,900 per month at home
- Aetna Life & Casualty Co. has reported a $78,000 per case
saving for victims of catastrophic accidents through its
Individual Care Management Program utilizing home health
services.
- Aetna, in 1986, indicated significant savings by treating
newborns with breathing and feeding problems in the home; the
cost was $20,000 per month with home care compared to $60,000
per month in the hospital setting.
- Aetna also reported in 1986 that it saved $200,000 a year per
case by treating technology-dependent children in their homes.
At home care averaged $50,000 compared to $250,000 in the
hospital.
- The Center for Health Care Law reported in 1992 that Blue Cross
Blue Shield of Harrisburg, Pennsylvania, realized a savings of
$2,200 per day through care of ventilator-dependent children
at home compared to hospital services.
- In a study conducted in one Veterans Administration hospital,
as reported in Health Services Research in 1992, terminally ill
patients were randomly assigned to an experimental group
receiving home care and to a control group receiving
traditional care. While there was no difference in survival
rates, patients in the home care group reported higher
satisfaction than those without home care. Participants in the
home health group were hospitalized an average of 5.9 fewer
days in a six-month period and had costs that were 18 percent
lower.
Home Health Agencies Are Also Managers of Care
Home health agencies have a record of successful and cost-effective
coordination of health care and social support services in the
community setting. In accordance with their legal mandates under
the Medicare and Medicaid programs, home health agencies already
provide assessment and care management for their patients. In fact,
the Medicare home health benefit was expanded in 1989 to include
"Skilled Management and Evaluation of a Care Plan" as a separate
reimbursable nursing service.
In any health care reform legislation that it enacts, Congress must
permit any qualified organization--public or private, non-profit or
02/09/93
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PAHHA
009/009
-5-
for-profit, provider or non-provider--to participate as a case
manager or managed care provider. Established standards of
professional performance and the capacity to perform
interdisciplinary assessments must be the qualifying criteria for
case management organizations, not tax or provider status. Congress
should not take the extreme measure of excluding health care
providers who are currently familiar with, and providing,
assessment and care management.
A case management system must be developed that will:
- target case management only to those who require such
services;
- limit unnecessary expenditures for case management services;
- prevent creation of an unneeded layer of bureaucracy;
- prevent bottlenecks to care which occur when there is a single
model of entry into, and management of, the health care
system;
- use the skills of experienced health care professionals
who are monitored on a regular basis for the quality of the
care they provide, including their case management services;
- ensure that the relationship between the caregiver and the
provider is maintained without third-party interference; and
- provide measurable outcomes and accountability.
For any reform based on managed competition, capitated payments, or
bundling of services, any qualified organization, including home
health providers, must be allowed to freely compete for contracts
to serve as the managed care provider. A qualification for
selection should be a track record of providing quality care in the
service area.
Home health agencies have a very successful record of providing
cost-sffective coordination of health care services and other
resources--and are closer to the community and people served than
most other providers.
FEB 10 '93 15:46 GPHA
P.1
RICOH FAX 35
FACSIMILE TRANSMISSION
Page 1
of 3
Date 2/10/93
To:
Ms. Darry Jodrey
Location:
Telephone #:
(1-717) 233-1856
Fax #:
(1-717) 238-2238
From:
Ronald Heigler, Executive Director
Location:
Greater Philadelphia Health Action, Inc.
Telephone #:
(215)288-9200
Fax #:
(215)288-7671
Remarks:
The following is an organizational profile on Greater
Philadelphia Health Action, Inc. Hope it is helpful.
I am looking forward to meeting you on February 11th.
Any problems with this transmission, call 288-9200.
Thank you.
FEB 10 '93 15:46 GPHA
P.2
ORGANIZATIONAL PROFILE--GREATER PHILADELPHIA HEALTH ACTION, INC.
History and Mission
Greater Philadelphia Health Action, Inc. (GPHA) is a private, non-
profit 501 (c) corporation. GPHA is a Section 330, Public Health
Service (PHS) Grantee. It was organized over 20 years ago to
provide comprehensive, coordinated, accessible health care services
to medically underserved Philadelphians. Since its inception, GPHA
has grown from a single site operation to eight sites in major
underserved areas of Philadelphia.
Scope of Services and Service Population
GPHA operates four primary health care centers, two comprehensive
school-based health clinics, a drug and alcohol counseling and
treatment program, and a day care center. Through its network, GPHA
serves four major areas of the city - the northeast, south,
southeast and southwest. Our success is apparent by the increased
numbers of residents who seek care at our neighborhood health
centers. GPHA served over 21,000 patients in 1992, generating over
100,000 patient encounters. Forty-one percent of the patients are
male and 59 percent female (38 percent of whom are of childbearing
age). Sixty-nine percent are enrolled in Medical Assistance or the
HealthPASS program; 3.0 percent Medicare; 4 percent private
insurance; and, 24 percent are uninsured. The majority of users,
87.4 percent, are at or below 100 percent of the poverty level; 6.1
percent are between 101-150 percent of poverty; and only 6.5
percent are over 151 percent of poverty.
Primary care (Pediatrics, Internal Medicine), OB/GYN (featuring a
case managed comprehensive prenatal program and Family Planning),
Podiatry, Dental services, Social Service, health education and
nutritionist support are available at each health center.
Like Philadelphia and other major, economically disadvantaged urban
centers, the residents suffer from many of the same health care
problems which are strongly associated with poverty status--a 17.7
percent infant mortality rate; 11.9 percent low birthweight rate;
27 teen pregnancies per thousand; increasing rates of sexually
transmitted diseases (including AIDS). In January of 1991, GPHA
received a grant to provide early intervention and case management
services to HIV positive patients. As a result, GPHA tested over
1,100 patients during calendar year 1991. Since GPHA began its
grant funded program, over 2,000 patients have received early
intervention services. One thousand four hundred of these patients
are currently open cases, with 540 of these being HIV positive.
Sixty of these patients are HIV positive women representing an
increase of 25% over 1991.
In response to major needs of users, a variety of program
initiatives have been developed by GPHA to supplement service
delivery, including: (1) perinatal case management program; (2)
school-based health centers; (3) adolescent pregnancy childbirth
education program; (4) HIV case management program; and, (5) an
adolescent peer education STD/substance abuse prevention program.
FEB 10 '93 15:47 GPHA
P.3
Summary of Four Major Policy Options
Related to School-Based Health Centers
Greater Philadelphia Health Action, Inc.
Philadelphia, Pennsylvania
Option 1: Improve Childrens' and Adolescents' Access To Health And
Related Services Via School-Based Health Centers.
State (Congress) should adopt strategies to improve
childrens'/adolescents' access to appropriate
health and related services through the provision
of care at school-based health centers.
Option 2: Identify Long-Term Funding Sources For School-Based
Health Centers.
State (Congress) should establish support for long-
term funding for comprehensive school-based health
care.
- There is a critical need for long-term stable
source of funding. Who will fund? States?
Feds? Medicaid? What about the uninsured? Who
will absorb these costs?
Option 3: Take Steps to Improve Childrens' and Adolescents'
Financial Access to Health Services.
Mandate on immediate expansion of Medicaid
eligibility for children and adolescents. One out
of three adolescents (approximately 2.76 million)
poor adolescents are not covered by Medicaid.
Mandate that employers provide health insurance for
their currently uninsured workers and those
workers' dependents.
- Many uninsured children and adolescents are
the dependents of parents who work but whose
employment benefits do not include health
insurance.
Option 4: Support State Data Collection/Applied Research On School-
Based Health Centers
State/congress should rigorously support evaluated
demonstration programs on the costs/benefits of
school-based health center programs.
State could create a locus for a strong state role
in addressing child/teen health issues.
02/10/93
17:04
SEN. WOFFORD
005
02/10/93
15:13
25
MATERNITY CARE COALIT
PAGE 04
MATERNITY CARE COALITION
OF GREATER PHILADELPHIA
NATIONAL HEALTH CARE REFORM: INCLUDING WOMEN AND CHILDREN
Any Health Care Reform Plan must include:
Guaranteed coverage for all families regardless of age, income, employment status. citizenship status
or family composition with no period of ineligibility for care. Coverage must be portable and not
restricted as a result of preexisting conditions or poor health status. There will be no eligibility
requirements and one identification card for services, the same for all persons.
Elimination of all financial barriers: No co-payments, no deductibles and no means tests.
A comprehensive benefit package including all preventive, primary, reproductive. acute and
rehabilitative care with both high-touch and high-tech services available. Benefit package must include
prenatal and pediatric care and all diagnostic services, social work services, nutrition counseling, care
coordination, patient education, parenting education, home health services, home visiting services,
genetic screening and treatment, comprehensive family planning services including pregnancy
termination counseling and services, smoking cessation services, and durable medical goods. Also
included must be dental care, vision services, prescription drugs, mental health services and alcohol
and drug addiction treatment and services. HIV screening. counseling and AIDS treatment and services
must be covered in this system.
Provision of community-based. family-centered. culturally sensitive, prevention-oriented health care
with involvement of consumers at all levels of the service delivery system and inclusion of women and
children in the health research agenda.
Development of a system of care infrastructure that includes assessing needs, planning for resources,
developing adequate capacity, evaluating impact and assuring quality at all levels. Included in this is
the need to promote clearly the role of the federal, state and local public agencies and providers and
providing the necessary resources.
Establishment of raimbursement rates that adequately cover the comprehensive services of a wide
range of health care professionals including midwives and nurse practitioners and that accommodate
client choice of provider. Training of all health providers to emphasize health promotion and prevention
in addition to treatment of disease. Special attention must be paid to assuring adequate resources for
traditionally underserved populations.
Establishment of streamlined administrative. billing and enrollment procedures to maximize the funding
and provision of patient care.
Development of comprehensive outreach programs and public education campaigns targeted to policy
makers and the general public.
A mechanism for assisting families which have suffered adverse perinatal events or other health
outcomes and a system to address liability concerns of providers while maintaining consumer
protection.
Special thanks to the following arganizations and/or publications whose work centributed to this decument: *A Paund of Preventien: The Case for Universal Manufaity
Care IN the U.S.*. March of Dimas Birth Defacts Feundation, Children's Datense Fund, Americation of Meternel and Child Heach Programs, Campaign for Wemen's Health,
Institute of Medicine, Foundation for Public Health Policy, N Il Women's Health Network, American Public Mealth Association, Alen Outtmether Institute, League of
Women Vaters. Wemen's Institute far Crintibearing Paticy.
X
number
CHLDREN
ASC
Monthly
Income
Income
Bafore Times
FAMILY ( 2
Before Taxes
FAMILY OF 3
$1532
s 6,938
CHAPS/MSP
CHAPS/MSP
$1.149
$1,446
$1.819
$1282
HEALTHY
CARING/MSP
HEALTHY
CARING/MSP
BEGINNINGS
BEGINNINGS
$ No
8 94-8
$ 345
$ 4'4
MEDICAID
MEDICAID
EPSDT
EPSDT
$ a
1 y
0-5
6.7 8-4'
111 "
14
19 In
0.5
b 7 N 7"
1f.17
IN
18 no
Years for pregnant of any age)
Years (or pregnant of any age)
"Any child born after 9/30/93.
"Any child bom after S/30/93.
Monthly
Monthly
Income
Insure
Before Taxes
FAMILY OF 4
Before Taxes
FAMILY OF 5
$2325
$2,722
CHAPS/MSP
CHAPS/MSP
$ 1.744
$ 2.001
11.546
$1.10
HEALTHY
CARING/MSP
HEALTHY
CARING/MSP
BEGINNINGS
BEGINNINGS
$1.03
s 513
$ M:
MEDICAID
MEDICAID
EPSDT
EPSDT
$ n
$
"
0-5
61.7 N yr
to 17
1X
14 "
0.5
n.) R-4'
III 17
14 " I
Years (or pregnant of any age)
Years (or pregnant of env me)
child born after
"Any child
after
fl
Before Taxes
FAMILY OF 6
personado
FAMILY OF 6+
$ XIII
$ + just
per month
CHAPS/MSP
CHAPS/MSP
1 210
PT manth
02/18/93 15:13
02/10/93 17:05
s 2001
9 +361
PV mands
HEALTHY
CARING/MSP
HEALTHY
CARING/MSP
BEGINNINGS
BEGINNINGS
$ 1,550
5 +198
25
per morch
, 7n:
s +144
MEDICAID
PT month
MEDICAID
EPSDT
EPSDT
$
4
$ 0
0.5
n-7 3.9°
10.17
18
19-30
0-5
6-7 B-V
ID- 17
IF
# "
Years (or pregnant of any age)
Years (or pregnant of any age)
"Any child born after 9/30/03.
"Any child born after 0/20183.
FPG
FOR MORE INFORMATION OR TO ENROLL IN A PROGRA'
UNIFORM ELIGIBILITY
3009/189%
CHILD HEALTH WATCH can help you casult in the right program:
PCCY (Philadelphia)
563-58
CHAPS/MSP
WNAC (Germantown)
$43.97
NSCA (North Philadelphia)
150%
Medical Assistance (DPA, Medicald)
133%
Healthy Beginnings
560-23
HEALTHY
MATERNITY CARE COALIT
SEN. WOFFORD
426-87
560-28
Early Periodic Screening
CARING/MSP
Diagnosis and Treatment (EPSDT)
300/513-76
BEGINNINGS
The Caring Pregram for
100%
Children (Caring)
8804864-54
Children's Access in
Primary Services (CHAFS)
563-51
Maternally Services Project (MSP)
995-33
av:
MEDICAID
EPSDT
Family size Is parent(s) or guardian(s) plus children.
Fer example, 1 grandparent with 2 children is a family of 1
$
0. 3
6.7 8.9*
10-17
B
201
Years for pregnant of any opel
90 PAGE
*Any child born ultre 9/30/93.
207 D
MEMORANDUM
Post-It™ brand tax transmittal memo 7671
# of pages
DATE: February 10, 1993
C6. To
TO:
Alyse
Dept.
Phone# Co. (Renn)
From Him Manage
FROM: Mary
15-898-6088
Fax # 917-238-2238
Fax
615-898-6320
RE:
Claire Fagin's Remarks
Claire will stress the following in her remarks:
1.
The federal government must eliminate barriers to
reimbursement of nurse practitioners, nurse midwives, clinical
nurse specialists etc. in order to achieve goals of cost-
containment and access to health services by all citizens.
2.
The standard benefits package should initially be
targeted at women and young children. Ultimately this package must
address the long-term care needs of the millions of people living
with chronic illnesses.
3. The federal government must eliminate barriers to state
and local initiative designed to meet the health needs of a
community (e.g. ERISA, Medicare waivers that currently take up to
two years to obtain).
4. The federal government must provide the financial support
for clinical research to assess the cost and effectiveness of new
models of care. The government must also provide continued support
for the development of clinical practice guidelines.
5.
The federal government should reform the health
insurance market and eliminate practices that are denying citizens
with essential coverage.
