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Appendix B

Health Care and Long-Term Care Options

In developing its recommendations on health care and long-term care, the Commission carefully evaluated a variety of options. To understand the full reasoning behind the Commission's choices, it is useful to review the alternatives the Commission considered and ultimately rejected. All cost estimates are for 1990 and assume full implementation in that year.

• Reform the health insurance market to ensure

that private insurance is available to all those

willing to purchase it; • Provide a sliding-scale subsidy to those whose

family incomes are between poverty and twice poverty so they could purchase private insurance.

HEALTH CARE

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Two alternatives to the Commission approach that are often proposed to ensure health care coverage for all Americans are (1) expanding public coverage for the poor and helping others purchase private insurance on a voluntary basis, and (2) replacing the current job-based system with national health insurance. The Commission evaluated these options primarily in terms of the amount of additional coverage they would provide, their disruption of current practices, and their costs to the taxpayer. 1 Table B-1 and Figures B-1 and B-2 compare the options to the Commission's recommendations.

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Expanding Public and Promoting
Private Coverage

Most options for helping people obtain health insurance involve providing coverage to the poor and assisting the near-poor to purchase coverage. This combination attempts to expand existing coverage mechanisms to people now left out. It retains the voluntary nature of our current system and enables individuals to make their own choices about health insurance.

New federal expenditures New costs to society

Figure B-2 Comparison of Coverage,

by Health Insurance Options

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• Provide public insurance free to all those whose

family income is below poverty; • Set provider payments at rates set according to

Reform private

insurance and
improve Medicaid

Pepper
Commission

proposal

Refundable tax
credits for all

Single payer national health

insurance

NOTE: 31.5 million people under age 65 now lack health insurance

The Commission rejected this approach for three reasons. First, it would not ensure adequate health insurance for all Americans. Half of today's uninsured would remain uninsured, and the underinsured would not be helped at all.

The limited impact of this proposal on coverage reflects the fact that even subsidies to people with incomes up to twice the poverty level leave insurance beyond the means of many who are now uninsured. Subsidies may not be sufficient to make coverage affordable for the near-poor, and people with incomes above twice the poverty level would get no help with insurance costs.2 A family of three with an income of about $20,000 (twice the poverty standard), for example, could face insurance costs exceeding 10 percent of their income.

Second, because the federal government would absorb the full costs for low-income workers, taxpayers would have to pay substantially more than the job-based approach the Commission recommends. Further, it threatens to unravel the coverage employers now provide-shifting costs from employers to taxpayers.

Third, without universal coverage it would be impossible either to eliminate uncompensated care or to stop the cost shifting from those without coverage to those with it. Larger employers, who pay for much of this cost shifting, would not benefit from this proposal.

The new federal costs are relatively high because coverage would be extended to many workers and their families who could obtain job-based coverage if their employers provided it. More than half the uninsured are workers or in families of workers with family incomes below twice the poverty level.

This approach also raises the concern that employers might drop the coverage they provide if their employees could obtain it elsewhere. The more generous the subsidy, the more likely that behavior becomes. If low-income people who now have jobbased insurance were to use Medicaid or the subsidies, federal costs could increase by another $15.6 billion.3

The net new cost to society of covering about 17 million of the uninsured (the sum of the net costs to the federal government, and savings to state governments and individuals) would be $10 billion, or $585 per newly insured person.4, 5 This compares with net new costs to society of $12 billion der the Commission recommendations for almost 32 million uninsured ($381 per newly insured person).

Replacing the Current System

The Commission considered replacing the job-based connection to health insurance—that is, replacing the mechanism by which 75 percent of all workers and their dependents now obtain health insurance-with two very different approaches to national health insurance. These were a refundable tax credit provided to everyone for the purchase of private health insurance and a single-payer, federally run national health insurance system.

