The political realities are sobering. The Clinton Health Security plan is often compared to Social Security and Medicare. But when Social Security and Medicare passed Congress, Roosevelt and Johnson each had commanding majorities in both houses. In 1935, there were 69 Democrats and 25 Republicans in the Senate; in 1965, the Democratic margin was 67-33. Even so, severe compromises were necessary. Today, with 60 votes needed to close off debate, the Senate has only 57 Democrats, and the president cannot depend on all of them. What is remarkable is that even with these numbers, Clinton has compiled the highest rate of legislative success in the first year of office of any president since Eisenhower.
Democrats have stronger control in the House but are more polarized on health care reform than in the Senate. A conservative group backs a managed-competition plan that does not achieve universal coverage, while a liberal wing supports a single-payer plan. Although the Clinton plan has elements in common with both, the two have little in common with each other. But to pass a bill, most members of these groups must join together.
The fiscal constraints are as daunting as the political obstacles. Facing a long-term structural deficit and negligible prospects for major new taxes, the administration cannot offer all the sweeteners that ordinarily make compromise palatable. Medicare was a boon to doctors and hospitals, and in other countries the adoption of universal health insurance has typically included concessions increasing the incomes of providers. That alternative isn't available now. The imperative to restrain health care costs inevitably means restraining the growth of health care incomes.
These are some of the hard realities complicating health reform. The constraints will be far more serious, however, if they are misjudged. Victory will be elusive if groups fail to adjust their expectations, and public enthusiasm will dissipate if concessions go too far. The delicate task of leadership is to thread its way between those two perils. In the countdown to congressional decision, success will depend on whether the leadership fighting for reform in and outside the gov ernment can keep up public pressure for change while striking a workable deal among contending interests and party factions.
The Clinton Health Security plan already embodies a number of strategic choices aimed at overcoming the barriers to change. The proposal retains basic features of the current system: private health plans, premium-based financing shared by employers and employees, and a separate Medicare program for the elderly. But it seeks to assure universal coverage and cost containment by creating a new framework for the purchase of insurance, requiring employer contributions, and capping premium increases as well as employer and individual obligations. Each of these departures is a potential flash point of conflict.
A year ago in these pages, I described the approach to coverage and cost control that evolved into the president's proposal. (See Footnote 1) This approach shares some key features with plans favored by liberals and other features with plans backed by conservatives. Like single-payer proposals, it guarantees coverage to all Americans as a right of citizenship, provides comprehensive health benefits, limits burdens according to ability to pay, and caps growth in expenditures for covered benefits. Like more conservative proposals that emphasize competition, the president's approach enables Americans to receive coverage through a private health plan of their own choosing, obliges plans to compete on price and quality for enrollment, and asks consumers to bear the marginal cost of health plans that produce the guaranteed benefit package at a higher premium.
The key institutional innovation is the creation of health alliances--originally called health insurance purchasing cooperatives--to pool costs and to serve as the gateway for consumers to the health plans in their communities. The alliances enable consumers rather than employers to choose plans and reduce administrative overhead for individual and small-group insurance. In the president's proposal, they also serve as the mechanism for consolidating the stream of revenue for health care and capping growth in costs (the caps apply to the weighted-average premium in the alliances, not the premiums of individual plans).
Rather than call for new broad-based taxes, the Clinton plan finances new federal costs primarily out of redirected growth in existing health programs. The only new taxes are an increase in tobacco taxes, an assessment on large corporations that run their own health alliances, and a partial recapture of savings to companies benefiting from lower health insurance costs for early retirees. Reductions in projected outlays for existing programs make up 57 percent of the sources of funds for the new initiatives. This financing strategy applies both to coverage of the under-65 population and to what might be thought of as the "Medicare module" in the plan. These are the provisions to limit the growth of spending for Medicare's existing benefits and to use the savings to provide the elderly prescription drug coverage and to finance a new program of home-based long-term care for the elderly and disabled.
