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924 I I January 12,1993 THE CONTRADICITONS IN THE CIJNTON HEALTlMLAN INTRODUCTION I' The most obvious defect of the current Clinton proposal is that it tries to combine in one measure two completely contradictgr strategies for reforming the health system. On the one hand it incorporates all the bureaucratic appa ratus of rigid national budgets sweeping price controls, and powerful boards to determine what medical care Americans will receive. But on the other hand, it also incorporates features of a strategy based on consumer choice and competition.
Specifically, the Clinton proposal would d Establish a fixed national health budget, developed by a National Health Board d Establish local managed care networks, which would receive a fee to provide medical services. Providers outside these networks woul d be subject to price controls and budget limits d Requlre all employers elther to provide coverage to thelr employees or to enroll their employees in a managed care network. Unemployed Americans and Medicaid recipients could join a network, with the gover n ment paying part or all of the pmium d Require all insurers to offer a comprehenslve set of health services, determined by the National Health Board, and to charge enrollees a premium without re gard to health risk. Insurers could no longer deny coverage to anyone.
Other praposals, including a bill developed by the Conservative Democratic Faun in the House, would include versions of the Clinton consumer choice strategy but do not in clude his provisions for fixed budgets and price controls. These generally are known as managed competition proposals that will not mix, there are many other flaws. Among them While the entire Clinton plan suffers from the oil-and-water problem of two strategies For a fixed national budget to mean anything, it must incarparate e xplicit ra tioning, which is inefficient yd rejected by the vast majority of Americans by margins of nearly four to one. Otherwise it is nothing more than a spending target and will succeed only if other cost controls work. Unfortunately for Clinton, Amer i cas experience with health cm price controls and entitlement programs suggests the national budget will be meaningless 3 For example, a recent EBRUGallup swey, completed in October 1992, found only 20 percent of Americans prepared to accept limits on the h ealth care available to the average penon. See John Immmahr, Rarioning Healrh Cure: A Pvbfic Perspecfive, paper presented December 1,1992, at a forum sponsored by the Employee Benefit Research Institute in Washimgton, D.C 2 Establishing a standard benefit s package for Americans will encourage heavy lobbying by medical specialties to be included, much as they have lobbied suc cessfully at the state level to be included in mandated benefits laws. The likely result: a steady increase in the cost of the basic p ackage Place of employment would continue to be the primary determinant of the health caxe available to each family. Changing jobs often would mean chang ing plans and doctors By not significantly reforming the tax treatment of health care, the Clinton pr oposal locks in many of the perverse incentives and inequities of the current tax code.
Consumer choice and competition should be at the heart of any structural reform of Americas health care system, as Clinton has suggested. But that means rejecting the r em nants of health care central planning contained in the Clinton proposal. Instead it means enacting a major reform of the tax code to give Americans the incentive and the means to choose the plan that is best for them within a framework of wide choice a n d strong com petition. With that reform in place, America could achieve the illusive goal of affordable access to quality care for all its citizens WHY AMERICANS WANT HEALTH CARE REFORM Dissatisfaction with the health care system is higher in the United S tates than in any othermajor industrialized country. Polls routinely show that well over 80 percent of Americans want the system completely rebuilt or feel it needs fundamental change.
By comparison, less than 50 percent of Canadians or Germans believe tha t such a level of change is necessary in their systems means that Americans want big changes in the way that they themselves receive health care. A 1992 national survey, for instance, found only 26 percent wem ssatisfied with the health care services thei r family received during the last few years. What concerns Americans most is that their employer-pvided to them of medical care will became prohibitive.
There is a good reason why families are anxious, even if they currently have good in surance and are re ceiving excellent care. That is because for working Americans, health care benefits invariably are tied to the place of work. Not only are there historical rea sons for this, but because the tax code treats health care benefits as tax-free income if they a re supplied by an employer as part of a workers compensation, there are also strong incentives for health care to be provided in this way Politicians should be wary, however, of assuming that this high level of dissatisfaction P nefits will be cut back, o r that the cost Be 4 5 6 Ibid Robert J. Blendon and Karen Donelan, me Public and the Emmg Debate Over National Health Immw The New England Jowd ofMedicine, 323, July 19,1990, pp. 208-212.