Table B-1 Options for Health Insurance Coverage: Costs and Distribution

(In Billions of 1990 Dollars)

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Americans without health insurance=0

'Employers who now provide health insurance will save $12.8 billion. Employers who now do not provide health insurance will spend an additional $27.5 billion. Individuals will save $19.3 billion in out-of-pocket and premium expenses. SOURCE: Staff estimates reviewed by John Sheils of Lewin/ICF and Kenneth Thorpe of Harvard School of Public Health.

The particular refundable credit approach analyzed by the Commission would entitle all Americans (including those who are poor but not eligible for Medicaid) to a refundable tax credit toward the purchase of a qualified health insurance plan. Except for the poor, tax credits would be valued at 80 percent of the average cost of health insurance in a particular geographic area. For the poor, the credit would be worth 100 percent of the average cost of health insurance. The health insurance would have to meet specific standards, including a minimum package of benefits. The insurers would have to participate in periodic open enrollments and premiums would have to be the same for all enrollees in the community.

the health plan's efficiency. U.S. experience to date shows that employers—who have entire departments of experts and larger checkbooks than individualsare only beginning to manage their health plans in ways likely to contain costs. The tax credit approach would eliminate their role and their efforts from the system. It is highly uncertain that individuals would do a better job than employers in choosing the most cost-effective plan. Helping consumers make the choice—and preventing insurers from competing for good risks—would require substantial government involvement.

The single-payer national health insurance (NHI) plan considered by the Commission would pay for the health care of all Americans. While private insurers might be able to participate in the processing of the claims filed, private insurance for publicly covered benefits would be prohibited. Individuals would be free to choose among health care providers, but the federal government would determine provider payment rates. Payment methods could entail area budgets for hospitals and negotiated fee schedules for physicians and other providers, subject to budgets.

The government approach would control health care expenditures through government determination or negotiation of payments for care. Relying solely on government action to contain costs puts considerable pressure on a single system of payment. Critics contend that political pressures to expand benefits and improve reimbursement, combined with difficulty in controlling service use, would constrain the government's ability to check health care expenditures. The expansion of Medicare is often cited as an example. Government, too, is only now learning to control its costs. The experience of other nations shows that controlling costs through government oversight or determination of payment is difficult but can be accomplished.

The advantage of replacing the current system with a new national health insurance program of either type is that it would treat all Americans the same way. Insurance would not have to change when employment changes. The government-run system, in particular, could be administratively straightforward. Essentially everyone would have an identical health insurance card. The system would save both the administrative costs of duplicative insurance companies, and the marketing costs and profits of insurance companies. By contrast, the tax credit approach could increase administrative costs, as insurance shifted from a job-based to an individual market.

Either approach would be highly disruptive to current insurance arrangements and very costly to the federal government. It would require dismantling most of the social and economic relationships that now exist for health care and that still assure most people adequate protection. It would also require a tremendous increase in expenditures by the federal treasury. Net new federal expenditures for the refundable tax credit option would be $226 billion. New health costs to society for this approach would be $12 billion ($381 per newly insured person). Net new federal expenditures for the single-payer national health plan would total $224 billion. Net new costs to society for this approach would be $8 billion ($254 per newly insured person)—a reflection of the reduction in administrative costs that this option would allow.

Furthermore, inherent in either approach are mechanisms aimed at containing health care expenditures. The tax credit approach would rely on price competition among insurers and providers to encourage cost consciousness among consumers. Shopping for the lowest health insurance price, it is argued, would encourage insurers and providers to work together on ways to reduce health care costs and, consequently, their premiums.

But relying on this approach as the sole mechanism for cost containment means depending on a complicated chain of events, which might not occur. Educating consumers to make effective choices is not a simple task, and their actual choice may reflect aspects of the insurance that have little to do with

The Commission decided against both national health insurance approaches because of the major disruption involved, the shift in financing from employers to taxpayers, and the belief that effective action can be more readily accomplished by building upon the current system. Furthermore, in the Commission's view, neither approach is necessary to achieve cost containment, since the best elements of competition and government payment controls can be incorporated in a combination job-based and public system.

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