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HEALTH CARE REFORM

Y 4. W 36:103-92

Health Care Reforn, Serial No. 103-. . . ^^Q-g

BEFORE THE

SUBCOMMITTEE ON HEALTH

OF THE

COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES

ONE HUNDRED THIRD CONGRESS

SECOND SESSION

VOLUME XIII

Issues Relating to Inner-City and Rural
Communities

FEBRUARY 7, 1994

H.R. 1200, American Health Security Act of 1993;
H.R. 2610, MediPlan Act of 1993; and Other Sin-
gle-Payer Options

FEBRUARY 9, 1994

Alternative Health Reform Proposals Including
H.R. 3080, H.R. 3704, H.R. 3652, H.R 3222, and
H.R. 3698

FEBRUARY 10, 1994

Serial 103-92

Printed for the use of the Committee on Ways and Means

f^B 8 /QQ

-^<Wif*£j^i^-

HEALTH CARE REFORM

HEARINGS

BEFORE THE

SUBCOMMITTEE ON HEALTH

OF THE

COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES

ONE HUNDRED THIRD CONGRESS

SECOND SESSION

VOLUME XIII

Issues Relating to Inner-City and Rural
Communities

FEBRUARY 7, 1994

H.R. 1200, American Health Security Act of 1993;
H.R. 2610, MediPlan Act of 1993; and Other Sin-
gle-Payer Options

FEBRUARY 9, 1994

Alternative Health Reform Proposals Including
H.R. 3080, H.R. 3704, H.R. 3652, H.R 3222, and
H.R. 3698

FEBRUARY 10, 1994

Serial 103-92

Printed for the use of the Committee on Ways and Means

U.S. GOVERNMENT PRINTING OFFICE
81-665 CC WASHINGTON : 1994

For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402
ISBN 0-16-046315-7

COMMITTEE ON WAYS AND MEANS
DAN ROSTENKOWSKI, Illinois, Chairman

SAM M. GIBBONS, Florida
J.J. PICKLE, Texas
CHARLES B. RANGEL, New York
FORTNEY PETE STARK, California
ANDY JACOBS, Jr., Indiana
HAROLD E. FORD, Tennessee
ROBERT T. MATSUl, California
BARBARA B. KENNELLY, Connecticut
WILLIAM J. COYNE, Pennsylvania
MICHAEL A. ANDREWS, Texas
SANDER M. LEVIN, Michigan
BENJAMIN L. CARDIN, Maryland
JIM MCDERMOTT, Washington
GERALD D. KLECZKA, Wisconsin
JOHN LEWIS, Georgia
L.F. PAYNE, Virginia
RICHARD E. NEAL, Massachusetts
PETER HOAGLAND, Nebraska
MICHAEL R. MCNULTY, New York
MIKE KOPETSKI, Oregon
WILLIAM J. JEFFERSON, Louisiana
BILL K. BREWSTER, Oklahoma
MEL REYNOLDS. Illinois

BILL ARCHER. Texas
PHILIP M. CRANE, Illinois
BILL THOMAS, California
E. CLAY SHAW, JK., Florida
DON SUNDQUIST. Tennessee
NANCY L. JOHNSON, Connecticut
JIM BUNNING, Kentucky
FRED GRANDY, Iowa
AMO HOUGHTON. New York
WALLY HERGER. California
JIM MCCRERY. Louisiana
MEL HANCOCK, Missouri
RICK SANTORUM, Pennsylvania
DAVE CAMP. Michigan

Janice Mays, Chief Counsel and Staff Director
Charles M. Brain, Assistant Staff Director
Phillip D. Moseley, Minority Chief of Staff

Subcommittee on Health

FORTNEY PETE STARK. California, Chairman

SANDER M. LEVIN, Michigan
BENJAMIN L. CARDIN, Maryland
MICHAEL A. ANDREWS, Texas
JIM McDERMOTT, Washington
GERALD D. KLECZKA, Wisconsin
JOHN LEWIS. Georgia

BILL THOMAS. California
NANCY L. JOHNSON, Connecticut
FRED GRANDY, Iowa
JIM McCRERY, Louisiana

(It)

CONTENTS

ISSUES RELATING TO INNER-CITY AND RURAL COMMUNITIES-
FEBRUARY 7, 1994

Page
Press release of Friday, January 21, 1994, announcing the hearing 2

WITNESSES

U.S. Department of Health and Human Services, Hon. Philip R. Lee, M.D.,

Assistant Secretary for Health 28

Albert Einstein Medical Center, Martin Goldsmith '. 126

California Children's Hospital Association, Barbara Staggers, M.D., and

Susan Maddox 120

Center for Health Policy Research, George Washington University, Sara

Rosenbaum 51

Children's Hospital Oakland, Barbara Staggers, M.D 120

Children's Hospital of Wiconsin, Jen E. Vice 109

Family Health Care Centers, John M. Silva 77

Moody, Hon. Jim, Medical College of Wisconsin 99

National Association of Children's Hospitals and Related Institutions, Inc.,

Jon E. Vice 109

National Association of Community Health Centers, John M. Silva 77

National Association of Public Hospitals, Larry S. Gage 66

National Association of Urban Critical Access Hospitals, Martin Goldsmith .... 126
National Rural Health Association, James D. Bernstein, and North Carolina

Office of Rural Health 61

Roberts, Hon. Pat, a Representative in Congress from the State of Kansas,

and Cochair, House Rural Health Care Coalition 10

Stenholm, Hon. Charles, a Representative in Congress from the State of

Texas, and Cochair, House Rural Health Care Coalition 5

Thomas, Hon. Craig, a Representative in Congress from the State of Wyo

ming, and Member, House Rural Health Care Coalition 16

Wayne County, Mich., Hon. Edward H. McNamara, County Executive 136

SUBMISSIONS FOR THE RECORD

Evergreen Legal Services, Yakima, Wash., and Native American Program,
M. Helen Spencer; Spokane Legal Services, Spokane, Wash., Thomas N.
Termaine; and Native American Rights Fund Support Center, Boulder,

Colo., Steven C. Moore, joint letter 143

Geisinger Foundation, Danville, Pa., statement and attachment 148

National Association for Medical Equipment Services, statement 170

National Congress of American Indians, Gaiashkibos, statement 175

National Grange of the Order of Patrons of Husbandry, Robert E. Barrow,

statement 182

(111)

H.R. 1200, AMERICAN HEALTH SECURITY ACT OF 1993; HJL 2610,
MEDIPLAN ACT OF 1993; AND OTHER SINGLE-PAYER OPTIONS-
FEBRUARY 9, 1994

Page

Press release of Thursday, January 27, 1994, announcing the hearing 186

WITNESSES

Anderson, Gerard, Johns Hopkins University, Baltimore, Md 218

Conyers, Hon. John, a Representative in Congress from the State of Michi-
gan 193

MacKillop, William J., M.D., Queens University, Kingston, Ontario, Canada .. 287
McDermott, Hon. Jim, a Representative in Congress from the State of Wash-
ington 190

Miller, Hon. George, a Representative in Congress from the State of Califor-
nia 198

National Council of Senior Citizens, Lawrence T. Smedley 265

Priest, Lisa, Toronto (Canada) Star 236

Public Citizen's Congress Watch, Sara S. Nichols 254

Save Our Security Coalition, Hon. Arthur S. Flemming 248

Walker, Michael A., Fraser Institute, Vancouver, Canada 271

SUBMISSIONS FOR THE RECORD

Amalgamated Clothing & Textile Workers Union, Jack Sheinkman, state-
ment 318

American Health Care Association, statement 324

Dans, Peter E., M.D., Hunt Valley, Md., statement 231

Hsiao, William C, M.D., Harvard University School of Public Health, Cam-
bridge, Mass., statement 228

Shriners Hospitals for Crippled Children, Tampa, Fla., Gene Bracewell, state-
ment 326

ALTERNATIVE HEALTH REFORM PROPOSALS INCLUDING HJl. 3080,
H.R. 3704, H.R. 3652, H.R. 3222, AND HJl. 3698

Press release of Tuesday, February 1, 1994, announcing the hearing 328

WITNESSES

Blue Cross of California, Ivconard 1). Schaeffer 496

Chafee, Hon. John H., a U.S. Senator from the State of Rhode Island 358

CONSAD Research Corp., Wilbur A. Steger 449

Consumers Union, Gail Shearer 521

ERISA Industry Committee, Anthony J. Knettel 544

Grams, Hon. Rod, a Representative in Congress from the State of Minnesota . 418

Grandy, Hon. Fred, a Representative in Congress from the State of Iowa 374

Healthcare Equity Action Ijcague, Dirk Van Dongen 557

Healthcare Leadership Council, Pamela G. Bailey 537

Helms, Robert B., American Enterprise Institute for Public Policy Research ... 474
Johnson, Hon. Nancy L., a Representative in Congress from the State of

Connecticut 386

Lott, Hon, Trent, a U.S. Senator from the State of Mississippi 341

Lott, John R., Jr., University of Pennsylvania, Wharton School 465

Manhattan Institute, Elizabeth P. McCaughey 481

McCrery, Hon. Jim, a Representative in Congress from the State of Louisi-
ana 420

Michel, Hon. Robert H., Republican I^eader, U.S. House of Representatives,

and a Representative in Congress from the State of Illinois 334

National Association of Wholesaler-Distributors, Dirk Van Dongen 557

National Ijeadership Coalition for Health Care Reform, Henry E. Simmons,

M.D., and Mark Goldberg 513

Page

Payne, Hon. L.F., a Pcpresentative in Congress from the State of Virginia 382

Rice, Thomas, University of California-Los Angeles 437

Rose, Hon. Charlie, a Representative in Congress from the State of North

Carolina 435

Steams, Hon. ClifT, a Representative in Congress from the State of Florida .... 389

Thomas, Hon. Bill, a Representative in Congress from the State of California . 366

SUBMISSIONS FOR THE RECORD

Hall, Mark A., Wake Forest University School of Law, Winston-Salem, N.C.,

statement 577

Hubbard, R. Glenn, Columbia University, New York, N.Y., statement 587

Institute of Interactive Management (INTERACT), Bala Cynwyd, Pa., Russell

L. Ackoff, letter and attachment 595

Nickles, Hon. Don, a U.S. Senator from the State of Oklahoma, statement

and attachment 403

Opticians Association of America, Paul Houghland, Jr., statement 600

Ramstad, Hon. Jim, a Representative in Congress from the State of Min-
nesota, statement 417

ISSUES RELATING TO INNER-CITY AND
RURAL COMMUNITIES

MONDAY, FEBRUARY 7, 1994

House of Representatives,
Committee on Ways and Means,

Subcommittee on Health,

Washington, D.C.
The subcommittee met, pursuant to call, at 1:30 p.m., in room
1100, Longworth House Office Building, Hon. Fortney Pete Stark
(chairman of the subcommittee) presiding.

[The press release announcing the hearing follows:!

(1)

FOR IMMEDIATE RELEASE
FRIDAY, JANUARY 21, 1994

PRESS RELEASE #25
SUBCOMMITTEE ON HEALTH
COMMITTEE ON WAYS AND MEANS
U.S. HOUSE OF REPRESENTATIVES
1102 LONGWORTH HOUSE OFFICE BLDO.
WASHINGTON, D.C. 20515
TELEPHONE: (202) 225-7785

THE HONORABLE PETE STARK (D., CALIF.), CHAIRMAN,

SUBCOMMITTEE ON HEALTH,

COMMITTEE ON WAYS AND MEANS, U.S. HOUSE OF REPRESENTATIVES,

ANNOUNCES A HEARING

HEALTH CARE REFORM:

ISSUES RELATING TO INNER-CITY AND RURAL COMMUNITIES

The Honorable Pete Stark (D. , Calif.) » Chairman, Subcommittee on
Health, Committee on Ways and Means, U.S. House of Representatives,
announced today that the Subcommittee will hold a hearing on issues
relating to health care service delivery in inner-city and rural
communities, as discussed in the President's health care reform
proposals. This hearing will be held on Monday, February 7, 1994,
beginning at 1:30 p.m., in the main Committee hearing room,
1100 liOngworth House Office Building.

