on the services and population the new program would cover. Contributions would be increased annually to reflect general, not health care, inflation.

Although the Commission does not assign administrative responsibility for the new program to the Medicare program, operation in conjunction with or as part of that program is consistent with the Commission's intent. The Commission would allow the new public plan, like Medicare, to rely on private insurers to administer claims and, under contracts, to offer managed care options. It would further allow states to administer the new public plan, at their option and subject to federal rules. Federal rules would ensure administration consistent with the Commission's intent that the program guarantee coverage for specified benefits to all persons not covered through employment and payment to providers at federally specified rates.

To reflect the Commission's commitment to severing the tie between welfare and public health insurance coverage, the Commission recommends that all aspects of any state administration be conducted through an agency which is unconnected to the state's welfare or Medicaid departments. Although the Commission does not formally address further aspects of administration, its commitment to universal coverage and its cost estimates imply that the new public program would be administered to ensure participation by all persons eligible.

The Commission recommends that the new program pay providers Medicare rates, as appropriate, or, more broadly, rates determined according to Medicare rules (including the prospective payment system for hospitals and the new resource-based relative value scale, subject to volume performance standards and limits. on balance billing, for physicians' services.) 6 This approach reflects the Commission's intent that public programs for low-income people and others (a) pay appropriately for service, both to ensure access for the population served and to avoid shifting costs to the privately insured; and (b) contain cost increases over time (as discussed below).

Benefits for workers and nonworkers would be similar. The main exception is that the public plan would include early, periodic screening, diagnosis, and treatment services (EPSDT) for children, consistent with coverage under the current Medicaid program. Workers whose employers choose coverage through the public plan would also receive these benefits. Privately insured workers could obtain the coverage of these services through the public plan at cost (or at a rate, subsidized as above, for families with incomes under at least twice the poverty level).

Minimum Benefit Package

The Commission believes that universal coverage for health care that ensures people access to necessary care requires establishing a minimum standard for coverage. That standard would establish basic protection for the currently uninsured and underinsured and would preserve protection for the currently insured into the future. The Commission recommends that a federally specified standard benefit package supersede current state laws requiring insurers to offer specific benefits; that employer-based coverage through traditional or managed care plans provide at least the minimum standard (although employers are not precluded from offering more generous plans, as most do now); and that the same minimum package (with modest modifications) be provided to nonworkers and others through the public plan.7

The recommended minimum benefit package covers:

Hospital care, surgical and other inpatient physicians' services, physician office visits, diagnostic tests, and limited mental health services (45 inpatient days and 25 outpatient visits). 8. 9

• Preventive services, including prenatal care, wellchild care, mammograms, pap smears, colorectal and prostate cancer screening procedures and other preventive services that evidence shows are effective relative to costs. 10. 11 (One year after the effective date of the Commission plan, the Office of Technology Assessment shall report to the Secretary of Health and Human Services on an assessment of the cost-effectiveness of prescription drug coverage for inclusion as a preventive service.)

Individuals would be required to contribute to the costs of coverage as follows:

• Individuals covered through employment pay a maximum of 20 percent of the premium for private coverage or a contribution to the public plan equivalent to 20 percent of the combined employer-employee contribution and paid as a percentage of wages.

Individuals not covered through employment pay the full costs of coverage in the public plan, subject to ability to pay.

• Cost sharing for basic services includes a deductible of $250 for an individual and $500 for a family. For all services except mental health outpatient services and preventive care services, individuals pay 20 percent coinsurance. Outpatient mental health services are subject to 50 percent copayment. There are no deductibles or coinsurance on preventive services.

• Once individuals' or families' cost sharing for covered services reaches $3,000, individuals make no further out-of-pocket payments for covered services.

• Premiums and cost sharing requirements are subsidized for low-income people. People with incomes below 100 percent of the federal poverty level pay no premiums or coinsurance. Premiums and cost sharing are also subsidized, on a sliding scale, for people with incomes up to at least 200 percent of poverty. For this population, premiums may not exceed 3 percent of income.

This package responds to a number of the Commission's concerns.

Parity with Employer Coverage-A job-based approach to universal coverage would impose requirements on employers to cover employees not now covered. The Commission aims to provide coverage similar to, but somewhat less generous than, most employers who provide coverage now offer.

The 20 percent maximum on employee contributions to premiums is less generous than the practices of most employers (see Table 2-1). In 1987, the majority of all firms required less than 20 percent payment from employees toward premiums for single and family coverage.

preventive exams. Well-child care (includes routine exams, tests, and immunizations).

N/A = not available.

No

N/A

64%

SOURCE: Pepper Commission staff analysis based on Small Business Administration, The State of Small Business: A Report of the President, 1987, Washington D.C., U.S. GPO and Hay/Huggins Benefits Report, 1989 Prevalence of Practice and Executive Summary, Hay Group, 1989.

Finally, the Commission's recommended cost sharing requirements and its $3,000 cap on out-of-pocket spending are more extensive than job-based plans typically require, except that they eliminate cost sharing for preventive services (see Table 2-3).