As part of its financing, the president's plan includes several transitional compromises. By a transitional compromise, I mean one that stretches out or delays new initiatives, as opposed to a structural compromise that alters basic features. The main transitional compromises are that the plan phases in universal coverage, state by state, between 1996 and 1998, and defers some elements of the benefit package, notably broader mental health and dental coverage, until 2001. The proposed new home- and community-based long-term care program for the elderly and disabled will be gradually introduced between 1996 and 2000.
While accommodating fiscal realities, the president's plan does not make the structural compromise of sacrificing universal coverage or a comprehensive benefit package. A more limited plan, providing modest insurance-market reforms and minimum protection for the poor, would still fail to provide security to the middle class, control of costs to workers, business, or taxpayers, or any benefit to the elderly, and would thereby forfeit critical support.
The president's plan also maintains an option for states to carry out universal coverage through a single-payer system. No legislation will be able to pass without support from the grassroots organizations and members of Congress who support a single-payer plan. Many advocates of the alliance approach also believe that a single-payer system may work better in rural states and that all states should have both alternatives.
Nonetheless, there will be strong pressure to move toward a more limited plan. The two main "centrist" alternatives to the president's plan are the conservative Democrats' bill, introduced by Rep. Jim Cooper of Tennessee, and the Senate Republican proposal presented by Sen. John Chafee of Rhode Island. The Cooper plan does not assure universal coverage, and the Chafee plan does so only on the basis of a mandate on individuals (rather than employers) to purchase a limited benefit package to be defined by a national board after legislation. Both plans rely on market forces and caps on tax benefits for health insurance to contain costs. While the Cooper and Chafee plans call for purchasing cooperatives, their cooperatives are smaller and more vulnerable to adverse selection (that is, a higher risk membership) than the broad-based alliances in the president's plan. The Cooper and Chafee plans also have no regulatory backstop for capping cost increases if competition fails. And neither provides the elderly prescription drug coverage or extends long-term care.
The proposals differ in many other areas: the relation between the federal government and the states, malpractice liability, medical education, quality improvement, antitrust, integration of Medicaid, and changes in other government programs ranging from public health to the veterans' health care system. Without slighting the importance of these issues, I want to focus on three points of conflict that seem to me particularly crucial in determining whether reform can pass and whether it will work: the employer mandate; the structure of the health alliances; and the use of caps to contain costs--that is, both the premium caps in the Clinton plan and the tax caps in the Cooper and Chafee plans.
Ever since the first battle in the United States over "compulsory" health insurance on the eve of World War I, the central point at issue has been whether employers would be compelled to pay for health insurance. If there is one reason for optimism today, it is that many groups previously opposed to an employer mandate--the U.S. Chamber of Commerce, National Association of Manufacturers, American Medical Association, and Health Insurance Association of America--now accept one. Still, there is no certainty that a mandate can get 60 votes in the Senate and 218 in the House.
Some conservatives and business groups will oppose any requirement for employer contributions no matter what the terms are. For example, the National Federation of Independent Businesses, a lobby for small business, is using the issue to build up its own organization. The NFIB will almost certainly remain stridently opposed, even though the Clinton plan would enable many of its own members to buy coverage much more cheaply than today.
However, if an employer mandate is to pass Congress, the margin of victory may depend on the cost to business. Under the president's proposal, required employer contributions will pay for 80 percent of the average premium in an alliance for the guaranteed benefit package (with a prorated share for part-time workers). Employers paying for coverage through regional health alliances will pay no more than 7.9 percent of payroll for the 80 percent share, and employers with fewer than 75 workers will receive discounts capping their costs at levels as low as 3.5 percent of payroll, depending on both a firm's size and its average wages.
Several other provisions also affect employers' costs. The proposed caps on the growth of average alliance premiums will directly limit increases in employers' liabilities. Another provision will spread the cost of families among employers. While employers collectively will contribute 80 percent of the average premium, an individual employer will pay that amount divided by the average number of workers per family in an alliance. Since on average there are 1.4 workers per family, the average employer will actually pay only 57 percent of family premiums. In addition, early retirees between ages 55 and 65 will receive a community-rated premium through the alliances (that is, their costs will no longer reflect their age and health status), and federal subsidies will pick up the 80 percent share. Employers paying for early retiree benefits will see those costs decline even with the limited federal recapture of savings, which applies only for the three years beginning with the introduction of the special retiree benefit in 1998.