In announcing the hearing. Chairman Stark said, "As we move to
enact universal health care coverage, we need to take steps to ensure
that residents of inner-city and rural areas have access to the
health care they need. Lack of insurance is only one part of the
problem in these communities, which for too long have suffered from a
shortage of physicians and health care facilities."

Oral testimony will be heard from invited witnesses only.
However, any individual or organization may submit a written
statement for consideration by the Subcommittee and for inclusion in
the printed record of the hearing.

BACKGROUND:

The Administration estimates that 72 million Americans live in
inner-city and rural areas where there are insufficient numbers of
providers or inadequate facilities to provide health care services.

While access to health insurance is a problem for many residents
of inner-city and rural communities, ensuring the infrastructure
needed to deliver services will require more than a guarantee of
universal coverage. Health care reform proposals that rely on
competing health plans to provide access to services need to be
adapted for communities which currently suffer a shortage of
providers. Assuring that health plans provide accessible health
services to inner-city and rural residents is essential to the
success of the Administration's strategy.

The Administration's health care reform legislation includes
provisions intended to address the concerns of underserved
communities c These provisions include those designed to assist
"essential community providers" and those designed to provide support
for the creation of health networks in underserved areas. However,
the Administration proposal also would substantially reduce
Medicare's disproportionate share adjustment and indirect medical
education adjustment which currently provide assistance to inner-city
hospitals serving the indigent. Witnesses are asked to comment on
the implications for inner-city and rural communities of the
Administration's health reform proposal in general and these
proposals in particular.

DETAILS FOR SOBMIS8ION OF WRITTEN COMMENTS;

Persons submitting written statements for the printed record of
the hearing should submit at least six (6) copies of their statements
by the close of business on the last day of the hearings, to
Janice Mays, Chief Counsel and Staff Director, Committee on Ways and
Means, U.S. House of Representatives, 1102 Longworth House Office
Building, Washington, D.C. 20515. An additional supply of statements
may be furnished for distribution to the press and public if supplied
to the Subcommittee office, room 1114 Longworth House Office
Building, before the final hearing begins.

FORMATTING REODIREMEHT8 ;

Each statement presented for printing to the Committee by a wrtness, any written statement or exhibit submitted for
the printed record, or any written comments in response to a request for written comments must conform to the guidelines
listed below Any statement or exhibit not in compliance with these guidelines will not be printed, but will be maintained in
the Committee files for review and use by the Committee.

1. All statements and any accompanying exhibits for printing must be typed in single space on legal-size paper and
may not exceed a total of 10 pages.

2. Copies of whole documents submitted as exhibit material will not be accepted for printing Instead, exhibit
material should be referenced and quoted or paraphrased. All exhibit material not meeting these specifications
will be maintained in the Committee files for review and use by the Committee

3. Statements must contain the name and capacity in which the witness will appear or, for written comments, the
name and capacity of the person submitting the statement, as well as any clients or persons, or any organization
for whom the witness appears or for whom the statement is submitted.

4. A supplemental sheet must accompany each statement listing the name, full address, a telephone number where
the witness or the designated representative may be reached and a topical outline or summary of the comments
and recommendations in the full statement This supplemental sheet will not l>e included in the printed record.

Chairman Stark. Good afternoon.

The subcommittee will continue hearings on health reform with
a discussion of issues affecting inner-city and rural communities.

Because they include a disproportionate share of the uninsured,
guaranteeing universal coverage is a critical step in insuring access
to health services for residents of inner-city and rural communities.
Twenty-five percent of the residents under age 65 here in the Dis-
trict of Columbia, for example, are uninsured. Agricultural workers
in our rural communities are uninsured at substantially higher
rates than other Americans.

Insurance coverage is not enough, however, to address the
unique access problems faced in these areas. These communities
lack the health care infrastructure, hospitals, physicians and other
providers needed to deliver health care. For example, 28 States
have at least one county without a physician.

The capital needs of safety net hospitals are chronically under-
funded. Many of these facilities are struggling to continue to serve
as the only provider for many costly, specialized services such as
trauma care, neonatal, intensive care and emergency psychiatric
treatment.

Last year, H.R. 2294, the Essential Health Facilities Investment
Act, which the Chair introduced, offered to expand the essential ac-
cess community hospital program for rural health networks to all
50 States, and established a similar program of assistance for net-
works of urban essential community providers to provide Federal
loans and grants for meeting the capital needs of safety net provid-
ers.

The shortage of providers and lack of infrastructure is aggra-
vated by the greater need for services in both these communities.
Violence, drug abuse and homelessness plague our inner cities and
put immense stress on the health care system. Residents of rural
areas are older, sicker, poorer, and have higher rates of unemploy-
ment and chronic illness than other Americans.

The subcommittee has been concerned about the problems of
inner-city and rural areas. As the committee of jurisdiction over the
Medicare program, we have worked to protect access for Medicare
beneficiaries in these communities through the disproportionate
share adjustment, the Equal Access Community Hospital program,
and other targeted assistance.

As recently as last June, the subcommittee held a hearing to dis-
cuss approaches we might consider to address needs of inner-city
and rural areas as we undertake health care reform legislation.

Since then, we have received the administration's Health Secu-
rity Act which includes provisions intended to target assistance to
the special needs of rural and inner-city communities. These in-
clude authorizations for a number of public health service initia-
tives for underserved populations, capital funding for community
health plans and practice networks, and authorization for a new
program of financial assistance for capital development of commu-
nity health plans and practice networks.

Our witnesses today have been asked to discuss the overall im-
pact of the administration's proposal on rural and inner-city areas.
We welcome their assistance.

Mr. Thomas.

Mr. Thomas of California. Thank you, Mr. Chairman.

As we have seen with the testimony, the inner-city and rural
communities have far more in common than a lot of people realize
in terms of trying to get their health care needs met. We are deal-
ing with somewhat unique problems, but I think you will find that
the testimony from our colleagues, both from the rural and inner
city, will show there is a lot more in common than most people re-
alize.

There are unique instances; for example, the gentleman from
Wyoming, my namesake, has an enormous population that comes
into their States on periodic months visiting national parks. I have
the Sierra Nevadas behind me that is the playground for millions
from Los Angeles County, and when they fall down and break their
leg, it is my hospitals that they get airlifted to.

There are unique situations, but by and large what you are going
to find is that as we debate the question of insuring all Americans,
my colleagues are here to help us understand better who and
where the phrase, "all Americans" encompass.

I look forward to their testimony.

Chairman Stark. Mr. McCrery.

Our first panel is comprised of the distinguished cochairs of the
Rural Health Care Coalition joined by one of their principal mem-
bers: Hon. Craig Thomas from Wyoming, is backstopping Hon.
Charles Stenholm of Texas and Hon. Pat Roberts of Kansas. Thank
you for coming. We are glad you would take the time to be with
us.

If you have presented written statements, they will appear, with-
out objection, in the record in their entirety. In any event, we wel-
come your addressing us. Are you the leadoff, Charlie? Please do.

STATEMENT OF HON. CHARLES W. STENHOLM, A REPRESEN-
TATIVE IN CONGRESS FROM THE STATE OF TEXAS, AND
COCHAIRMAN, HOUSE RURAL HEALTH CARE COALITION

Mr. Stenholm. We appreciate very much the opportunity to tes-
tify before your committee today. We appreciate your remarks and
I want to associate myself particularly with Mr. Thomas' remarks
that there is a lot more in common between inner city and rural
than might meet the common eye.

As you know, Pat Roberts and I cochair the Rural Health Care
Coalition in the House of Representatives and have been working
with this coalition over the past several years to see that the poten-
tial health system reforms do in fact affect rural areas in a very
fair and efficient way.

Today I would concentrate my remarks in three areas: First, in
the area of work force; Second, in the area of integrated delivery
systems; and finally, the small business aspects since rural Amer-
ica has many, many small businesses.

As I am sure you understand, the shortage of health care profes-
sionals in rural areas has historically been and continues to be the
central barrier to access to health care services in many rural com-
munities. There are approximately 2,000 health professional short-
age areas in the United States and over half of those are in rural
areas.

In the State of Texas, approximately one-half of the 254 counties
are designated shortage areas. Of those, 88 percent are rural. As
you know, the measure of physician-to-population ratio is com-
monly used as an indicator of underserved populations. In rural
Texas, there are 71.1 physicians per 100,000 people. In urban parts
of the State, the physician-to-population ratio is more than double
the rural figure. In the Nation as a whole, the average is 248 phy-
sicians per 100,000 people. The figures for nurses and other provid-
ers in Texas add to the picture of underservice in our rural areas.

Rural counties in general rely on nurses with less training than
the nurses who practice in urban areas. The majority of nurses
practicing in rural Texas are licensed vocational nurses. While we
are enormously grateful for their services, rural communities are in
need of nurses with more advanced training.

If attempts to improve access to quality care in rural areas
through organizing and building rural health care delivery systems
are going to be successful, we first need an adequate supply of
health care providers practicing in rural areas.

The President's bill contains a number of tax incentives to en-
courage primary care providers to locate in rural areas. These
types of incentives are supported by many rural health advocates.
However, it is important to note that financial incentives alone are
not likely to be sufficient to significantly increase the number of
providers locating in rural areas.

I personally am very interested in some of the new and innova-
tive things that are being tried in my State and elsewhere in which
in rural communities that we in fact need to do something to help
ourselves. An example is the areas where they are starting locally
funded scholarship programs, such as the community scholars pro-
gram in Texas. I think community-based incentives to attract men
and women to doctoring and nursing, matched with State funds
and also perhaps, Federal matching funds, makes a lot of sense.

Moving on to the integrated delivery systems, in looking at tax
incentives for rural and underserved areas, I also encourage the
committee to place a priority on incentives to build these integrated
health care delivery and communication systems. This is something
again where it is going to require a tremendous amount of coopera-
tion between local. State and Federal efforts if we are in fact going
to meet the needs of rural areas.

Finally, I would point out, in the area of small business, a major
area of concern for the coalition is the effect of systemwide reforms
on small businesses which make up a significant percentage of the
employers in rural America. We encourage the committee to care-
fully explore the issue of employer mandates before making a deci-
sion which would negatively impact job growth and availability in
the already fragile rural economy.

While the coalition has not officially taken a position in support
or opposition to the issue of employer mandates, there are many
of us who have grave reservations about these mandates and we
are united in our concern about how mandates could impact upon
small business employment in our rural communities.

IThe prepared statement follows:]

Testimony of

CONGRESSMAN CHARLES W. STENHOLM

CO-CHAIRMAN OF THE HOUSE RURAL HEALTH CARE COALITION

before the

Committee on Ways and Means, Subcommittee on Health

February 7, 1994

Mr. Chairman, I appreciate this opportunity to testify before your Committee
regarding the impact of health system reform on rural America. As you know, I,
along with Representative Pat Roberts of Kansas, co-chair the Rural Health Care
Coalition in the House of Representatives. The Coalition has been working on
determining the effects of potential health reforms on rural areas for the past year
and we are pleased to be able to share some of our findings and concerns with you
today.

