by Christa Rosenberg, Consultant for Health Policy
|Although the final details of national health care reform will be undecided for some time, elements in a number of major reform plans will shape the development of a reformed health care system significantly: health plan, purchasing cooperatives (PCs), employer involvement, cost containment mechanisms, and insurance reforms. This report outlines how each of these elements is treated in four major health care reform plans — the Clinton, Stark, Cooper, and Chafee bills — and discusses implications.|
President Clinton’s pursuit of national health care reform began over a year ago when he assembled hundreds of health experts in Washington, D.C., to develop his Health Security Act of 1993 [House Resolution (HR) 3600/Senate (S) 1757]. Despite all of the expertise that was gathered and all of the debates that have ensued since then, the ultimate fate of the president’s plan still remains uncertain. The uncertainty continues because the issues involved are extremely complex and partisan disagreements have obstructed productive compromise.
Adding to the complexity of the issues is the number of reform plans that have been proposed. At least eight comprehensive reform bills have been introduced in the House and Senate during this congressional session — including that of Senator Chafee (R‑Rhode Island) on November 22 and that of Representative Cooper (D‑Tennessee) on October 6 — to rival Clinton’s Health Security Act.
The president’s plan must compete with each of these eight bills as well as with the powerful chairpersons of the various House and Senate subcommittees and committees. Chairpersons can eliminate or revise the introduced bill, or substitute their own plan for any bill that is assigned to their respective committees. President Clinton’s plan has, however, set the framework for many of the reform plans that are being seriously considered.
Rep. Pete Stark (D‑California), chairman of the House Ways and Means Committee’s Subcommittee on Health, revised portions of the Clinton plan last month. To date, Stark’s subcommittee has been the only committee or subcommittee in either chamber to obtain a majority vote on a health reform plan.
The Stark plan’s emergence to the full committee, however, is only the first step toward possible passage; the full House Ways and Means Committee could change the plan’s elements or completely eliminate it when Congress reconvenes the week of April 11.
Rep. Dan Rostenkowski (D‑Illinois), who chairs the full committee, has already indicated that he will begin marking up the bill by replacing Stark’s financing mechanism. Nevertheless, Stark’s ability to forge a fragile consensus (6 – 5 votes) among the 11 members of his subcommittee indicates that compromise is possible and that reform is impending.
(See the glossary on page 12 for an explanation of terms critical to the following discussion.)
The Clinton Plan (HR 3600/S 1757)
The president’s original bill would provide universal coverage by requiring all employers to purchase health insurance for their workers. Small businesses, the unemployed, and low‐income individuals would receive subsidies to purchase coverage. States would be required to establish purchasing cooperative (PCs), through which employers and individuals would buy insurance at the reduced rates that result from competition among insurance companies. Insurance premium increases would be limited by federally established growth restrictions.
The Stark Plan (HR 3600)
Representative Stark’s bill — a substitute for the Clinton bill — would keep many of Clinton’s original provisions but does rewrite several major features to attain universal coverage.
Unlike the Clinton plan, Stark’s plan would create Medicare Part C so that low‐income individuals and small employers could purchase insurance through the federal government.
Under the Stark plan PC formation would be voluntary and participation in them would be optional. The Stark plan would also require individuals to submit proof of insurance with their annual tax returns. As with the Clinton plan, the Stark plan would require employers to contribute towards the cost of employee health coverage.
The Cooper Plan (HR 3222/S 1579)
Representative Cooper’s bill would require all employers to offer — but not pay for — health insurance coverage. Although this plan would not provide universal coverage, it would make insurance easier to obtain by reforming insurance practices and mandating that states must establish PCs. Small employers would be required to purchase insurance through the PCs to maintain tax deductibility of premiums.
The Chafee Plan
Representative Chafee’s bill would provide universal coverage through its individual mandate. Employers would be required to offer — but not pay for — health insurance coverage, and individuals would be responsible for purchasing insurance. PC formation would be on a voluntary basis.