6. State and local governments should have the autonomy to
develop and oversee systems of health care within a framework of
managed competition. These governments should also assure that
these system are delivering expected services and keeping within
their budgets.
7.
State and local governments should promote the
development of primary care practices based in such community
settings as schools etc.
8. The state government should assure that consumers have
access to an excellent information base upon which they can make
their health care choices.
Wofford Panel on Costs
Senator Wofford, your commitment to quality health care is
well recognized and deeply appreciated by the citizens of
Pennsylvania and the nation. I am pleased to have the opportunity
to share my views on the primary issue that is driving the health
reform debate. The perspectives I share are the result of more than
25 years as a nurse clinician and administrator.
Past attempts to contain costs through regulation have been
unsuccessful in achieving significant reform. The same can be said
for the more recent philosophy of depending on market forces to
control health care spending. While reason would argue that
neither approach should be abandoned, experience would argue that
more systemic change is in order.
Such a change would depend on a fundamental shift in the
definitions of health care services and health care providers.
While an initial reaction might be that broadening services would
increase costs, more careful study shows that by changing the
nature of services and the kind of providers, demand and costs can
be lowered and quality maintained and in some cases enhanced.
Among the primary changes called for are reforms in the areas of
guaranteed benefits, alternative systems of community based care,
insurance reimbursement policies, tax policies and consumer
information. It is important to note that these areas for reform
are inter-dependent for their success.
1.
Guaranteed Benefits. A comprehensive package of
relatively low to moderate cost health care services, guaranteed by
all insurers, will go a long way to decrease the aggregate costs of
care by reducing the demand for higher cost services. This package
must include at the minimum: preventive services including regular
check-ups, pre-natal and well baby care, immunizations, primary
care, home care and mental health services. One example of
reducing costs while increasing access is evident in the United
Kingdom where 75% of prenatal care and normal births are safely
handled by certified nurse midwives. In the U. S. less than 4% of
normal births are handled by certified nurse midwives despite that
fact that the total cost of such care is 1/3 (at most) of
traditional obstetrician care.
2. Alternative System of Community Based Care. Efforts to
reduce costs would be better achieved by replacing the current
maze of disjointed, fragmented services with a "more seamless"
system of coordinated, community based care. Community settings
have been shown to increase access to preventive services which, in
turn, decrease the demand for higher cost health care. In such
systems, the role of the nurse is essential. Serving as a
gatekeeper and accustomed to providing services in primary care
sites such as schools and work settings, nurse coordination of
family access to health care has been shown to reduce costs while
increasing access. Nurses have the best record of providing such
services in underserved rural and urban areas and are notable for
utilizing appropriate preventive, low tech interventions rather
than the costly high tech interventions now so customary. These
roles are particularly suitable in managed care arrangements and
will offer planners competitive pricing in local and national
health reform efforts: providing that barriers to practice are
removed.
3. Insurance Reimbursement Policies. These barriers include
private, state and federal insurance reimbursement policies.
Currently, the policies of third party payers allow only the most
costly of services by the most costly of providers despite the
considerable and growing body of scientific literature that
supports nurse practitioners, certified nurse midwives and clinical
nurse specialists as providers who can assure cost-savings and
quality of services.
4. Tax Policies. The issue of a tax cap for employer-paid
health benefits and the need for local adjustments to any national
index is a question to be resolved if significant cost savings are
to be achieved.
5. Consumer Information. Unconscionably absent from the
current health care system are consumers who are knowledgeable
about health care costs. Efforts to achieve cost containment must
begin with informed consumers who will contribute to decisions
related to how much we will spend on health care and how these
dollars will be allocated.
In summary, a new vision of reform to reduce cost and
guarantee access requires a restructuring of the health care
delivery system which assures a standard of care, uses health
resources effectively and efficiently, and balances efforts to
promote health with the capacity to cure disease.
Thank you.
(Moccia and Fagin, February 10, 1993)
DR. ROBERT DOE
President, Medical Society of Lancaster County
Conesta, PA
Lancaster County Task Force
Attached are comments from the Lancaster Task Force on their model
for health care reform: managed competition with expenditure limits.
Background
This group has established a coordinated care system for Medical
Assistance recipients in Lancaster County. It has the support of the
community, the Department of Public Welfare and the Health Care
Financing Administration. Three local hospitals have donated $50,000 to
develop a database for the program. Savings to the Commonwealth are
projected at 10-20 percent.
Dr. Doe supports managed competition with expenditure limits as a
promising model for health care reform. His concerns and
recommendations are the following:
managed care plans should be defined in broad terms to
include both staff-HMOs, as well as preferred provider plans
(PPOs);
Health Insurance Purchasing Cooperatives could become a new
and expensive layer of bureaucracy. HIPC cost effectiveness
could be increased if they were limited to providing services to
Medicaid and low income rcipients, individual purchasers of
insurance, and small businesses;
regional expenditure targets could interfere with the market
forces set up by the managed competition approach;
the Oregon approach (prioritization of services to be covered)
should be used to create a national definition of a mandated
benefits package;
other important initiatives to control costs should be
implemented such as uniform claim forms, uniform
reimbursement rules, elimination of the practice of denying
coverage because of pre-esisting conditions, malpractice and
anti-trust reform, uniform data collection standards, and
limiting provider fees.
Questions
1.
I am aware of your fear that health insurance purchasing
cooperatives could become a new and expensive layer of bureaucracy.
However, couldn't regional purchasing cooperatives serve to eliminate the
wasteful duplication of health benefit management functions currently
found in most businesses and organizations?
2.
How can we ensure that Medicaid and low income groups receive the
same benefits and services as do middle and upper income groups?
02/09/1993 16:02
7172958378
LANCASTER EMERG ASSC
PAGE 02
Thomas Jefferson stated many years ago when questioned about
health "with your talents and industry, with science, and that
steadfast honesty which eternally pursues right, regardless of
consequences, you may promise yourself everything-but health
without which there is no happiness.
For several decades the American health care system has been
constructed piecemeal, without overall strategy. Today this trend
must be reversed in order to create an improved health care
delivery system which is more fair and cost effective yet
maintains quality, cutting-edge technology and individual choice
of provider. To facilitate this change, health care reform must
be initiated at the federal level, permit state variation and
encourage the creation of locally controlled health networks.
Imagine creating a paper mache sculpture. The wire frame of the
piece is created federally and given to the states. Each state
determines the method for purchasing the glue, plaster and paint.
The local community receives the frame and materials and
completes the sculpture with its own local color and artistic
interpretation.
In specific terms, the federal government must define the rules
the health care system. This includes defining a basic
fit package for all Americans, relaxing regulations, and tort
eform. At the State level, payment mechanisms for the basic
benefits package could vary allowing States funding options.
Local communities need to be empowered to create networks of
providers and community agencies to deliver coordinated care.
More than one network should exist in each area to maintain
consumer choice and competition yet cooperation on use of
expensive technologies must be encouraged. A federal funding
source and clearing house for project development information
should be created to aid in this process.
As an example of this approach, a coordinated care network for
Lancaster County Medical Assistance patients is being established
pending HCFA approval of a waiver. The program began from the
work of a county Health Task Force composed of providers,
consumers, business, insurance, labor and community agency
representatives. Through a cooperative effort with the
Pennsylvania Medical society and the Pennsylvania DPW the final
program was designed. The system will link all MA patients to a
primary care provider, facilitate provider CIOSS coverage
networks to ensure 24 hour care access, and track patients who
fail to show for well child care, immunizations or prenatal care.
A community based computer network linking out patient providers
to hospital emergency departments is being developed. This
Server based system will maintain a data base for providers
rning medicines, allergies, and immunizations. This will
te a permanent childhood immunization record and allow
tracking of individuals for well child care.
We must accept the challenge to refine our nation's health care
system. Government must unleash the creative genius of local
02/09/1993 16:02
7172958378
LANCASTER EMERG ASSC
PAGE 03
communities and avoid the yoke of a system too tightly defined at
the national level in the name of cost control. As Jefferson
said, "The time necessary to secure this
should be devoted to
it in preference to every other pursuit.
"
COMMENTS ON MANAGED COMPETITION WITH EXPENDITURE LIMITS AS A
MODEL FOR HEALTH CARE. REFORM - lancaster County Task Force
The are several aspects of the managed competition approach which
have great promise. First, the creation of Area Health Plans as a
cooperative venture between insurers and providers would
facilitate the expansion of primary care networks, access to care
for all, and allow for local creativity within the plans to
deliver cost effective, high quality health care. By placing
these plans in competition with one another, market forces would
be brought to bear into the health care system. The emphasis of
these plans would be toward the goal of assuring a primary care
source for all citizens which would serve to emphasize preventive
and early diagnostic aspects of health. These efforts would go
toward improvement in both cost reduction and quality of life. It
must be recognized, however, that the HMO model of Health Plan is
not the only structure which could achieve these goals. Preferred
provider networks with selection of a primary care giver as
gatekeeper/advice giver can also improve the proper utilization
of health care by the patient. The difference between this model
and an HMO is that there is no capitation of the primary care
physician and financial penalty for the primary care giver to
refer to a specialist is avoided. Under the HMO model, the gate
keeper looses money from his/her own income when making
referrals. This is a potential conflict of interest for the
referrer. Area Health Plans of both types should be allowed to
compete.
Under the "Jackson Hole" proposal for Managed Competition,
regional Health Insurance Purchasing Cooperatives would be
formed. This entity would pass through the premium monies to the
AHP's which qualified to be offered by the HIPC. The HIPC is
envisioned as a monitoring agency for the health plans, a
regulator of premium cost and a collector of data on health
quality and cost. The personnel of the HIPC unfortunately would
add a new layer of bureaucracy to the health system and I caution
whether it would be cost effective. However, if the HIPC were
limited to providing service to Medicaid, low income recipients.
individual purchasers of insurance. and small industry, perhaps
the cost of running the HIPC could be reduced. This would leave
large industry to shop for the AHP's of its choice without the
intermediary of the HIPC.
The other envisioned role of the HIPC is to be the arbitrator of
the regional expenditure target set by a national board. The
Lancaster County Task Force is concerned that such budgeting may
interfere with the market forces set up by the Managed
Competition approach. In particular, localities that are spending
less than their allotted budget would be encouraged to find ways
to spend the extra money 50 that their budget would not be
reduced the following year. If expenditure limits are selected,
however, we would recommend that be accomplished through the
mechanism described in the next paragraph.
The most important step in controlling health cost will be to
create a national definition of a mandated benefits package. A
process similar to the Oregon approach for medicaid reform
should be considered. Once a prioritization of services list is
created, a line drawn in the list would determine those services
that would be covered and the expected cost for delivering these
services. If the year's expenditure target were exceeded, then
the national panel would need to look at the list and decide if
the covered services should be changed or if the budget was
invalid. Initially, expenditure targets should only be used on a
trial basis in selected regions to determine if the model can
work. At the inception they should not be binding.
In order to gain near term control of expanding health care cost,
a series of important initiatives need to be implemented early in
the transition to whatever new health system is selected.
1)uniform claim forms 2)uniform rules for regulation and
reimbursement of the basic health package mentioned above
S)elimination of refusal or cancellation of insurance for prior
health conditions 4)malpractice reform 5)anti-trust exemption for
provider cooperation and fee negotiation-also to encourage
improved provider peer review
6)revision of tax exempt status of health expenditure to allow
both individuals and corporations the right to deduct the cost of
the basic health care package but not extra coverage beyond this
standard--money saved by government could be used to expand
medicaid coverage 7)establish data collection standards for
inpatient and outpatient services to allow monitoring of
utilization and reduce duplication of services by providers (ie
Lancaster County Outpatient provider computer network) 8) limit
provider fee increases to inflation index and encourage voluntary
freeze-this is to include suppliers, pharmacy etc. 9) begin
development of definition of basic health benefit package
10) revise laws preventing creative managed care options (Moynahan
Bill)
I suggest that congress consider enacting a package of new laws
outlined above while convening a series of regional
consumer/provider roundtable forums to attempt to reach consensus
on the structure of the final health system to be selected. In
the interim, useful steps toward cost containment will have
begun.
Sincerely,
Robert G. Doe MD
213 Tomahawk Dr
Conestoga, Pa. 17516
President, Medical Society of lancaster Co.
LAUCASTER COUNTY TASK FORCE
GOVERNOR CASEY'S HEALTH CARE REFORM PROPOSAL
Attached are materials concerning Governor Casey's health
care reform plan that proposes a system of "managed competition"
for Pennsylvania.
Background
In November 1991, Governor Casey asked the Pennsylvania
Economic Development Partnership to determine what could be done
to reduce health care expenditures, broaden access, and improve
the delivery of health care services in Pennsylvania. Jay
Tolson, Chairman and Chief Executive Officer of Fischer and
Porter Company, and Bill George, President of the Pennsylvania
AFL-CIO, co-chaired the committee that produced the attached
report (which was released November, 1992).
Governor Casey plans to conduct a series of public hearings,
the first of which took place in Erie on December 17, the second
was in Scranton on Jan 29, and the third was in Altoona on Jan26
Three more are planned: February 26 in Philadelphia; February 22
in Pittsburgh; and Harrisburg-no date set.
Governor Casey will use the testimony presented at these
hearings and other comments received to draft legislation for
presentation to the General Assembly sometime this Spring.
Summary of the PEDP Proposal
The proposal has several components:
1.
Guarantees every Pennsylvanian a basic package of health
care services.
2.
A Health Policy Board would be created to oversee and
regulate the health care system. The Board would be an
independent state agency whose members would be appointed by
the Governor and approved by the Senate. The Board could
consist of both consumers and providers.
Note: The Board is not a Garamendi style HIPC; it will not
function as a purchasing agent for consumers, but instead
will determine the ground rules for competition among
certified plans.
The major functions of the Board include:
Defining a group of services which constitute
the basic health care package,
Certifying Managed Care Networks within
prescribed regions (MCN),
Setting procedures, measuring and monitoring
product and process quality in managed care
networks,
Establishing standards for managed care
networks,
Setting payment schedules for employers,
employed and unemployed individuals, and
state and federal programs.
3.
Each individual or family would enroll directly in a managed
care network (MCN). Managed care networks are defined as
health maintenace organizations or any other institution or
combination of institutions that agree to provide the basic
health care package.
4.
While individuals or employers could purchase supplementary
health coverage from MCNs, it would also be possible to
purchase traditional indemnity insurance with fee-for-
service reimbursement from traditional insurers.
5.
State mandated benefits would cover people's basic health
care needs, with an emphasis on preventive care.
6.
Coverage for additional services, not included in the basic
plan, may be provided to individuals through employers,
unions, membership organizations, and other groups.
7.
Medical Assistance (Medicaid) recipients would be included
in the plan from the start; Medicare recipients would be
incorporated over time.
8.
Businesses, state and national governments, self-employed
individuals, and others who have the ability to pay would
contribute to covering the cost of the basic benefit
package.
10.