WORKFORCE

As I am sure you understand, the shortage of health care professionals in rural areas
has historically been and continues to be the central barrier to the access of health
care services in many rural communities. There are approximately 2,000 health
professional shortage areas in the United States and over half of those are rural
areas. In the state of Texas, approximately one half of the 254 counties are
designated shortage areas; of those, 88% are rural. As you know, the measure of
physician to population ratio is commonly used as an indicator of underserved
populations. In rural Texas, there are 71.1 physicians per 100,00 people. In urban
parts of the state the physician to population ration is more than double the rural
figure. In the nation as a whole, the average is 248 physicians per 100,000 people.
The figures for nurses and other providers in Texas add to the picture of underservice
in our rural counties. Rural counties, in general, rely on nurses with less training
than the nurses who practice in urban areas. The majority of nurses practicing in
rural Texas are Licensed Vocational Nurses (LVNs). While we are enormously
grateful for the services of our LVNs, rural communities are in great need of nurses
with more advanced training.

If attempts to improve access to quality health care in rural areas through organizing
and building rural health delivery systems are going to be successful, we first need an
adequate supply of health care providers practicing in rural areas. The Coalition
places a priority on assuring that any health reform plan that is passed contains
effective measures to encourage providers, especially primary care physicians, nurse
practitioners, physician assistants and certified nurse midwives, to practice in
underserved areas.

H.R. 3600 contains a number of tax incentives aimed at encouraging primary care
providers to locate in rural areas. These types of incentives are supported by many
rural health advocates though it is important to note that financial incentives alone
are not likely to be sufficient to significantly increase the number of providers locating
in rural areas. Some rural states and facilities, particularly health centers and rural
health clinics currently are using iimovative training programs to encourage providers
to practice in rural areas. I hope that workforce provisions included in health reform
will encourage and provide incentives for these community facilities to continue to be
involved through direct funding for their educational efforts.

I trust that the Committee will work to direct the dollars spent on health reform and
provider incentives in such a maimer as to achieve the most effective results possible.
There are several questions I would encourage the Members of the Committee to
investigate further: Can the funds and tax incentives available to providers reasonably
be expected to alleviate provider shortages in underserved areas? Will the new
structure of Graduate Medical Education financing and other medical education
reforms significantly improve the number of primary care providers practicing in rural
America? Do provisions in the bill, including licensing requirements, adequately and
appropriately expand the utilization of mid-level practitioners?

INTEGRATED DELIVERY SYSTEMS

In looking at tax incentives for rural and underserved areas I also encourage the
Committee to place a priority on incentives to build integrated health care delivery
and communications systems. These measures can help to alleviate some of the non-
financial concerns of isolated rural practitioners such as the heavy workload and the

absence of professional consultation and support services.

Community-based initiatives to coordinate services and build network systems are a
necessary component of improving access to quality care in rural areas. I encourage
the Committee to consider options to help communities in the plarming and
implementation of delivery networks including technical and Hnancial assistance for:
information and telecommunications systems; enabling services such as transportation
and translation; the recruitment and retention of providers; and assistance in meeting
capital and solvency requirements for health plans.

Another concern of the Coalition is the effect of system-wide reforms on small
businesses, which make up a significant percentage of the employers in rural America.
We encourage the Committee to carefully explore the issue of employer mandates
before making a decision which could negatively impact job growth and availabUity in
the already fragile rural economy. While the Coalition has not officially taken a
position in support or opposition to the issue of employer mandates, there are many
of us who have grave reservations about these mandates and we are united in our
concern about how mandates could impact small business employment in our rural
communities.

Thank you for this opportunity to testify on these matters of great importance to me
and a number of our colleagues. I am pleased to turn over the floor to my Co-
Chair, Representative Pat Roberts, who will discuss several other concerns of the
Coalition.

Chairman Stark. Mr. Roberts.

STATEMENT OF HON. PAT ROBERTS, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF KANSAS, AND COCHAIR-
MAN, HOUSE RURAL HEALTH CARE COALITION

Mr. Roberts. Thank you, Mr. Chairman.

Usually the Stenholm-Roberts posse rides in the sometimes pow-
erful House Agriculture Committee and we are usually on time.
However, I note with the green, amber and red light, I may go over
about 1 or 2 minutes and I beg the subcommittee's indulgence.

Chairman Stark. That is just habit. We tend to, as a matter of
comity, ignore it.

Mr. Thomas ok California. I would urge the gentleman from
Kansas not to abide directly by the light, but to use it as a guide.

Mr. Roberts. Sort of a guiding light. Bill.

Thank you for the opportunity to discuss the aspects of the rural
health care problem. As of today, we have 151 members who are
privileged to serve in a rural area and we got a little tired of bang-
ing our knuckles raw on the door of HCFA or HHS or any one of
the alphabet soup acronyms, so we joined together and have 151
of us, and it is bipartisan.

I would like to address some of the concerns that I have with
President Clinton's health care reform plan and its impact on infra-
structure development, on governance and control of health care.
We sent a letter, Mr. Stenholm and Mr. Slattery, who is also a
member of the Coalition and Mr. Gunderson and myself to the
American Hospital Association, the American Nurses Association,
the AMA, American Association of Medical Colleges, the National
Rural Health Association, the American Academy of Family Physi-
cians, the National Association of Community Health Centers, the
Rural Policy Research Institute, the National Alliance of Nurse
Practitioners, and the National Rural Health Network, and we are
getting a lot of letters back.

We asked about the President's plan with regard to work force,
infrastructure, reimbursement issues and governance, information
systems, and small business. These are the concerns that we are
hearing back from these groups.

I think everybody knows the Nation's rural hospitals are experi-
encing financial shortfalls and shoestring budgets. In general, rural
hospitals serve a higher population with regard to Medicare and a
lower level of insured patients. So this provides less opportunity for
our hospitals to subsidize losses on both the Medicare and the Med-
icaid patients from any private pay patient.

In Kansas as in Texas, we have 60 Medicare-dependent hos-
pitals, and Medicare reimburses rural hospitals about 90 cents on
the dollar. I am deeply concerned about the proposal to cut an ad-
ditional $124 billion from the Medicare budget in order to pay for
alleged health reform. Unless additional funding sources are in-
cluded, these cuts will really cripple the small rural hospital; many
could close their doors.

Most of the hospitals with 50 beds or less are in my 66-county
district, so it would be a real problem. The Health Security Act
does take several steps to invest in expansion of primary care serv-
ices in underserved areas, and I support such efforts.

However, under the President's plan, a large portion of these
funds would be administered under something called the qualified
community health plans and practice networks program which
would give the greatest preference to facilities such as health main-
tenance organizations that are generally utilized in large urban
areas.

Publicly funded providers who band together are given a lower
preference for receiving support, and that is not good news. There
are similar concerns in the funding of educational and prevention
programs.

I support the plan's real initiative to educate our youth in
healthy activities, but in establishing the criteria for local edu-
cation agencies to receive the planning grants for educational pro-
grams, the President's plan limits such grants to agencies that en-
roll a minimum of 25,000 students. No school district in 85 rural
counties in Kansas would qualify for such a grant.

State and local governments must have the flexibility to struc-
ture the health care delivery system and take into account these
special circumstances. Under the President's plan, regional health
alliances function under control of the National Health Board. This
board is responsible for determining a global budget as well as set-
ting caps on insurance premium spending for each regional alli-
ance.

I am concerned that these regional alliance premium caps will be
developed on what we call historical data. Since payments to rural
providers are lower than those to our urban counterparts, this will
lock in lower payments to the rural provider.

Mr. Stenholm, myself and Mr. Thomas and all of us on the
Health Care Coalition have been working to get those Medicare re-
imbursements at least back up to cost. If we base payments on his-
torical data, again we are going to have a lot of problems.

Another concern for rural areas is the global budget concept.
This is basically in my opinion a zero-sum game. If one alliance
spends more, then another will have to spend less. Rural alliances
made up of farmers and ranchers who are engaged in hazardous
occupations could be forced to exceed their budget.

If the regional health alliance runs out of money, individuals and
employers in the region must make up the shortfall. That is taxes
up and down Main Street. But if the amount of money that can be
spent in the region is capped, how else can the shortfall be made
up without some form of rationing. Due to a lack of services and
providers, our rural citizens are already experiencing rationed
health care.

The Federal Government holds broad regulatory powers by being
the sole designator of underserved areas that link our local commu-
nities to important Federal funding. This could be remedied, and
I would make a suggestion to the subcommittee, Mr. Chairman, by
utilizing the Health Professional Shortage Area, or what we call a
HPSA, instead of the medically underserved population.

HPSA designations allow for more State control to target the
areas for Federal funding. In addition, the Clinton plan in my opin-
ion fails to adequately address the important issue of the rural
health delivery systems that cross State lines.

In western Kansas and in my neighbor's county, we have facili-
ties in Cheyenne County, Kans. and Dundee County, Nebr. Many
rely on facilities in Denver, Colo. So rural residents should not be
forced to travel any greater distances to seek care in their own
States when a closer facility simply could be utilized in a neighbor-
ing State.

I have some information with regard to the electronic informa-
tion system. We are going to need additional grants to get up and
running because rural hospitals fall short in terms of funding.

Mr. Chairman, I am simply going to say I look forward to work-
ing with this committee to develop workable health care reform.
There are many similarities, I think, between the Health Security
Act and some alternative health reform bills, that is, the Presi-
dent's plan, in the Congress.

I think most of us on the Coalition would agree that we must re-
form the insurance market. We must implement administrative
simplification measures. We must increase the deductibility to the
self-employed. We must reform the malpractice laws and remove
what we call the antitrust barriers.

Medical savings accounts have also been proposed as an alter-
native method to control the skyrocketing costs. I just make the ob-
servation if we did all that, it would be a landmark policy change.
The idea that somehow these recommendations represent only in-
cremental reform and not substantive reform is, I think, false.

Thank you.

Chairman Stark. Thank you.

[The prepared statement follows:]

TESTIMOhfY BY THE HONORABLE PAT ROBERTS (R-KS)
HEARING BEFXDRE THE WAYS AND MEANS SUBCOMMITTEE ON HEALTH

FEBRUARY 7, 1994

1:30 P.M.

1100 LONGWORTH BUILDING

Mr. Chairman, thank you for the opportunity to discuss njral health care with you today.
I serve as co-chairman of the House Rural Health Care Coalition, a group of 151 Members
concerned about health care in rural areas. Rural Americans face unique health delivery
problems that stem from a shortage of health providers, services and facilities, as well as
geographic barriers. Today, I would like to specifically address concerns with President
Clinton's health care reform plan and its impact on infrastructure development, governance and
control of rural health care.
Infrastructure

Our nation's rural hospitals are experiencing financial shortfalls and shoestring budgets.
In general, rural hospitals provide health care services to a higher Medicare population and a
lower level of insured patients. This provides less opportunity for our hospitals to subsidize
losses on Medicare and Medicaid patients from private pay patients. In Kansas, we have 60
Medicare Dq)endent Hospitals. Medicare reimburses rural hospitals about 90 cents on the
dollar. I am deeply concerned about the proposal to cut an additional $124 billion out of the
Medicare budget in order to pay for health care reform. Unless additional funding sources are
included, these cuts will cripple small rural hospitals. Many will close their doors.

The Health Security Act takes several steps to invest in the expansion of primary care
services in underserved areas and I support such efforts. However, under President Clinton's
plan, a large portion of these funds would be adraijiistered under the Qualified Community
Health Plans and Practice Networks Program, which would give greatest preference to facilities
such as Health Maintenance Organizations, that are generally utilized in large, uiban areas.
Publicly-fiinded providers who band together are given a lower preference for receiving support.

There are similar concerns in the funding of educational and prevention programs. I
support the plan's initiative to educate our youth in healthy activities. But in establishing criteria
for local education agencies to receive planning grants for educational programs, the Health
Security Act limits such grants to agencies that enroll a minimum of 25,000 students. No school
district in any of the 85 niral counties in Kansas would qualify for a grant.

Each rural community has its unique set of service delivery problems, resources, and
priorities. State and local governments must have the flexibility to structure health delivery
systems that take into account these special circumstances.