An element common to all four plans that is expected to pass is the provision that would allow greater freedom for health care providers to form partnerships than current antitrust legislation permits. This freedom is intended to increase the use of managed care.
The entities that would result from these provider partnerships are called health plans. These plans would consist of hospitals, physician groups, and other health professionals that would provide a wide range of services — everything from primary care to hospital care and home and hospice care. Capitations — fixed fees a provider receives for giving individuals care for a specific period — would be paid to health plans, which would assume financial responsibility for providing all of the services that are covered under the standard benefits package.
Establishment of regulations for health plan partnership formation would be different in the four reform plans. The Clinton and Stark bills would allow partnerships to form according to regulations that would be issued by the Secretary of the Department of Health and Human Services. These two reform proposals do not outline what the regulations would be; instead, their bills state that the secretary would issue acquisition regulations for health insurance and health care providers after passage of the bills.
Representative Cooper’s plan would require the president to develop specific guidelines on the application of federal antitrust laws to health plans, and these guidelines would be required to facilitate health plan formation. Guidelines would not be developed until after passage of Cooper’s bill.
Senator Chafee’s plan also would allow health providers and insurance groups to establish partnerships. Unlike the other three, Chafee’s bill spells out exactly what types of health plan partnerships are allowable. Partnerships that fall into one of the categories outlined in the Chafee bill would be permitted to form.
It is evident that each of the four plans intends to reform antitrust legislation to promote health plan formation, but each bill takes a different approach to who will decide how it should be done.
Purchasing cooperatives are the heart of the cost reduction efforts in the Clinton, Cooper, and Chafee reform plans. Stark’s plan, with its voluntary PCs and creation of Medicare Part C, would not rely on purchasing groups as much as the other three plans (see Exhibit 1).
The PCs would gather individuals into large groups, which is advantageous for purchasing insurance because the larger the group, the more risk is spread, resulting in lower premium costs. This approach is often referred to as giving individuals and small employers “purchasing power.” Although the concept of PCs is shared by all four reform plans, each plan would approach PC form and function quite differently.
Only the Clinton and Cooper bills would mandate the formation of PCs. The Clinton PCs could be either state agencies or nonprofit corporations, and the Cooper PCs must be nonprofit corporations, although they must be established by states.
Stark’s plan does not require formation of PCs. By offering a series of grants for PC development and implementation, however, under this plan the federal government would provide states with a strong incentive to form PCs.
Cooperatives are least likely to form under the Chafee plan since his plan would allow purchasing groups to form but would not require states to establish them. The absence of mandatory alliances in the Chafee plan is inconsistent with the bill’s reliance on alliances as a major cost‐containment mechanism.
These approaches to purchasing groups have a number of additional problems. First, as currently structured, the Clinton PCs would be giant entities, capable of making — or breaking — the entire reformed system because their responsibilities are so extensive. To begin with, PCs would be responsible for disseminating quality information to consumers and health plans, ensuring continual improvement in health plan performance, and conducting educational programs to teach consumers how to use quality information in selecting health plans.
The Clinton PCs also would be responsible for ensuring that everyone is covered in the PC area, administering subsidies, and negotiating health plan rates. If the PCs handle these extensive responsibilities well, the health care system would function efficiently and effectively. If they fail to do so, the system is likely to be plagued with numerous and complex problems.
Such large cooperatives would be especially vulnerable to bureaucracy and inefficiency. Because such entities have no precedent and formation of them would demand extensive resources and given that Rep. Dan Rostenkowski of the House Ways and Means Committee has said that the Clinton PCs will never be reported out of his committee, it is highly unlikely that Clinton’s vision of PCs will come to fruition.
In contrast, the Cooper PCs would most likely be smaller than the Clinton PCs, since only employers with fewer than 100 workers would be allowed to purchase coverage through them.1 As state‐chartered, nonprofit corporations, Cooper’s PCs would be somewhat similar to those that have recently been established in Florida and would have similar vulnerabilities.