The 1992 KaiWComrnonwealth Health Insurance Survey 3 This tax-prefer red employment-based system leads directly to the characteristics of U.S. health care that cause so much concern? Among these A lack of portability. With health benefits tied to the place of work, moving jobs or being laid off can mean the loss of benefit s , or at the very least having to join a different health plan, often with various restrictions on pre-existing conditions and other limits. One result of this is "job lock," the phenomenon where workers feel unable to take a better job for fear of losing coverage.
Some 30 percent of Americans say a member of their household has experi enced this8 A high level of uninsurance. With tax advantages effectively restricted to em ployer-sponsored group coverage, workers without a company plan often find purchasin g their own health insurance prohibitively expensive. This is why about three-quarters of the uninsured are workers or their dependents. This problem is compounded by the underwriting and renewal practices of insm which makes coverage virtually unobtainab l e for families with a poor health recordg Rapid cost escalation. Even though company-provided benefits actually are part of a worker's gross compensation-not "paid for" by employers-work en tend to think of benefits as 'W or involving little direct cost t o them selves. Mareover, the group underwriting of employment-based health insur ance means that individual employees do not typically face higher costs (other than, possibly, copayments) because of their own usage of services. As a re sult, thm is usually little or no incentive far workers to limit their consump tion of unnecessary care, or to seek the best value for money. This is the main reason why health care costs are increasing at several times the general rate of inflation To be sure, there are othe r features of the U.S. health care system that contribute to the dissatisfaction and financial whes of Americans. Among these are excessive insurance paperwork (often encouraged by employers to slow down the volume of claims and the various effects of larg e malpractice settlements (such as the lack of certain specialties in some areas But the core of the problem is its employment-based design 7 8 9 Far a fuller description of the design of the current system and its consequences, see Stuart M. Butler A Poli cy Maker's Guide to the Health Care Crisis. Part I Heritage Foundation Talking Points, March 5,1992 1991 New Yarlt Times-CBS poll cited by Paul Starr, Thebgic qfHeufth-Cme Rcfom (Knoxville,Tenn whit Direct Books, 1992 p. 21.
See Edmund F. Haislmaiex A Poli cy Maker's Guide to the Health Care Crisis, Part IIk What's Wrong with America's Health Insurance Market Heritage Foundation Talkbig Points, October 1,1992 4 THE CLINTON PLAN The Clinton transition team currently is developing a full proposal, expected to be sent to Congress early in the new Administration. But President-elect Clinton did spell out the broad outlines of his pferred approach during the campaign. The plan aims to limit health cost increases to the same growth rate as wages, to guarantee affo r dable, quality coverage for all Americans, and yet to preserve personal choice of doctor and hospital low the Plan Is Meant to Work Controlling Costs d The plan would establish a national health budget, covering total private as well as public expenditure s . This figure would be developed by a Natlonal Health Board consisting of Iepmentatives from the public, providers, busi ness, labor, and government The national budget would be broken down into global budgets for states and possibly networks of hospitals and doctors d Within this budget limit, most Americans would have access to a choice of local managed care networks. These organized systems of insurers, hospitals and doctors would receive a fmed amount of money from employers or the government, known as a capitation fee, for supplying an enrollee's full medi cal senrices. The fee would be set by each state, to meet its share of the na tional budget d Other ~mericans, at the discretion of their employers, would be enrolled in company-sponsored health insu r ance plans. For such services provided out si& the managed care networks, states would introduce fee schedules for doctars and hospitals carresponding to the global budget d Medicare would be subject to a budget limit and to existing physician and hospita l fee schedules d Certain tax breaks would be eliminawd for pharmaceutical companies that raised their drug prices faster than the rate of inflation 1) Universal Coverage d All employers would be required to provide coverage to their employees and families , either directly from insurers or through the managed ca~e networks.
Employees would be required to shoulder a partion of the cost. Small em ployers would receive tax credits to help offset the cost of the mandate d The health insurance deduction for the self-employed would be raised to 100 percent of coverage cost, up from today's 25 percent d Insurers would face new requirements. They would have to offer a com prehensive health benefits package, determined by the National Health Board. They would no lon g er be able to exclude any family from enrolling 5 in their plan, whatever their health recd Insurers would also be required to charge COmmUnity rates, which means premiums to be set regionally, with out regard to the insurance risk posed by an employee or group of employ ees, or to administrative factors (such as the size of an enrolled work farce).