Under the President's plan, regional health alliances function under control of the
National Health Board. This Board is responsible for determining a global budget, as well
setting caps on insurance premium spending for each regional alliance. I am concerned that
these regional alliance premium caps will be developed based on historical data. Since payments
to rural providers are lower than those to their urban counterparts, this will lock in lower
payments to rural providers.

Another concern for rural areas is the global budget concept. This is basically a zero-
sum game. If one alliance spends more, another will have to spend less. Rural alliances, made
up of farmers and ranchers who are engaged in hazardous occupations, could be forced to
exceed budgets. If the regional health alliances run out of money, individuals and employers
in the region must make up for the shortfall, most likely by increasing taxes up and down main
street. But if the amount of money that can be spent in the region is capped, how else can the
shortfall be made up without some form of rationing? Due to a lack of services and providers,
rural Americans are already experiencing rationed health care.

The federal government holds broad regulatory powers by being the sole designator of
underserved areas that link local communities to important federal funding and by retaining
discretion for funding the development of networks. This could be remedied by utilizing the
Health Professional Shortage Area, or HPSA, instead of the Medically Underserved Population.
HPSA designations allow for more state control to correctly target areas for federal funding.

The Clinton plan fails to adequately address the important issue of rural health delivery
systems that cross state lines. In western Kansas, residents have formed the State Line Health
Network, which includes facilities in Cheyenne County, Kansas, and Dundy County, Nebraska.
Denver, Colorado, has become a regional health center for rural residents of several surrounding
states. Rural residents should not be forced to travel greater distances to seek care in their own
states when closer facilities are already being utilized in neighboring states.
Information Systems

Electronic information systems arc important to rural health and I support the
administrative's initiative to move toward electronic billing and standardized forms. However,
these information systems are expensive and small rural hospitals may struggle to come up with
the financing needed. The Implementation process must be phased in so that rural communities
will have adequate time to build funds.

Telcmedicine is particularly important to rural health delivery systems. It assures less
professional isolation for rural physicians, a critical component needed to recruit more health
providers to rural areas. However, without the assurance of payment for telemedicine services,
the full potential of telemedical technology will never be realized. Currently, HCFA provides
reimbursement for certain radiology and pathology services, but does not recognize medical
consultations performed via telecommunications links. This administrative roadblock prevents
the development and expansion of these systems in rural America. The Rural Health Care
Coalition has met with HCFA officials about this but is awaiting a response.

Mr. Chairman, I look forward to working with this committee to develop workable health
care reform. There are many similarities between the Health Security Act and alternative health
reform bills in Congress. Everyone agrees that we must reform the insurance market,
implement administrative simplification measures, increase deductibility to the self-employed,
reform malpractice laws, and remove anti-trust barriers. Medical savings accounts have been
proposed as an alternative method to control skyrocketing costs. I support measures to
implement these reforms.

Mr. Chairman, thank you for this opportunity. I urge the Committee to take a serious
look at our recommendations and consider the impact any comprehensive health care reform
initiative will have on rural and underserved areas.

Chairman Stark. Craig.

STATEMENT OF HON. CRAIG THOMAS, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF WYOMING AND CHAIRMAN,
TASK FORCE ON HOSPITALS AND CLINICS, HOUSE RURAL
HEALTH CARE COALITION

Mr. Thomas of Wyoming. Thank you very much, Mr. Chairman.
I appreciate the opportunity of visiting with you a bit about rural
health care.

There are several points I would like to make during the brief
comments. One is that a "one fits all" program doesn't work in this
country. We have great diversity.

Another is that the available facilities in rural areas are quite
different than they are where there is a larger population, and I
think we have to deal with that.

Another is the need for antitrust reform and redefining hospitals
so that we can reimburse them on a different basis. I am sure we
agree that rural people need to be on an equal footing when we
talk about reforming health care.

A nationalized system simply won't fit the whole country, wheth-
er it be managed competition, or nationalized alliances, both of
which are in the President's plan. These proposals don't fit the di-
versity that we have. The notion of putting together a large group
of buyers with leverage to select among buyers is not a new idea;
agriculture has been doing it for years, but it doesn't work well in
a place like Wyoming.

We have 460,000 people, nearly 100,000 square miles. The New
England Journal of Medicine said that it takes approximately
180,000 people to put together a managed care unit. The largest
town is something less than 60,000 in Wyoming. So it makes it
quite a different situation.

We talk about goals, but all of us generally agree we need to in-
crease access, do something about decreasing costs and maintain-
ing quality, but access in a rural area means something quite dif-
ferent.

In urban areas generally if you have the financial support, you
have access. In Wyoming, you may not have access despite having
the financial backing to do that. We need to work with nurse prac-
titioners and physician's assistants. In Sublette County, Wyo., the
largest town is Pinedale, of about 3,000. There is one physician in
the countv. It is 100 miles to the closest hospital, and Dr. Johnson
works well there.

Your daughter knows a lot about this kind of thing, Mr. Chair-
man. All rural areas are not the same. I noticed with some interest
in Arkansas they had 89 hospitals generally serving an area of 580
square miles. Wyoming has 25 hospital serving an average area of
about 3,700 square miles, so it is quite a different matter.

The administration refers in their bill to rural areas being served
by things such as migrant and community health centers, rural
health clinics, federally qualified health centers, family planning
clinics, school-based clinics, and calls them essential community
providers. We have such facilities in my State, two migrant cen-
ters, some 400 miles apart. So this sort of an approach will not deal
with our problems.

My friend has already mentioned the reduction in Medicare. Our
South Big Horn Hospital, devoted 80 percent of their patient care
to Medicare patients. So not being reimbursed or being
underreimbursed for Medicare is an element of great concern.

I too think that there are some fundamental changes that could
be made without trying to replace the whole system; if we could do
something about fundamental insurance reform so that people
aren't denied coverage, and if we could do something about anti-
trust reform. We finally put together two hospitals in Cheyenne
last year and it will be a more effective approach. Telemedical serv-
ices are also something that is very meaningful to us.

I suppose we have a unique situation, but I think if we are not
careful all the tertiary care in Wyoming will go to the border areas:
Salt Lake City; Billings, Mont.; Rapid City, S. Dak.; Denver, Colo.;
and we will be left with nothing, but very basic care.

So to a State where there is as many miles, I think that would
be a bad situation.

My main plea is that we follow H.R. 3078, which we put in the
Rural Health Care Coalition, which redefines hospitals. South Big
Horn ended up with a 4 percent occupancy, over 80 percent Medi-
care. They couldn't function with the regulations. If we could rede-
fine those, and we have done that in Montana with a special appro-
priation, if we could do nothing more than keep a 24-hour emer-
gency room, these folks need a facility.

They can't support a full-service hospital facility — if we could re-
define that so there could be Medicare/Medicaid, the payments
made to something less than what we define as a full-service hos-
pital, we think that would be particularly useful.

That provision exists in the Chafee bill and the Cooper proposal
as well as Mr. Michel's proposal. It does not exist nor does it fit
apparently in the administration bill.

Mr. Chairman, we appreciate your interest in the uniqueness of
rural areas and hope to work witn you as we to something that will
be workable for all of us.

Thank you.

Chairman Stark. We thank all of you.

[The prepared statement follows:]

€ongvtii of tf)e Winitth ^tatti

^ouit of ^epreiientatibeK

JHagfjinffton, M<L 20515-5001

TESTIMONY BY THE HONORABLE CRAIG THOMAS (AL-WY)

HEARING BEFORE THE WAYS AND MEANS SUBCOMMITTEE ON HEALTH

HEALTH CARE SERVICE DELIVERY INFRASTRUCTURE
IN INNER-CITY AND RURAL COMMUNITIES

FEBRUARY 7, 1994

1:30 P.M.

1100 LONGWORTH BUILDING

Mr. Chairman, thank you for the opportunity to testify before your subcommittee. I
appreciate you holding this hearing as Congress moves forward on health care reform. One
thing is certain, no matter what plan is adopted, rural people must be on equal footing as
those who live in urban areas.

Some policy experts advocate a nationalized system of health care as the solution,
while others advocate a "managed competition" approach. In the administration's case, it
recommends both. However, without real state flexibility neither system is adaptable to the
circumstances confronted daily by rural people.

A study published in the New England Journal of Medicine found that areas need
at least 180,000 people to support the most basic managed care program. The largest town
in Wyoming is less than 60,000. We do not have one urban area. So when you are talking
about health care reform, you need to include workable answers for people in a state of
435,000 rural residents.

My state faces a severe health professional shortage. We also encounter difficult
weather conditions that can change without a moment's notice, geographic boundaries that
add an extra 100 miles to the drive for the nearest hospital and virtually no public
transportation. These are the types of access problems common of rural areas -- often a
greater hindrance to quality care than cost itself.

President Clinton's "Health Security Act" imposes a one-size, fits-all program. It
relies heavily on managed care and government controls. But as you can see from the
description of my communities, we do not fit in the administration's plan.

As the Chairman for the Rural Health Care Coalition Task Force on Hospitals and
Qinics, I am deeply concerned about the president's complex health alliance structure.
These alliances would be required to pool consumers, bargain with providers and collect

premiums. However, they disregard the most important component rural areas need --
flexibility. It is difficult to bargain with providers in a rural areas when there are not any.

Not all rural areas are alike. Wyoming has 25 sole community hospitals that on
average service approximately 3,700 square miles. By contrast, Arkansas has approximately
89 hospitals servicing an average of 580 square miles. While Arkansas is also considered
rural, Wyoming is twice the size, with one fifth of the population. What might work for
Arkansas people will not work for Wyoming people.

The administration claims states like Wyoming will not have a problem with its
health alliance structure because the number of providers, allowed to participate, would be
expanded. For instance, the alliances would automatically approve migrant and community
health centers, rural health clinics, federally-qualified health centers, family planning clinics
and school-based clinics as "essential-community providers." All other providers, wishing
to participate, would have to apply to the Secretary.

Despite the expanded provider provision, rural areas will still be affected. The
"essential community provider" definition does not include the most common facilities in
rural areas - sole community hospitals (SCHs) or Medicare Dependent hospitals. Out of
all the categories listed for expansion, Wyoming has two migrant health centers in Worland
and Guernsey, which are eight hours apart. What happens to the folks in between? Or the
residents located in the rest of the Northeastern and Southwestern parts of the state?
Where will they go to receive care? How are these alliances an answer?

The president's plan will also make it difficult for rural areas by slashing $124 billion
from Medicare reimbursement. After all the time and energy the Rural Health Care
Coalition has spent in improving the level of reimbursement to rural areas, this cut puts us
back to square one. The administration claims all the "new-paying patients" with insurance
policies will offset the cut. But the fact is, so-called charity care is not a major problem in
rural areas. Medicare and Medicaid reimbursement is the bulk of our facilities. For
example, during 1993 one hospital in Wyoming received $6.9 million in Medicare
reimbursement. It wrote off $1 milUon for charity care. As you can see, Wyoming's
facilities depend much more on federal reimbursement programs, and any additional cuts
will force our providers to shut their doors. And who would lose? Wyoming's rural
residents.

Health care reform is suppose to improve the delivery of care to both urban and
rural people. It is not suppose to risk the limited number of providers that rural areas so
desperately depend on.

I suggest Congress focus on measures that can be enacted today. Changes like
fundamental insurance reform, anti-trust reform, reimbursement for telemedicine services,
tort reform, and improving health professional recruitment programs. These are the steps
that will improve the rural health care delivery system. States like mine need flexibility to

reform their health care delivery system, yet the president's plan only provides two
choices ~ health alliances or single-payer plans. Frankly, neither will work in Wyoming.

If the administration's plan, or any other health care reform measure, wants to foster
integration among facilities and providers, the plan must include flexible measures. I have
one specific suggestion, my bill, H.R. 3078, the "Rural Emergency Access Care Hospital
Act." It complements any comprehensive health care reform plan. Many rural communities
resist closing an underutilized facility, for fear of losing the emergency room. My bill,
however, helps reduce excess capacity. It also helps create a network of satellite clinics and
full-service hospitals in rural areas.