In 1992 Florida passed legislation requiring the state to set up one nonprofit PC in each of 11 regions. These PCs will make insurance available to small employers beginning in May this year, but employers are not required to participate. Premium bids from health plans were accepted and made public for the first time in February of 1994. The bids varied widely — from 20 percent below to 20 percent above the cost of premiums that would be available to small employers purchasing coverage outside the PC.
As the first real test of managed competition, the Florida initiative shows that competition has the potential to lower insurance costs in the small employer market. Nevertheless, ultimate success will depend on how many small employers choose to purchase coverage. If not enough employers participate, premium costs are likely to rise.
The PCs under the Cooper plan could face the same situation. Although this plan would require all employers to make arrangements for employees to obtain insurance, employers and their employees would not be required to purchase coverage through the PCs. If not enough people choose to participate, the PCs — and managed competition — would fail.
As uncertain as PC success under the Clinton and Cooper plans is, PCs under the Chafee plan are certain to fail for two reasons. First, establishment of the PCs is voluntary for states. The only state requirements for PC formation are that (1) states must establish regional boundaries or coverage areas and a cooperative would be limited to offering insurance only within the area in which it is established and (2) states must have procedures for PC establishment and operations. Nevertheless, since states would not have to establish PCs, it is possible that they never would be formed.
The second reason why the Chafee PCs are certain to fail is that if they actually form, multiple PCs would be allowed in each geographic region. Not only would the health plans compete with one another, the PCs would compete against each other as well. This situation would mean that participating employers could purchase their coverage from multiple cooperatives. Consequently, the purchasing power of each PC would be lower than if a single PC was mandated per area because membership would be spread among a number of smaller pools rather than concentrated in one large pool.
The Stark plan compromises somewhat between mandatory PCs, such as those in the Clinton and Cooper plans, and voluntary PCs, such as those in the Chafee plan. Although Stark would not require PC formation — by offering federal grants for PC planning, development, and initial operation — his plan would provide strong financial incentives for states to do so. States would have to meet federal requirements to be eligible for the grants.
Stark’s plan retains one of the most important elements of the Clinton and Cooper PCs: requiring states that choose to establish PCs to have only one PC per geographic area. His plan also allows states to design their own health delivery and financing systems. Those states that have federal acceptance for their state‐developed health system can choose to mandate employer participation in the PCs. This allowance gives states the flexibility necessary for adjusting to the various health care systems and demographic and economic conditions peculiar to each state.
Employer Contributions and Universal Coverage
The most obvious and controversial difference among employer mandates of the four plans is the extent to which each requires employers to furnish health insurance for their workers (see Exhibit 2). The Clinton plan — the least popular among small business owners — would require employers to offer insurance and pay at least 80 percent of the average regional premium. Likewise, the Stark plan would require employers to pay 80 percent of the plan that the employer offers.
In contrast, the Cooper and Chafee plans would require employers to offer but not pay for employees’ health insurance. The “offer but not pay for” clause in the Cooper and Chafee plans simply means that employers would have to make purchasing arrangements with an insurer or a PC on behalf of their employees. Employers would provide the names of their eligible employees to a PC and would deduct insurance costs from employee paychecks if employees request that they do so.
The rationale behind the “offer but not pay for” clause is that it would encourage small employers to join large purchasing pools for insurance, which would lower premium costs for the individuals who purchase the insurance because an insurer’s risk is lower when it is spread across a greater number of people. Consequently, proponents say, individuals should be able to afford the cost of health insurance. This option is popular among employers because they would not be required to contribute to employee health insurance.
The other major mandate difference among these plans is the Chafee plan’s requirement that all individuals must purchase insurance, which means universal coverage would be attained. The Clinton and Stark plans also would achieve universal coverage — but by means of an employer mandate to pay for coverage. Although individuals would be required to have insurance under the Clinton and Stark plans, their plans are not considered to have an “individual mandate” since the primary payment method would be through the employer mandate.