And insurers also would have to introduce a single, standardized claim form package, and to establishing general standards for pricing and service infomation m uch like the Securities and Exchange Commission oversees the financial d The government would band together small businesses and individuals into publicly-sponsored purchasing groups. Health networks would then have to compete for the business of each ind i vidual or business. This feature of the Clinton plan is generally known as managed competition 10 Alain Enthoven and Richard Kronick, A Consumer Choice plan far the 1990s. The New England Jowd of Medicine, 320, Janua~y 5,1989, pp 29-37 and 320, January 12 , 1989, pp. 94-101 11 See Jeremy Rosna, A prosresSive Plan for Affordable. Universal Health Care. in Will Marshall and Martin Schmnm, eds Manaiate for Change (New York: Berkley Books, 1992 6 The main features of the CDF bill are refinements of the same mana g ed competi tion approach used in the Clinton plan. Among the specific provisions of the CDF bill: d Tax and regulatory incentives would be given for health care providers and insurance companies to form networks known as Accountable Health Plans AHPs Thes e plans would have to offer a standard, federally determined plan-although they could also market more elaborate plans. As in the Clinton proposal AHPs would have to price their product using a form of community rating, with variations in premiums based on l y on geographic location and to a limited degree based on age. Plans would have to enroll individuals regardless of medical condition d Currently an employer may deduct from taxable income the full cost (with out limit) of health benefits included in an e mployees compensation.
Workers may exclude the value (again, without limit of those benefits from their taxable income. More modest tax breaks are available for the self-employed and those experiencing high out-of-pocket medical costs Under the CDF bill, t he employers tax deduction would be limited to the cost of the lowest-priced AHP in the area. The extra cost of more elaborate plans provided by the employer would be added to the fms taxable in come. Individuals who pay all or part of the premiums of an AHP plan would be able to deduct the full amount. Individuals or firms purchasing non-AHP plans would receive no tax breaks. In the Clinton proposal, there is no discussion of tax changes.
State-chartered not-for-profit Health Plan Purchaslng Cooperatlves HPPCs) would be established These would have the exclusive right in a region to organize a set of Accountable Health Plans. Businesses with fewer than 1,OOO employees would have to join a HPPC. At the states dis cretion, larger firms might effectively for m their own HPPC. HPPCs would collect all premiums from individuals or firms and make payments to health plans according to the health risk of each plans enrollees d Medicaid would be replaced with a new federal program to enable all fami lies with incomes below 200 percent of the state% poverty level to obtain coverage through a HPPC. Families with incomes between 100 percent and 200 percent of poverty would pay premiums according to a sliding scale, based on income. The states would be relieved of the bur den of acute medical caxe, but would have to take over responsibility for long-term cm.
I I 12 Undated description of H.R. 5936 released by the Conservative Democratic Forum 7 PROBLEMS WITH THE CLINTON PLAN The Clinton proposal undoubtedly served the purpo ses of an election campaign, fof it contained elements from the major competing plans espoused by different factions of the Democratic coalition. But that is the central flaw in the proposal. It would mean a na tional health care system combining two cont r adictory sfrategies-central planning with price controls, and consumer choice with competition. Rather than combining the best of each strategy, it would in reality mean the worst of each. If enacted, it is destined to col lapse in chaos as competing heal t h care providers seek to evade price controls and shift their costs to less regulated sectors, government bureaucracies expand to try to stop eva sion, and consumers grumble at the red tape and rationing while exploiting every loop hole in the regulations .
But the proposal does not merely suffer from this self-destroying internal contradic tion. Its core elements have their own serious weaknesses Yhy Global Budgets With Price Controls Cannot Work in the U.S.
Many Americans find the idea of a national health care budget very appealing. Why not simply establish some total amount the country will spend on health cm, and then distribute these resou~ces efficiently and fairly? If it were that simple, there would b e good reason to apply the same approach to every other sector of the economy. A global budget for housing, perhaps, and one for automobiles. By simply declaring such budgets and enfming them, Americans presumably could end inflation in every sector, impro ve efficiency, and have billions of dollars in savings to spend on extra goods and services. It sounds too good to be true.