Currently, if a facility has a difficult time staying open due to high regulatory costs
and low in-patient stays, it is prohibited from downsizing to an emergency medical center.
Medicare will not recognize a facility that does not meet all the conditions of participation.
As a result, a facility wishing to downsize will lose its Medicare Part A reimbursement. My
bill makes this regulation more flexible by creating a new limited service category. Small
rural hospitals could convert to "Rural Emergency Access Care Hospitals" (REACH),
provided they meet the following qualifications: 1) obtain approval from the Secretary
certifying that access to critical services would be severely limited to residents in the
commuiiity if the rural hospital were to close; 2) be able to transfer patients to a nearby
full-service hospital; 3) keep a practitioner, who is certified in advanced cardiac life support
by the State, on-site 24-hours a day; and 4) have a physician on-call on a 24-hour basis.
Hospital administrators view this as a solid solution to improve the rural health care delivery
system.

H.R. 3078 has been folded into Sen. John Chafee's "Health Equity and Access
Reform Today Act," Rep. Jim Cooper's, "Managed Competition Act," and Rep. Bob
Michel's, "Affordable Health Care Now Act." I suggest it also be included in President
Clinton's, "Health Security Act." As well as other measures to add real flexibility for rural
health care reform. But there are many more needed. I have a list of those as additions
to my testimony I will submit for the record.

Mr. Chairman, I hope solutions like the REACH bill and changes to the
administration's "essential-community provider" definition, will be given serious consideration
by the subcommittee. I also hope it focuses on reforms that can be put in place today.

Congress cannot afford to implement a national health care program that
discriminates against rural people. Rural folks deserve access to quality health care just as
much as those living in iimer cities. And any comprehensive reform plan must take that into
account.

Again, thank you for holding this hearing. I appreciate your interest in rural areas
and look forward to exchanging other recommendations to improve our nation's health care
delivery system.

Chairman Stark. Charlie, just to pick up on your question about
the similarities. You mentioned 71 physicians per 100,000 and in-
terestingly enough, here in the Anacostia region of the District of
Columbia, we have about 200,000 people and we only have 117 pri-
mary care physicians.

Now I know about the trip from Laramie to Cheyenne which is
one trip in the summer and another in the winter, but if you think
about getting on a Metro bus from way out Pennsylvania Avenue
to Greorgetown, a couple of transfers with a couple of kids, there is
indeed the question of providing access to populations who for one
reason or another have their services limited.

I know that we have worked on this with the Coalition, Charlie,
that you and Congressman Roberts cochair, trying to work out a
way that we can expand access and provide the quality of care. In
other words, it is an article of faith that you can operate a 10-bed
hospital and support an MRI.

The question is how do you get folks in that area to a tertiary
center or even a bigger hospital? Those are all problems, and they
are not necessarily just related to any one solution to the unin-
sured.

I gather, Craig, that you are saying that we don't need any one
of these particular plans, but you have 14 percent in Wyoming of
your under-65 population uninsured.

Mr. Thomas of Wyoming. Yes.

Chairman Stark. Somehow or other it seems to me if we don't
insure them, everybody else in Wyoming is going to be picking up
the costs of their care, and that is a proolem we are going to have
to deal within addition to seeing that the resources are there once
they get insurance.

Mr. Thomas of Wyoming. I agree with that, Mr. Chairman, but
I think my point is we have to do it in a way that will work. The
legislature put together some movement on small group insurance.
We think we can make a fundamental change where people are not
denied or cancelled insurance.

I have to confess that in my bill, I require insurance. I do it with
a voucher. I, too, would like to see everybody insured to stop cost-
shifting. My main point is that something that fits in Baltimore
probably won't fit in Basin, Wyo.

Chairman Stark. The gentleman is correct. There is an imme-
diate member of the Stark family who keeps reminding me of the
problem since she is a care provider in vour State. I am kept well
aware of the problems of providing healtn care.

Mr. Thomas.

Mr. Thomas of Calif^ornia. Back to the point that you made be-
cause people say yes, but you can't carry the analogy between the
urban and the rural too far. I think it is amazing how far you can
carry it, not just in terms of distances; 10 blocks is sometimes
equal to 100 miles in the rural areas, but type of facilities that are
available and the fact the debates tend to stem on the question of
coverage, and there are very strong and eloquent statements made
about the fact that we just don't want access; we want coverage.

Frankly, there are a lot of areas of the United States that would
settle for access because coverage would follow and the distances,
both mental and physical, are such that they are denied it.

We have real problems. There are a number of bills that have
the economic incentives in there. My bill is $1,000 a month tax
credit for providers who move to frontier and rural areas.

That is not the only problem. Craig mentioned the telemedical.
Technology today, I think, will provide not only greater resources
so that you don't need as much of a facility there than you would
have 10 years ago to provide really cutting-edge quality, but we are
finding more and more that one of the problems is that profes-
sionals who go out into inner-city and rural areas don't get the pro-
fessional reinforcement, the kind of in-service training.

This can be done more and more with modem technology. So my
big concern — it says California on my name tag, but I represent a
rural area and there are a lot of rural areas within urban States —
is that we are in some way going to get our needs met.

My concern is that as we set up — if it is an employer mandate —
with employer mandate, you get what in terms of access and cov-
erage in rural areas? It is very easy to set up a structure, not even
a one-size-fits-all, but a belief that a basic structure will enable
unique areas to resolve their own problems and that is not the
case.

My biggest concern as we go forward is to make sure that in both
the urban and the rural area, there is enough flexibility in the sys-
tem, not iust at the State level, but also at the local and Federal
levels, to be able to come up with a package that works.

If you are going to give universal coverage, you would like to
have it actually there and working. We fought HCFA in terms of
the rural formulas. We don't want to fight whatever the new agen-
cy is in making sure that what is on paper can be actually be deliv-
ered to areas.

We will work with you. We will screen it through you, and are
looking forward to your input from your folks who clearly want to
solve the problem for all Americans and make sure they are in-
cluded because it is easy to set up a system that looks good on
paper, but doesn't deliver the kind of health care you guys are con-
cerned about.

I appreciate your testimony.

Chairman Stark. Mr. McDermott.

Mr. McDermott. Thank you, Mr. Chairman.

I want to tell you a story. Early on in the discussions that the
single-payer people had with Mrs. Clinton, I said to her. Managed
competition will work in urban areas, particularly in the suburbs,
but it doesn't work in the inner-city or rural areas.

Thirty-five percent of the American people live either in rural
areas or in the inner cities. I had just driven across the country
from Seattle to Washington, D.C., and had been impressed again
with how rural the West is. I said, "Take the State of Nebraska.
You can have all the managed competition you want in the world
in Lincoln and Omaha, but tne other 500 miles of Nebraska is sand
hills and cattle ranchers and Native Americans, and you are lucky
if you have a doctor in every thousand square miles when you get
around Valentine and some of those places and you are never going
to find managed competition working."

She had a nealth care meeting in Omaha and told me about the
discussion she had with the Republican Governor of Nebraska who

said managed competition may make sense in Omaha and Lincoln,
but we are going to have single payer across the rest of the State.

What tends to happen, what will happen, what happened in our
State of Washington, is rural people are always fighting to get cov-
ered because we always take care of the big cities, and that is the
history of the west.

You, I think, will in the end be much better off with a single-
payer system and I would remind you of the history of Canada, al-
though I am not pushing Canada. The original province to start the
whole business was Saskatchewan, which is about as rural a prov-
ince as there is.

The farmers there decided that a single-payer system made
sense. They put it together in their legislature back in 1946. So the
idea of a single payer is that you collect the money and provide the
same care to everybody, then it becomes a matter of deciding how
to do it.

I think if we are going to avoid dividing ourselves into rural and
inner-city people on the one hand and suburban people on the
other. The strongest position for you is the single payer.

Chairman Stark. There is some good free advice.

Mr. McCrery.

Mr. McCrery. Thank you, Mr. Chairman. I thank my colleagues
for coming before the committee today to share your concerns about
rural health care.

I represent north Louisiana and it is not just the metropolises of
Shreveport and Monroe, but also a vast rural area. So I share your
concerns about our rural health care system. I would say to my tal-
ented friend from Washington that if I am not mistaken, the Med-
icaid and the Medicare systems are single-payer systems and that
is what has caused much of the problem in our rural areas today.

Is there dependence on those government-funded systems and in-
adequate reimbursement schedules that we have had for rural hos-
pitals and providers? So I am not sure that is the total answer, but
we will debate that later.

I hope that whatever this committee comes out with will pay spe-
cial attention to our rural areas, our rural providers, because if we
don't, I suspect that the folks in north Louisiana will have to find
a way to Shreveport or Monroe to get health care.

I appreciate your coming before the committee today and look
forward to working with you on this topic.

Thank you, Mr. Chairman.

Chairman Stark. Mr. Lewis.

Mr. Lewis. Thank you, Mr. Chairman.

Let me say to my colleagues I want to thank you for being here
today and for testifying before this committee. I may represent
urban Atlanta here, but many of you may not know that I grew up
in rural Alabama, about 50 miles from Montgomery outside of a lit-
tle place called Troy. My father had been a sharecropper, a tenant
farmer, and in 1944 when I was 4 years old, he saved $300 and
bought 110 acres of land.

That was a good investment. My mother still lives on this farm,
and I know what it is to g^ow up in a community where there is
not a health facility, where there is not a doctor. So I share some
of your concerns.

Whatever system, whatever plan that we are able to devise, we
must have one where no one, whether they be in rural or urban
America, will be left out or left behind, and I am very mindful of
your concerns.

Thank you, Mr. Chairman.

Mr. Roberts. Could I make one final point?

Chairman Stark. Please.

Mr. Roberts. I know you made the point that there are 14 per-
cent that are uninsured in Wyoming. I think that is because of the
snowdrifts there. In Kansas, a poll has been recently taken, and we
have 9 percent uninsured and furthermore, they asked them whv
and 38 percent of those were satisfied that they were uninsured,
didn't want insurance, apparently.

What happens to the 62 percent is the problem with regard to
the cost-shifting that goes on and if we do get reimbursed by Medi-
care 90 cents on the dollar, every one of my county seats in the 66
counties that I represent, 57,000 square miles that I represent has
had to pass a bond issue.

I asked the First Lady when she came out to Kansas City and
then out to Garden City, America, for the various summit meetings
about the HIPCs — that is when they were HIPCs, not alliances.

I said "Well, we have a lot of deer and antelope that play out in
my country, but I am not too sure about HIPCs." Why couldn't we
have a hign plains HIPCs; several States.

As regard to the single-payer system, and this was in reference
to what you said Jim, we do have a little situation from Saskatche-
wan where we are very happy for their single-payer system be-
cause we are getting a lot of primary care doctors leaving Canada
and coming to Kansas to take part in a system they feel is a little
better.

One doctor from Liberal, Kans. that took part in the Garden City
hearing had just come from Canada. His partner was supposed to
come, but his partner died of a heart attack, and he was waiting
for a bypass operation.

I only mention that in that there are some downside effects with
regard to the serious illnesses that we would like to see some serv-
ice out there as well. I am not trying to pick any kind of a discus-
sion here, but I did want to mention that.

By the way. Liberal, Kans. is not an oxymoron.

Mr. Stenholm. Mr. Chairman, one observation. Right now we
have a very exciting experiment going on in one of the communities
in my district in which they are creating a health clinic in an
underinsured, underserved area of a city. It is small by comparison
with Washington, D.C., standards, but the theory still makes good
sense.

