Page images
PDF
EPUB

1) Tax caps to limit the amount of insurance premiums that are deductible as a business expense by employers or exempt from wage income taxes for the recipients. Removing tax deductibility of all premiums would raise $50 billion per year. A more modest proposal to limit deductibility to $250 per month for a family plan would raise $5 billion per year. The notion here is that the tax code should not support gold-plated benefit plans above a certain level. This would raise revenues but would also help restrain costs because it would remove the myth that benefits are free. This idea will not be in the formal report, it's a "killer amendment."

2) Some thought was given to abolishing firstdollar coverage in every plan, private or public, a pernicious feature that contributes to the overuse of medical facilities. The idea here is that the persons present at the time of the delivery of the health care are the provider and the patient; notably absent is anyone with a serious economic interest in the events taking place. By requiring a co-payment for every procedure the patient would become the "economic cop at the point of delivery." This idea is not in the formal report, same political reason.

3) Reform of the tort system was widely discussed. The idea is to prevent the direct cost effects in our litigious society which cause huge damage awards and increase the cost of malpractice insurance. Malpractice insurance premiums alone add 1% or $6 billion to health care costs. Litigation costs and defensive medicine add at least another 1.5% or $9 billion. Some estimates place the total cost of defensive medicine at $30 billion or more. In Canada, malpractice costs (adjusted for population) are about one-tenth those in the U.S. Malpractice reform illustrates how intertwined the health care system is with other behavioral and cultural mores; here are a few things Canada does:

a) The plaintiff pays the legal costs of the doctor or hospital if the court rules in favor of the defendant.

b) Punitive damage awards are either nonexistent or severely limited.

[blocks in formation]

5) Outcomes research received some commentary and will be in the formal report. The notion here is that we have only the sketchiest knowledge of the balance between medical cost inputs and medical outcomes benefits. The experiences with DRGS and with relative value scales for compensating physicians were considered to be successes which should be followed up with similar longterm research on inputs and outputs to be used as guidance for physicians, both to guide therapy choices and to assist in malpractice defense. Clearly, this kind of research may also lead eventually to controls on intensity of the application of procedures. This kind of research would be done by the medical fraternity itself and would not be some economic, government-based study. One such study is being done on a joint basis by the Rand Corporation and the American Medical Association.

6) Reforming the tax code to provide equity in the system and to encourage private sector participation, for example:

a) Allow the self-employed individual the same deduction currently available to corporations. Currently, a selfemployed individual is allowed only a 25% reduction in medical insurance premiums against this income.

Part II - 6

[blocks in formation]

The Medicare plan was adopted over the forecasts of an impending apocalypse by organized medicine and fiscal experts--one group fearing socialized medicine and the other runaway costs. To a greater or lesser degree, both have been right. The Medicare system was based on "fee for service" so that doctors would feel little change in their relationships with a patient and could charge their normal and customary fee. They would remain the gatekeeper for access to the hospital. Hospitals became the primary Why? point for delivery of medical care. Policymakers were fearful that if medical services were delivered in an outpatient or home setting, control of usage would be very difficult and costs would climb out of control. With a doctor as the gatekeeper and the hospital as the venue it was felt that costs could be limited. The result of these two concerns--a "non-socialized" system and a hospital-based delivery system--is an expensive system. For care to be covered, it must be delivered in a hospital setting. Hospitals are not "care" facilities, they are "cure" facilities. Many of the elderly need care not cure, yet the system keeps them in an expensive hospital even though outpatient treatment might be more cost- and medicallyeffective. Overall, few changes were made in the delivery system--Medicare pumped more demand into a cost-plus fee-for-service system.

Part A of Medicare covers hospital stays. It is totally financed by payroll taxes assessed on the working population to pay for those 65 and older regardless of whether or not the beneficiaries are working and whether or not they are medically indigent. Usage is controlled by deductibles and co-payments. Most notably, the first day's hospital stay is paid for by the patient.

Part B of Medicare covers doctor bills. It was originally designed for 50-50 payment, half by general revenues and half by beneficiaries. As costs escalated, it became politically undesirable to raise the Part B premiums. The beneficiary proportion dropped to 25 percent and general revenues picked up about three-quarters. In the Reagan years, an unsuccessful attempt was made to restore the 50-50 split. The primary method for cost control is the use of co-payments. Basically, the patient pays 20 percent of the normal and customary doctor's fee set by Medicare. Significantly, doctors' fees set by Medicare have been limited to an economic index since 1972 and rates of increase for some years were frozen entirely. As a result, the patient often pays much more than 20 percent of the doctor's bill since the doctors are billing more than the Medicare allowable.