Of these four plans, Cooper’s plan is the only one that would not provide universal coverage. This plan would make insurance more affordable, but employers and consumers could choose whether to purchase insurance. All four plans would provide employer and/or individual subsidies to help the low‐income population purchase health insurance.
The Clinton and Stark employer mandates that employers must offer employee coverage and pay for 80 percent of it will have to overcome significant opposition to survive. Republicans and Democrats alike are denouncing the level of coverage that employers would have to provide under the Clinton plan because of the uncertain effects such a mandate would have on small businesses. Several analyses predict the potential effects of employer mandates on small businesses, but the results are conflicting, and even the most methodologically sound studies cannot predict with certainty how employer mandates will affect the small business community.
Nevertheless, eliminating the employer mandate altogether is potentially hazardous. Paul Starr, a noted sociologist and health care historian, points out that if universal coverage is going to be achieved without an employer mandate to pay for at least a portion of coverage, almost half of the population would need subsidies to afford insurance.2
If half of the population would need subsidies, then a substantial financing source, taxes, would be required, taxes, an option that is not popular with large employers, small employers, or the general public. Furthermore, if consumers receive subsidies and no employer mandate exists, then employers would have an incentive to reduce — or even eliminate — coverage. That is, employers could save money by cutting their health benefits and costs, knowing that the government would subsidize their employees’ benefits.
Cost containment is one of the dominant issues pushing health care reform to the forefront of the national political agenda. Cost containment measures under each of the four major bills share some similarities and some differences (see Exhibit 3). Similarities include mandates for administrative savings, malpractice reform, reductions in Medicare spending growth, and some level of managed competition. Differences include national health care spending limits, tax deductibility for insurance, and some portions of managed competition.
One of the major differences between the Clinton and Stark plans and the Cooper and Chafee plans is the use of national spending limits in the first two plans. The Clinton bill would enforce annual premium growth limits for health plans within each PC region when health plan bids are higher than federally established growth rates.
The Stark plan also would establish national spending targets; however, its backup mechanism for years when the targets are passed is a payment methodology based on the Medicare payment methodology. Private health plans would be required to use this methodology for provider reimbursement.
Both the Clinton and Stark methods would allow the free market to keep health costs down while providing a more restrictive stand‐by method of cost containment in the event that the free market does not work. The Cooper and Chafee plans do not have backup plans for spending limits.
Taxing Health Benefits
Each of the four reform plans also would treat taxes on health benefits somewhat differently. At present, employers can deduct 100 percent of their health benefit contributions from the taxes they pay at the end of the year. Employee contributions are 100 percent tax‐exempt — that is, they are not counted as employee income. Self‐employed individuals, however, can deduct only 25 percent of their insurance costs under the current system. Deductions are allowed for unreim‐bursed health expenses (that is, expenses not paid for by insurance) that are over 7.5 percent of the individual’s adjusted gross income.
Under the Clinton and Stark reform plans, 100 percent tax deductibility for health coverage would be extended to include self‐employed individuals as well as employers and employees. Beginning in 2004, however, employer and individual contributions for coverage other than the comprehensive benefit package would be taxed under the Clinton plan. Stark’s bill would continue to keep all benefits tax deductible for the employer and tax exempt for the employee. Both the Cooper and Chafee plans, however, would im‐mediately set a cap on tax deduc‐tibility for employers, employees, and the self‐employed.
Limiting the amount of health benefits that are tax‐exempt is a means of (1) reducing the rate of spending for unnecessarily extensive health care benefits and (2) raising revenue to finance subsidies for the poor. In addition, reducing the rate of spending on health benefits is seen as one way to reduce the rate of growth in overall health spending. The rationale is that employers and individuals who want more extensive benefits packages should be allowed to purchase them at their own expense.
Although reducing health insurance spending by limiting tax‐exemptions is well‐intended, consideration also should be given to the potential for a two‐tiered system that could develop as a result. That is, the poor would be forced to settle for the standard plan while those with additional resources would be able to purchase extra benefits.