We have to bring the care to where the people are. It can be
done. It is being done now on an experimental basis in a little kind
of a trade-off or side bar from what we all know is to be clinic and
migrant health concepts. This is something that we hope within a
short period of time is going to show positive results in one commu-
nity in attempting to deal with the underserved.

Mr. Thomas of Wyoming. We are doing some of the same
things. In Douglas, Wyo., they have reduced the number of acute
care beds. They have long-term care beds to take care of the over-

head. They have brought the physicians into the building so that
they have gotten away from duplication of expensive equipment
and are helping them some with their administrative costs. They
bring specialists around from the larger towns.

So there is a lot being done now to devise this distribution sys-
tem of health care on our own and we are pretty pleased with that.

Chairman Stark. Pat, you touched on this and I don't want to
let you all go — you represent not only rural constituents, but quite
often independent constituents, and you suggested, Pat, that
maybe some of the folks in Kansas just don't want insurance.
Texas has darn near 25 percent uninsured.

My question is can we, with the exception of perhaps the occa-
sional religious community, can we really let people go without in-
surance if we are going to have a universal plan?

I suggest that that may mostly be youngsters in their early
twenties who think they are healthy, but they don't wear their mo-
torcycle helmet, and they could get just as sick or they can get dia-
betes, and then without insurance, they become a cost to the com-
munity and haven't paid their fair share for insurance.

If we could agree on a plan, whatever it is, could we also agree
that everybody has to be in it? You don't let people say, "To hell
with it. I am going my own way."

Mr. ROBKUTS. In Dodge City, that is sort of our motto. Let me
take a stab, if I might, with regard to the health care summit or
conference we had with Senators Dole and Kassebaum and admin-
istration witnesses and myself. Craig was supposed to be there, but
he had another meeting as well, a similar meeting.

In the first place, there is no one in a rural area that is not re-
ceiving care. You have a small community caring, if I can refer to
it in that way, that means that they are getting care. With only
9 percent uninsured, that is one of the lowest in the country. If you
say 38 percent prefer not to be insured, I am not too sure that you
want to mandate that those folks simply join a plan they can't af-
ford.

There is cost sharing, but it is more due not because of that, but
because that hospital only gets 90 cents on the dollar and we can't
even pay our professionals what we have to pay them to attract
people to come there; so the criteria already used in the current
programs is at the wrong end of the telescope. Then the community
has to pass a bond issue.

There is a revolution going on in the rural health care delivery
system. We are doing everything we can just to hang on. I guess
I would answer your question by saying this: We heard a lot of ad-
ministration witnesses at that summit meeting. We had about 650
farmers and ranchers — no, make that 450 — I had a politician's
count — and they were sitting pretty quiet as we were going through
all the ramifications of the President's plan.

Finally, Roberts stood up and said "I am not sure that the Amer-
ican dream is that everybody be level with everybody else," that
this is an actual mandate. You get into the ideological argument
whether this is an entitlement, a right and a mandate.

You are right; in our country, we like people to do what grand-
mother said to do, drink less, stay out of the smart juice, smoke

less, exercise, get into preventive medicine and wellness — ^you have
that individual responsibility. I got a standing ovation.

I am not sure it made too many happy that were testifying, but
we got some notice of it. I know where you are headed, but I don't
know how you devise a mandatory system that is not going to be
more regulatory, more costly, more paperwork and more red tape.

Chairman Stai^k. I am not sure I do either. I am just suggesting
that you raise a question.

Mr. Roberts. It is a good question.

Chairman Stark. If 25 percent of the people in Texas stayed out
of the plan, we would be in trouble.

Mr. Stenholm. I would comment, if we have to mandate it, it
ought to be mandated on the individual's opinion and then you get
into choices that come with individual choice.

The biggest fear is for us to create the system and then mandate
it and have somebody else pay for it. That gets us in big trouble.
If there is any one message coming through loud and clear to me
and all members from local governments, unfunded mandates, we
have had enough of it.

We in Congress decide what is good for everybody, telling the
States or businesses "You have to provide this and meet these cri-
teria that sound good and are good," but then the cost associated
with it becomes another third-party pay syndrome and that is what
has gotten us into trouble with Medicare and Medicaid right now.

That is the challenge we are going to have.

Chairman Stark. In these hallowed halls, we put a big slash be-
tween Medicare and Medicaid. That is some other building over
there that has Medicaid, Charley. We try to keep those separate.

Mr. STE^fHOLM. Pardon me, Mr. Chairman.

Mr. McDermott. Let me come back to an issue — when I was in
the State legislature, the biggest budget was the road budget. We
used to argue, we raise all the taxes and where do we put the
roads, in the rural areas. Boys from the rural areas always argued
that is the way it has to be, you have to bring the farm goods in
and put them out through the port.

We never raised the issue, in fact they never raised the issue
that it was an individual responsibility to put roads in front of your
farm because if we had done that, they would still be on gravel out
there and we would have them made out of enamel in the cities
because we raised all the tax itself But it is clear that in a society
if you are going to deal with an issue like transportation, you have
to put it in the pot and those people who need it get their share
out of it when they need it.

It seems to me that in health care, we are increasingly moving
in that direction. That is the problem I have with the individual
responsibility. Not that it isn't a good idea, but it was impossible
to do in roads and in sewers and a lot of other things, and when
you come to the issue of providing that costly, very technical health
care we have in this country, it is impossible for individuals to do
it for themselves.

So we have to join together some way. That is why it is not tak-
ing away the individual's responsibility, but some people in the
rural areas, if they have a bad crop year, they are not going to be
able to buy that premium.

What are you going to say to them when they show up at the
hospital? I am sorry, you don't have a card. You are out.

I am not going to do that. Maybe you would do that to your
people

Mr. Thomas of Wyoming. We don't do that now.

Mr. McDermott. Of course you don't. That is why it seems to
me that those who can pay can

Mr. Thomas of Wyoming. It is a pretty big leap to go from tak-
ing care of those who have had an unfortunate thing to turning it
into a public utility, and it seems to me that roads are one thing
that governments have normally done. Health care

Mr. McDermott. It wasn't in the old days.

Mr. Thomas of Wyoming. Why don't we do it for groceries as
well, or housing, or automobiles? They are very important. We
ought to make sure that everybody has one.

I think that is a great leap of faith to go from highways to health
care in terms of being a socialized program.

Mr. Roberts. Most of the road systems in my 66 counties are
maintained by the county, and then State and then Federal as best
we can, although I at least have 5 bills in to designate Federal
highways throughout my district. That is not entirely true, but

Mr. McDermott. That is called cost-shifting.

Mr. Roberts. If you want to continue to pay about 10 cents out
of your disposable income dollar for the food and fiber market bas-
ket of food in this country, we are doing something right with re-
gard to agriculture and our contributions and the belabored farm
program.

One example, and this goes back to HEW and Secretary Califano
who was worried about quality and cost containment. We came up
with something called utilization review back in the 1970s with my
predecessor and Keith Sebelius, who was here prior to me. All of
a sudden, HEW popped out of the woodwork and said, "You are not
going to have any Medicare payment being honored unless a team
of three doctors reviews admissions to the rural hospital every 24
hours."

We looked at that and we said "By golly, we are for it," and the
hospitals said, "You can't be for that. We can't do that."

We said if they can find us the three doctors, we will get a lot
of primary physicians. That was ludicrous and it took 6 months to
1 year to get rid of that. That is the kind of thing in terms of an
unfunded mandate that Mr. Stenholm, Mr. Thomas and Mr. Rob-
erts are worried about with the heavy hands of the Clinton plan —
that is my words, pardon me, the Health Security Act.

Chairman Stark. I want to thank the panel. Whatever we end
up doing, we have over the 8 years I guess that I have chaired this
subcommittee had great good rapport with the rural caucus, in our
little area of Medicare. Each year we have done a little bit better
and a little bit more.

Whenever we get through this major undertaking that we are in
now, I pledge to you we are going to get back to that system again,
because I can't believe that whatever we do this year will be the
final word for the next 10 years.

So I look forward to continuing to get the bipartisan input and
support that we have had in the past for a lot of tough Medicare

cuts where we have been able to protect both the rural providers
and beneficiaries. I appreciate the input that the caucus has given
us and look forward to your continued assistance.

Mr. Stenholm. We appreciate the past and future support, Mr.
Chairman.

Chairman Stark. Thank you.

The next witness — we don't seem to get enough of each other, Dr.
Philip Lee, Assistant Secretary for Health, Department of Health
and Human Services back again for his weekly visit. We still have
some of the pills left from the last time. Dr. Lee, but we will get
your new prescription today and we look forward to hearing your
comments on access to health care in inner cities and rural areas
under the administration's health care reform.

STATEMENT OF PHILIP R. LEE, M.D., ASSISTANT SECRETARY
FOR HEALTH, U.S. DEPARTMENT OF HEALTH AND HUMAN
SERVICES

Dr. Lee. Mr. Chairman and members of the subcommittee, I wel-
come the chance to testify. I just want to review briefly what is in
the statement submitted for the record and then be prepared to re-
spond to your questions.

Without a doubt, the current crisis in health care is more severe
in inner-city and rural areas than it is in other areas of the coun-
try. I think it epitomizes the problem of health insecurity, and that
is the fundamental problem that the Health Security Act proposes
to deal with.

In the testimony, I describe the health care problems in rural
and inner-city areas, and I won't repeat those for members of this
committee because you are very familiar with them.

The lack of insurance, the lack of available providers, and the
other barriers to access have contributed to the poor health status
of many residents in rural and inner-city areas. Those are not the
only problems, but they contribute significantly.

Under the Health Security Act, under the basic elements in the
reform, first and foremost, everyone is covered, there is a com-
prehensive benefit package, and clinical preventive services are
provided without copayments and deductibles. The alliances pro-
vide consumers with purchasing power which many lack today.

Indigent populations will receive subsidies to cover part or all of
the costs of their premiums, cost sharing and in some cases, wrap-
around services.

Self-employed, including farm families throughout the Nation,
will be able to deduct 100 percent of the cost of health insurance
premiums instead of the current 25 percent. Small businesses will
be eligible for premium discounts, further stretching their health
care dollars. Providers will no longer receive lower payments when
they care for low-income patients.

Medicare bonus payments for physicians practicing in under-
served areas will be doubled for primary care and continued for
specialty services. Practitioners in underserved areas will be eligi-
ble for tax credits. They will also get allowable depreciation ex-
penses for medical equipment, and there will be safeguards to pre-
vent discrimination based on race, ethnicity or gender.

The access initiative, which is a major element in title III of the
Health Security Act, includes six interrelated approaches to over-
coming existing barriers to care. These programs will help assure
that all Americans, including those living in inner-city and rural
areas, not only have access to the full range of services, including
the comprehensive benefit package, but also will have an adequate
choice of culturally sensitive providers and health plans.

Those six interrelated approaches include the continued funding
and indeed increased funding for current safety net programs, such
as Ryan White, migrant health centers, community health centers,
homeless, family planning programs, changes in practitioner sup-
ply, particularly expansion of the National Health Service Corps,
changes in graduate medical education, which would increase the
number of generalists, and increased funding for primary care
training for nurse practitioners, for physician assistants and others
who could work in the rural areas.

Capacity expansion is, I think, critically important both for rural
and inner-city areas; this would provide both loans, grants and
loan guarantees to create practice networks in rural areas or inner-
city areas.

Outreach and enabling services, things like transportation, trans-
lation, child care and outreach, would be expanded both through
the community health center program and the other safety net pro-
grams and as an additional initiative, because they are areas that
are not usually provided by health plans.

Increased support for mental health and substance abuse in the
public health service programs along with the expanded mental
health benefits in the benefit package would assure that individ-
uals would have access to those services. Social supports and out-
reach would be necessary to help plans integrate those benefits and
individuals to receive those benefits.

