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HI Cost as Projected Under Alternative

HI Cost as Projected Under Alternative

II-B with Provisions of H.R. 1900

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-HI Tax Rates

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As you know, the Quadrennial Advisory Council on Social Security is currently analyzing the fiscal problems of the Hospital Insurance trust fund and exploring the long range options for resolution. We anticipate that their recommendations will be in later this year. We will continue, of course, to work towards designing the kinds of program activities that we believe will make for a more fiscally balanced program.

Next, if I can, I would like to go over our proposals as we have submitted them to Congress.

We need to change behavior. In order to do that, we need to remove all kinds of perverse incentives for all sectors of the market. And we believe that the hospitals, the physicians, the consumer, the employers and the insurers all need to work together and to share the responsibility for controlling costs on which I think in the past we have not always worked together.

Our first proposal is to restructure part A of the medicare program to provide catastrophic coverage for the elderly. And in doing that, we are proposing to eliminate the existing limits on the covered hospital days. Currently we cover 90 days in each spell of illness. The first 60 days are free and then from day 61 to day 90, the beneficiary pays one-quarter of the cost. And then if he moves into his 60-day lifetime reserve, he pays half of the cost. Each individual pays the first day deductible which is the average cost of one day in the hospital, which this year is $304. Next year, as you know, because hospital costs are going up, that figure may be $350, because the deductible is determined by statute as the average cost of one day's care.

So we think in the long run, whatever we can do to bring down the phenomenal growth in hospital costs, will then bring down the Part A deductible, too.

We are proposing to increase cost sharing in the early days of the beneficiaries spell of illness, because we think that is where the incentive could be to have the beneficiary work with the physician. And perhaps ask the doctor if it is possible to leave the hospital one day early

If we could save one day of each hospital stay of each one of our medicare patients, we would save $1 billion a year.

I think many of us are familiar with occasions when that one day could have been saved, although perhaps not in all cases.

We are proposing that the cost sharing in the early days in the hospital spell of illness be at the rate of 8 percent, or $28 per day, on hospital days 2 through 15, and then 5 percent or roughly $17.50 a day, on the hospital days after the 5th.

We are also, however, proposing to reduce from 12.5 to 5 percent the coinsurance on care in skilled nursing facilities that beneficiaries now pay on days 21 to 100. And also no beneficiary would be charged the coinsurance on more than 60 hospital days a year. The deductible could not be charged more than twice in 1 year's time.

And if I may use an example, under the current law, if an individual was severely ill, and was hospitalized, let's say for 150 days, then under the current law the individual could be liable for as much as $13,475, and after the 150th day then be liable for the full cost of all uncovered services. By contrast, under our catastrophic proposal, the individual would still pay the same first day deductible and would pay an additional coinsurance that would total about $1,530.

Again, we think that this is a better proposal, because it protects the sickest patients and gives the incentive up front to those who perhaps are less ill and could leave the hospital a day sooner.

The second proposal we have is to expand our authority to deal with a voluntary voucher system for our medicare patients to give our beneficiaries the option of enrolling in any one of a number of private health plans.

Last year Congress did permit us to pay HMO's and other competitive medical plans on a risk basis. We would establish a voluntary program of a voucher valued at 95 percent of what we know it would cost to care for that same beneficiary if he had elected traditional coverage.

Each plan would have to guarantee that as a minimum they would pay the same benefits as are currently provided under medicare's parts A and B, and the individual would have an annual opportunity to either change plans or return to the traditional medicare program.

One important feature here is that this would enhance competition among the various private plans, because if the individual beneficiary was able to find a plan that cost less, then the beneficiary could either take advantage of additional services that were offered by that particular private plan, or he could get a cash rebate.

Again, we are trying to effect more competition in the marketplace.

Another proposal we have is to freeze the physician fee. Physician fees are the second largest component of medicare spending. In 1982 it went up an average of 21 percent and in 1983, it is anticipated it will be going up 19 percent. Because the physicians largely have been unaffected by the laws that have been passed under both the Tax Equity and Fiscal Responsibility Act of 1982 and the Omnibus Budget Reconciliation Act of 1981, we believe that it would be appropriate to ask for a freeze in physician reimbursement under the medicare program for 1 year, effective from July 1983 through June 1984, while we study the restructuring of the fee system.

Another component we have is the proposal to increase the part B premium. When the medicare part B program was initially set up, the source of income was to be a 50/50 split, with a 50-percent share from general revenue financing and 50 percent from the premium. Over the years the beneficiaries percentage has eroded because it was tied to social security cash benefit increases. We have found ourselves now with less than a quarter of the total outlays being paid for by the premiums themselves as indicated by the next chart. (See chart C, p. 11.) So we are proposing to increase the premiums.


Supplementary Medical Insurance Trust Fund Income

(billions of dollars)



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However, we are also proposing recognition of the recent legislation just passed to postpone the increase in the part B premium that is scheduled for July 1983 until January 1984. We would then set the part B premium to cover 25 percent of the projected expenditures, and then beginning in January 1985, we would increase the percentage covered by the premium by approximately 2.5 percentage points each year until it reached 35 percent. And we would then hold at that particular level.

We also would establish a hold-harmless clause in order to prevent a reduction in anybody's social security checks from what they had received the previous year.

An additional component is to recognize that the value of the part B deductible has eroded over time. We propose to index the part B deductible to the annual changes in the national medicare economic index, so that we can maintain the constant dollar value of the deductible, to use it as a deterrent to unnecessary utilization.

Under current law, regular increases in the deductible are not provided and thus the initial beneficiary liability has been reduced in real terms. In fact, you could say the shift has been returning the cost to the general taxpayer through general revenues by lack of having the deductible indexed.

And, then, finally, I would like to mention one other proposal, which, although it is not within the health care financing legislative proposals, it is a proposal of this administration. The proposal would put a tax exclusion or tax cap limit on the amount of taxfree insurance that every individual pays.

It is suggested that we would set an insurance cap of $175 per month for a family or $70 per month for an individual. Currently, the monthly average insurance cost for most individuals is running at $132 or $53 for an individual. Roughly about 30 percent of all individuals are covered by hospital insurance that is above the amount that we would have a tax cap on.

And what we are proposing is that individuals would still be free to purchase that type of insurance, but the excess above the cap could be included in the employee's taxable income.

For example, I simply want to point out that this is a progressive cap: the higher the salary of the individual, the more the tax would be on the premium above the cap. And the average individual who is receiving a salary income of $10 to $20,000 a year would be paying less than $2 a month in additional taxes, if he so chooses to continue to have a high cost plan.

The consumer's other option, of course, would be to look for a lower cost plan, and in doing so, we hope the plans would be giving their attention to decreasing the overall outlays in their program.

In conclusion, then, I would simply like to say that we think the proposals that we have initiated for consideration by Congress this year are to enhance cost awareness for all parties, because if you look at the health care industry, it is really divided into three parts: the patients, the providers, and the third-party payers. We are trying to effectively change behavior of all three groups and to enhance the cost awareness of all of them.

We want to improve the structural financing of the medicare program through reimbursement and coverage changes and provide for catastrophic coverage.

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