89%, among all segments of our society. However, after the legislation was implemented, it became more widely recognized that the bulk of the additional costs of this program would be paid for by a new surcharge on income tax of middle- and upper-income elderly. In a way, it carried the dreaded virus of means testing--the more you have, the more you pay. The sentiment shifted and the plan was roundly denounced by all those familiar with it, especially the elderly, and most savagely by those in upper income brackets who were most likely to pay the new surcharge and get the least benefits-not a surprising turn of events.

in

To get the support of Senator Pepper and other legislators who wanted long-term care coverage, the bill included a proviso that a bipartisan commission would be formed in order to make recommendations to Congress within a year for legislation to provide longterm care. Others were concerned about the fact that over 31 million Americans lack health insurance and another 20 million are underinsured. A section in the Catastrophic Health Care Act created a Bipartisan Commission, made up of six Senators, six Congressmen, all heavyweights committees concerned with health, aging or finance, and three Presidential appointees, and charged it with responsibility to make specific legislative and funding recommendations within a year from the signing of the Act; that is, by July 1989. There were many delays in getting the Commission organized and in fact I did not get my appointment confirmed until the early part of January 1989 and the Commission did not meet until February 1989. In one of our first meetings, Senator Pepper undertook the extension of the deadline of the Commission to November 1989. By then Senator Pepper was quite ill and upon his death, Senator Jay Rockefeller (West Virginia) took over the Chairmanship and one of his first acts was to extend the deadline to March 1, 1990. We then turned our attention to three issues: Access, LongTerm Care and How to Pay For It.

The Question of Access

Most members seem to feel that the first priority for any new resources in the health care field should go toward providing

coverage for some 31-37 million Americans who are not now covered by health insurance. This group of people is rising both in number and as a percentage of the total population. The priority for access derives from the general feeling that it is scandalous that the United States' spending, fast approaching 12% of GNP, is the highest in the world, its medical care the best in the world, and yet 15% of the population does not have health insurance coverage and ready access to the medical care system.

Within this 15%, the members focused especially on children (some 8 million) and pregnant women. It is generally agreed that most preventive care is both good medical and economic policy. Virtually all would agree that the most effective preventive care is for young children and pregnant women. Perhaps 80% of the time of the Commission was spent on access, reflecting its high priority and the markedly different approaches vigorously championed by members--reformers and non-reformers.

The Reformers

One major policy debate on access revolved around whether or not there should be systemic reform of the whole health care system. Some would reform the current system which covers 85% of the people through job-related plans or Medicare in order to get a "better system" to cover the remaining 15%. They believe that we should introduce an entirely new way of financing health care (including Medicare) through use of vouchers. The idea is to introduce free market principles into the health care. equation in order to ultimately stimulate free choice and control costs. Other reformers, albeit the antithesis of free market philosophers, are those who want to go all the way, now, to a National Health Insurance System.

A National Health Insurance System along the lines of Canada's was discussed many times and hovered over the deliberations, especially in the beginning. This was a program favored by many Washington "old hands" in health care. But it seemed that many of the members concluded that we couldn't get there from here; there are too

Part II - 2

many cultural differences, funding differences, lack of confidence in federal programs, differences in the legislative systems, etc., etc. which prevented us from seriously going down the Canadian path. There was also a feeling that the Canadian system is increasingly featuring cost containment through rationing and is going down the path of the British National Health Service. The early enthusiasm for a Canadian approach gave way to a skepticism. Whether pursuit of a Canadian system will resurface in Congress is hard to say, but it is certainly possible.

The Non-Reformers

At the other end of the spectrum are the nonreformers--those who believe that the bulk of the present system for non-elderly is jobbased and that the remaining 15% should be covered on the job. It's a popular approach. According to an Employee Benefits Research Institute survey, 80% of Americans favor mandated benefits. One way has great budgetary appeal: a plain, unsubsidized mandate that all businesses must cover employees and all self-employed persons must buy coverage. The other less onerous method is a subsidized job-based system to bring everybody under an employer plan with special subsidies to ease the pain for small business. The concerns about small business are very widespread and very real. Members recognize the importance of small business to job formation in this country and recognize that any kind of a plan is likely to have a cost equivalent of at least 25 per hour. This would put an extra burden on small business at least as bad as the minimum wage increases that were recently enacted after much debate and apocalyptic economic commentary.

In spite of problems--and the myriad of rules and subsidies it would entail--the bulk of the deliberation was devoted to a job-based system, with as much volunteerism, seduction, and, finally, coercion as necessary to cover most of the 15% of employees now without insurance coverage. The federal government picks up the unemployed and, especially, subsidizes child and prenatal

care.

The job-based system has the following key

attributes:

1) Benefits are roughly a Medicare package.

2) It rolls much of Medicaid into the Medicare system, a major federalization.

3) It will be subsidized and phased in for small business in order to ease the economic pain. The subsidy period will be available only for the five years after enactment of the law.

4) It is likely to especially subsidize, maybe on a permanent basis, coverage for children and prenatal care.

5) Major reforms of the insurance market. 6) The federal cost is estimated at $23 billion per year when fully phased in over five years.