Employers would pay for employees' health-care coverage, but
would not have to administer benefits. There would be some
subsidy to low-income employers and the unemployed.
11.
Individuals would cover co-payments and deductibles. A
program of coverage during periods of unemployment would be
developed.
12.
Payments would be made on a capitated basis to the managed
care plans. It is not clear whether payments to providers
would be risk-adjusted.
Recommendations for Immediate Action.
Included in the report is a list of "receommendations for
immediate action." This list includes:
1.
Improvements in the Certificate of Need Program (CON),
2.
Exploring operations of the CON program within an overall
dollar cap.
3.
Restrictions of provider self-referrals to facilities in
which they have ownership interests.
4.
Requirement for hospitals and other providers to share
technology and coordinate major investment with their
community -- this recommendation has anti-trust
implications.
5.
Development of uniform claim forms and electronic billing
procedures.
6.
Efforts to encourage the growth of managed care in the
commonwealth in employer-based coverage and through the
state Medicaid program.
7.
Encourage preventive care and healthy living. Insurers
should provide discounts to employers who develop work-site
health and wellness programs.
8.
Insurers should: use community-rating; increase payments to
primary care providers; and adopt open enrollment policies.
9.
Develop and market low-cost basic benefit packages to small
employers.
Analysis
The PEDP proposal contains many of the key elements of
comprehensive reform, although it leaves a number of important
questions unanswered.
Under the proposal's system of managed competition, it is
unclear precisely how coverage will be guaranteed for all state
residents. Would all individuals receive coverage through a
certified Managed Care Network? How are low-income persons
treated? What kind of subsideies would there be for small
employers?
A Health Policy Board would be created to perform many of
the functions of a purchasing cooperative--and would act as one
purchasing cooperative for the entire state. The proposal would
allow providers to be members of the Board without giving any
portion of the provider community "undue influence." Most
experts agree that providers should not be allowed be members of
the purchasing cooperative.
Under the proposal, the Board would set capitation rates for
the basic health plan. This payment rate would be set without
reference to the amount of service utilized and would be based on
community experience. There is no mention of the need to risk-
adjust premiums for those plans that accept a greater proportion
of high risk patients.
Budgeting is a part of the plan only to the extent that
Managed Care Networks would be required to live within a total
determined by the number of enrollees and the per capita rate.
This is cost containment from the bottom up: the plan includes no
specific state role in setting overall spending targets.
The Seranton Times
02/01/93
JAN 2 9 1993
Told of Health Care Woe
13:06
FAX
Witnesses Describe
717
Insurance Problems
LTE
2341
By LYNNE SLACK SHEDLOCK
plan. sho would be forced In RU n
your without payment for her pre.
Times Stall Writer
existing heart condition.
As a result, she sald, she proba-
Gov. Robert P. Casey and n panel
hly will romaln In the more expen-
of officials who alo developing a
slve individual plan the couple is
health care reform proposal for the
now using while her husband on-
state today took lostboony from
ters the group plan.
Individuals, the Insurance Industry
"They have me trappod," she
and the medical community Dat the
said. "I'vo never asked for mything
problems of health Insurance.
freo, only for something we can
The hearing, held nl Marywood
afford. We've even thought about
College, was the third of six such
divorce and thon maybe I could get
forunit being conducted neross the
the (state assistance) blue card."
state (0 gain public Input before
Ruth LaFountain, n small bust-
Rebert P. Casey
William M. George
the proposal Is prosented (o the
ucss owner from Strondsburg, testl.
(11/19)
General Assembly In the spring.
fied on the difficulties she has had
SENATOR WOFFORD
they
Casey, Indicating that the state
In obtaining family insurance COY.
and the nallon are facing n health
erage for horsolf and her (wo ern-
care crisis, sald: "The time Is past
ployees, one of whom has a pre-
for wringing hands. It's time now to
existing condition.
strive for solutions, 110 matter how
LaFountain said in many cases
difficult that may he."
the insurance companies would not
A large amount of the testimony
cover the employee with the pre-
dealt with the problems oncoun-
existing condition, and sliv and the
tered by those with pre-oxisting
other employee would thon not
conditions who are other unable
have the numbers in be considered
to obtain coverage or 15/10 are
" group.
foreed to orduro A walling period
She encountered other problems
until their conditions are covered
as well. Premimums ranged from
by their Insurance plans.
$000 to SHG0 a month - almost 60
Connie Stackhouse testified that
percont of hor current payroll.
the promimum for horself and hor
Some companies Insisted that shu
husband, Dale, a self-employed me.
purchase life Insurance In addition
chanic, had grown beyond what
10 health Insurance, saying that It
they could hundle. The couple do-
was state law. " is not.
Robert 1. Casey, Banked by Andrew Greenberg, state
from Strundsburg, during a state hearing conducted at the
eldod to soarch for a group plan
"We've been llad to a tot." La-
and found one through member-
Fountain said, suggesting that the
:ry of commerce, left, and William George of the AFL-CIO,
Marywood College campus on health care reform. (Staff Color-
ship In the Small Business Buroau.
state devetop a booklot for small
isks a question of Ruth LaFountale; a small-business owner
photo by Uniothy Butler)
But Mrs. Stackhouse sald that in
businesses that outlines Insurance
order for her to join the group
(Continued on Page 12)
The Seranton Times
JAN 2 I 1993
Casey, Others Told
Of Health Care Woes
(Continued from Page 1)
Inc costs by foreing providers to
guidellnes.
control costs through such moa-
In the moantline, she romains
sures AS allowhating unnecessary
without coverage.
tosts and over utilization.
"We're out there hanging on the
But Dr. Petor Cognetti of the
(Imb and gambling that one of us
Pennsylvania Acadomy of Family
docs not get III," sho anid, worrying
Practices told the panel that test-
that sho could loso her business If
ing is often done because of the
also bacame sick.
unroalistle expectations of the my
Kellk Williams of the Pennsyl.
public and because of the fear of
vanta Center for Independent D/y-
lawsults.
Ing urgod the state 10 look into the
Cognoul made several #06605-
problem people with disabilities
ilons to the panel including oducal-
oncountor In purchasing needed
ling the public about their options
equipment. Some Insurance compa-
and torto reform. Costs could also
nies will cover purchase for froms
be controlled, he sald, through
such as power wheelchairs, while
deregulation of taboratory tests
others do not.
and standardization of forms. He
110 also expressed concorn about
said my health care management
the suggested managed caro COR-
program must Include proventative
ponent of the state proposal. 110
CAFE and education or what he
sald that ofton health management
colled "the unimbor one honith
organizations use "gatehooper"
huzard of nicollno
physicans who must innko reformats
The proposal by the Economic
for spociallst visits. Using the gate.
Dovelopment Partnership would
keepors may limit needed necess to
provide health care to every Ponn-
specialists for those with disabili.
sylvanian while saving at least $6
Clos.
billion annually by the your 2000
"I hope any plan can empower
through " system of minaged care
people to have cholees," 110 said.
networks.
Paul Holdron, vice prosident of
Under the proposal, Insurors or
marketing, business affatrs and ou-
managed care companios - such
orational development for Blue
ns health maintenapee organiza-
Cross of Northeastorn Pennsyl.
tions would organizo networks
vaula, said the three components
that would contract with hospitals,
needed for health Insurance ro.
physicans, clinics and other provi.
form Are community rating, open
dors. Individuals would have a
enrollment and basic bonafits
choice of managed care networks
packages froe of state mandates.
In their region.
"Access is not the main issue In
Pennayivania," he said, citing the
All networks would be required
low percontage of uninsured In the
10 offer n standard bonefits pack-
state. "The main obstacle Is making
age, but additional services could
it affordable."
be purchased separatoly. Employe
Panel members questioned Hold-
ers would be required to make
ron's testimony. anying that Prooing
payments to networks on bohalf of
basic benefit packages of mandates
employees. Networks could not
would actually result In less cover-
dony coverage based on a pro-
age. Instand, They suggested codue-
oxisting condition.
ECONOMIC DEVELOPMENT PARTNERSHIP
Robert P. Casey
Andrew T. Greenberg
Chairman
Executive Director
COMMITTEE ON HEALTH CARE
MEMBERSHIP
Co-Chairmen
William M. George
Jay H. Tolson
President
Chairman of the Board and President
Pennsylvania AFL-CIO
Fischer and Porter Company
Committee Members
Mary Del Brady
Karl Krieger
Vice President
President
Allegheny Health Education and
Transtech, Inc.
Research Foundation
Thomas P. Foley, Ex-Officio
A. James Freeman
Secretary of Labor and Industry
President
Lord Corporation
Andrew T. Greenberg, Ex-Officio
Secretary of Commerce
Edward J. Keller
Executive Director
Cynthia Maleski, Ex-Officio
AFSCME
Acting Insurance Commissioner
Council 13
Dr. Allan S. Noonan, Ex-Officio
Dr. Donald Mattison
Secretary of Health
Dean
Graduate School of Public Health
Linda M. Rhodes, Ex-Officio
The University of Pittsburgh
Secretary of Aging
Bruce H. Raimy
Karen Snider, Ex-Officio
Chief Executive Officer
Secretary of Public Welfare
Welder's Supply Company
John T. Tighe III, Ex-Officio
Geri Swift
Deputy Chief of Staff for Operations
President
and Administration
Geri Swift Associates
Governor's Office
A-4
Designated Representatives
Janet Kail
David Wilderman
Executive Assistant
Vice President
AFSCME
Pennsylvania AFL-CIO
Council 13
Donald Saurer
Manager Public Relations
Lord Corporation
State Agency Staff Representatives
Scott Bair
Ken Slaysman
Director, Economic Development Policy
Economist
Office
Department of Commerce
Department of Commerce
Janie Snyder
Martha Bergsten
Director, Office of Policy, Planning, and
Economic Development Policy Specialist
Evaluation
Governor's Policy Office
Department of Labor and Industry
Richard Browdie
Donna Wenger
Deputy Secretary
Deputy Secretary for Planning and
Department of Aging
Quality Assurance
Department of Health
Sherry Knowlton
Deputy Secretary
Ken Wolensky
Office of Medical Assistance Programs
Director, Program Services Office
Department of Public Welfare
Department of Insurance
David Meyers
Special Assistant to the Governor
Governor's Office
A-5
CONFIDENTIAL
STAFF RECOMMENDATIONS: COMPREHENSIVE HEALTH REFORM
LEGISLATION
The staff has reached a consensus recommendation on major
elements of a comprehensive health reform bill and identified a limited
number of important issues that will need to be resolved by the members.
The staff recommend a program that includes strong cost containment,
universal health insurance coverage, and measures to improve the health
care delivery system and foster health promotion and disease prevention.
The program is built on the best ideas of the comprehensive Democratic
bills introduced during the last session of Congress, the work done by the
group prior to the election, the program advanced during the Clinton
campaign, and new ideas introduced by members of the group subsequent
to the election.
COST CONTAINMENT
Cost containment is achieved through a national health care budget
implemented by a combination of managed competition, capitated premium
limits, and negotiated rates, where necessary. In addition, a number of
other steps are taken to assure that the program addresses all aspects of
the cost problem.
-Global budget. The national health care budget is established by a
new, independent health board patterned after the Federal Reserve Board.
The Board establishes budgets for States, as well as the nation as a
whole. The national budget will be related to the long-term growth in the
economy, but the Board is given flexibility to respond to unforseen events
and national health needs.
--Managed Competition. Health Insurance Purchasing Cooperatives
(HIPCs) are established in each State, as described in the universal
coverage section below. HIPCs aggressively negotiate with health plans
to assure quality, cost-effective care for individuals enrolling through the
HIPC. Enrollees have financial incentives to choose the most
cost-efrective plans, and the combination of enrollee incentives and HIPC
purchasing power will promote the growth of HMOs and other forms of
managed care capable of reducing health care costs. HIPCs purchase
health care from all plans within a budget established consistent with the
national and state budget.
DETERMINED TO BE AN
ADMINISTRATIVE MARKING
INITIALS: 10B DATE: 8/13/14
2014-0483-5
employer-paid health insurance premiums or the deductibility by the
employer of such premiums?
UNIVERSAL COVERAGE
All Americans are guaranteed affordable private health insurance
coverage, with benefit packages meeting national standards.
--Insurance mechanism. A Health Insurance Purchasing Cooperative
is a state-chartered organization with a board of directors representing
purchasers of health care services. Coverage is provided by a choice of
competing health plans selected by a HIPC in the geographic area in which
the enrollee resides. Payment of a mandatory premium by businesses and
workers entitles the worker and the worker's dependents to enroll in low
cost health plans offered by the HIPC without further premium charges.
Individuals may enroll in more expensive plans by paying an additional,
voluntary premium. Employers may contribute more than the mandatory
amount, but any additional, voluntary contribution would have to be the
same for any plan chosen by the worker, with cash rebates to workers
choosing less expensive plans. The unemployed and those out of the labor
force pay a premium related to income, up to the actuarial value of the
plan.
HIPCs would be required to offer a choice of plans to enrollees,
including freedom-of-choice plans. Covered benefits would be
standardized, enrollment in any plan would be available to any HIPC
participant, and, if the required benefit package is less than
comprehensive, several levels of coverage would have to be made
available. Payments by the HIPCs to the plans would be risk-adjusted, so
that plans would not be penalized for enrolling higher risk individuals, and
plans would have to meet a variety of other standards, including quality
and disclosure of information, in order to be offered by a HIPC.
--Benefits. The staff recommends that required benefits be as
comprehensive as possible, consistent with member decisions about the
total cost of the program. Specifically, the staff assumes that required
benefits will include all medically necessary physician services
(including services performed by such non-physician professionals as
advanced practice nurses and physician assistants), hospital services
(including hospice services), diagnostic tests, mental health and
substance abuse benefits, pre-natal and maternity care, EPSDT services
for children, and specified preventive benefits for adults. In addition, the
staff recommends, subject to decisions about the total cost of the
package, coverage of all recommended prevention benefits, prescription
drugs, rehabilitation services, durable medical equipment, family
planning services, improved mental health and substance abuse benefits,
and home health and skilled nursing home benefits when such benefits are
an alternative to hospitalization.
Special Provisions for low-income individuals. If required
benefits are less than comprehensive, low-income individuals will be
provided an expanded package of benefits comparable to current Medicaid
mandatory and optional services. Cost-sharing and premiums will be
subsidized for the low-income. Provisions will be included in the program
to safeguard quality for low-income beneficiaries and to avoid
segregation of low-income enrollees in low-cost plans.
MAJOR ISSUES ON WHICH THERE IS NO CONSENSUS STAFF RECOMMENDATION
--Should all employees be required to receive coverage through
HIPCs or should large employers be allowed to provide coverage directly?
--Should the Medicare program be eliminated and Medicare enrollees
be required to receive their coverage through HIPCs?
-Should long-term care be a required benefit?
--Should there be special provisions to assist firms that provide
retiree health benefits?