The political problem posed by the mandate is not the total costs to business, but rather the costs to specific types of firms. In no year will the mandate raise net costs to the business sector by more than 4 percent above current trends, and by the end of the decade, because of the cost containment provisions in the reform package, the business sector will be spending less than it would if we do nothing.
However, some firms stand to gain and others to lose because the new system will tend to spread costs more evenly among employers. Currently insuring firms-- particularly those that cover whole families and have older workers and many retirees--will tend to see reductions in their costs, while those that have provided little or no coverage will, of course, experience increases. For example, manufacturing companies, state governments, and small businesses that now provide good health benefits will generally see lower costs for their employees. But retail firms and other low-wage service businesses, especially those that rely heavily on part-time workers, will see higher costs. The firms exposed to the largest relative increases are employers with more than 5,000 workers, such as national retailers, that now offer no insurance and low average wages.
Employers' costs could be moderated or shifted through any of several changes:
The conflict here is between political perception and economic reality. Much of the public believes that employers bear the costs of health benefits. Moreover, many who now receive a higher employer contribution will be worried that they will lose some of what they now have. Here it will be essential to explain that just as a minimum wage does not drag down salaries for people who earn more, so, too, a minimum requirement for employer contributions need have no impact on workers whose employers now pay more either voluntarily or through collective bargaining.
There are limits to how far the employer share can be cut back without jeopardizing the goals of reform. The lower the share paid by the employer, the greater the number of households that need to be subsidized to make coverage affordable--and the more political resistance to a strong standard of coverage. Without any employer contribution, many families would face a staggering burden; subsidies would have to reach roughly half the population. Moreover, once such public subsidies were available, employers would cut back coverage, thereby generating still higher subsidy costs--a key problem with the Republican proposals for an individual mandate.
The employer mandate endorsed by the U.S. Chamber of Commerce calls for employers to pay 50 percent of the premium. It is not actually necessary to go as far as the Chamber's position to achieve nearly all of its effect. For example, if some in Congress proposed to reduce the minimum employer share under the Clinton plan from 80 percent to 70 percent, the effective share of family premiums for individual employers would, in fact, be 50 percent. Only for single workers would an individual employer be required to pay 70 percent. Moreover, about 10 percent of current premiums reflect the cost of unpaid medical bills of the uninsured that will be covered under reform. Thus, under universal coverage a mandate for employers collectively to pay 70 percent of the average premium would reduce the average employer's burden to approximately the level called for by the Chamber relative to present rates.
Of course, employers could contribute a higher share than the minimum level. And individuals and families whose employers contributed the minimum would pay only the difference between 70 percent of the average premium and the premium of the plan they select. On average, their share would be 30 percent.
A formula along these lines could reduce the cost of employer subsidies to the federal government. If the required employer contribution were reduced to 70 percent of the average but the cap on those contributions remained at 7.9 percent of payroll, fewer employers would hit the cap. Subsidies to low-income families would increase, yet there would be a net reduction in subsidy costs that could free up revenue to cap the contributions of low-wage firms with more than 5,000 employees, though perhaps not at the 7.9 percent level.
This route to reform is much to be preferred to a reduction in the guaranteed benefits to a catastrophic package (that is, with deductibles on the order of $2,000 or $3,000). Catastrophic insurance fails to provide the coverage of primary and preventive care that keeps patients out of emergency rooms and hospitals. It reinforces the skewed allocation of resources toward high-cost services that has made the U.S. health system the most costly in the world.
Moreover, if unemployment still threatens Americans with loss of their current coverage (and thereby access to the doctors in their health plan), reform will not have provided them genuine security. Also, a catastrophic option creates severe problems of risk selection: the people most attracted to it are likely to be young and healthy. That is why proponents of managed competition, as much as single-payer advocates, have opposed making catastrophic coverage the guaranteed benefit level.