And then there are two programs for school age youth; one in an
education program, and the second is school-related health serv-
ices. These are particularly directed toward adolescents because
they often, even when they are in health plans, don't utilize the
traditional providers. One of the services that would be included
would be psychosocial support and counseling services, which have
been identified as a major need.

Finally, there are the core public health programs. We believe
that as everyone is insured and the plans can relieve local govern-
ments of the financial obligations of providing care for uninsured
individuals, that the local health departments and the State health
departments can return to their basic public health function of pro-
tecting the health of the whole population. This is even more im-
portant for low-income individuals because they are more at risk
to things like tuberculosis, communicable diseases, waterborne dis-
eases, and other public health problems that would be dealt with
through these core public health programs.

These programs include surveillance for communicable and
chronic diseases that would help us define the magnitude and the
source, for example, of a tuberculosis epidemic or, let's say, a
chronic disease problem in the community so that the resources
can be directed at dealing specifically with those problems, pro-
grams to control communicable diseases and injuries, environ-

mental protection, public education and community mobilization,
accountability and quality assurance.

Here the State health departments and indeed the local health
departments can help assure plan performance in terms of achiev-
ing public health objectives. Public health laboratories would also
be an essential part of this, as would training and education of
public health professionals.

And finally, true research areas, prevention research at NIH and
outcomes effectiveness research and health services research at the
Agency for Health Care Policy and Research. These are all inter-
related initiatives that we think would strengthen the capacity of
the system which, without a real attention to the infrastructure
and organizational issues, really with just the health security card,
will not meet the needs of rural and inner-city areas.

Let me just close then, Mr. Chairman, by emphasizing that the
President's Health Security Act is designed to provide all Ameri-
cans, including those living in inner-city and rural neighborhoods,
with real health security at an affordable cost. To this end, the
public health initiatives in title HI are not separate from, but rath-
er integral to the success of health care reform.

Thank you for the opportunity to be with you and I am pleased
to respond to any questions.

[The prepared statement follows:]

STATEMENT OF PHILIP R. LEE, M.D.,
DEPARTMENT OF HEALTH AND HUMAN SERVICES

Good morning, Mr. Chairman and members of the Subcommittee. I welcome this
opportunity to discuss how the President's Health Security Act will meet the health needs of
rural and inner city Americans.

Mr. Chairman, you and others in the Congress have been eloquent in speaking out
about the health crisis facing our inner cities and rural communities. Indeed, these areas
epitomize the problems and consequences of health insecurity. Compared with other parts
of the country, rural areas and inner cities have a greater proportion of uninsured people;
fewer, and often poorly qualified health care providers; inadequate outpatient and inpatient
facilities; and a paucity of economic resources to create effective networks of care. Although
the need for health services is great in these communities, many residents face substantial
geographic and cultural barriers to obtaining care. In addition, they suffer from a
disproportionately high burden of preventable disease and injury. The costs of these health
problems have been staggering, both economically and in terms of human suffering.

The President's plan provides the means — for the first time — to make health security
a reality for all Americans, including those living in rural areas and inner cities. It does so
not only by assuring all Americans comprehensive insurance coverage, but also by building
up the capability of rural and inner city communities to overcome barriers to care and to
protect and improve the health of their residents.

THE HEALTH CARE PROBLEM IN RURAL AREAS AND INNER CITIES

Obtaining affordable health insurance is one of the most glaring problems for inner
city and rural Americans. In the District of Columbia, for example, one in four residents
under age 65 does not have health insurance. More than 8 million rural Americans have no
health insurance, including 18 percent of all farm families. Because they generally lack the
benefit of being part of a large business or purchasing group, rural Americans often pay
more for health insurance than those living in other parts of the country. Some can purchase
coverage through small employers or a rural cooperative, but many rural families have no
choice but to purchase separate coverage at high market rates.

Even when rural and inner city residents are fortunate enough to have health
insurance, many barriers still stand in the way of receiving proper medical care. In rural
communities, barriers such as geography and lack of transportation present real challenges to
health care delivery. With a relatively small population spread over a large area and health
care professionals in short supply, patients often must travel long distances to see a
physician.

Far removed from the support of their peers and the sophisticated equipment of their
training facilities, fewer and fewer physicians are choosing to set up rural practices. Without
enough doctors, nurses, and facilities, building networks of care becomes more difficult, as
does the task of attracting or establishing enough health plans to foster choice and
competition.

In inner cities, the challenges to obtaining access to care are different, though no less
problematic. Crime, poverty, overcrowding, unemployment, and violence make the inner
city an unattractive environment for health professionals. Ironically, many inner city
neighborhoods are located only a few blocks away from some of the worid's most remowned
academic health centers, yet the number of physicians willing to practice in these areas has
dwindled in recent years. One study by the Community Service Society of New York found
only 28 properly qualified physicians serving a population of 1.7 million people in low-
income neighborhoods in Harlem, north central Brooklyn and the South Bronx.

In addition to the scarcity of providers, the quality and accessibility of care is also a
serious problem for inner city patients. Of the 701 generalist physicians practicing in
Harlem, Brooklyn and the South Bronx, only 28 or 3.9% were found to meet minimum
standards for providing adequate primary care. Many refused to accept patients on
Medicaid, were open for less than 20 hours a week, and did not offer emergency after hours
care or have admitting with any hospital.

Practitioners in inner cities are also frequently ill-prepared to meet the cultural and
linguistic needs of their diverse patient population. Rarely do these environments produce
physicians from their own communities. Consequently, patients and providers generally
come from vastly different backgrounds.

The lack of health insurance and other barriers to care have contributed to the poor
health status of many residents of rural and inner city communities. Let me give you just a
few examples of the disproportionate share of preventable illness and injury these populations
bear and the costs of these problems to the health care system.

• Cancer is diagnosed at much later stages in inner-city populations, often when
it is no longer treatable. In Harlem, for instance, only five percent of women
with breast cancer are diagnosed at an early stage as compared with 42% of
African American women and 52% of Caucasian women nationwide. The
Centers for Disease Control estimates that the direct medical costs of treating
breast cancer rise from $25,000 to $84,000 per individual when detected late
instead of early.

• From 1985 through 1992, while the tuberculosis case rate declined from 6.7 to
6.5 cases per 100,000 in non-urban areas of the United States, it increased
from 17.1 to 22 cases per 100,000 in urban areas. Currently, New York City
accounts for 14 percent of all cases of tuberculosis in the country. In Harlem,
the prevalence of tuberculosis is 200 cases per 100,000, four times higher
than the New York City average. The Centers for Disease Control estimates
that $480 million per year will be required to curtail the emerging tuberculosis
epidemic.

• HIV/AIDS is a serious problem in inner cities, but it is also becoming more
prevalent in rural areas. In North Carolina, for example, HIV infection has
increased at an alarming rate, with 75 percent of new infections occuring
among low-income minorities in rural as well as urban areas of the state. The
cumulative cost of treating all persons with HIV is forecast to be $15.2 billion
in 1995. Yet each case of AIDS that can be prevented can save approximately
$102,000 in health care costs.

• Rural areas have an inordinately high rate of serious accidents due to the risks
of farm, mining, and other occupations. Over a three year period in Iowa,
CDC's National Center for Injury Control reported 7,797 farm injuries,
resulting in 1,263 hospitalizations, and 236 deaths. The Center for
Agriculture Disease and Injury Research, Education, and Prevention at the
University of Iowa estimates that preventing the 140,000 disabilities caused by
farm accidents each year in the United States would save $3.6 billion.

BENEFITS OF THE HEALTH SECURITY ACT TO RURAL AND INNER CITY
AREAS

This morning, I would like to go over those aspects of tlie President's plan that will
provide inner city and rural Americans with real health security. After reviewing some of
the basic elements of the reform, I will concentrate on the public health initiatives contained
•in Title III of the Health Security Act that are designed to assure all Americans - including
those living in underserved areas ~ access to medically necessary and appropriate care when
they need it, and to enhance the ability of all communities to protect, preserve, and promote
the health of their residents. These programs, which are integral to achieving the goals of
health care reform, will ultimately determine how well we improve the poor health status of
many inner city and rural Americans and the extent to which we will be able to contain our
nation's escalating health care costs.

Basic Elements of Reform

I need not review in detail with this committee the basic elements of the President's
plan that will improve access to care for all Americans. However, considering the special
problems of inner cities and rural regions of the country, several points are worth
emphasizing:

• Under reform, all Americans will be covered for a comprehensive range of
benefits, including expanded mental health and substance abuse services. In
addition, preventive services will be available without deductibles or
copayments.

• Health care alliances will provide consumers with the purchasing power many
currently lack to bargain for lower premiums.

• Indigent populations will receive subsidies to cover part or all of the costs of
premiums, cost sharing, and, in some cases, wraparound services.

• The self-employed, including farm families throughout the nation, will be able
to deduct 100 percent of the cost of their health insurance premiums instead of
the current 25 jiercent.

• Small businesses will be eligible for premium discounts, further stretching
their health care dollars.

• Providers no longer will receive lower payments when they care for low-
income patients. Medicare's bonus payment for physicians practicing in
underserved areas will be doubled for primary care physicians and continued
for specialists. Hospitals serving a high proportion of low-income and
undocumented persons will receive additional payments through a federal
Vulnerable Population Adjustment.

• Practitioners providing care in underserved areas will be eligible for tax credits
of up to $500 per month for nonphysician providers and $1,000 per month for
primary care physicians. The allowable depreciation expense for medical
equipment also will be substantially increased for these providers.

• Safeguards will be implemented to prevent discrimination based on race,
ethnicity, age, or gender. These include prohibitions against cherry picking
and redlining, enforcement of Title VI of the Civil Rights Act, requirements
that alliances not subdivide metropolitan statistical areas, and the ability of
States to require health plans to include inner-city or rural communities in their
service areas.

Access Initiatives

Congress, including members of this subcommittee, has demonstrated great concern
about the ability of underserved populations to obtain access to personal health care services.
You have also expressed concern about the ability of health care providers currently caring
for underserved populations to participate successfully in the reformed system. The
President recognizes, as you do, that a Health Security Card will not, in and of itself,
guarantee that all Americans receive appropriate medical care. To achieve this goal,
universal health insurance must be backed up by an adequate system of practitioners,
facilities, education, outreach, and information.

The Health Security Act uses six interrelated approaches to overcome existing barriers
to care. These programs will assure that all Americans - including those living in inner-city
and rural areas — not only have access to the full range of services included in the
comprehensive benefits package, but also will have an adequate choice of culturally sensitive
providers and health plans.

• Current Safety-Net Programs. First, current safety-net programs such as
community and migrant health centers, programs for the homeless, family planning,
Ryan White, and maternal and child health will be maintained and strengthened under
reform.

Providers funded under these programs will receive automatic designation as essential
communify providers for at least five years. This will guarantee them payment for
covered services from all health plans. Equally important, it will assure that
vulnerable populations have continuing access to practitioners with experience meeting
their special needs, regardless of which health plan they choose to enroll in.

• Practitioner Supply. The supply of practitioners in rural and urban underserved
areas will be increased in several ways under reform. The National Health Service
Corps will be expanded approximately five-fold from its current field strength of
1,600. Residency training will be redirected to increase the ratio of primary care
physicians to specialist physicians from about one-third to 55 percent. Support for
training programs for primary care physicians, physician assistants, and advanced
practice nurses will be doubled.

Special programs to increase the representation of minorities among health
professionals will help to overcome access barriers that stem from cultural gaps.

• Capacity Expansion. Capacity expansion in inner-city and rural areas will be
actively supported both by expanding the successful community and migrant health
center program to provide services to an additional 2 million individuals and through
a new competitive grant and loan program supporting the development of community-
oriented practice networks and health plans.