IMPROVING THE HEALTH CARE DELIVERY SYSTEM
The staff recommends a program that establishes a new emphasis on
health promotion and disease prevention, moves the health delivery
system in the direction of primary care and greater coordination of
services; and provides a variety of special programs directed at
underserved rural, inner-city, and minority populations for whom
insurance coverage alone is not sufficient to assure good health care.
--Preventive health. As noted above, the staff recommends that the
required benefit package include coverage of the full range of preventive
services recommended by the U.S. Preventive Services Task Force,
including pre-natal care, well-baby and child care, and adult services such
as pap smears and mammograms. All children will be guaranteed EPSDT
coverage. Existing Federal health promotion and disease prevention
programs will be supplemented by additional grant programs directed at
high priority problems.
-System Reform. New grant programs will be established to
encourage development of integrated community care networks. Antitrust
laws will be clarified to encourage providers to work together at the
community level to eliminate duplicative, wasteful services and fill gaps
in the delivery system. State barriers to the development of integrated
systems of care will be pre-empted, and loans will be available to develop
new primary care clinics in rural and other underserved areas.
The supply and distribution of primary care physicians and non-
physician professionals will be improved by: expanding programs to
recruit students likely to choose primary care careers; encouraging health
professions training programs to increase emphasize primary care; and by
improving reimbursement for primary care specialists relative to other
specialists. Training programs for non-physician primary care specialists
will be enhanced. The negotiated rates established by Federal Board and
the States will be required to reimburse institutions for medical
education in a way that will provide an appropriate balance between
primary care training and other specialty training. The program will
incorporate the recommendations of the Physician Payment Review
Commission expected in March or will establish a separate Commission
appointed by the Federal Health Board to assure to develop detailed
recommendations to achieve an appropriate supply and distribution of
health manpower.
--Populations with special needs. The Community Health Centers
program service capacity will be tripled, to 15 million people annually.
The National Health Service Corps will be will be increased to 1400 new
physicians yearly and a field strength of 4200 physicians. Efforts to
expand the supply of minority and other physicians and other health
professionals interested in serving special needs populations will be
enhanced. Expanded outreach in poor and minority communities will be
required. Grants will be provided to local health departments and other
facilities serving populations with special needs. Data-gathering on
health status and needs of minority populations will be expanded, and
representatives of underserved populations will be included on all boards
and commissions established by the legislation. The rural health
transition grant program will be expanded. A program of school-based or
school-related clinics will be established, as will an initiative directed
at reducing infant mortality and improving the health status of infants
and young children at high risk, including a program to assure universal
childhood vaccinations.
The staff recommends that high priority should be given to adequate
funding for these initiatives, including consideration of funding some
subset of these programs as capped entitlements from the revenues or
savings provided in the comprehensive reform legislation.
FINANCING
The program will be funded by a combination of business and
individual premium contributions, with subsidies provided to low-income
individuals and to small businesses requiring assistance in meeting their
additional responsibilities. Consideration has been given to a payroll-
related premium as a financing device, with subsidies to small business
based on either limiting the percentage of total payroll contributed by the
business or limiting the required percentage of pay contributed on behalf
of any individual.
Subsidy costs for businesses and individuals could be raised either
through cost-containment or new revenues.
ISSUES ON WHICH THERE IS NO STAFF CONSENSUS
Should cost containment be established at a level that will fully
fund program costs not covered by premiums, that will result in deficit
reduction, or that will require additional general taxes?
--What should be the basis on which premiums are assessed on
businesses and individuals and the level at which they are set?
--What should be the basis for providing subsidies to small
businesses?
STATE FLEXIBILITY
States shall be allowed to adopt and operate comprehensive health
programs as long as those programs meet Federal standards for assuring
coverage, access, and quality, and controlling costs.
DISCUSSION DOCUMENT
COMPREHENSIVE HEALTH REFORM
GLOBAL BUDGETING RECOMMENDATIONS
I. Principles -
a) growth of budget related to long term growth in economy
b) budget is overall "fence" with tools to control costs
c) flexibility for unforseen events
II. Design and Enforcement of Budget
a) The Federal Health Expenditure Board sets an aggregate global
budget at the federal level; which is then allocated to state and
HIPC levels, using data from HIPCs and States
b) HIPC receives global budget which is used to establish premium
rates for all HIPC plans: These rates are risk-adjusted
c) Certified plans can set their own payment rates to providers
or use those established by the National board or the states, as
long as they stay within the per capita rate
d) States will have the ultimate responsibility for the failure
of plans to live within their budgets, unless a State asks the
Federal government to assume responsibility for the cost control
system within that State.
e) National, state, and HIPC budgets for subsequent years are
based on allowed premiums for the budget year, not on actual
expenditures by the plans for health care services, so any
overages are not built into the base. (What if they spend less?)
III. Budgets for Large Business outside the HIPC
a) Allocation - Limits set to a base year amount. The plans are
allowed no more than a per capita percentage increase over the
prior year, based on the percentage increase allowed in the
overall budget. Flexibility for changes in population covered,
etc.
b) Enforcement - Self-insured firms bear the financial risk.
Firms may use the regulated rates or negotiate their own
arrangements with providers. For large employers that work with
insurers - the insurance company assumes the risk-
If self-insured businesses fail to stay within budgets after
three years, they will be forced to join the HIPC.
IV. FEDERAL AND STATE ROLES FOR GLOBAL BUDGETING
Federal Government
1) designs national structure to contain costs including minimum
benefit package, global budeting, rate-setting and managed
competition.
2) sets annual national budget for health care, allocates among
the states using demographics, historical spending and other
appropriate factors
3) federal government assumes responsibility for data collection,
technology assessment, outcomes research, physician supply and
other tools needed to control health care costs.
4) establishes rates through negotiations to be used by states
where managed competition is not viable, or as a tool to help
states live within budgets, for optional use by health plans
where the State prefers not to set its own rates, or as a last
resort when states fail to meet global budget target.
Enforcement: if a state fails to live within budget set by
federal government over a three year period then:
the federal government should deem a state out of compliance and
the state may lose its right to design its own cost control
system
STATE GOVERNMENT
1) States establish an authority/function (HIPC) in-state that
would be responsible to structure the health care system so that
federal cost control and performance goals are met.
2) States may opt out of the national system provided they can
meet federal access and cost containment requirements
3) States are responsible for allocating their budgets and
responsible for enforcement.
4) States are responsible for enforcement of state global
budgets, using HIPC purchasing power, and where appropriate -
rate-setting - to control costs and meet budget.
Open Issue: Are changes to ERISA necessary to help states
tocontrol costs?
V. SPECIAL PROVISIONS WHERE MANAGED CARE IS NOT VIABLE
1) Rates will need to be established for use in places where
managed competition is ineffective and to provide optional
assistance for fee-for-service plans in meeting the premium cap.
2) Volume performance targets will have to be used in combination
with rate-setting to control volume
3) standardized all-payer rates will be set, preferably through
negotiations at the federal level; they can be used by self-
insured plans as a tool to stay within budget targets
4) states will have the option to negotiate their own rates
5) Medicare payment methodology and volume performance standards
should be used as a guideline in the establishment of rates and
volume performance standards for health care delivery outside of
the Medicare Program under a health care reform proposal
VI. Data Collection - We need to do more work to improve the
collection and coordination across existing payers.
OUTSTANDING ISSUES
1) Standard Benefit Package - outstanding issues which relate to
cost containment.
a) How comprehensive will the standard benefit package be ?
b) Will there be "richer" packages available for business and
or/employees to purchase ?
c) If richer packages are available, will they be purchased with
after-tax dollars ?
d) How will such health care costs outside a basic package be
included in a global budget ?
2) Does the budget include only covered services or all
expenditures?
HEALTH INSURANCE PURCHASING COOPERATIVES
RECOMMENDATIONS
IN GENERAL:
* HIPCs will act as aggressive purchasers for all consumers of
health care enrolled in the HIPC, whether they participate in
managed care plans or fee-for-service plans. It will select
participating health plans and establish allowable premium
charges for each plan
* The HIPC will handle enrollment and premium collection. It
will assure quality of plans and will collect and disseminate
information to assist consumers in choosing a plan. It will
risk-adjust premiums to participating plans. It will assure
standardization of benefit packages across plans
* Participating health care plans will, to the extent
practicable, be paid on a capitated rate. They have the option of
living within the capitated amount, using any methodolgy
available to stay within the budget, or using the negotiated
reimbursement rates as a tool to stay within the budget,
accompanied by Volume performance standards, similar to those
used under the Medicare physician payment reform law.
* The national all-payer rate system will be used for fee-for-
service providers in the HIPC program, unless the State chooses
to run a different cost-containment program for all payers
GOVERNANCE
Federal Government - establishes broad guidelines for
establishment and operation of HIPCs and consumer protection
standards.
State Government - States charter HIPCs. Design and enforce
consumer protection and other requirements within federal
guidelines. Design intrastate and interstate compacts.
Governing Board - The federal government should provide
parameters on qualifications for membership in particular that it
is representative of the purchasers. To make sure that the HIPC
is responsive to local needs, however, the procedures for exact
representation, size and appointment should be within a state's
discretion.
HIPCs should be cooperatives for purchasers, and act as their
negotiating agents, so its relation with insurers and providers
should be arms-length. Instead, providers and insurers should
form advisory boards that periodically meet with the HIPC board
Model of Governance - HIPC as a Public Corporation
* a non-profit entity, established by the state for exclusive
purpose of assisting employers and individuals purchase health
insurance, subject to federal standards
*
Models exist such as Port Authority
*
California Public Employees Retirement System
FEDERAL BENEFIT PACKAGE
*
One comprehensive standard benefit package will be offered by
all HIPC plans. The benefit package will be standardized so that
benefits, definitions, format and terms are the same.
*
HIPC must offer at least one fee-for-service plan
Outstanding Issues:
*
Will benefits be allowed to be sold outside the benefit package
and if so, will such "wrap around" benefits be standardized like
Medigap.
*
If a broad benefit package cannot be included for cost reasons,
the HIPC could offer several limited, standardized benefit
packages
* Will each HIPC be required to establish a public plan ? Will
such plan be administered by the HIPC?
PHYSICIAN INCENTIVES - the following policy options may be used
as incentives for physicians to participate in managed care
plans:
*
Actions violating anti-trust and safe harbor provisions between
physicians or groups of physicians and accountable health plans
must continue to be prohibited
CONSUMER INCENTIVES -
*
Mandatory premium contributions by individuals and businesses
set at a level sufficient to purchase the lowest-price plan or
the average of the three lowest-price plans (or some similar
measure)
*
More expensive plans must be purchased by voluntary
contributions by businesses or individuals. If businesses
voluntarily contribute more than the mandatory amount, the
contribution must be equal for all p lans. If an individual
chooses a plan costing less than the sum of the voluntary and
mandatory contribution, a cash rebate must be provided.
RURAL ISSUES
1) States should be given authority to make a finding that all or
regions of their territory should be exempt from managed
competition requirements and prescribe the alternative system
that will assure coverage and meet budget requirements.
Such a finding should be certified by the National Board (or
HIPC). More work needs to be done to define exactly what
national requirements these areas could be exempted from.
Studies should be supported by HRSA to develop a bether
information base or criteria to assist states in determining what
numbers of people and health providers are needed to effectively
support managed competition.
2) HIPCs will be established for every territory, whether or not
managed competition is viable.
3) Technical grants and other assistance should be available to
help States and regions where managed competition cannot work to
develop community care networks
4) States should be allowed to develop interstate agreements to
allow for coverage of residents of adjoining boarder areas.
Regional HIPCs encompassing a number of states should also be
allowed.
5) A comprehensive set of proposals to assist rural areas in
recruiting and retaining primary care doctors and other health
professionals must be included in legislation
Open Issues - Quality protections for Medicaid beneficiaries in
HIPCs. - Group is working with Children's Defense Fund and other
advocacy groups to develop specific quality protections,
including solvency standards.
*
Quality protection must be assured for all beneficiaries.
*
How do we prevent low-income people from being segregated into
a low-cost (or second-tier) plan?
Open Issue: Should large employers be allowed to opt out of the
HIPC; if so, what size firm should be allowed to opt out?
SERVICE DELIVERY RECOMMENDATIONS
I. Supply and Distribution of Health Care Professionals.
a) The Physician Payment Review Commission is scheduled tc report
to Congress in March, 1993 on physician supply and distribution
issues. Health Care Reform legislation should include provisions
which incorporate the recommendations of PPRC to address the
supply and distribution of physicians and other health care
professionals.
b) The legislation should further direct PPRC to undertake
additional analysis of how such recommendations are to be
implemented. For example, if PPRC recommends a reduction in the
aggregate supply of physicians, further recommendations should be
made to determine which specialties need to be reduced, and by
what percentage, and what programs need to be implemented to
assure access to primary care physicians in underserved areas.
c) Alternatively, the legislation may establish a separate
Commission, to be appointed by the Federal Health Board to make
recommendations about the implementation of anappropriate level
of health manpower.
(i) The Commission will include members from the academic health
centers, medical schools, practicing physicians, including
specialty societies, nursing schools, mid-level practitioners,
health policy experts and consumers.
(ii) In making recommendations about implementation, the
Commission shall consider changes in the financing of graduate
and undergraduate medical education, increases in the training of
nurse practitioners, other mid-levels, and non-physician
providers, limitation and allocation of residency slots,
expansion of training opportunities in community-based and public
health settings, and any other options that may achieve the.
objective of an appropriate supply and distribution of health
professionals.
d) The Commission shall make recommendations to the Federal
Health Expenditure Board, the Congress and the President for
appropriate legislative and/or executive action to achieve the
goal of a balanced health workforce policy.
II. Anti-Trust Initiative
a) Health Care Reform legislation will include a clarification or
modification of anti-trust law to encourage collaborative efforts
between health care institutions to encourage the development of
community care networks that will reduce unnecessary and costly
duplication of services and to improve the availability of needed
services. Such anti-trust legislation should include government
oversight to ensure consumer protection and prevent anti-
competitive behavior.
III. Expansion of Standard Benefit Package
All of the following recommendations are pending approval based
on cost-estimates from CBO.
a) Rehabilitation Services -Rehab services provided by
Comprehensive Outpatient Rehab Facilities (CORFs) and outpatient
services provided by physicial therapists, occupational
therapists, and speech therapists would be included in the
standard package.
b) Durable Medical Equipment - DME coverage included similar to
the current Medicare DME benefit; specify that DME includes
"assistive devices" such as communication devices for persons who
cannot speak.
c) Alternatives to Hospitalization - add home health, short-term
skilled nursing home benefit as an alternative to
hospitalization, similar to hospice benefit.
d) Family Planning Services - coverage for prescription and non-
prescription birth control devices; ensure that physician and
other health professional visits in connection with the provision
of family planning services are covered.
e) Expanded Mental Health Benefit - the group has not finished
its work on this issue; therefore this is a placeholder for a
possible expansion in benefits covered for mental health. There
has been criticism that the current mental health benefit is
inadequate and discriminates against people with mental illness.
f) Prescription Drugs - inclusion of benefit, pending cost
estimates
IV. Every effort will be made to fund preventive care benefits
and primary care initiatives, including the possibility of
designating some as capped entitlements.