It is, of course. The central problem with such an idea is in a sense semantic: either a national budget means something or it does not Optlon 1: A Meaningful Budget. If a national budget really means something then it means Americans as a whole, by law, can spend only a certain amount on their health care.
Once that figure is reached, say on December 12th in a particular year, health care ser vices must cease, hospital doors must be closed and doctors offices shut down. To be sure, well-managed hospitals and prudent doctors can spread their resources cmfully over a whole year, as they try to do in Canada, so that there is no end-of-y ear shut down. But even that will happen only if each hospital or pup of providers has its own government-mandated budget, which means another extensive layer of bureaucracy.
Otherwise each hospital or doctor has the incentive to maximize earnings without re gard to any national or state budget. If every provider is, in a sense, cutting a slice from a limited pie, none has the incentive to cut a small slice so that someone else can cut a larger one Setting a global budget for any part of the health care sy s tem also begs a question what counts as health spending? If a hospitals budget is controlled, how does the gov ernment deal with the explosion of spending that no doubt would occur in substitutes for hospitals, such as clinics, skilled nursing homes, and e ven doctors offices. A bud get might be set for prescription drugs, but what about non-prescription medications such as antihistamines, cough syrup, or aspirin? Every attempt to clamp down on one 8 definition simply would mean an increase in spending some whext else less subject to control.
But for lawmakers, the biggest problem is that for a global budget to mean any thing, it must involve denying some Americans health care they are willing and able to pay fbr-in other words, to ration care. While the citi zens of some countries grudg ingly accept explicit rationing, surveys of public opinion in the U.S. suggest that Con gress and the new Clinton Administration risk an enormous backlash if they enact a rationing system. 13 Moreover, attempts to mitigate the aspects of rationing that would most offend Americans and humane in Canada and Britain because the particulars of the rationing system far the most part are carried out by physicians. With his or her eye on the budget, it is the doctor who makes case-by-c a se decisions that match course of treatment with avail able funds. This works tolerably well because patients are far more inclined to accept rationing by their doctor than by some faceless official in the department of health and unlike the official, the doctor can take into account the many unique and subjec tive feams of an individual patient.
This leads some advocates of rationing in the U.S. to call for the rationing decision to be made as close as possible to the patient, ideally by the doctor.To be sure, that would fit in with the attitudes of most Americans. Most Americans strongly oppose ra tioning. But when asked who should make rationing decisions if that were the law they overwhelmingly want their own doctor or local doctors to do ~0 Government officials come well down the list of prefextnces.
But it is diffkult to see how such a localized rationing system could function in the U.S. without a sweeping overhaul of the malpractice laws. In Canada or Britain a pa tient may be angry when a doctor re fuses care, but he must accept it. In America the patient hires an attorney and sues when he does not like the doctors decision. Yet Congress shows little inclination to confront the powerful trial lawyers lobby and pro vide health practitioners with the type of immunity enjoyed by Canadian or British doctars.
At the other extreme, other advocates of rationing-including, it appears, President elect Clinton-would entrust detailed guidelines over what health ca~e Americans will or will not receive to some in dependent national board, a kind of Supreme Court of Health. Such a board supposedly would be immune hm public pressm, much like the Federal Reserve Board or the U.S. Supreme Court, and its edicts would carry the farce of law. Not suxprisingly, rationing b y an independent board is among the least preferred options of an American public which is in any case overwhelmingly opposed to rationing. And even if such a board were beyond the political reach of pa tients angry at its decisions, the creators of the b o ard-Members of Congress-would not be not likely to succeed. For example, rationing is made more palatable 13 Seefwtnote3 14 EBRWallup Poll, cited in Immerwahr, Rutioning Healfh Cure 9 Option 2: A Meaningless Budget. But a national budget may in practice b e devoid of any real meaning other than a hoped-fur outcome. In other words, it may be like any entitle ment budget within the federal budget-not a limit on spending but merely the pro jected spending outcome of other policies. In this case, for Mr Clinton s national health budget to grow no faster than the increase in wages (which averaged 6.2 per cent during 1980-1991, compared with a health care expenditure growth averaging 10.3 percent during the period), as he desires, his other cost control measms must prove far mm effective than any strategy currently used widely in the public or private sectors.