The next step in Medicare coverage, the Medicare Catastrophic Coverage Act of 1988, had an entirely different basis. The most fundamental difference is that catastrophic coverage is an insurance program paid for entirely by the covered population and does not involve any outside funding from payroll taxes or general revenue. Moreover, it is a program--every mandatory insurance

participant in Medicare must belong to the Another significant insurance program. departure is that not all members of the insurance program pay the same amount. All participants pay $4 per month, per person. But there is an income tax surcharge of 15 percent levied on those who pay taxes and therefore have income. The cap is $800 per person, per year. Thus, those who have more, pay more--a vastly different concept than is true in the rest of the Medicare program. But, even with this income tax surcharge, there is still an overall subsidy of some $700 per year across all parts of Medicare, even for those persons who pay the maximum surcharge.

Another feature of the Catastrophic Coverage Act is that it will for the first time pay for drugs, beginning in 1992. There is a very high deductible of $600 above which the catastrophic coverage will pay for drugs. In Medicare Parts A and B drugs are not covered, except those given in a hospital stay, a legacy of the fear of runaway costs.

Part I -3

The catastrophic plan is not even a year old and may not live to an old age1; already there are disputes over whether or not the funding is excessive, too low, or unfair. The political heat has gotten very high because of the income tax surcharge. Yet there are others whose calculations purport to show that the drug component of catastrophic coverage is headed for bankruptcy even before it starts. President Bush recently indicated he would not advocate a change in the terms of the bill to reduce premiums; the Chairman of the House Ways and Means Committee has endorsed that position. This is probably a wise course of action since estimates of health care spending have been notoriously off the mark. For instance, when the Medicare bill was passed, expenditures in 1990 were expected to be $10 billion. The current estimate for 1990 is $110 billion.

The Medicare system has two major flaws. First, it does not take care of those who are unable to make required payments, either copayments or deductibles. In order to provide a safety net for poor persons, the Medicaid program operates at the state level. Medicaid costs in America now run at $46 billion, but Medicaid suffers from highly variable coverage from state to state and requires spenddown. Spenddown means that in order to take advantage of the Medicaid safety net one must have assets no greater than $2,000 per person and $3,000 per couple. Many older people are reluctant to become financially destitute in order to pay for needed health care services. The system also encourages asset shifting by the elderly to their dependents in order to meet spenddown requirements.

The second major flaw is that the current system is not designed for long-term care. The "Medicure" system has inadequate mechanisms for providing the type of care required by many elderly people, especially those over 75. Moreover, the lack of "care" facilities means that costly cure facilities are overburdened with persons who can be cared for more economically in facilities other than hospitals.

The Long-Term Care Issue

Long-term care was not included in the Catastrophic Coverage Act largely because the costs were unknown but believed to be astronomical. There has been limited actuarial experience by private insurance carriers for the concept of long-term care. In addition, there was a feeling that Medicaid provided a safety net for those in need of longterm care, albeit with the onus of the spenddown provision. But the push is on for long-term care coverage and one of the principal mandated objectives of the is to make Bipartisan Commission recommendations to Congress for long-term care coverage. The estimated cost for longterm care in the first year is $45 billion (compared with 1988 spending for Medicare of $78.9 billion). This $45 billion is not all incremental health care spending; it is estimated that long-term care provided by private plans, Medicaid, and private spending now consumes about $11 billion. Nonetheless, long-term care is a major economic commitment.

Comprehensive Health Care

Another major issue for the future is to cover millions of people not now covered by Medicare or by private plans. The frequently quoted figures are in the 31-37 million range though there are some statistical problems. For one, about one-fifth of the total represents people who are "not covered" because they chose to be covered under a spousal plan. For another, about 10 percent of "employed but not covered" have not yet completed eligibility requirements. Typically, Americans are reasonably well off, medically speaking, if they are 65 or older or are employed by a major corporation. Virtually 100 percent of all firms with 500 or more employees provide coverage, but only 46 percent of those with 19 employees and 78 percent with 10-24 employees. Younger people who are unemployed or self-employed and people employed by small businesses have the greatest problem accessing medical care for economic reasons (Table 4).