V. Additional Public Health/Preventive Benefits - Recommended for
inclusion pending cost estimates and feasibility of
implementation
1) School-linked clinics - bring services to adolescents (or all
school-aged children and youth) through school-based or school-
linked health clinics
2) expand comprehensive services to pregnant women and young
children to age 3 through an "Early Start" program
3) a universal childhood immunization program
OUTSTANDING ISSUES
1) Increase funding for Health Care for the Homeless
2) What services should be covered as part of the standard
benefit Package? Can people purchase supplemental benefits
3) How do we best integrate issues not directly related to health
services or the provision of health services and financing with
health reform? (e.g. funding for lead paint programs and other
public health initiatives which contribute to the poor health and
increased health care costs of populations.)
4) Moving away from a list of services and allow a community to
address its own health needs within a global budget, using health
outcomes to measure success.
5) How will abortion be covered in the health benefit package?
6) Will the health benefit package include long term care?
12/03/92
FOR IMMEDIATE RELEASE
CONTACT: Don White
December 3, 1992
202/223-7782
HIAA
Health Tear
Health Insurance Association of America
NEWS RELEASE
HEALTH INSURANCE INDUSTRY RELEASES PLAN FOR
COMPREHENSIVE REFORM OF HEALTH CARE DELIVERY SYSTEM
WASHINGTON, D.C., December 3 -- In a radical break from
previous policy, the Health Insurance Association of America
(HIAA) today approved circulation of a discussion paper that
would provide universal health care coverage and generate
substantial revenue to help pay for health programs.
Under HIAA's draft reform proposal, the federal government
would require all individuals to carry, and all employers to
offer, an essential, continuous package of health care coverage.
Funding to help pay for coverage for people below the poverty
line would come from eliminating favorable tax treatment for
benefits that go beyond the essential package.
"This reform proposal marks a fundamental shift by insurers
and indicates our deep commitment to meaningful health care
reform that ensures coverage for all Americans while preserving
the tradition of high-quality care," noted Ian M. Rolland,
Chairman of the Board of HIAA. "We expect that these measures
will lead to universal and more affordable health care for the
country. It is also fair to say that it heralds a new era for
hospitals, doctors, and insurers."
The HIAA Board of Directors strongly endorsed comprehensive
reform of the health care system, consistent with the set of
- more -
1025 Connecticut Avenue, NW Washington, DC 20036-3998 202/223-7783 FAX 202/223-7896
principles outlined in the draft proposal. The Board also
directed that the draft be distributed to all HIAA member
companies for additional comment and refinement, according to Mr.
Rolland, who is the Chairman and Chief Executive Officer of the
Lincoln National Life Insurance Company of Fort Wayne, Indiana.
The new proposal rests upon four comerstones:
Universal Coverage: HIAA's draft proposal ensures
health care for all Americans, eliminating the
problem of the uninsured. Under this program,
everyone would be covered -- by law -- under an
essential package of care, either through an
employer or their own means. Private insurers
would agree to provide coverage to everyone. The
government would pay for health insurance for
people below the poverty line. Private insurers
and HMOS would provide managed care to the poor in
order to encourage preventive treatment and
wellness care.
An Essential Package of Benefits: Each individual
would be guaranteed an essential package of
benefits, which includes primary and preventive
services as well as catastrophic coverage.
Coverage will be designed to meet the essential
needs of Americans, and consumers also would have
the option to purchase supplemental coverage for
additional benefits. People above the poverty
line and people below the poverty line would
receive the same package of benefits, and
government would help define the essential package
of coverage.
Cost Control Features: HIAA's cost control
prescription includes the elimination of cost
shifting from Medicare and Medicaid patients to
privately insured individuals. It also includes
new approaches designed to discourage excessive
doctor visits, the unnecessary use of technology,
and unnecessary hospital or specialist care.
An Equitable Tax Policy: To promote equitable tax
policies, premiums paid for an essential package
would be excluded from employee or individual
taxable incomes. However, premiums paid by an
employer for benefits in excess of the essential
package could be deemed taxable to the employee.
Monies generated from this tax preference would
help finance health care coverage for the poor.
- more -
One important component of the proposal is the further
development of integrated financing and delivery systems -- we're
calling them Responsible Health Systems (RHSs), which will
compete with one another and other forms of health insurance in
offering the essential package and supplemental coverage. The
proposal calls for flexibility in how future care will be
delivered.
"our program is designed to provide everyone in the United
States with health insurance coverage and to help people become
healthier while holding down costs," observed HIAA President Carl
J. Schramm.
"This new initiative will jump-start health care reform," "
noted G. David Hurd, HIAA's incoming Chairman of the Board and a
primary architect of the proposal. "With this approach, all
Americans can be assured of coverage. Costs will be stabilized
and the quality of care, especially for the poor, will improve
dramatically," added Hurd, who is also President and Chief
Executive Officer of The Principal Financial Group of Des Moines.
HIAA is a Washington, D.C.-based trade association
representing the nation's leading commercial health insurance
companies.
###
/03/92
HIAA
Health Insurance Amociation of America
Creating a Working Health Care System: Key Points
1. Guiding Principles to Achieve High Quality, Affordable Care
for All:
Healthy and productive life, maximizing dignity and
quality of life for all
People's health care costs are stabilized
2. Pluralistic Financing and Delivery Systems
Based on competition on a level playing field
Evolving and flexible
Open to innovation
Private sector is empowered by government which removes
barriers to growth of pluralistic, competitive systems
Based heavily on employer system
3.
Cost Containment is Centerpiece
Relies on managed care in many evolving forms.
Responsible Health Systems are one form -- other forms
also compete with Responsible Health Systems on a level
playing field
Characteristics of Responsible Health Systems:
Combine all sources of financing, including
government, with the delivery of care.
Accountable to patients and the community
Competes to meet the needs of a community
Competes in offering an essential package and
supplemental coverage
Integrates all levels of care
Develops and discloses quality measures
Provides incentives for healthy behavior
May pay providers in a variety of ways
A government-empowered, self-regulatory organization
comprised of providers, insurers, employers and the public
will establish "rules of the road" for all players in the
health care system. This entity would:
Revised
12/3/92
1025 Connecticut Avenue, N.W., Washington, DC 20036-3998 202/223-7780 Telecopler 202/223-7897
- 2 -
establish consistent payment methodology for all payers
eliminate cost shifting
define basic benefit plan
pre-empt conflicting state laws
authorize technology assessment and coordinate
technology/resource allocation
Employers/Responsible Health Systems provide incentives
for healthy behavior for example, by discounts, promotions
or education.
4. All Americans have continuous coverage for an ensential
package -- not bare bones -- of health care.
Covers primary, preventive and catastrophic care
Essential package is the same for the poor and nonpoor
S. All Americans who are not poor must pay for coverage on a
continuous basis -- healthy people cannot opt out.
6. Employers remain central
Must offer a plan and offer payroll deduction
May pay for (in part or in total) employee and dependents
Provides incentives to promote healthy behavior
7. Government pays for all the poor -- buys care like other
payors and pays full cost like other payors. Does not
underpay and shift costs to others.
8. Equitable Tax Policy
Tax incentives for the essential package will be extended
to individuals as well as employees.
Any health benefits in excess of the essential package
will be treated as taxable income to employees, or paid
with after-tax dollars for individuals.
Revenues from tax changes help government pay for poor and
stop cost-shifting.
9. Results and trends are measurable and will compare favorably
to other nations on a variety of measures such as costs,
mortality, percent who smoke, height/weight standards, and
qunshot wounds.
Revised
12/3/92
03792 15:03
02028287468
COMM-DW
- 3 -
10. Systemic factors driving costs are slowed.
Responsible Health Systems and other payment approaches
are financially designed to discourage excess doctor
visits, unnecessary hospital and specialist care, and
technology use.
Physicians empowered to practice effective, not defensive,
medicine.
Diminished use of inappropriate and unnecessary care.
Administrative simplicity and uniformity save money and
help control fraud and waste.
Incentives for healthy lifestyle choices pay off.
Revised
12/3/92
TALKING POINTS - ADMINISTRATIVE COSTS
-- One of the major problems in our current health system is the large
amount of administrative waste. This waste is largely due to the
hundreds of different forms and billing procedures throughout the system
and underwriting practices in the small group market.
-- A recent study estimated that of the $281 billion in hospital spending
in 1991, $93.9 billion -- or 33 percent -- will be attributed to
administrative functions.
-- An estimated 14 percent of administrative costs ($13.5 billion a year)
could be saved by moving to a system that: eliminated individual patient
billing and accounting; eliminated selective contract negotiations; and
regulated the distribution of profits to shareholders in for-profit
hospitals.
-- Hospitals alone spent about $7.4 billion on patient accounting and
credit and collections in 1991.
-- A typical US hospital has 50 billing clerks sending and tracking bills.
The equivalent Canadian hospital has three such clerks who are mainly
involved with billing American Visitors.
-- One study shows that 23 percent of US health care spending (over $130
billion) goes to managers, administrators, insurers, lawyers, and other
paper pushers.
-- Between 1970 and 1985, the number of health administrators rose
three times faster than the number of physicians or other health care
workers.
-- In 1985 health insurance overhead alone consumed $106 per capita, as
much as research, public health programs and new health facility
construction combined.
-- For small businesses, for every one dollar they pay in premiums, 25-40
cents goes to cover administrative expenses.
MALPRACTICE REFORM
Arguments Against Major Malpractice Reform:
--Malpractice premiums are not a significant part of the
health care cost problem. They account for less than five per
cent of doctor's costs and less than 1 per cent of hospital
costs.
--The evidence on the costs of defensive medicine is weak
and is complicated by a lack of clear definition as to what
defensive medicine is. The Congressional Research Service
summarized the most recent, comprehensive study, by saying, "the
Harvard study provides some evidence that the current malpractice
tort system has the effect of encouraging additional medical
services, which adds to the cost of the health care system. But
it is not clear from this study whether these services constitute
wasteful defensive medicine or efforts to improve patient
outcomes." (Congressional Research Service, Medical Malpractice,
a report prepared for the Ways and Means Committee, April 26,
1990), p.63.
--But regardless of the cost of defensive medicine, there is
no evidence that changes in the tort system will reduce it or
impact on health care costs. Virtually every state has enacted
tort reforms of the type proposed in this amendment in the last
two decades, but health costs are going up faster than ever.
-Physicians practice defensive medicine because they do not
want to be sued, and it stretches credulity to believe that they
will change their practice patterns because awards are a little
lower or it is a little harder to get into court.
One should put these aggregate costs of medical
practice insurance in perspective, by relating them to
ne total health care costs for the nation. In 1987, when
health care costs were roughly $500 billion, medical
malpractice premiums consumed slightly more than one percent
of our health care dollars (up from .5% of health care
dollars in 1960) 5 True, $4 billion of these premiums
charges were borne by physicians, as compared with $103
billion spent on physicians services. But while malpractice
premiums do represent a somewhat higher share of physician
services, four percent of gross physician revenues is not an
extraordinarily high bill to pay for liability insurance.
These overall figures, however, tend to understate the
acuteness of the problem in specific situations. There is a
great deal of variation in premiums by specialty and by
geographic location. 6 For example, while general
5. Levit, Freeland, National Medical Care Expenditures,
Health Affairs (Winter 1988) 124. See also P. Weiler, Medi-
cal Malpractice: (ALI Background Paper, 1987).
6. Premiums are based on claims history of the geographic
location and the individual specialty. Since certain
specialties are known to lead to many more claims than
others, specialty designation has the greatest impact on
one's insurance premium. For instance, St. Paul's rates
specialties according to eight classes. Family practice,
class four, is indexed at 1.0. Physicians who do no surgery,
including allergists, dermatologists and psychiatrists, are
in class 1A and indexed at .32. On the other hand,
neurosurgical physicians are in class eight, and are indexed
at 3.48. This means that in a given state, if family prac-
titioners are charged $10,000 for malpractice premiums,
psychiatrists are charges $3,200 and neurosurgical
physicians are charges at least $35,000. In major
metropolitan areas, malpractice premiums are quite a bit
higher. For instance, St. Pauls charged class four
physicians $43,900 in California in July of 1989. In Los
5
Medical Malpractice". a background Paper Prepared for
The Pepper Commission. February 21, 1990
1. Hospitals
More limited information is available on insurance costs for other
providers. A 1986 GAO report⁶⁸ estimated that total hospital malpractice
insurance costs increased 57 percent over the 1983-1985 period, from $849
million to $1.336 billion. Total costs include self-insurance costs, premium
costs, and estimates of uninsured losses. The average cost per inpatient day
increased by 85 percent over the period--from $3.02 to $5.60. The higher
percentage increase figure per inpatient day reflected the 13 percent decline
in number of inputient days over the period. The report observed significant
variations in hospital insurance costs by region and hospital size.
RS, "Medical
In 1989, the St. Paul Company reported a recent slight decrease in claims
frequency and a moderation in the growth of claims costs for its hospital
Malpractice;
policyholders. As a result the company reported that it would be seeking
hospital rate decreases averaging 2 percent nationwide in 1989. The company
Ipril, 1990, 12.41
determines individual premiums for its policyholders by the State or territory
where the facility is located, the number of occupied beds and outpatient
visits, the limits of liability selected, the number of years insured under claims
made coverage, the deductible option selected, and experience rating. The
average countrywide acute care bed rates for mature claims-made coverage at
$1 million/$3 million coverage levels would be $1,480 in 1989 when all rate
filings were approved. This compares with $1,516 in 1988. Table 4.6 shows
the company's proposed hospital average bed rates for 1989.
(onye, David, et.al., The Causes of the Medical Malpractice Crisis, P. 1502.