The private sectors smnuous efforts at cost control, for instance, still resulted in an average annual premium increase of 14.4 percent between 1980 and 1991, compared with an average rise in the Consumer Price Index of 4.7 percent. And in addition, per capita s ending on health care grew during the period at an average annual rate of 9.3 percen$ Even the successful Federal Employee Health Benefits Program (FE H BP the nearest existing model to a functioning managed competition system, could only keep the average annual increase in premium costs down to 10.8 percent during the period. And with over five times as many bureaucrats, and 30 times as many pages of reg ulations, as the FEHBP per covered enrollee, Medicare costs still swelled at an an nual rate of 9.7 percent.
Medicares experience with price controls should give cold comfort to Clinton aides who see price controls as the key to achieving a global budget. Medicares attempt in the 1980s to hold down costs with standard fees for each treatment quickly led to an explosion of Medicate physician costs, as hospitals shifted costs to evade controls.
Moreover, hospitals which played by the rules lost money, while those that gamed the price controls prospered. Attempts to limit physician costs through government fiat have had similar results. Many conscientious doctors have found their inwmes falling while others maximized their incomes by such tactics as sharter a n d more frequent of fice visits for patientslpd by routinely using procedures and diagnoses that yield high reimbursements Voblems wlth Managed Competition Managed competition proposals tend to differ according to where they place the em phasis-on managed o r on competition. The Clinton plan, for instance, smsses gov ernment management. It incorporates a national board with sweeping powers to set bud gets, determine benefits packages and, in some mas, fuc treatment prices. Thus competi tion would operate wit h in a tightly organized framework of government controls. The Jackson Hole proposal, by contrast, is less rigid, but even this incorporates various boards and federal rules to limit and direct competition 15 Congnuison of Premium Trends for the Federal Emp r Orees Health Bems Program IO Private Sector Pmum Trends and Other Market Indicators, unpublished study conducted by Lewin/IcF, Arlington, Virginia, 1992 16 Robert E. Moffit, PhD., Comparable Wd for Doctors: A Sevete Case of Government Malpmctb, Heritage F o undation Backgrounder No. 855, September 23,1991 10 Each of these proposals, of course, exists only in theory. The interesting thing about the Federal Employee Health Benefit Program, the only existing national managed com petition program, is that it inc o rporates relatively little direct management. The heart of the FEHBP, which covers over nine million federal workers, retirees, and dependents, is an annual choice of health plan, known as "open season Federal workers axe presented with a set of competing plans, with information on premiums, services, and likely out-of pocket costs. They then pick the plan they consider the best value, with about two-thirds of the premium cost paid directly by the government. While the system is managed by the OMice of Per sonnel Management, OPM's main function is to assm an orderly open season, determine whether competing plans meet basic criteria, and remit premiums to the relevant plans.
The FEHBP is by no means perfect, but it does offer a useful real-life model as a ben chmark for analyzing the managed competition component of the Clinton Plan, as well as the Conservative Democratic Forum's managed competition legislation.This, to gether with other analysis, suggests that significant refcnms are needed in the proposals P r oblem #1 17 Price controls don't mix with competition Price controls introduce huge distortions into a market. Combining them with a strong dose of competition and consumer choice only aggravates the problem, as pa tients and providers make choices and de c isions based in many cases on artificial prices. And complex price controls are unnecessary if a strong market exists. Si cantly, even though the FEHBP includes several fee-for-service health plans, it does not impose Medicare-style price controls on phys icians or hospitals Solution: Abandon price controls in the Clinton plan, including for Medicare, and allow competitive markets to control costs. Let consumer choice of plan, or direct payment for medical services, be the instrument of cost control.
Basing a family's choices of plan to those offered through an employer based co-operatlve retains many of the drawbacks of today's employment based system.