Universal Standard Appropriate to Needs of the Uninsured-The Commission is concerned that the minimum benefit package be both a minimum standard for all Americans and appropriate to the needs of the uninsured, who are disproportionately low income. Primary care services are critical to the uninsured because, without coverage, these services are particularly difficult to obtain. Coverage of primary care reduces financial barriers that lead to inappropriate use of high-cost providers and delays in seeking care. Hospital coverage is standard practice and essential to ensure protection against financial catastrophe and to avoid shifting costs from some patients to others.

Cost Sharing Requirements-The deductibles and the hospital coinsurance in the package are higher than in typical plans provided by firms now offering health insurance. The Commission believes that individuals should share in the responsibility of paying for health services and that cost sharing makes the consumer more cost conscious when purchasing care. But the Commission intends that cost sharing should not become a barrier to health care for people who could not afford it. For people with low incomes even small contributions can be a barrier to necessary care. Therefore, as described above, the Commission recommends that low-income people whose income is up to at least 200 percent of poverty be provided with subsidies for premiums, deductibles, and coinsurance requirements. There is some evidence that a family's income must be 250 percent of poverty before discretionary income is available to spend on health care.

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Preventive Services-The Commission believes that preventive services are critical to adequate coverage. Preventive services have historically been excluded from insurance policies because their use does not meet the traditional definition of an insurable event. Nevertheless, recent surveys indicate that coverage of preventive services in health insurance plans may be increasing. 14 The Commission believes the specific preventive benefits included and the commitment to include others-as they are demonstrated to be costeffective-will prevent or delay the onset of disease and detect illness early enough for effective treatment. This could result in reduced mortality and improved quality of life, and could also produce savings by averting the costs of expensive treatments.

Because cost sharing is associated with reduced use of service, and because the Commission believes that the use of preventive services should be encouraged, deductibles and coinsurance would not apply to these services.

Role of Medicaid-The public plan would replace the mandatory Medicaid package. The Commission intends that current Medicaid beneficiaries would not be made worse off by the creation of the new public program. Many states currently offer a variety of optional services including prescription drugs (provided in all states), dental services, and optional mental health services to their Medicaid populations.15 The Commission recommends that a residual Medicaid program be maintained which provides these benefits to Medicaid beneficiaries at current federal/state matching

rates.

Putting Universal Coverage into Effect

The Commission recognizes both the urgency of ensuring universal health care coverage and the time and planning needed to make universal coverage effective and avoid undue disruption. It recommends implementation in five phases, each lasting a year. The phases are sequenced so that the most urgent problems and reforms needed to make the system work are dealt with first.

Year One-The Commission believes that the nation cannot afford to delay adequate protection for pregnant women and children. The Commission recommends that universal coverage begin by ensuring that all uninsured pregnant women and children up to age six in nonworking families or families of workers whose employers do not provide health insurance can enroll in the new federal public plan. That plan would also absorb pregnant women and children now served by the Medicaid program. Reimbursement rates would be

improved, relative to current Medicaid rates, based on Medicare payment principles.

This step would not only provide critical coverage; it would also begin to build the new federal program that is a major component of the universal system.

At the same time, the Commission recommends that the reforms needed to build the private insurance component of that system-reforms of the private insurance market-be initiated. This step would ensure access to health insurance by all employers, regardless of industry, size, or age or health status of their work force.

Year Two-In the second year the Commission recommends extending access to the federal program (and replacing Medicaid) for children to age 18, and providing the subsidies to small employers (and, for premium shares and cost sharing, to their low-income employees) to facilitate the purchase of private health insurance in the reformed marketplace.

Specifically, unincorporated businesses would be allowed to deduct the full cost of health insurance from taxable income. As a way of further easing what may be a difficult transition, firms with fewer than 25 employees and average payrolls below $18,000 per worker (whether or not they now offer insurance) would receive a 40 percent refundable tax credit toward the purchase of coverage that satisfies the minimum benefit standard. Firms could make use of this credit during the five-year period following its first availability. After the credit ends, firms that are at extreme financial risk and that employ 10 or fewer workers could purchase coverage from the public plan at an affordable rate.

Also in year two, reimbursement rates in the new federal plan would be set according to Medicare principles, as would rates for adults remaining in the Medicaid program.

Year Three-When firms have had two years to plan and adjust, the Commission recommends that all firms with more than 100 employees be required to provide health insurance coverage to their employees (fulland part-time) and their nonworking family members, by purchasing private coverage or contributing to the public plan on their workers' behalf.

Year Four-By the fourth year of the program, the Commission believes it would be necessary to assess the adequacy of efforts to ensure universal coverage for employees and their families in businesses with 25 to 100 workers. At enactment, the number of workers and dependents without health insurance from their employers who are attached to firms of less than 100

employees would be estimated. In year four, the Commission recommends that it be determined whether 80 percent of workers and dependents in firms with 25 to 100 employees who lacked coverage from their employers at the outset had obtained it.