Table 13
National health expenditures aggregate amount and average annual percent change, by type (
expenditure: Selected calendar years 1965-2000
Type of expenditure
2000
1995
1990
1987
1986
1985
1984
1980
1970
:
Amount in billions
t
are Financing
National health expenditures
$1,529.3
$999.1
$647.3
$496 6
$458.2
$422.6
$391.1
$248.1
$750
$
Health services and supplies
1,493.8
972.1
6265
479.3
442.0
407.2
375.4
236.2
69.6
Review. National
Personal health care
1,398.1
900.5
573.5
438.9
4040
371.3
3419
219.7
65.4
Hospital care
621.0
1393.6
250 4
192.6
179.6
1672
; 1563
101.6
280
HealthEx perritures
Physician services
319.6
209.0
132.6
101.4
92.0
82.8
75.4
46.8
143
Dentist services
Summer 1987. V018
89.6
62.2
41.8
32.4
29.6
27.1
24.6
15.4
47
Other professional services
60.4
38.1
22.9
16.2
14.1
12.4
10.9
5.7
16
#1, P. 25
Drugs and medical sundries
102.6
65.4
42.1
32.8
30 6
28.7
26.5
18.8
8.0
Eyeglasses and appliances
24.7
16.7
11.2
8.8
8.2
7.5
7.0
5.1
1.9
Nursing home care
129.0
84.7
54.5
41.6
38.1
35.0
31.7
20 4
4.7
Other personal health care
51.2
30.8
18.0
13.1
11.9
10.8
9.4
5.9
2.1
Program administration and not cost of
private health insurance
57 7
44.4
34.6
25.9
24.5
23.6
22.6
9.2
28
Government public health activities
38.0
27.2
18.5
14.4
13.4
12.3
11.0
7.3
1.4
Research and construction of medical
facilities
35 5
26.9
20.7
17.3
16.3
15.4
15.6
11.9
5.4
Noncommercial research'
20.2
15.3
11.5
9.0
8.2
7.4
6.8
5.4
2.0
Construction
15.3
11.6
9.3
8.3
8.0
8.1
8.9
6.5
3.4
CALCULATION
$ 1.3 billion in malpractice insurance costs divided by $ 167.2
billion in total hospital care expenditures (1985 data) = 0.8 %
62
63
estimated $11.7 billion represented the costs of defensive medicine. For
The Harvard study nevertheless produced results indicating the following:
hospitals, the liability system cost about $2 billion in 1985, relative to an
in 1983, there was some relationship between hospitals' rates of claims and
expenditure for hospital services of $167 billion. The major cost component
the cost per discharge. Hospitals with a higher rate of malpractice claims
was premiums. Defensive hospital expenditures, such as increased admissions,
against them tended to be ones with relatively higher total costs per discharge,
longer stays, and more intensive stays were not considered in the hospital
thus indicating higher intensity of services, that is, more procedures, time
calculation. However, Sloan and Bovbjerg, researchers who have examined the
spent with the patient, etc. It was not clear, however, whether this intensity
malpractice issue, speculate that hospital admissions, stays, and inpatient
of services reflected wasteful defensive medicine or more resources effectively
procedures might have fallen even more than they did had there not been an
being used to prevent patient injury. Most of the etatistical tests applied to
increased threat of malpractice suits."
this research question pointed to a positive relationship between malpractice
claims rates and injury rates. As claims increased, 80 too did injuries. This
For Medicare, the cost of defensive medicine was estimated by the Health
suggested that the litigation threat was not producing fewer adverse events,
Care Financing Administration to be $2.5 billion in fiscal year 1987. They
and was not, therefore, an effective deterrent. Stated differently, had New
derived this estimate using an assumed annual national volume of defensive
York State's tort law provided an effective deterrence, the instances of doctor
medicine of $10.2 billion, an earlier AMA estimate. 100
negligence and patient injuries would have fallen with increased claims.
Again, methodological difficulties led the researchers to say that these findings
The costs of defensive medicine have also been examined at the level of
"are at best weak evidence of no deterrence." 102 They expressed much caution
the individual hospital. The Harvard study of New York physicians and
in concluding that State tort laws are ineffective deterrents to negligent or
hospitals hypothesized that if there is a deterrence effect resulting from the
incompetent medical care.103
threat (real or perceived) of malpractice litigation, then where the threat is
greater, hospitals should respond by providing more services and a higher
In short, the Harvard study provides some evidence that the current
intensity of services (such as increased tests), and taking other actions to
malpractice tort system has the effect of encouraging additional medical
reduce patient adverse events.
services, which adds to the cost of the health care system. But it is not clear
from this study whether these services constitute wasteful defensive medicine
However, a number of factors complicate the testing of such a hypothesis.
or efforts to improve patient outcomes. It is also not clear whether the threat
One factor is that malpractice insurance insulates the physician or hospital
of malpractice litigation serves as an effective deterrence to negligence or
from the full effects of a law suit. The insurer pays the claims, and in
other behaviors which produce adverse patient outcomes.
general, the premiums charged to the physician or hospital do not reflect their
past malpractice claims experience. Another complicating factor may be that
Many doubt that it will ever be possible to obtain an accurate measure
a high claims rate for a hospital may reflect the presence of a concentration
of the true costs of defensive medicine given. all the factors that enter into
of less competent physicians and thus more adverse events in the hospital's
medical decision making. However, it is clear that a large proportion of the
area. Other methodological issues, such as sample size, add to the difficulties
medical profession believes that physicians are altering their practice patterns
of a quantitative approach to this question. 101
in response to malpractice premiums and out of fear of the legal consequences
of their decisions.
98 Sloan, Frank A. and Randall R. Bovbjerg. p. 25. The AMA derived
these estimates from a survey of physicians. The estimate of the cost of
defensive medicine was thus based on physician self-reporting of practice
changes attributed to liability risk. The AMA's researchers also did a separate
calculation of defensive medicine using econometric techniques, and concluded
that for 1984, defensive medicine accounted for $12.1 billion. See Sloan and
Bovjberg. p. 27.
"Tbid.
100 Department of Health and Human Services. Task Force Report. p. 97-
98.
¹⁰²Ibid. p. 10-5, 10-44.
101
d Medical Practice Study. p. 10-2.
103 Ibid. p. 10-46.
CRS "Medical Malpractice" Opri.
Ok
NUMBER OF STATES ENACTING
SPECIFIC TORT REFORMS
(In effect as of April 1990)
Attorney fee Regulation
25
Collateral Source Rule
29
Joint & Several Liability Rule
28
Limits on Recovery
25
Periodic Payment of Damages
31
(Source: Congressional Research Service, "Medical Malpractice",
A report prepared at the request of the House Committee on
Ways and Means, April, 1990, p. 113)
MEDICAL MALPRACTICE
S. 489, "The Ensuing Access Through Medical
Liability Reform Act (Hatch Bill)
Chief Sponsor: Orrin Hatch (R-Ut)
[Senator Hatch has introduced medical liability legislation six times
since 1985. S. 489 is identical to a bill the Senator introduced a year ago
on which no action was taken.]
S. 489 would:
preempt state law and require the application of several
"reforms" in all state and federal court medical
malpractice actions:
*
$250,000 cap on awards for non-economic
damages;
*
limits on contingent fees;
*
mandatory periodic payments of future damages
exceeding $100,000;
*
mandatory offsets of awards for collateral
sources of recovery;
*
uniform statute of limitation that in most cases
would run from the time of injury.
authorize incentive grants to states that implement
alternative systems.
strengthen authority of state licensing and medical
discipline agencies.
S. 1123, "The Health Care Liability Reform and Quality
of Care Improvement Act" (President's Bill)
Chief Sponsors:
Orrin Hatch (R-UT) "By Request"
John Danforth (R-MO) "By Request"
S. 1123 would:
withhold one percent of certain Medicare funds and
two percent of certain Medicaid funds in order to
create a pool of incentive money to be distributed to
states that implement the following medical malpractice
tort "reforms:"
*
$250,000 cap on non-economic damages;
*
mandatory periodic payments of future
damages;
*
mandatory offsets of awards for collateral
sources of recovery;
*
provisions for alternative dispute resolution.
S. 1232, "The Medical Injury Compensation Fairness Act"
(Domenici Bill)
Chief Sponsor: Pete Domenici (R-NM)
S. 1232 would:
remove virtually all malpractice claims from the courts
entirely and resolve them instead through binding
arbitration. (Participants in all Federal health care
programs -- any person accepting or providing health
care paid for in part or entirely with Federal money --
would be required to resolve medical malpractice
disputes through mandatory and binding alternative
dispute resolution. Tax deductions for employer
funded health plans would be disallowed unless all
employees covered by the plan agreed to participate in
the binding arbitration system.)
place limits on awards made by the arbitration system:
*
$250,000 cap on non-economic damages;
*
offset of awards for collateral sources of
recovery;
*
mandatory periodic payment of future damages;
*
punitive damages payable only to the state.
Authorize the Secretary of HHS to determine medical
practice guidelines which then would be deemed to
supply the standard of care for determining liability.
Doctors' malpractice
premiums to fall 25%
Decision affects most Mass. physicians
commissioner, said the decreases. ef-
By Elsa C. Arnett
GLOBE STAFF
fective July 1, were approved be-
cause fewer patients are suing doc-
Malpractice premiums for Mass-
tors, and the sizes of jury awards
achusetts doctors will drop an aver-
and settlements have leveled since
age of 25 percent this year - the
their peak in the mid-1980s.
sharpest decline in 15 years - ac-
"This is a turning point in mal-
cording to a decision issued by the
practice rates, and our hope is that it
state's Division of Insurance yester-
will attract medical business to
day.
Massachusetts," Scott said.
The nearly $50 million reduction
on annual aggregate premiums of
Tracy Gehan. a spokeswoman for
about $180 million will affect rates
the Joint Underwriting Association,
for all physicians whose policies are
a nonprofit medical insurance com-
issued by the Medical Malpractice
pany, said the premium reduction
Joint Underwriting Association of
reflects the trend toward fewer
claims and smaller lawsuit awards.
Massachusetts - which insures 60 to
80 percent of the state's doctors -
"This is good news. Everyone bene-
fits." Gehan said.
and doctors insured by any other
providers licensed by the state. Doc-
Specifically, doctors with "$1 mil-
tors buying policies from insurers
lion/$3 million occurrence policies" -
not licensed by Massachusetts will
which means those insured for up to
not be affected.
$1 million for each claim up to a
Susan K. Scott. acting insurance
MALPRACTICE. Page 16
Obbe
3.2.91
Globe.9.9
Doctors' malpractice premiums to fall 25%
MALPRACTICE
enrolled in this policy.
Yesterday's decision is a victory
Continued from Page 15
Gehan said some doctors will see
for Massachusetts doctors, who have
less than a 25 percent drop in thair
maximum of $3 million dollars a year
argued that high malpractice premi-
premiums, but all will see at least an
urns, combined with high overhead
-Wn see an average 25 percent re-
18 percent decrease, including those,
costs and incomes lower than the na-
duction in their premiums.
who hold only the minimal policy.
tional average, make Massachusetts
For example. an obstetrician who
Meanwhile. doctors who hold "gg
paid $46,234 for such a policy in 1990
an unattractive place to practice
million/$8 million" occurrence poli-
medicine.
- the current average for obstotri-
ciss could 888 decreases of alightly
"It's been extremely difficult for
cians in Massachuretts - will pay w
over 25 parcent.
doctors to survive in Massachuretts.
proximentely $34,400 in 1091. Gehan
acid 81 percent of JUA's doctors are
Generally, doctors' actual mal-
so this is definitely going to make it
practice premiums vary according to
a little envier," said Barry M. Man-
the type of policy purchased. the lov-
uel, president of the Maseachusetts
el of coverage purchased. the physi-
Medical Society.
cirn's specialty risk calculation and
Malpractice premiums increased
whether the physician is eligible for
about 400 percent during the 1980s.
discounts.
according to Manuel However. dur-
An additional component of the
ing the past several years. changes
rate decrease is that physicians are
in tort laws and 2 decline in the num-
being forgiven the fees they pre-
ber of law suits and the amount of
vioualy would have been required to
the awards have led to a much-need-
pay this year based on certain past
ed correction in the costs, asid Paul
claims. known M "daferred premium
Weller, a law professor at Harvard
liability" payments, estimated at
Law School, whose specialities in-
about $20 million.
clude medical realoractice.
18
19
The six-State GAO review cited earlier28 also recorded significant
TABLE 2.5. St. Paul Company: Top Five Allegations for
differences among states both in the level of paid claim severity and in the
Surgery, Failure to Diagnose, and Improper Treatment, 1987-1988
rates of increase over the 1980-1984 period. Variations also occurred among
specialties; these tended to be somewhat erratic because of the small number
of paid claims and the wide range of awards.29
Percent of
allegation
3. Claim Characteristics
Allegation
Number
group
Claims involving diagnostic issues are the most expensive of those filed
against physicians and surgeons insured by St. Paul. These claims accounted
Surgery
for 34 percent of the total costs incurred for claims reported in 1987 and
Postoperative complication
1,474
51.4%
1988. Failure to diagnose cancer was the most frequent allegation of this
Inadvertent act
375
13.1
type. Tables 24 and 2.5 provide additional information on the types of
Postoperative death
258
9.0
allegations made during 1987 and 1988 for physicians insured by St. Paul.
Inappropriate procedure
233
8.1
Delay/complications
164
5.7
Total top five
2,504
87.3
TABLE 2.4. St. Paul Company: Major Allegation
Groups by Frequency, 1987-1988
Failure to diagnose
Cancer
607
21.9
Fracture/dislocation
304
11.0
Percent of
Infection
220
7.9
Percent of
total
Pregnancy problems
217
7.8
total
incurred
Abdominal problem
190
6.9
Group
Number
claims
cost
Total top five
1,538
55.5
Improper treatment
Surgery
2,867
28.8%
25.8%
Birth-related
661
24.7
Failure to diagnose
2,771
27.8
34.4
Drug side effect
288
10.8
Improper treatment
2,672
26.9
29.7
Insufficient therapy
277
10.4
Anesthesia
366
3.7
3.6
Fracture/dislocation
272
102
Other issues
1,271
12.8
6.5
Infection
225
8.4
Total claims
9,947
100.0
100.0
Total top five
1,723
64.5
Source: Physicians' and Surgeons Update. The St. Paul's 1989 Annual
Report to Policyholders. p. 4.
Source: Physicians' and Surgeons Update. The St. Paul's 1989 Annual
Report to Policyholders. p. 4.
4. Physician Demographics
Several studies have attempted to analyze the claims experience of
physicians to determine the characteristics of those with favorable versus
unfavorable experience. A recent study30 of the Florida malpractice database
SoSloan, Frank A., Paula M. Mergenhagen, Bradley Burfield, Randall R.
"GAO, Six State Case Studies, p. 18.
Bovbjerg, and Mahmud Hassen. Medical Malpractice Experience of Physicians,
"Danzon, Medical Malpractice Liability, p. 106.
Predictable or Haphazard? Journal of the American Medical Association, V.
262, no. 23. Dec. 15, 1989. p. 3291-3297.
