Appendix B

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.

HEALTH CARE

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.

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.

The Commission looked at several options to extend coverage to the poor and near-poor-including broadening Medicaid eligibility as well as providing an array of subsidies to small employers and individuals. A variation that illustrates the effect of these approaches would:

• Provide public insurance free to all those whose family income is below poverty;

• Set provider payments at rates set according to Medicare rules, rather than at Medicaid rates;

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.

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 under the Commission recommendations for almost 32 million uninsured ($381 per newly insured person).

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.

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.

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.

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 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 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.

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 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 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.

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.

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.

LONG-TERM CARE

The options that the Commission considered to reach its long-term care goals can be classified into three broad categories. These were (1) providing government coverage to the low-income population and promoting private insurance for the better-off; (2) providing comprehensive social insurance for all longterm care services (at home and in nursing homes), relying on private insurance to finance cost sharing requirements; and (3) providing limited social insurance for nursing home care-for example, by trading some current Medicare coverage (accepting higher deductibles) for limited nursing home care, or covering only the early part ("front-end") or last part ("back-end") of nursing home stays. Under the third. approach, services not covered by social insurance would be subject to a combination of private insurance and government assistance for the low-income population. The Commission evaluated the adequacy of the protection these options provided, as well as their costs to the taxpayer.

Expanding and Improving Medicaid and Promoting Private Long-Term Care Insurance

This strategy, which (relative to other options) minimizes the government's role as payer, would expand Medicaid coverage for home and communitybased care for the poor and near-poor. It would also enhance Medicaid financial protection for single nursing home users. Moreover, it would subsidize private long-term care insurance for low- and middle-income people.

Compared with current policy, this approach would improve people's protection in several ways. Publicly financed home and community-based care would not only provide support that low-income disabled people now lack, but also enhance their ability to live independently in the community. For those who need nursing home care, the proposal would fill some current gaps. Medicaid's financial protection is not now uniform across states. In some states, for example, individuals whose incomes fall below the price of nursing home care but are above the established level for Medicaid eligibility are not allowed to "spend down." These people may have to remain in the community even though they need institutional

care.

Furthermore, although the Medicare Catastrophic Coverage Act of 1988 (in provisions that have been retained) raised the level of assets that are protected for the noninstitutionalized spouse, no comparable

asset protection was provided to single nursing home residents. These people must spend down their life's savings to $2,000 before they receive any benefits.

This option would also address barriers that may now limit private long-term care insurance. Ambiguities in the tax treatment of long-term care insurance premiums have been viewed as inhibitors to market growth, particularly the employer-based market. Modifying the tax code so that it would treat private long-term care insurance like health insurance would help insurers market policies to individuals. It would also encourage employers to offer and perhaps contribute to group plans, thus making the purchase of a policy more accessible and affordable to more people and at younger ages. Subsidies could further reduce costs to both employers and individuals. Some states, for example, are exploring subsidies for the purchase of private long-term care insurance by waiving Medicaid asset depletion requirements for people who have purchased a qualified policy. Alternatively, subsidies could take the more traditional form of refundable tax credits.

The specific proposal the Commission evaluated has the following elements.

Home and Community-Based Care-Eligibility for home and community-based services under Medicaid would be improved by replacing Medicaid's optional personal care program and the waiver programs with a mandatory program, creating uniformity across states. The income eligibility criterion would be raised to 200 percent of the poverty level, but no asset test would be applied. To be eligible for benefits, individuals would have to be severely disabled as measured by a demonstrated need for personal assistance with impairments in three or more activities of daily living (ADLs) or the presence of cognitive impairment. The service package would be determined by a case manager who, working together with the family (where available), would allocate the appropriate type and amount of services. Beneficiaries with incomes between 100 percent and 200 percent of the poverty level would be required to contribute to the cost of their care.

Nursing Home Improvements-All states would be required to establish a medically needy program for Medicaid-financed nursing home care. This would allow all persons with incomes below the costs of institutional care but above 200 percent of the poverty level (about equal to 300 percent of Supplemental Security Income) to spend down their incomes to Medicaid eligibility. In addition, single persons who qualify for the nursing home benefit would be allowed to keep up to $12,000 in nonhousing assets.

Government Promotion of Private Long-Term Care Insurance-Government would pursue two strategies to expand private health insurance. First, it would clarify the federal tax code so that the long-term care insurance premiums paid and the benefits received are treated like health insurance premiums and benefits. In addition, the government would subsidize the purchase of private long-term care insurance through a 20 percent tax credit. This credit would be targeted at the low- and middle-income population. Specifically, individuals with $25,000 or less and couples with $40,000 or less would qualify. Above these thresholds, the credit would be reduced by one percentage point for each $1,000 increase in adjusted gross income, so that the credit would be phased out for individuals with $45,000 and couples with $60,000 or more.

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Table B-2 shows how these measures would provide people protection, both today and in the future. If this program were implemented today, about half the elderly population and 30 percent of those under 65 would qualify for home care protection through the Medicaid program, on the basis of their incomes (less than 200 percent of poverty). The new costs of home care provisions to federal and state governments (shared through Medicaid) would be about $11.6 billion-$7.3 billion for the elderly and $4.3 billion for the nonelderly. Nursing home improvements would cost an estimated $1.1 billion. Private insurance would take time to expand, even with increased government support. Its effects must therefore be examined over time. Furthermore, given uncertainties about the growth of private insurance, it is appropriate to consider a range of possible effects in the future, rather than a single estimate. By the year 2000, private insurance could reach from 8 percent to 20 percent of the elderly and, by the year 2018, 26 percent to 50 percent of the elderly.8 The combination of private insurance and Medicaid in 2018 could reach between 61 percent and 85 percent of the elderly.

Percent of elderly who satisfy income eligibility requirements.

b Percent of elderly whose assets would be fully protected. Percent of elderly expected to purchase private insurance.

SOURCE: Lewin/ICF estimates, based on Brookings/ICF Long-Term Care Financing Model.

Because private insurance will take time to grow, even in the year 2000, the Medicaid program would continue to be the primary source of protection for the elderly under this option. (Data limitations make it necessary to focus analysis on the population over age 65.) Through the year 2000, the incomes of nearly half the elderly would be too high to qualify for expanded coverage at home. Fewer than two out of five elderly people would have assets fully protected by the enhanced nursing home benefits.