Under the Clinton plan, the place of employment still would determine the range of RoblemX2 health plans available to a family. Each company could calculate whether its bottom line would be better if it continued to provide insurance, or simply dumped its em ployees into a managed care network. This is the same dumping incentive for employ ers that wou l d result in millions of Americans losin their current coverage under the major "play or pay" bills languishing in Congress. 1 17 For a full description of the FEHBP, see Robert E. Moffit, Ph.D Consumer Choice in Heal Learning from the Federal Employee Hea l th Benefit System Heritage Foundation Buckgrounder, No. 878, February 6,1992 18 See Edmund F. Haislmaiex, The Mitchell HealthAmeka Act A Bait and Switch for American Worlrers Mtage Foundation Issue Bulletin No. 170, January 17,1992 11 I In the CDF plan, p l ace of em- ployment also determines the I Value of Health Care Exclusion for I range of plans available to a I Typical Families in 1991 family. Thus although insurance reforms would mean a family could always have access to a plan, changing jobs would in I many cases also require a fam- less than $10,000 50 ily to change its coverage.
By contrast, almost all Mem bers of Congress and other fed eral workers and retirees have the same range of choices in any given area his means $1 00,000 or more 1.463 All Fa milies that moving from a huge agency to a small congressional office, or retiring, does not force a change Of coverage Souroo: Lewin/lCF estimates using the Hdth Benefits Simulation Model Solution: Take an individuals place of employment out of the equat i on by allowing fami lies in any large geographic ma to enroll in any available plan. Under this arrange ment, the HPPCs envisioned in the Conservative Democratic Forum bill would operate much as OPM does for federal workers. If large employers wished to o f fer a special range of plans to their own employees they could do so, but workers would not have to join a company-sponsored plan. In some cases, very large employers cmntly operat ing a plan might decide to spin it off as a subsidiary and turn it into an Accountable Health Plan open to anyone in a geographic =a. Among other things, this would mean a worker could remain enrolled in the plan if he moved to another fum In addition, employers could be required to make payroll deductions, on the instruc tion o f employees, and send premiums to each workers chosen plan, as federal agen cies and ofices do for federal workers. This would reduce total administrative costs of the system and make premium payment simpler for most families. For the employer it would be much like making a payroll reduction for an employees chosen 401(k pension plan.
Problem #3: Limiting plans to standard packages reduces consumer choice and Innovation, and will lead to intense lobbying by specialty groups.
One concern expressed by many a dvocates of managed competition is that if rival plans can compete directly for customers, cherry-picking will occur. This means some plans will offer low-cost basic services aimed at healthy individuals, or give healthy individuals a discount to get thei r business, leaving less healthy families in in creasingly expensive plans with ma services. A related concern is that families 19 Some plans are restricted to certain categories of workers 12 would sign up for a basic plan until they want extensive electi ve treatment, and then switch temporarily to a more elaborate plan. This adverse selection problem exists to a degree within the FEHBP, where each plan must charge all employees and I ees the same premium.
Most proponents of managed competition attempt to deal with this by designing a system to force plans to compete primarily on quality and price, not on the range of services they offer. Under the Jackson Hole Group and CDF proposals, for instance, a national board would establish a standard, comprehensiv e health package that all com peting plans would be required to offer. This would be like all automobile companies making one standard vehicle, so that they could compete on the basis of quality and price, not by offering models with different equipment. O n ly the standard health pack age would be eligible for tax relief. Any additional services would have to be paid for in after-tax dollars. The Clinton proposal is less clear. Managed care networks would receive a budget-driven fmd annual fee for meeting a consumers full health needs.
The National Health Board would determine the comprehensive package required of insurers ment board determines the standard medical services available to all Americans cept for those willing and able to pay in after-tax dollars for additional sdces. This would be like requiring most Americans to drive the basic model of Chevrolet, while allowing a choice of luxury can and imports for the rich. Innovative treatments, 01 al ternative forms of health caxe, would have to wait for g overnment approval as part of the stanm package befare they would be generally available to dary Americans.
A related problem is that every specialty would have a strong financial incentive to lobby hard to be included in the tax-preferred standard package . Specialty groups have lobbied successfully at the state level to be included in state-mandated insurance package.This has forced up the cost of health insurance and is a major cause of firms deciding to self-insure (feded law then pennits exemptions fro m state mandates).