20
examined the concentration of losses among physicians, predictability of claims
D. Other Providers
experience, and eject of claims experience on physicians' practice decisions
and on actions taken by the state licensing board. For purposes of analysis,
More limited information is available on claims experience for other
physicians were divided into three groups--low risk medical specialist,
nonphysician providers. St. Paul Company reports a slight decrease in claims
obstetrics-anesthesiology and surgical specialties. A review of the data showed
frequency and a moderation in the long-term growth in cost of claims for its
that most payments by insurers involved a comparatively small number of
hospital policyholders. The 1988 rate of 3.4 claims per 100 occupied bads
physicians. Eighty-five percent of those in the low risk medical specialty
represents a continuing decease from the high of 3.8 reported in 1985. The
group did not even have one incident that resulted in payment Gndemnity
decline in claims frequency was accompanied by an increase in claims severity.
payment and/or associated loss expense) between 1975-1980. The figures
The average cost per reported claim, including defense costs and capped at
dropped to 66 percent for the obstetrics-anesthesiology group and 52 percent
$100,000 was $16,472 in 1988 and $13,965 in 1987.
for the surgical specialty group In all three groups, a large share of total
payments involved a comparatively small number of physicians. In the
St. Paul reports that the average paid medical liability claim with losses
medical specialty group, 85 percent of payments were made for 3 percent of
capped at $100,000 and including defense costs was $58,046 in 1988, nearly
physicians. In the obstetrica-anesthesiology group, more than 85 percent of
60 percent higher than the $36,694 recorded in 1985. The average with losses
payments were incurred by 6 percent of physicians. For surgical specialties,
capped at $1 million was $86,170, an increase of 52 percent over the $56,537
three-fourths of the total payment was made on behalf of 7.8 percent of
recorded in 1985.
physicians. Physicians with relatively prestigious credentials (board
certification status, prestige of medical school, and U.S. or Canadian medical
Allegations involving treatment issues accounted for 47 percent of the
school) had no better and for some indicators, worse claims experience.
claims and 58 percent of total incurred costs reported by St. Paul insured
hospitals over the 1987-1988 period. Claims alleging delayed or omitted
The Florida study also noted that physicians with adverse claims
treatment are the most costly among treatment issues. The most frequent
experience were less likely than other physicians to make subsequent major
allegation involves treatment complications with a bad result. Nearly three-
changes in their practice such as quitting or moving to another state.
fourths of the claims that occur in the inpatient surgery area cite treatment
Physicians with very poor claims histories were more likely to have complaints
issues while such issues constitute about one-third of claims in the emergency
filed against them with the State licensing board; however, sanctions imposed
department.
against physicians with either poor or excellent histories were not severe.
Physicians with adverse claims experience over the 1975-1980 period were far
St. Paul also reported some limited information concerning nursing home
more likely to have worse claims experience from incidents arising during
claims. Falls involving residents accounted for 37 percent of all claims and
1981-1983. The authors noted that past experience may predict future claims
35 percent of the total costs of claims occurring in nursing homes insured by
experience. However they caution against linking malpractice experience with
the company.*
the quality of care delivered. For example, those with a higher number of
claims may be taking on more complex cases.
Another study31 of demographic characteristics focused on those whose
standard line insurance was terminated and who subsequently obtained
insurance from surplus line companies. The study covered the 1983-1987
period. It found that certain specialties (such as neurosurgery, plastic surgery,
obstetrics/gvnecology, and orthopedics) were overrepresented in the surplus
line pool. Physicians in the 45-54 year age group were also overrepresented.
On the other hand, the percentage of those who were board certified or
foreign medical graduates was comparable to that in the general population.
s2The St. Paul's Hospital Update. 1989 Annual Report to Policyholders.
Schwartz, William B., and Daniel N. Mendelson. Physicians Who Have
St. Paul, Minnesota. p. 4.
Surplu Lost Their Malpractice Insurance, Their Demographic Characteristics and the
Companies that Insure Them. Journal of the American Medical
Nursing Home Update. The St. Paul's 1989 Annual Report to
Associ.
262, no. 10, Sept. 8, 1989. p. 1335-1341.
Policyholders. St. Paul, Minnesota. p. 2.
01/21/92
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Special Communications
The Cost of Medical Professional Liability
Roger A. Reynolds, PhD; John A. Rizzo, PhD: Martin L. Gonzalez, MS
The high cost of medical professional liability is a source of growing concern
enues of the average self-employed phy-
among policymakers, health care consumers, and the medical profession. While
sician. Applying this percentage to ag-
the concern is widespread, to date there has been little quantitative evidence on
gregate US expenditures on physicians'
the overall economic Impact of the problem. Utilizing data from the American
services ($75.4 billion), estimated total
Medical Association's Socioeconomic Monitoring System, the Impact of medical
premiums paid by physicians were $3.0
billion in 1984.
professional liability (PL) on the cost of physicians' services has been estimated
Although data on premiums are read-
employing two different methods. Both estimates Indicate that the costs of PL are
ily accessible. there has been relatively
substantial. In particular, the two methods yield estimates of the total cost of PL in
little quantitative evidence on the actual
1984 of $13.7 and $12.1 billion, respectively-or approximately 15% of the total
effects of the current PL system on the
expenditures on physicians' services. Furthermore, increased costs associated
other channels through which health
with PL from 1983 to 1984 alone are estimated under the two methods to have
care costs may be affected. A 1983 re-
accounted for 63% and 57%, respectively, of the increase In expenditures on
port by the AMA Committee on Profes-
physicians' services. These costs Include PL Insurance premiums, costs of
sional Liability placed the total costs
practice changes made In response to increasing PL risk, and costs of Incurring
associated with PL at between $15 and
claims that are not covered by PL Insurance.
$40 billion. This suggests that pre-
WAMA 1997;257:2776-2781)
miums account for only a small portion
of PL costs. However, these estimates
necessarily relied to a large degree on
subjective judgment, given the limited
AFTER abating as a problem in the late
age total losses per claim (awards plus
information available then. The lack of
1970s, medical professional liability
expenses) from 1976 to 1981.' More re-
better estimates of the overall costs
(PL) has once again become an impor-
cent data from the American Medical
associated with PL has made it difficult
tant policy concern. Recent trends indi-
Assurance Co suggest that increases in
to gauge the actual scope of the prob-
cate that the incidence of malpractice
the severity of losses have accelerated.
lem. In this article, two distinct meth-
claims, settlements, and PL insurance
From 1981 to 1983 alone, the average
ods are employed to develop estimates
premiums are increasing,
paid loss increased by 70.2% (from
of the costs associated with PL. The
The average physician's risk of incur-
$42 to $72243)." Figures reported
first approach uses direct data on PL
ring 8 medical malpractice claim has
by Jury Verdict Research of Solon,
insurance premiums, practice changes
increased nearly threefold since 1980.
Ohio, indicate that malpractice awards
physicians have made in response to
Information from the American Medical
rose at an average annual rate of 24.7%
increased claims risk, and other costs of
Association's (AMA's) Socioeconomic
during the period 1979 to 1983.'
incurring malpractice claims to derive
Monitoring System (SMS) survey con-
A central aspect of the concern pre-
estimates of the major components of
ducted in the last quarter of 1984 indi-
cipitated by medical PL trends is their
PL costs. The second approach employs
cates the number of claims filed against
impact on the cost of physicians' ser-
a multivariate analysis to infer costs
physicians increased from an average
vices. Increasing claims, settlements,
from the impact of variations in PL
annual rate of 3.0 per 100 physicians
and awards affect health care costs
insurance premiums on physicians' fees
before 1980, to 7.8 from 1980 to 1983, and
through several channels. These in-
and utilization rates for a range of proce-
clude (1) higher PL insurance premi-
dures.
See also PP 2801 and 2807.
ums; (2) changes in practice patterns
The similarity of estimates derived
designed to reduce PL risks, but that
from the two methods contributes to
9.8 in 1984. In addition to the incidence
ultimately also affect fees and utili-
our confidence about the general order
of claims, awards and other losses per
zation levels for physicians' services;
of magnitude of the PL effect on the cost
I
claim have increased. The St Paul Fire
and (3) costs associated with incur-
of physicians' services. In particular,
and Marine Insurance Co noted a 63.5%
ring claims that are excluded from PL
the two methods yield estimates indi-
increase (from 89998 to $16343) in aver-
premiums.
cating that PL costs were responsible
From the Department of Medical Fractice Econom-
Professional liability insurance pre-
for $13.7 and $12.1 billion. respectively,
ICS. Center for Health Policy Research, American Medi-
miums are the most readily quantified of
of the total expenditures on physicians'
cal Association, Chicago
the cost elements. After a mcderate
services of $75.4 billion in 1984.
The authors are respectively Department Director.
Research Economist. and Staff Associate in the De-
rate of growth of 4.0% from 1976 to 1982,
The next section describes the SMS
partment of Medical Practice Economics. Center for
following the last malpractice crisis,
surveys that serve as the principal
Health Policy Research. American Medical Associa-
tion. The views and opinions expressed in this article
premiums are rising rapidly again.
sources of data employed in the analy-
are those of the authors and do not necessanly reflact
From 1982 to 1983, the average pre-
sis. This is followed by a presentation of
the official policy of the American Medical Association.
miums paid by physicians increased by
the methods and results. We conclude
Reprint requests to Department of Medical Practice
22.4% from $5800 to $7100. In 1984,
with a discussion of the limitations of
Economics. Center for Health Policy Research. Amen-
can Medical Association. 535 N Dearborn St. Chicago,
premiums rose by another 18.3% to an
our results and their policy implica-
IL 60610 (Dr Reynolds).
average of $8400-or 4.0% of gross rev-
tions.
2778
JAMA. May 22/29. 1987-Vol 257, No. 20
Medical Professional Liability-Reynolds et al
01/21/92
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SMS SURVEY DATA
sociated with PL under the first method
Second, the analysis under both
Information from SMS physician sur-
below. The fourth quarter 1984 survey
methods was necessarily limited to self-
veys conducted in the fourth quarter of
included 1202 completed interviews and
employed physicians because gross rev-
1984 and second quarter of 1985 pro-
had a 65.1% response rate.
enue and practice expense information
vided the principal data used in our
The second quarter 1985 survey in-
was not collected in the SMS surveys
analysis. (Data from other SMS surveys
cluded questions on physician income
from employee physicians. However,
and other sources were used in an ancil-
and expenses, including malpractice in-
revenues attributable to employee phy-
lary role.) The SMS is a survey program
surance premiums, in 1984, as well as
sicians in the SMS sample population
conducted by the AMA to provide fre-
questions on fees and recent utilization
(other than hospital employees) were
quent and timely information on major
levels for selected procedures. These
represented in aggregate expenditures
socioeconomic characteristics of physi-
questions are included in the SMS sur-
on physicians' services as defined in the
clans' practices and physician responses
vey conducted in the second quarter of
national health expenditure accounts."
to important changes in the medical
each year, coinciding with tax filing
In our analysis, we made the assump-
marketplace. Samples for each survey
time, to ensure physicians had com-
tion that the relative impact of PL on
are drawn from the AMA Physician
pleted their accounting for the previous
employee physician revenues reflected
Masterfile in a manner representative of
year and were able to provide the most
in aggregate expenditure figures was
the population of nonfederal patient
accurate information possible on their
similar to that of self-employed physi-
care physicians, excluding residents, in
income and practice expenses. Informa-
cians. (Appendix tables, referred to be-
the United States. Surveys are con-
tion from this survey was used to esti-
low, are filed with NAPS, No. 04492.)
ducted by telephone. Advance informa-
mate costs under our second method.
tion is sent to sample physicians regard-
The survey included 4040 completed
Method 1
ing the content of the survey 50 that
interviews and had a 62.0% response
This approach directly estimates the
physicians may review their records on
rate. Further details on the SMS survey
increases in several major components
appropriate items before being inter-
program design and methods are de-
of PL costs in 1984. While information
viewed.
scribed elsewhere.'
on premium levels has been collected on
The fourth quarter 1984 survey in-
an annual basis by the SMS, the fourth
cluded questions asking physicians how
COST ESTIMATE METHODS
quarter 1984 SMS survey is the only
many claims had been filed against them
AND RESULTS
source of information on the magnitude
in their career, in the last five years, and
Although the available data made it
of practice changes and other costs of
in the last year. Responses to these
possible to directly estimate aggregate
incurring claims.
questions, coupled with AMA Master-
premiums, costs associated with prac-
Practice Changes.-Table 1 indi-
file data on the years each physician had
tice changes and other costs of incurring
cates the widespread and expanding
been in practice, provided the basis for
claims were more difficult to quantify.
extent of selected practice changes
computing the annual claims rates re-
Given the need to rely on some assump-
made in response to growing PL risks.
ported above. Physicians were also
tions in deriving estimates of those cost
The first column indicates responses to
asked a series of questions as to
components, the use of two different
questions in the third quarter 1988 SMS
whether they were maintaining more
methods served as a check on their
survey that asked whether or not physi-
detailed records, prescribing more
reliability.
cians had recently increased their time
diagnostic tests and treatment proce-
Ultimately, our purpose was to assess
spent with patients, record keeping,
dures, spending more time with pa-
the impact of increasing PL risk on
and prescribing of tests and treatment
tients, and having more follow-up visits
aggregate expenditures on physicians'
procedures in response to increased
with patients in the last 12 months in
services. Two conceptual points should
risks. Seventy percent of physicians re-
response to the growth in malpractice
be noted in this regard. First, in extrap-
ported having made at least one of these
claims. If they responded affirmatively
olating from the impact of PL on the
changes. Increased record keeping was
to any of these items, they were asked to
average physician to the aggregate
the most common change identified.
quantify the change in percentage
level. use was made of the identity that
Unfortunately, the magnitude of the
terms. Some of these questions were
aggregate expenditures on physicians
changes was not obtained.
skipped for physicians with practices
services equals the sum of revenues
The second two columns of Table 1
for which the questions were deemed
across all physicians' practices. Since
show the percent of physicians making
inapplicable. Since the wording of these
resistance among patients to higher
practice changes and the magnitude of
questions referred only to changes
fees may prevent physicians from pass-
these changes (expressed in percentage
made in response to the growth in
ing on the full amount of their cost
terms) in 1984 in response to continuing
claims, responses included both
increases, such increases may not result
increases in risk. This information was
changes that might be deemed to have
in correspondingly higher average phy-
collected in the fourth quarter 1984 SMS
medical benefit and those that were
sician revenues. Assuming that cost in-
survey. The results indicate that 41.8%
3
made merely to provide additional
creases are fully reflected in higher
of physicians either made additional
validation or to serve as a basis for
physician revenues, therefore, may re-
changes in their practices or adopted
subsequent evaluation of medical judg-
sult in overstatement of the impact of
changes for the first time in 1984. In
ments. Finally, physicians who re-
PL costs on expenditures on physicians'
terms of magnitude of change, the aver-
ported having claims filed against them
services. Our first method had this limi-
age physician increased record keeping
in the last five years were asked about
tation since it attempted to infer the
costs by 2.9%, prescribed 3.2% more
days they had lost from their practice
impact on expenditures from estimates
tests and treatment procedures, in-
and attorney fees related to their claims
of costs faced by physicians attributable
creased follow-up visits by 2.6%, and
but not covered by their insurance. In-
to PL; our second method avoided this
spent 2.4% more time with patients.
formation from the questions on prac-
problem since it developed estimates of
Other information in SMS surveys on
tice changes and costs to physicians of
changes in fees and utilization levels
fees, total amount of time practiced,
settling claims provided the basis for
that can be directly related to revenue
earnings, expenses, and revenues made
estimating components of the costs as-
changes associated with PL risk.
it possible to estimate the costs per
JAMA. May 22/29, 1987-Vol 257, No. 20
Medical Professional Liability-Reynolds et al
2777
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Table 1.-Practice Changes in Response to Increasing Professional Liability Risk*
revenues. In the aggregate, this indi-
% of Physicians
cates that practice changes made in
Making Change
Average % Change
Cost of Change
response to PL risk accounted for $10.6
per Physician
per Physician
Activity
Prior to 1984
billion of expenditures on physicians'
1984+
in 19841*
in 1984, stt
services in 1984.
increased record keeping
66.9
31.0
2.0
900
Prescription of more tests
Other Costs of Incurring Claims.-
or treatment procedures
43.0
20.0
3.2
$
For physicians incurring PL claims, in-
Increased time apent with patients
35.9
17.0
24
1800
surance does not always cover all of the
increased follow-up visits
NAI
17.0
2.6
1900
associated costs. Among such costs are
% of physicians with at least
those relating to time lost from work
one listed practice change
70.0
41.8
and hiring an attorney in addition to
Average Total Cost per Physician
that provided by the insurance com-
of Listed Practice Changes in 1984
4600
pany. According to SMS information,
*Source: third Quarter 1983 and fourth quarter 1984 American Medical Associations Socioeconomic Monitoring
the average physician with at least one
System surveys.
claim in the last five years lost 2.7 days
*Figures reflect only new or increased practice changes in 1884. Physicians making practice changes and the
per claim from practice and paid $725
amount of these changes made prior to 1884 in response to liability risks are not reflected in these figures.