The design of the purchasing alliances, although less well understood than the employer mandate, is just as contentious and critical an issue. While the Clinton, Cooper, and Chafee plans all make use of alliances, the Clinton plan structures them in a way that is far more likely to spread burdens fairly and control costs. Under the Cooper and Chafee plans, the purchasing alliances would have higher costs than employee groups outside. And once configured as high-cost pools, they would likely become unstable and a source of steadily deteriorating coverage.
Under the president's plan, regional health alliances will contract with health plans for coverage of all employees of firms with fewer than 5,000 workers, public employees, part-time workers, the unemployed, and other individuals outside the labor force--in all, more than 80 percent of the population under age 65. The alliances will thereby create a single pool covering the vast majority of Americans at a community rate, that is, the same premium regardless of health or other personal characteristics. The groups that purchase coverage through this pool will face no financial disadvantage compared with groups outside and most likely will benefit from a wider array of choices.
The president's plan allows firms with over 5,000 employees to opt into the regional alliances on an initially risk-adjusted basis, a provision designed to offset the costs of big companies with older workers. Large companies that establish their own alliances must still provide their employees at least the guaranteed benefit package and a choice of three plans. However, they are not eligible for any federal subsidies and must pay an assessment equal to 1 percent of payroll.
The Cooper bill, in contrast, would limit eligibility for its regional purchasing cooperatives to residents of an area otherwise without insurance and to firms with fewer than 100 employees. The Chafee plan calls for competing voluntary cooperatives, also limited to employers with fewer than 100 workers.
Both of these proposals threaten to raise premiums in the purchasing cooperatives as a result of adverse selection--the probability that the population in the cooperatives will include disproportionate numbers of people with high health costs. Under the Cooper proposal, individuals within small firms and all others not covered by large firms would choose whether or not to buy insurance. Under the Chafee plan, small firms would choose whether or not to buy from a purchasing cooperative. Because the proposals do not require participation in the alliances, individuals or groups with relatively higher risks will be the most likely to purchase coverage. And because the cooperatives are restricted to uninsured individuals and employees of small firms, they make up a more costly pool than the larger firms.
Making the cooperatives voluntary poses the same problems that a voluntary Social Security system would have. Not only will those purchasing coverage tend to have higher expected medical costs, but the system will cost more to administer because it will face marketing expenses obviated by an employer mandate. In addition, the cooperatives in the Cooper and Chafee plans will have to spread their administrative costs over a population that is both smaller and more costly to serve.
To ask only small firms and their employees to share in a pool that includes the unemployed and the poor is to impose an extra cost upon them that larger employers do not have to bear. Neither the Cooper nor Chafee plans include the offsetting benefits to membership in the regional pools--that is, the caps on employer contributions and avoidance of the 1 percent payroll assessment. This is not only a matter of fairness. If premiums in the alliances cost more, businesses and unions will seek to get out and the cooperatives may unravel.
That may happen during the legislative process. The danger is a cascade of exceptions, as one group after another seeks the ability to contract directly for insurance outside the alliances. This, of course, is exactly what the insurers want, since it would give them the ability to continue cherry picking the healthy. If Congress yields to those demands, the alliances will have higher premiums, subsidy costs will rise, and the entire reform effort may become a fiasco.
The Cooper bill is closer than the Chafee plan to the president's proposal in two respects. Cooper calls for only one purchasing cooperative per region--not for competing cooperatives, which themselves would have incentives to cherry pick em ployee groups. Under the Cooper plan, furthermore, firms with fewer than 100 employees can receive tax benefits for health insurance only if they buy coverage through the regional purchasing cooperative. This provision, which I think of as the "Cooper mandate," amounts to a 34 percent tax on any other health coverage and helps to limit adverse selection.
If Congress requires employers to contribute to health insurance, the differences between the Clinton and Cooper proposals for alliances may narrow. Cooper's original 1992 bill called for a cutoff size of 1,000 employees for employer-participation in the alliances. Cooper should, therefore, be willing to come back at least to that level. The lower the cutoff point, the greater the risk of hitting a tipping point where the alliances turn into an unfavorable risk pool and groups of all kinds demand the right to buy insurance on their own.