Initially, this situation might appear to be an improvement on the current scenario that leaves 37 million people uninsured; however, if the standard plan benefits are significantly reduced to pass an affordable health reform plan with universal coverage, a two‐tiered system could easily develop, leaving millions with a substandard plan. In such a case, limiting tax exemptions could prevent individuals from obtaining necessary benefits.
Insurance Industry Reform
Changes to current insurance industry practices resulting from insurance reforms in the four plans would be similar (see Exhibit 4). For instance, all four plans require that health plans cover all eligible employees and individuals who want to purchase coverage, including those with preexisting conditions.
The only way that health plans could be exempt from providing coverage under the Cooper and Chafee plans is if an individual had failed to pay premiums, committed fraud in terms of health plan eligibility, or moved their residence to an area outside of the health plan’s service area.
The Clinton plan, in contrast, would not allow health plans to cancel enrollment for failure to pay premiums. In fact, health plans could not disenroll any individual until s/he had signed up with a new health plan. Stark’s bill is silent on whether health plans would be permitted to cancel a policy based on reasons that are unrelated to health status.
The Chafee plan is unique in that it would allow consumers to purchase medical IRAs, or medical savings accounts, instead of a standard plan. Individuals who choose to use a medical IRA would contribute tax‐free income or personal money to the account and would be required to purchase a catastrophic plan, which costs less than standard plans but has a high deductible (around $3,000). Individuals could use the tax‐free money that was deposited into the account only to pay for noncatastrophic health care services.
The catastrophic plan would cover the cost of additional services after the individual had paid the deductible. Money left in a medical IRA at the end of the year could be withdrawn for personal use, but the money would be taxed as income. Proponents of medical IRAs explain that consumers will purchase health care services more prudently if they pay for them with money that could eventually be used for other personal items if not spent on health care.
Despite the reported cost saving possibilities of medical IRAs, a number of problems exist with the type of payment system Chafee uses. First, savings accounts would deter consumers from obtaining necessary as well as unnecessary care. The potential for additional income at the end of the year would motivate some consumers to delay care, which could cause health conditions to worsen and ultimately result in greater costs than if care had been obtained at the onset of the illness.
Exacerbating this problem is the fact that consumers may not make sound judgements about what care is necessary and what care is unnecessary. Furthermore, the use of catastrophic coverage and medical IRAs would create inadequate funding of insurance pools. Healthy individuals, not expecting to need care, would most likely choose to participate in the catastrophic plans, which would leave the less healthy population to participate in traditional insurance arrangements.
To support their costs, insurance pools with such high concentrations of unhealthy individuals would have to charge higher premiums than pools without such concentrations. Thus, medical IRAs would not actually achieve the overall cost savings that proponents claim they would.
The elements of health care reform are complex and will require serious discussion if compromises are to be made and health care reform is to be attained. Representative Stark’s initiative to negotiate several of the elements of reform indicates that these serious discussions have commenced.
In fact, Rep. John Dingell (D‑Michigan) also has drafted a new health proposal that his Energy and Commerce Committee will take up when Congress reconvenes on April 11. Like Stark’s proposal, Dingell’s plan rewrites several reform elements: Employer mandates to pay for coverage would be retained at a lower rate than 80 percent, PCs would be voluntary, and the standard benefits package would be reduced from the level outlined in the Clinton plan. All of these details, however, will change numerous times before a final bill is reported out to the full House floor for a vote.
Although the details of the reform bills will change, the elements undergirding the reform plans — health plans, PCs, employer involvement, cost containment mechanisms, and insurance reforms — will be preserved, because these elements have been embraced by many members of Congress as the keys to successful reform.
Developing these elements into a health care system that provides universal coverage while controlling costs will be the major focus of Congress as it returns to Washington to undertake the serious discussions that are necessary to complete the difficult task that President Clinton began last year.