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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 mandatory insurance program--every participant in Medicare must belong to the insurance program. Another significant 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 Bipartisan Commission is to make 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

Editor'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

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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 typical AIDS patient patient is treated for approximately 18 to 24 months. This 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 pay-as-you-go basis. Moreover, unlike 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

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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?

The Global Solution

I have observed over years of watching public policy being made that one must look for a confluence of events which ultimately pushes policy over the wall of resistance. The weakening of resistance combines with continued pressure for change. Here is how the constituencies are lining up on the universal health insurance debate:

• Many Americans are dissatisfied with their public or private health care plan (or their lack of one) and want something better.

• Business is faced with an enormous unfunded liability problem and will welcome a global solution. Certainly small business would be reluctant to pick up a share of the 31-37 million uncovered

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• 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

DEVELOPMENTS IN HEALTH CARE POLICY:

REPORT ON THE UNITED STATES BIPARTISAN COMMISSION ON COMPREHENSIVE HEALTH CARE (THE PEPPER COMMISSION) By: James Balog

Introduction

In this report I will present a highly personalized view of the deliberations and findings of the United States Bipartisan Commission on Comprehensive Health Care (The Pepper Commission). Even though I have been involved in health care policy matters at the federal level for over ten years, it is still an "outsider's" view because the central thrust of this Commission was political. It provided me an interesting and instructive insight into the legislative forces and interest groups which shape health care policy in this country. As I look back over the ten years that I have been at health care policy discussions at the federal level, I am reminded of what Satchel Paige once said, "Don't look back, it may be gaining on you." The health care problem is gaining on us. The longer I am at it, the more I realize that the problem is growing at a faster rate than my understanding of it and faster than the ability of Congress to deal with it.

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• The origin of The Pepper Commission • The workings of it

The systemic reforms the Commission touched on

• Cost control measures • Funding

And most important to you:

• Why things went as they did because this will give you the greatest insight into what to expect in legislation over time.

• What I think will happen and when.

These are my interpretations and are certainly not a consensus of members' views.

The Origin of The United States
Bipartisan Commission on
Comprehensive Health Care
(The Pepper Commission)

The

In all of the debate on the Catastrophic Health Care Act, which was signed into law July 1988, it was clear that the older Americans wanted long-term care coverage. In fact, many of them thought they got longterm care coverage with the Catastrophic Health Care Act and that misconception contributed heavily to its demise. Catastrophic Health Care Act did take some very important steps toward assuaging the fears of the elderly Americans concerning financial ruin from catastrophic illness though it certainly was a far cry from longterm care. In addition to the misunderstanding of the benefit package, the Achilles' heel of the whole legislation was that it required the beneficiaries of the plan to pay for it. The original catastrophic health insurance benefit plan advanced by Secretary Bowen would have extended Medicare benefits to include many of the elderly's uncovered medical care costs. This had overwhelming popular support, over

Part II - 1

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