With standard packages determined at the national level, the intense lobbying simply would move from state capitols to Washington, no doubt with the same cost-increas There are several problems with this approach. For one thing it means that a govem ing results.
Solution: Rather than establish a standaxd comprehensive package, with tax relief limited to that plan, require a lean basic package but allow families to choose a selection of ser vicesbeyond that and still obtain some tax relie f (see below 4 This would make the after-tax cost differential between a basic plan and an mare elaborate plan less sharp and so reduce the incentive for medical specialties- and organizations representing Americans with specific diseases-to lobby hard to be included in the base package.
The FEHBP effectively operates in this way, with direct government assistance (ap proximately two-thirds of the premium cost, up to a maximum) taking the place of tax relief. Significantly, the spndad requirements of FEHBP plans are minimal, and there is little pressm on Congress to expand them. Still, the market has evolved such that most plans do provide the services available in good corporate-sponsored plans To be sure, some adverse selection does take place in the FEH B P, and would do in a national system if plans could compete on the basis of services offered, rather than solely on price and quality. But that really only matters if plans are not able to vary 13 premiums to some degree according to risk. If they could v ary premiums, competi tion would make cherry-picking less attractive by driving down the premium price for covering healthy families, while higher-risk families would mean good reve nues for a competitive plan in the higher premium range.
There is a proble m with this only if premiums reflecting risk become urnason ably expensive for families. This happens today. Supporters of managed competi tion could reduce that problem by permitting plans to quote premiums for new en rollees only within a specified band (say up to 25 percent above or below a stan dard premium, according to risk) and without the right to turn down an applicant.
This is known as modified community rating. Existing enrollees would always be able to renew coverage at a premium increase no gr eater than the rise in the cost of the standard premium-irrespective of any change in their health status Still, requiring insurers to offer coverage to anyone, irrespective of medical con dition at a fixed price (community rating) or even within a band ( m odified commu nity rating) for a standard package of benefits, as proponents of managed competi tion would do, still leaves the insmrs open to adverse selection by families. This problem is endemic to all farms of community rating, because it forces insur e rs to accept high-risk individuals without fully factoring their cost into premiums. A far better approach would be to subsidize high-risk individuals directly, and allow in sm to charge appropriate premiums to cover them. This can be done through the tax treatment of health coverage (see #4 The credits and vouchers would lleduce the effective cost of more elaborate and expensive coverage for those families rc quiring it Problem #4: Most managed competition proposals do not sufficiently reform the tax trea t ment of heatth costs Todays tax treatment of health care costs discourages sensible choices by con sumers. By limiting full tax relief to company-sponsored health plans, the tax code enburages gold-plated company-paid plans while penalizing any employee w h o would pxtfer a leaner plan offered outside his company. By providing relief only fm premiums, the code encourages over-insurance, with employees routinely in suring themselves against such things as $5 prescriptions and routine dental care just to recei ve a tax break. The result is mm costly insurance farms and little in centive for families to shop wisely for even the most basic medical items.
The tax code is also extremely regressive in the wa y it helps families affard care. As Chart 2 shows, the value of the health cm tax exclusion is large for upper-income households with ccnporate plans, minuscule for low-paid workers with plans, and non-existent for those who work for firs without a plan. Reform of the tax treatment of health care is needed not only to correct the incentives in the current system, but also to assure coverage for the uninsured without any gen eral increase in taxation.
The managed competition proposals generally do not adequ ately address the need for tax refarm. Clinton has endorsed the idea of limiting the degxee to which companies can deduct the cost of health care plans. The CDF bill would do noth ing to change the tax treatment for employees, but it would introduce a tax penalty 14 How "Managed Competition" Would Work AHPs cannot base rates on medical history or predsting condiions Individuals Small Businesses All AHPS must offer the sambasicbeneffts 00000 I Federal Govern MpaYsPart of premium for those with'low Jdn coope r ative to cut administrative costs and spread rlsk Large Businesses nn I I Buy insurance CBrecIiyfrmAHP I I I overseeheaithmarket Provide consumer information Adjust for risk akng AHPs Standardizeaccounting on the quality of AHPs and paperwork Source: Cons e rvative Democratic Forum 15 benefits, yet leave well-paid employees with large tax breaks and all employees with the incentive to press for expensive company-sponsored plans while resisting reason able attempts by firms to make workers more attentive to c osts by paying more out-of pocket for their coverage.