Current data indicate that about 6 million workers are employed by firms with 25 to 100 employees but are either without any health insurance or obtained coverage from a source other than their own employer. 16 These data indicate that the coverage target for year four unadjusted for changes in the target employer population would be 4.8 million workers (80) percent of 6 million) plus their dependents not previously insured by their employers.

The Commission recommends that the Secretary of Health and Human Services be required to determine whether the target has been met.

If the coverage target has been met, the Secretary would then be required to report to Congress on how to ensure that workers in these small firms who remained uninsured could be provided coverage.

The Commission intends that this process leave no one without coverage. To guard against gaps, the Commission recommends that Congress provide expedited procedures under which to consider the Secretary's recommendations.

The Commission also intends that the Secretary continue to monitor the insurance status of this group and report periodically on it to Congress, to ensure that the combination of mechanisms still provides universal coverage.

If the Secretary finds that the target has not been met, employers with 25 to 100 employees would become subject to the same requirements as larger firms.

Year Five-In the fifth year of the program, the Commission recommends that the Secretary assess the adequacy of coverage in firms with fewer than 25 workers. Calculations on coverage, determinations by the Secretary, and action by Congress would occur as specified above. Current data indicate that about 23 million workers in firms with fewer than 25 employees now lack protection from their employers. These data indicate a coverage target of 17.6 million workers plus their dependents.

If the coverage target has been met, the Secretary would recommend to Congress ways to ensure coverage for persons still without it. The same safeguards to ensure universal coverage, initially and over time,

would also apply to this group of firms. If the 80 percent target has not been met, employers with fewer than 25 employees would become subject to the requirements imposed on firms with more than 100 workers.

The Commission's intent is to ensure that special attention be given to coverage for domestic workers and others in nontraditional employment roles. The Commission suggests that the Secretary of Labor be required to report to Congress 12 months after the fifth year of implementation on whether employers of these workers are providing health insurance. Consideration could be given to special measures to encourage coverage during the voluntary phase and to ensure their participation if requirements go into effect. Enforcement for these employers might require special penalties for noncompliance, possibly including employer liability for employee medical expenses.

Also in year five, the Commission recommends that all individuals not connected to the workplace and all individuals still covered by Medicaid become eligible for participation in the federal public plan.

If small employers do not reach their coverage targets, thus triggering coverage requirements for all employers, the combination of job-based and public coverage would be fully in place.

At the end of the fifth year, in that case, all individuals would be required to have health insurance through their employer or through the public plan.

If one or both of the classes of small employers meets its target, but some workers still are not covered, the Congress should act on the Secretary's recommendations for covering this group. Such action should precede requirements that all individuals have coverage.

The special subsidies/tax credits for small firms with low-wage employees would expire within five. years of their availability. An exception would be made, however, for firms that face extreme financial risk and that employ 10 or fewer people (see Table 2-4).

Costs, Coverage, and Service Impacts of Commission's Recommendations

Building universal coverage in the way the Commission recommends would extend coverage to the more than 31.5 million Americans who are now uninsured. It would also ensure adequate health insur

ance coverage for the roughly 20 million Americans who have some insurance but are still exposed to catastrophic costs in the event of major illness. All Americans would benefit from the guarantee of basic protection.

Inevitably, additional coverage costs money, even though the Commission's proposed structure includes reforms to promote efficiency and control health care costs. But in fact the Commission's recommendations would buy health coverage for all Americans for less than 2 percent more than health care expenditures under current law. The projected increase in total health care expenditures would amount to $12.0 billion in 1990, increasing total current health care expenditures from $647 billion to $659 billion in 1990 (see Table 2-5). (All cost estimates in the discussion that follows are for 1990.) 1

17

Not all sectors of society would be required to pay more, however. Employers who now offer health insurance to workers and their dependents are projected to save about $13 billion a year, because they would no longer bear the cost-shift of covering (as dependents) individuals who work for other firms and of uncompensated care or low Medicaid payments. Individuals and families are projected to save about $19 billion a year, as employers and government share in their insurance premiums and health care costs. State and local governments are projected to save $7.4 billion a year in payments for the uninsured. Because their health care expenditures would be limited in real terms to their current Medicaid contribution, states would also be relieved of the growing burden for the medically indigent.

Employers who do not now provide health insurance for their workers and the federal government would share the costs of the additional coverage. The newly insuring employers would incur a total of $27.5 billion a year in increased payroll costs—an average of less than 4 percent of payroll (after taxes). For a single employer the increase could not exceed a specified percentage of payroll (7 percent, in this analysis, based on current data). This is because the Commission's recommendation to set up a public health insurance program would effectively cap an employer's risk. The additional cost of guaranteeing universal coverage, $24 billion, would be financed by the federal government. (For alternative ways to fund this increase, see Chapter 5 and Appendix F.) Table 2-4 shows how costs would be phased in.

Costs to Employers-The net additional cost projected for employers under the Commission's recommendations would be made up of several different components (see Table 2-6). Under current arrange