Part I - 4

lEditor's note: At press time each House of Congress had voted to rescind the Medicare Catastrophic Coverage Act and the two versions of the recision are being reconciled as to the remnants that will remain

in the Law

[merged small][merged small][merged small][merged small][merged small][merged small][ocr errors][ocr errors][ocr errors][ocr errors][ocr errors][ocr errors][ocr errors][ocr errors][merged small][ocr errors][merged small][merged small][merged small][merged small][merged small][merged small][ocr errors][merged small]

A strong drive is being made currently to do something about this problem. Complicating the solution and the cost estimates is the fact that most AIDS patients fall into this category. The health care cost for an AIDS patient is about $100,000 per year and a is treated for typical AIDS patient is This approximately 18 to 24 months. represents around $15-20 billion to treat all current AIDS victims. The current therapies for AIDS merely prolong life--and medical costs--for varying amounts of time but the disease remains fatal. In major cities such as New York, the AIDS problem is already paralyzing the health care delivery system. The utilization of health care resources is one problem and the other is that there is no adequate way for the hospitals and doctors to be compensated for services. The likelihood is for additional major cost shifting to private plans.

The Unfunded Liability Problem

As if the sheer size of the overall health care problem and its rapid growth were not enough for American business, the accounting profession is now considering instituting a further burden: reserves for unfunded liabilities. That is, a corporation has an obligation, stated or implied, to provide health care coverage for its employees and its retired employees. Good accounting standards require companies to recognize this future cost by charging it to the profit and loss statement each year and building up an adequate reserve to pay for it. The effect on American business would be devastating. The Employee Benefit Research Institute has estimated, conservatively, that the present value of the liability for all

private employers is $169 billion (1988). Other estimates run as high as $2 trillion, not far below all the liabilities non-financial corporations carry on their books.

How Did We Get Into This Mess

The U.S. health care system now finds itself in the financial intensive care unit because it did not follow the standards of that other great employee benefit, the pension system. The private pension system:

• Assumes a defined liability, a certain contribution or a specified dollar amount of benefit.

• Is based on actuarial assumptions of life spans.

• Covers the employee and often the spouse, not other family members.

• Does not carry the inflation risk; the beneficiary does.

In addition, reserves were established and contributions to the fund are tax deductible when made.

Health benefits are largely undefined. Because the cost of the benefit was not expected to be large, most companies did it on a pay-as-you-go basis without a reserve buildup. Contributions to the pension fund are deductible in the year in which the contribution is made--contributions to a health care trust fund are not tax deductible, so most companies do not have a trust fund for future liabilities of retirees and current employees, another reason to fund them on a Moreover, unlike pay-as-you-go basis. pension plans, many health plans cover dependents of workers and of retirees. And, finally, the specter of inflation is aggravating the problem because costs for medical care are increasing at 2 to 3 times the inflation rate. The employer usually assumes the burden of health care at any cost.

Forecasts

Forecasts are hazardous in any field, but especially so in health care policy. The

Part 1-5

progress of policy is heavily intertwined with social and economic trends. Our country is now running huge fiscal deficits and there is no general revenue to share without more general taxes. Until the Tax Act of 1984 we had a silent, politically easy way to raise taxes: bracket creep. As inflation drove nominal wages higher and higher, taxpayers went into higher and higher brackets. The government collected more taxes without having to legislate a tax increase. Wage

earners saw their after-tax purchasing power decline. Bracket creep was eliminated when income tax brackets were indexed to inflation. Any increases to pay for the cost of government now require politically risky tax increases.

Congress has discovered a substitute for bracket creep: mandated benefits. This is the simple expedient of having Congress or state legislatures pass laws to require corporations and insurers to provide certain benefits which they then must put into their cost and price structure. This, of course, has economic implications for U.S. competitiveness that will manifest themselves only in the long run. The short run is more relevant. My guess is that Congress will attempt to mandate that long-term care benefits be incorporated into private plans. This will add to unfunded liabilities and force a solution to the unfunded liability problem. Then what?

[blocks in formation]
[ocr errors][merged small][merged small]

• The doctors are feeling the hobnails of the bureaucratic boot and are getting more and more frustrated with how to deliver the quality care while dealing with fiscal restraints. The National Medical Association has already endorsed a national health insurance program. It is a long way from the NMA to the AMA but the frustration level is rising, even among doctors. In an editorial in July 1986, the New England Journal of Medicine noted, "Perhaps even the medical profession, disenchanted with the private corporations and the competitive market will some day be leading the campaign for a publicly financed alternative."

• The bureaucracy is ready.

Conclusions

It remains to be seen how much of a dent the United States Bipartisan Commission on Comprehensive Health Care will make in solving this massive problem. Perhaps, more correctly, not a dent in solving the problem but rather the extent to which it will make a beginning toward a comprehensive solution of a comprehensive problem. For the longer term, will the larger solution continue to involve the private sector or will it become a national health insurance program? If we do not solve it with a major new private sector involvement, I predict by the year 2000 all the constituencies will unite to climb the wall of resistance to a comprehensive health care program funded from general taxation.

June 1989

Part I - 6

« PreviousContinue »