Some in Congress may also seek a transitional accommodation with Cooper: the use of the Cooper mandate, say in 1996, combined with a phased-in requirement for employers to pay for coverage. For example, the full employer mandate might apply in 1996 only to employers with over 100 employees, then in 1997 to firms between 50 and 100, and finally in 1998 to all firms. This sequence might help alliances get started (they would first be dealing with a more stable base of midsize employers largely accustomed to paying for health insurance), but it would complicate many other issues.
On one critical point, the Cooper plan is highly vulnerable. Unlike the president's proposal, it does not guarantee that every alliance will offer a traditional, fee-for-service plan that pays "any willing provider," and it includes no provision for alliances to negotiate fee-for-service rates. (See Footnote 2) These provisions of the Clinton plan are anathema to many advocates of managed competition who expect and hope that fee-for-service coverage will disappear entirely, but this is not a politically tenable position. The Cooper plan has gotten much support from conservatives and even from doctors who do not appreciate its implications for fee-for-service medicine.
The use of caps in containing costs may pose the toughest problem of all. On the one hand, the president's plan calls for a cap on health plan premiums that is opposed by Cooper, most Republicans, and many groups that accept the employer mandate and other elements of reform. On the other hand, the Cooper and Chafee plans call for a cap on tax benefits for health insurance set aside by the president, opposed by labor, and likely to be deeply unpopular. But this chasm, too, must be bridged.
The premium caps and tax caps have some of the same functions: restraining increases in system-wide costs and limiting new federal spending. The president's caps limit increases in average premiums in the alliances and thus control federal subsidies that depend on those premiums. The tax caps in the Cooper and Chafee plan limit the amount of tax-free money for insurance premiums and thus cut the cost of federal tax expenditures.
Under the Clinton plan, national legislation will set a growth rate for premiums for covered benefits for the country as a whole, and the National Health Board will adjust that rate for specific alliances depending on demographic changes and other factors. Alliances may meet their targets without any enforcement of caps as consumers switch out of high-cost plans, thereby dragging down the average. If, however, health plans' bids in a given year threaten to push an alliance's average over the allowable growth, the federal government will deny full rate increases to the plans seeking the biggest jumps and require the plans to pass on those rate reductions to their providers.
The administration conceives of the premium caps as a "backstop" to competition, needed because not every area will have vigorously competing plans and the health care industry has a history of successfully inhibiting competitive forces. The caps will also dampen expectations in an industry long accustomed to rapid inflation. Although the president's plan expects savings from the alliances and competition, the caps will put firm boundaries on the financial obligations of employers, individuals, and the federal government itself. It is this kind of firm limit that the Cooper and Chafee plans do not have.
Some early criticism of the president's plan released in September focused on whether the caps were realistic because they call for cutting the growth rate in spending for covered benefits from around 9 percent annually to about half that level between 1996 and 2000. However, the caps during this period are not premised on so quick and deep a reduction in the underlying rate of growth. Besides moderating the growth rate, reform also generates one-time savings from consolidation of the small-group insurance market, consumer switching out of high-cost plans, a uniform claims form, and other changes. This combination of ongoing and one-time savings will permit reducing the growth rate in health costs to levels approaching general inflation plus population by late in the 1990s. The president's plan also achieves a corresponding slowdown in the growth of Medicare costs through specific reductions in future payment increases.
If the debate focuses on the appropriate growth rate for both private and Medicare spending, the president will have won half the battle. The big risk to reform is the possibility that Congress will reject any caps on private premiums. Without the caps, initial premiums and later increases may well be higher than projected, raising the specter of higher subsidy costs and thereby undermining the commitment to a strong benefit package.
Perhaps the most important but least understood aspect of this issue concerns the baseline premiums for the first year of reform. Today provider rates and insurance premiums reflect the cost of unpaid bills left by the uninsured. After universal coverage, unless rates come down, providers will receive a windfall. In theory, competition should force providers to give up that bonanza, but to count on perfectly efficient markets would be foolhardy. A special tax might recapture windfalls, but it seems far better never to give the industry a windfall in the first place. Thus, the method for calculating baseline premiums pulls out the current cost of uncompensated care. With no premium caps, it is likely that health care reform would begin with a costly expansionary spurt.