By contrast, the Jackson Hole Group proposal would limit the tax relief for families to the value of the least costly standard plan. If a company provided a more generous plan, the exrra cost would beco me taxable income to the employee. By keeping the tax break as a deduction, highly-paid individuals still would enjoy the largest tax break under this arrangement, since they are in the highest tax bracket, while low-paid workers in low brackets or below the tax threshold still would receive little or no assis tance for the purchase of medical cm.
Limiting tax relief to the least costly standard plan also would mean in practice that full tax relief likely would only be available to a managed care health ma intenance or ganization (HMO Hence, the tax code would strongly penalize those Americans who value choosing their own doctar.
In addition, the proposals still would limit tax relief to insurance (or a plan not to out-of-pocket costs. So overinsurance woul d continue to be encouraged Solution: Eliminate the current tax exclusion for company-sponsored plans and replace it in a budget-neutral manner) with a sliding scale refundable tax adit for the purchase by families of insurance or out-of-pocket medical ex p enses. Companies with health plans would have to inform employees of the amount of their compensation devoted to the plan and permit employees to cash out this amount if they purchased at least a basic plan from another source This reform would do several things. First, it would give families a strong incentive to shop for the best value for money in health care coverage and seMces. Second, it would end the artificial distinction between insurance and out-of-pocket medical costs, thereby encouraging famili e s to choose mare economical plans with higher de ductibles and copayments. And third, it would give mcnz help to the low-paid and sick, and less to the highly-paid and healthy reason for this is that a refundable sliding-scale tax credit is like a voucher , with the amount of the voucher equal to a percentage of total medical costs. The percentage is highest for those with highest costs compared with their income. Thus a lower-income family, or a family generally in ill-health, would receive assistance equa l to a high percentage of their insurance and direct medical costs.
This tax reform is the central feature of a comprehensiv Consumer Choice Health Plan, developed by scholars at The Heritage Foundation5 A modified version of the consumer choice model is c ontained in the managed competition proposal advanced recently by the Progressive Policy Instit~te 20 See Stuart M. Butler and Edmund Haislmaier. eds A Nufiod Heulth Systemjor America (Washington, D.C The Heritage Foundation, 1989 and Butler, op. cir 21 S e e Rosnez, op. cit 16 CONCLUSION MOVING TOWARD COMPREHENSIVE HEALTH REFORM While the Clinton proposal is so seriously flawed as to be unworkable, it does at least seem to recognize that the key to fundamental health reform in the United States is through t h e private sector. He is not offering-at least overtly-a reform along the lines of the Canadian system, and he has virtually abandoned the play or pay proposals championed by the congressional leadership. He seems to have accepted that he needs to unleash t he power of consumer choice and competitive markets. Today these powerful forces for efficiency and cost control either are thwarted, or so distorted and misdirected by the tax code that they perversely encourage inefficiency and a surge in costs si dent- e lect Clinton, like an increasing number of lawmakers, recognizes that competition and consumer choice are crucial. The problem is that his proposal still is not really based on these forces. Other proposals advanced by lawmakers and organizations friendly to the incoming administration would do more to incorporate market dynamics into a na tional plan, but these, too, have serious flaws.
The modifications needed to make these consumer-choice proposals work effectively are contained in the comprehensive pla n developed at The Heritage Foundation. The es sential features of the plan axe contained in S. 3348, sponsored in the Senate by Onin Hatch, the Utah Republican.This plan would introduce tax and insurance refms which would, in effect, open up an improved v ersion of the federal employee health system to all Americans. It would allow them to choose plans offered by unions, chmhes, farm bu maus, or employer groups. They could make a choice without xegd to their place of work. And the plans tax reform would gi ve Americans the means and the incentive to choose wisely and economically. And in doing so, it would provide all American fami lies with essentially the same health system enjoyed for many years by their qresenta tives in Congress Stuart M, Butler, PhD.
Vice President and Director of Domestic Policy Studies 17