*Calculations include zeros for physicians who did not make any practice change in 1984.
per claim in outside attorney fees. Given
SLack of data on the average cost of an additional test or treatment procedure make M impossible to fill in this tem.
the average incidence of claims and re-
INA Indicates not available.
source cost of running a medical prac-
tice, these costs are estimated to have
amounted to $270 per physician or ap-
physician associated with each type of
some cost saving, they reflect an ad-
proximately $0.1 billion in the aggregate
practice change, except the prescrip-
verse consequence of increasing PL risk
in 1984. (Details of the calculation of
tion of additional tests and treatment
by restricting access to care.
these costs are given in NAPS appendix
procedures. (The detailed calculation of
Although the available information
Tables A4 and A5.)
these costs is shown in the NAPS ap-
has made it possible to estimate the
Additional costs may result from the
pendix tables A1 to A3.) The total cost of
incremental cost of practice changes in
potential damage to reputations and
the selected practice changes consid-
1984, it is still impossible to estimate the
dysfunction among physicians when
ered was $4600 per physician in 1984.
total cost of practice changes. including
claims are filed against them. These
These are costs attributable to practice
those adopted before 1984, without re-
costs cannot be easily measured. How-
changes in 1984 alone and do not include
sorting to some assumption. Two con-
ever, their importance is reflected in
costs of practice changes effected before
siderations regarding the relationship
changes made by physicians in their
1984, relating to increasing levels of
between practice changes and insur-
practices to reduce the probability of
malpractice claims risk.
ance premiums seem to be useful in
malpractice claims.
Two tentative implications can be
developing such an assumption. First,
Total Costs.-Given the $3.0 billion
drawn at this point. First, the cost of
the marginal effect of taking additional
aggregate level of premiums and the
practice changes was more than three
measures to reduce the risk of incurring
estimates of $10.6 billion attributable to
times the $1800 increase in average PL
a claim is likely to diminish as total
practice changes made to reduce PL
insurance premiums in 1984. This sug-
expenditures on such measures in-
risks and $0.1 billion in other costs of
gests that focusing on premiums alone
crease. This will likely cause the rate of
incurring claims, aggregate PL costs
considerably underestimates the eco-
practice change costs to diminish rela-
are estimated to have been $13.7 billion
nomic effects of PL trends. Second, the
tive to the rate of premium increases.
in 1984. This represents 18.2% of total
combined cost of higher premiums and
The ratio of incremental costs of prac-
expenditures on physicians' services in
practice changes of $5900 per physician
tice changes to premiums would, there-
that year.
represents 63% of the increase in aver-
fore, be less than the ratio of total cost of
age total practice revenues of physicians
practice changes employed to reduce
Method 2
of $9400 In 1984. This indicates that
risks to insurance premiums. The other
The second estimate of the cost of
increasing PL risk plays an important
consideration is that increases in pre-
physicians' services attributable to PL
role in contributing to recent increases
miums are likely to have been associ-
was developed from an analysis of the
in national expenditures on physicians'
ated with changes in the malpractice
impact of PL risk on physician fees and
services.
litigation environment that increase the
utilization rates for a range of repre-
Since our results only reflect a limited
effectiveness of devoting resources to
sentative services and procedures.
set of practice changes that add to the
reducing claims. This would cause
While the first approach provided esti-
cost of physicians' services, our figures
change expenditures on risk-reducing
mates of the economic effect of PL on
may underestimate the total impact of
practice changes to increase at a greater
the cost of physicians' services, this
PL in placing upward pressure on
rate than premiums.
approach provides estimates that are
health care costs. Conversely, increased
If these two effects approximately
more directly related to expenditures.
risks may cause physicians to curtail
offset each other, the ratio of the incre-
The effects of PL risk on the fee and
some of the services they provide, and
ment in practice change costs to the
utilization level for a given service is
the higher fees resulting from passing
increase in premiums equals the ratio of
derived from the impact of the risk on
on some of the costs of PL may discour-
total expenditures on defensive medi-
both patient demand and physician sup-
age patients from utilizing as many
cine to total premiums. Given the aver-
ply. The quantity of a service demanded
services as they might otherwise. The
age premium paid by self-employed
at any fee level will be increased to the
reductions in utilization through these
physicians in 1984 of $8400, this implies
extent that more of the service is re-
means will provide some offset to cost
that the total cost of practice changes
quired by physicians to curtail their
increases due to higher premiums and
made through 1984 in an effort to reduce
increased risks. Fees that physicians
other practice changes. However, while
the risk of malpractice claims was
require to supply each quantity of a
utilization reductions may produce
$29 700, or 14.1% of average physician
service will increase with PL insurance
2778
JAMA, May 22/29. 1987-Vol 257, No. 20
Medical Professional Liability-Reynolds et al
01/21/92
11:38
71832
LOC/C/LCRR
006/008
premiums, costs of additional resources
Table 2.-Elfects of Professional Liability Premiums on Physician Fee and Utilization Levels
employed to reduce risk, and other costs
associated with potential claims that
% Change in Fee
or Utilization per
may arise from providing the service.
Procedure
Costficient
SE
% Change in Premiums*
Both the supply and demand effects of
Fees
increased risks will tend to increase
Established patient office visit
0.85
0.17t
0.272
fees. However, they will have opposite
New patient office visit
1.16
0.37+
0.212
influences on utilization: increased de-
Follow-up hospital visit
1.18
0.22T
0.340
mand will tend to increase use of the
Electrocardiogram
1.48
0.46f
0.205
service, while higher costs will discour-
Obstatric care. normal delivery
22.24
4.531
0.427
age utilization. This causes the net ef-
Hysterectomy
25.38
5.74f
0.349
fect on utilization to be ambiguous. The
Hemis repair
3.11
5.88
0.089
impact of higher costs on utilization
Cholecystectomy
-2.36
8.60
-0.033
subsumes the possibility that physi-
Monthly utilization
Established patient office visit
-68.41
28.97+
-0.171
clans may cease providing some types of
New patient office visit
-13.81
7.334
-0.209
services altogether. While the first
Follow-up hospital visit
-45.15
20.84t
-0.297
method only captured the effects of PL
Electrocardlogram
6.06
34.99
0.073
causing utilization to increase, method 2
Obstetric care, normal delivery
1.48
1.31
0.168
captures the net effect of both positive
Hysterectomy
-0.48
0.63
-0.275
and negative influences of PL on utiliza-
tion.
Hemia repair
-0.51
1.12
-0.224
Cholecystectomy
0.70
0.95
0.217
Regression analysis was employed to
distinguish the effects of increased PL
"The premium levels employed in the computation are the averages for the specialties used in estimating the
risk on fees and utilization from the
premium effect for each procedure. For patient visits. these Include all specialities except radiology, psychiatry,
effects of other costs and factors affect-
pathology, and anesthesiology: for electrocardiograms, general-tarrily practice and Internal medicine: for obstatric
care and hysterectomies. obatetrics-gynecology; and for hernis repairs and cholecystectomies, general surgery.
ing the demand facing physicians.
findicates regression coeficient is different from o at the .01 significance level.
Rather than estimating structural
$indicates regression coeficient in different from 0 at the .10 significance level.
equations specifying the number of ser-
vices demanded at different fees and the
fee levels required to induce physicians
in NAPS appendix Table A6.)
to premium increases are obstetrical
to supply different quantities of various
The analysis was performed with
care, hysterectomies, and follow-up
services, the equations we estimated
data from the second quarter 1984 SMS
hospital visits. These findings appear
are "reduced form" equations. These
survey. Fee and utilization information
sensible to the extent that obstetric and
reflect the solution by physicians of the
available from the survey was limited
gynecologic services precipitate a dis-
supply and demand equations for the
for each procedure to physicians in spe-
proportionate share of malpractice
optimal fee and utilization levels. The
cialties that regularly perform the pro-
claims, and most incidents resulting in
reduced form equations generally in-
cedure (see footnote in Table 2). As
malpractice claims occur in the hospital.
clude all variables that affect supply and
demonstrated below, the procedures
The results may also reflect that there
demand, including PL risk
and services included in the analysis
are greater opportunities available to
To quantify PL risk for purposes of
directly account for 70% of expenditures
make practice changes that will reduce
the regression analysis, it is assumed
on physicians' services.
risks associated with these services
that PL premiums act as a signal to
The effects of PL on fees and utiliza-
than are available for other services.
physicians of their exposure to liability
tion derived from the regressions are
With respect to utilization patterns,
risk. Changes in fees and utilization in
shown in Table 2. (The full regression
all three types of visits considered de-
response to premium increases, there-
results and sample statistics are given
crease with PL risk. This is indicative of
fore, reflect the direct effect of premium
in NAPS appendix Tables A7 to A22.)
the discouraging impact that higher
costs, as well as the practice changes in
The first two columns report the re-
fees can generally be expected to gener-
response to PL risk and other costs of
gression coefficient of premiums and
ate on relatively elective services. such
incurring claims. Since actual pre-
its SE. The regression coefficient di-
as patient visits. This apparently domi-
miums paid by physicians are an imper-
rectly indicates the estimated effect of
nates any increase in visits that physi-
fect measure of their exposure to risk,
a $1000 change in PL insurance pre-
cians may specifically request in an ef-
an errors-in-variables problem exists
miums on the average fee or annual
fort to reduce risks. By contrast, the
that would cause biased regression re-
utilization for each procedure. The last
relatively small positive elasticity for
sults if actual premiums were directly
column provides an estimate of the per-
electrocardiogram utilization suggests
used in estimating the regression equa-
centage change in the fee or utiliza-
that the negative influence of higher
tions. A standard procedure of using
tion level per percentage change in
fees and the incentive to increase tests
"instrumental variables" estimates of
premiums. This measure, known as an
to reduce risk appear to have approx-
premiums in place of actual premiums
elasticity, has the advantage over the
imately offsetting impacts. Although
was used to avoid blases in estimating
regression coefficients of providing 2
the absolute magnitudes of the surgical
the fee and utilization equations.' Varia-
standardized basis for comparing re-
utilization elasticities are similar to
bles used in developing instrumental
sults across procedures.
those for visits, the direction of the
variable estimates of premiums and in
The results indicate that fees are
premium effect differs across proce-
estimating the reduced form fee and
positively related to PL insurance pre-
dures.
utilization equations are similar to those
miums for all procedures examined ex-
The relatively large SEs of the pre-
that have been employed in other stud-
cept cholecystectomies (for which, in
mium coefficient in the electrocar-
ies of premiums, physician fees, and
any event, the regression coefficient is
diogram and surgical procedure utiliza-
utilization patterns. (Descriptions
not statistically significant). The ser-
tion equations indicates imprecise
and sources of these variables are given
vices for which fees are most sensitive
coefficient estimates. This suggests
JAMA, May 22/29, 1987-Vol No. 20
Medical Professional Liability-Reynolds et al
2779
Washiton Doot, mednesday, Feb. Feb.3,1993 1993
'Defensive Medicine' Changes
Could Save Billions, Study Says
By Spencer Rich
would rise to about $15 billion in 1998,
Washington Post Staff Writer
measured in 1991 dollars, for an eight-year
total of $99 billion.
The nation's health care system could
Rubin said it might be realistic to expect
save $36 billion or more over the next five
that $36 billion of this could be saved over
years by reducing or eliminating the prac-
the next five years. Among the possible
tice of "defensive medicine,' according to a
strategies cited in the study: finding ways to
study released yesterday.
resolve malpractice disputes without going
"A billion here, a billion there and pretty
to trial, such as creating administrative
soon you're talking about real money, as
Senator Everett McKinley Dirksen once
boards to make preliminary recommenda-
said," said Raymond Scalletar, chairman of
tions on settlement of lawsuits; tightening
the board of the American Medical Asso-
laws to block excessive damage compensa-
ciation, at a news conference here.
3
tion when cases go to court; and granting
The $36 billion figure is a middle-range
physicians and hospitals immunity from
estimate and under different assumptions
suits if they follow government-set guide-
could reach $76 billion, said Robert J. Rubin,
lines for appropriate treatment.
former assistant secretary of health and hu-
Using broader assumptions, Rubin and
man services and now president of Lewin-
Mendelson calculated that defensive medicine
VHI, a health policy analysis firm that pre-
might cost $148 billion in 1991-98. Five-year
pared the study.
savings could be as high as $76 billion if doc-
The study was released by the National
tors and hospitals were totally freed of mal-
Medical Liability Reform Coalition, consisting
practice liability and there was a "no-fault"
of more than 60 business, health and insur-
system similar to workers' compensation.
ance groups including the AMA. It was un-
Roxanne Barton Conlin, president of the
dertaken to determine the real cost of defen-
Association of Trial Lawyers of America,
sive medicine, which Rubin defined as care
called the potential annual savings "a drop in
that does not really benefit patients but "is
the health care bucket that would be wiped
provided solely to avoid malpractice claims,"
out by cost increases in two months" at a
such as many clinical tests or X-rays given
time when total health costs exceed $800
primarily to insulate doctors from later accu-
billion a year.
sations of insufficient care in diagnosis.
Paraphrasing a 1992 Congressional Bud-
Rubin and associate Daniel Mendelson
get Office statement, she said: "Much of what
said the probable real cost of defensive
is called defensive medicine would probably
medicine alone-not including $9 billion
be provided to patients in the absence of legal
annually in malpractice insurance premi-
concerns. So-called defensive care improves
ums-was about $10 billion in 1991 and
the accuracy of medical diagnosis."