Furthermore, if there are no premium caps, the limits on Medicare spending will likely result in a shift of costs from Medicare to the private sector. Limits on Medicare's spending are on the way. The administration's proposed $125 billion in Medicare savings is about the same level as nearly half the Senate voted for in the Dole-Domenici entitlement cap; the Wellstone single-payer bill actually calls for higher cuts. But if there are no corresponding private limits, Medicare beneficiaries may encounter barriers to access, as Medicare payment levels fall behind. Even conservatives who support entitlement caps must face that if they want to cap Medicare but not private premiums, they will likely only shift costs to the very same private sector they are presumably seeking to protect from higher taxes.
One way to overcome opposition to the premium caps may be to set rules for their application. As even the most ardent advocates of competition recognize, some regions of the country do not have competing plans now, and some rural areas have little prospect of effective competition. Moreover, even in many areas with potential to support competing plans, it will take time for competition to become effective.
Some in Congress may propose, therefore, that the premium caps not apply unless the National Health Board makes a finding that competition in a region is ineffective in limiting costs. However, to prevent windfalls at the outset of reform, the National Health Board would need special authority to ensure that first-year rates reflect the reduction of uncompensated care to the previously uninsured.
In return for this concession, some supporters of reform in Congress might accept a limited version of the tax cap. For example, employer contributions could continue to be tax-deductible to the employer and excludable from taxable income of the employee up to 100 percent of the average premium--a provision that would at least constrain the use of tax-free dollars to pay for high-cost plans.
A tax cap, even at 100 percent of the average, would raise objections from unions. However, the early retiree benefits, which many observers assume will disappear from the final plan, could be the basis of a deal. Most of the cost of early retiree benefits comes from general features of the plan: community rating and discounts to low-income families, not the special federal subsidy for the 80 percent share. The recapture tax on companies benefiting from the early retiree provisions fully offsets the marginal cost of the retiree discount through the year 2000. Thus opponents of the retiree provisions may be persuaded to support them in exchange for labor's acceptance of a limited tax cap.
Premium caps are an indispensable element of the Clinton plan. In the event that Congress prefers to establish targets rather than enforceable limits at first, the targets should become caps in the third year if competition fails to limit premiums. This would give a fair test to competition but still provide a "scoreable" method of cost containment by 1998, when the program is fully implemented and more federal money is at stake.
The most critical dangers for the president's plan are defeat of the employer mandate, a merely voluntary basis for the alliances, and the loss of any way to limit baseline premiums in the first full year of implementation. Because the plan has so many interdependent parts, a defeat on any one of these could set in motion a reaction compromising core objectives of health security. These are the threats that the administration and its supporters must succeed in overcoming.
Some other difficult issues can be skirted by turning them over to the states. State flexibility is a kind of insurance policy against excessive compromises at the federal level. If the federal government botches reform, a flexible design will at least allow some states to get it right. The opportunity to win at the state level is the basis on which many of the single-payer groups now support the president's plan. State flexibility, however, can extend in many directions, including backwards, which is always the risk in compromise.
It is one thing, of course, to imagine there are bridges to compromise; it is another thing for opponents to cross them. The reality is that some opponents of the employer mandate, alliances, premium caps, and health care reform itself have no interest in compromise. A lot of groups do well under the status quo: that is why it is so expensive. Others, on the left, believe it is better to wait for the coming of single-payer enlightenment than to suffer any lesser outcome.
But we have had almost a century of waiting for universal health insurance. To break the pattern, we must not only accept the imperfect possibilities of our time--we will have to fight for them.
2. Many news articles and commentaries (for example, a November 18, 1993 editorial by Arnold Relman in the New England Journal of Medicine) repeat erroneously that the Clinton plan includes only managed care plans or that the fee-for-service option will necessarily have the highest premium. In fact, because of the cost-sharing provisions, the premium for fee-for-service plans may well be less than premiums for many HMOs or only a little higher. And because alliances negotiate fee-for-service rates, they have the power under the president's plan to keep fee-for-service premiums down. (Back to Text)