A word about estimates is appropriate. Estimates of health care costs, especially of government programs are notoriously bad, usually low. For example, 1990 Medicare costs are ten times the original estimates. The Pepper Commission cost estimates have already been challenged as far too low. Yet, someone must reach into the big, dark future and take a guess.

As for me, I am like the little boy in the dark: I am not afraid of the dark, but I am afraid of what's hiding in the dark.

Long-Term Care

Long-term care discussions were much less complicated and less contentious than one might have thought. The costs, the potential costs and inability to estimate them are horrendous worries and one would have thought this would cause a great deal of debate. As it turned out, the controversies were largely over front-end vs. back-end coverage and the extent of the benefit package. Seemingly, few legislators want to be against long-term care because of the power of the gray lobby. The real problem here will be one of financing and the benefit package itself is expensive no matter how you go about it.

The key elements:

Part II - 3

1) A social insurance type of program (no

means testing) for nursing home care for the severely disabled, elderly and nonelderly; three months, with a 20% co-pay, for skilled and custodial care.

2) There is a major initiative toward home care; three months' coverage, both for the elderly and the non-elderly, regardless of economic status.

3) The current spenddown requirements of Medicaid are considerably liberalized, up from $2,000 per person to $30,000. There is also a significant liberalization of personal care and housing needs allowance both for the patient and the spouse.

4) States administer the plan, the funding is largely federal with some state support.

5) The states' role is large because home care and nursing home care were considered better administered by states.

6) There are some incentives for development of private nursing home insurance.

As you can imagine, the costs of this program would be tremendous; the home care benefit is estimated to cost somewhere in the area of $24 billion per year when fully phased in after four years. This figure is very soft because no one has any idea how much informal care now being provided would immediately shift over to coverage. This is especially true for the non-elderly persons who would receive home care. For the expanded nursing home care package with a three-month front-end the estimated cost is at least $19 billion annually when fully phased in. Now perhaps it becomes clear why the discussion of long-term care was so muted; the numbers themselves numb the brain.

Cost Containment

This whole area of cost containment reared its head from time to time but was never fully addressed. The polarity on it was somewhat like this:

On one end were those who feel that any major cost containment measures would

Part II - 4

Compassionate people would agree we owe the elderly and other needy persons food, shelter, clothing and health care. When we say food we don't say gourmet, we say nutritious. Shelter is not Trump Tower, its comfortable. And clothing is not St. Laurent, it's adequate. But when it comes to medical care, there are no modifiers, no limits.

Can good policy surmount the "every and always" syndrome?

All too frequently, policy suggestions are subjected to the concern that "not everybody will be covered" or that "it won't work under these rare circumstances." The result is a set of rules to be sure no one ever falls through the cracks and a program that is complicated and subject to "gaming" abuse. It would be better to implement a program that covers most of the people most of the time and provide a safety net mechanism to catch the exceptions.

How to control costs in a fee-for-service system?

Health care costs are a result of unit price times volume, of course, and can be controlled by controlling either one or both. But there are some unique economic behavioral features in health care:

1) Cut fees and volume goes up.

2) Cut utilization and unit costs go up.

3) Reduced demand often causes prices to go up, not down.

In short, the medical care economy does not act in a free market fashion. Since the "invisible hand" of competition does not seem to do the job, the result is an incredibly complex bureaucracy to deal with a system featuring multi-payer, fee-for-service and cost shifting.

Administrative costs are the second fastest growing component of health care costs (professional fees are first) and now account for upwards of 9% ($55 billion) of costs, not counting what is spent in providers' offices. Administrative complexity is diverting human and material resources that could be put to better use in delivering health care and

is threatening to smother the system.

When should care be limited or withdrawn?

Our medical system pumps untold millions into heroic medical measures far exceeding the limits of rational care. The system provides care which goes from the rational, to the heroic, to the futile, and on to the senseless and even cruel. In the search for quantity of life, quality of life is forgotten. After all, the object of medicine is supposed to be a healthy life, not immortality.

Is it logical to shift so many resources to sustaining the dying at the expense of not helping the living?

On one end of the age spectrum, we pour in resources for the elderly while denying prenatal care and adequate care for children. About one-third of all Medicare expenditures are made in the last year of life--and almost one-third of that in the last month. The extension of life and the low quality of life in those terminal days must be balanced against other health care needs. An interesting development occurred in March, 1990 when a hospital was sued by a man whose life was extended through heroic measures against his wishes and his doctor's instructions--the first wrongful life suit in history.

Can we talk openly about rationing care?

Health care is rationed everywhere, in one way or another. As the head of the U.K. health scheme had already concluded in the early 1950s, there is no limit to mankind's demand for "free" health care. In the U.S. it's often done by ability to pay, in nationalized schemes, by queuing (as in the U.K.) or practice guidelines. Let's do talk about it: let's rationalize rationing to intelligently spread our health care resources across the spectrum of needs.

Cost Containment Proposals

Among cost containment measures discussed by The Pepper Commission (a few of which will be in the formal report and others will be offered by members as comments) are:

Part II-5

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.

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