The new program is designed to integrate federally funded providers with other
providers in underserved areas, bolstering their ability to coordinate care, negotiate
effectively with health plans, and form their own health plans. It will increase the
level of service available in underserved areas by creating new practice sites for 3,800
additional practitioners and by renovating and converting existing practice sites,
including public and rural hospitals. In addition, it will improve access to specialty
care in urban and rural underserved areas — and improve coordination of care - by
linking providers in practice networks with each other and with regional and academic
medical centers through information systems and telecommunications.
Grants and loans under the new program will be made to groups of providers working

in medically underserved areas or caring for underserved populations. In making
awards, preference will be given to groups that include the maximum number of
different types of federally funded providers and that link these providers with those
not supported by public funds. All providers included in the community practice
networks will receive automatic designation as essential conuiwnity providers.

Outreach/Enabling Services. The Access Initiative also incorporates a new
competitive grant program that will expand federal support tor enabling services, such
as transportation, translation, child-care, and outreach.

These grants will help 6 million isolated, culturally-diverse, hard-to-reach persons not
served by other programs get the supplemental services they need to obtain access to
medical care. They will also help individuals who have been denied access to the
current medical care system shift their care patterns away from emergency rooms and
receive earlier and more appropriate primary care services.

Awards in this program will be made to community practice networks, community
health plans, and other public and private not-for-profit organizations (such as
community health centers) with experience and expertise in providing outreach and
enabling services for underserved populations. These grants will supplement support
for enabling services provided through existing Public Health Service programs.

Mental Health and Substance Abuse Initiatives. The Health Security Act also
includes new funds to assure that low-income, hard-to-reach individuals know about
and take advantage of the expanded mental health and substance abuse treatment
benefits included in the comprehensive benefits package.

Working through the existing Community Mental Health Services and the Substance
Abuse Prevention and Treatment formula grants, these funds will support enabling
services - community and patient outreach, transportation, translation, education -
for 2.5 million low-income individuals and other vulnerable groups (such as the
homeless or the severely mentally ill). In addition, they will build up the currently
inadequate infrastructure for delivering mental health and substance abuse services in
communities and facilitate integrating these services within the broader health care
system.

School-Age Youth. Finally, the Access Initiative incorporates two new programs to
reach out to one of our Nation's most vulnerable groups - school-age youth and
adolescents. The Comprehensive School Health Education initiative will establish a
national framework within which States can create school health education programs
that improve the health and well being of students, grades K through 12, by
addressing locally relevant priorities and reducing behavior patterns associated with
preventable morbidity and mortality. This program will be targeted to areas with
high needs, including poverty, births to adolescents, and sexually-transmitted diseases
among school-aged youth.

The School-Related Services program will support the provision of health services —
including psychosocial services and counseling in disease prevention, health
promotion, and individualized risk behavior - to up to 3.2 million children in over
3,500 schools or school-linked sites. Grants will be made to states for the
development and implementation of state-wide projects targeted at high-risk youth
ages 10-19. In states that do not take this initiative, grants will be available to local
community partnerships including public schools, experienced providers, and
community organizations.

Core Public Health and Prevention Initiatives

Most of the health care debate has focused on the personal health care system. But,
without question, the burden of illness in inner cities and rural areas is directly related to our
lack of support and attention to public health. In 1982, the Institute of Medicine estimated
that only 10 percent of preventable early death is related to inadequate delivery of personal
medical services, whereas 70 percent is related to environmental and lifestyle factors that can
be addressed by public health. In recent years, however, as the health insurance system has
failed more and more Americans, public health's energies and resources have increasingly
been focused on providing personal health care services to the uninsured and underinsurei, to
the detriment of its essential, population-based functions.

To improve the health of inner city and rural residents we must define the particular
groups for whom health problems are most common. We must identify effective
interventions by learning why some communities are hard-hit by a problem while others
somehow seem to escape. We must target public education and prevention interventions to
populations at highest risk and populations with different cultural backgrounds. And we must
create alliances between public health agencies, health plans, and providers as well as sectors
outside health, such as public schools, law enforcement agencies, and social service agencies.

By guaranteeing all Americans univeral coverage, the Health Security Act provides
public health agencies with the opportunity to refocus their energies on protecting the health
of the residents in their communities. Two programs included in Title 111 provide the public
health system with vital support to achieve this goal.

• Core Public Health Program. This competitive grant program will provide

funds to State health agencies to strengthen the following essential public
health functions at state and local levels:

(1) surveillance of communicable and chronic diseases - essential to define the
magnitude, source, and trends of health problems so that limited resources can
be directed to populations at greatest risk.

(2) control of communicable diseases and injuries - essential to ensure that
new problems are identified early, that contact tracing and partner notification
occur effectively, and that sources of infectious exposures are removed.

(3) environmental protection — essential to safeguard the physical and social
environment (e.g., water, food, workplace, housing) against causes of disease.

(4) public education and community mobilization - essential to prevent major
causes of premature death and disability that are behavioral and societal in
nature.

(5) accountability and quality assurance - essential to protect consumers from
medical and health services that do more harm to health than good.

(6) public laboratory services — essential in the diagnosis of major infectious
and environmental threats to health.

(7) training and education of public health professionals - essential to ensure a
workforce capable of carrying out public health functions.

The program fosters greater accountability to the federal government than has
been realized previously for the definition and reporting of progress in
achieving public health objectives.

• Preventable Priority Health Problems. A second competitive grant program

will provide funds to public and private not-for-profit agencies to address
health issues that affect local communities or specific populations within
communities. Many of these problems do not affect the country uniformly and
call for tailored, community-based interventions. For example, in some inner-
city communities, diabetes or heart disease is a major problem; in others,
priority may be accorded to programs that deal with cigarette smoking; while
in still other areas, teen pregnancy is an issue of great concern. In cases
where multiple factors contribute to a health problem, as with violence, grants
will support approaches that cut across individual problems.

Among the initial set of priorities, the program will target prevention of
smoking by children and adolescents; violence prevention; and reductions in
behavioral risks that contribute to the incidence of chronic diseases, including
heart disease, cancer, stroke, and adult-onset diabetes.

Prevention Research

Expanding the knowledge base can also help residents of rural and inner city areas,
by elucidating new ways to improve access to care, prevent illness and injury, and control
health care costs. This is addressed by the final components of the Public Health Initiative,
which support a prevention research initiative in the National Institutes of Health and a health
services research initiative in the Department of Health and Human Services.

Prevention research is the foundation for both clinical preventive services and the
public health interventions included in the Health Security Act. Expanded prevention
research will ensure the availability of effective preventive measures against existing diseases
as well as new and emerging health threats. Progress in preventing disease will help to
offset escalating acute health care costs and the disproportionate impact of disease and
disability among women, minorities, and the elderly.

Health services research will elucidate what works best in medical care and how to
organize providers and institutions most effectively in the new health care system. This
investment will build on the considerable expertise of the Agency for Health Care Policy and
Research in investigating outcomes and quality research, identifying practice variations with
unnecessarily high costs, and developing practice guidelines to improve the appropriateness
and effectiveness of the treatment decisions made by health professionals. Further
development of these methods will provide more accurate measures to evaluate the
performance of alliances and health plans and to assess the extent to which reform is making
health care available to all Americans.

CONCLUSION

In closing let me emphasize that the President's Health Security Act is designed to
provide all Americans - including those living in inner-city and rural neighborhoods - with
real health security at an affordable price. To this end, the Public Health initiatives in Title
III are not separate from — but rather integral to — the success of health care reform.

I appreciate this opportunity to appear before the Subcommittee and will be pleased at
this time to answer any questions you may have.

Chairman Stark. Mr. Thomas.

Mr. Thomas. Dr. Lee, as we look at the President's bill, indeed
as we look at any comprehensive bill, there clearly are a number
of areas of reform that need to be addressed. I guess my question
to you would be, absent the mechanism for delivering universal
coverage, let's set that aside. Let's just assume that it is done and
not talk about how, OK? We have got universal coverage.

You then have a number of provisions in your bill that are either
paralleled or augmented within a number of other bills. Let's as-
sume that those components are agreed upon and we move for-
ward.

In your estimation, how critical or essential is the concept of the
alliance if we have got everyone covered and funded under a struc-
ture and we have got all of these support restructurings going on
in terms of a drive for more primary care, educational structure,
and the moneys on the outreach. We are moving particular identi-
fied populations under either managed-care concepts or other con-
cepts.

If you just didn't do the alliances, wouldn't you make a major,
major change? Or turn it the other way. Since you are in defense
of the administration's position, does none of that matter if you
can't get your alliance structure, your forced redistribution struc-
ture?

For most Americans, these folks are people that are left out to
a certain extent. Most of these programs are pickup programs to
bring them into the structure. How critical, in vour estimation, are
the alliances to delivering that changed servicer

Dr. Lee. Well, I do support, obviously, as a spokesperson for the
administration, the alliance concept, but I also personally happen
to strongly support this idea for two reasons particularly.

One, because it gives low — people who don't have access to the
market the purchasing power. In other words, it is a purchasing co-
operative on behalf of people who work for small employers or indi-
vidually employed individuals, and when you see what some larger
organizations can do to assure their employees the competitive ben-
efits in terms of quality and price, that is a significant benefit.

The other benefit to me

Mr. Thomas. I think on that point, doctor, that makes some
sense in urban areas. For example, in the area that I represent,
frankly, no managed competition, no forced competition model is
going to work. We are looking at some clinics and some other gov-
ernment-involved structures to really flesh out the health care de-
livery system.

So although a lot of us either in voluntary purchasing coopera-
tives in the Chafee-Thomas bill or the mandatory purchasing co-
operatives, that concept makes some sense and that is the point
that you just spoke to in terms of the alliance. But how does the
concept of the alliance work in a county of 17,000 people like Inyo
County, which is the second largest geographical county in the
United States? I mean, it is not going to work there, right?

Dr. Lee. I would say, to me, the second — and I will speak to that
also. The second advantage of the alliance is that it focuses on a
geographic area that contains a population, so it is population
based. It then permits, within the alliance area, a focus on achiev-

ing public health objectives within the plans, as well as within
health departments.

For example, with the immunization or other of the provisions in
the plan, it permits us to look at the population within that area
to see how well we are achieving those objectives with whatever
plan is in the area.

Now, in underserved rural areas or sparsely populated areas, as
the Sierra Counties in California, for example, it is my understand-
ing currently, with the purchasing cooperative in the Mr. Mid pro-
gram in California, that in those areas, they have basically a fee-
for-service plan that is the plan that is available in those areas.

And there does have to be in each alliance area, at least, a fee-
for-service plan. With the augmentation of the access initiative,
which would permit increased funding for resources with the
changes in training programs, both nurse practitioners and physi-
cians, hopefully we could get more physicians and more nurse prac-
titioners into those areas with the development of practice net-
works through the access initiative.

We should be able to enhance the services that are available to
individuals in Inyo County or some of the other sparsely populated
counties. So I think it is a combination of things. The alliance is
only one element in that.

Mr. Thomas. But in the testimony before this committee from
the administration on the purchasing cooperatives — on the alli-
ances, I think the administration was shocked to find out that the
voluntary purchasing cooperatives in California in terms of the re-
gional units aren't even necessarily contiguous; that, in fact, they
make up like components in different geographic areas of the State.

Is there anything in the Clinton bill that would allow these serv-
ices, as you have outlined them, within an alliance to cross State
lines?

Dr. Lee. Well, I think

Mr. Thomas. For example, western Nevada, believe it or not,
looks to the urban area of Inyo County, which is, we just outlined,
a very difficult area to deal with, for their support. Does the Clin-
ton bill envision these networks crossing State lines?

Dr. Lee. The networks could cross State lines, and also, of
course, the plans could cross State lines

Mr. Thomas. The alliances could not?

Dr. Lee. No, the alliances could not, but the plans absolutely
could, and there are many situations similar to that. If you look at,
say, North Dakota which serves a lot of patients from Minnesota,
or if you look at Delaware, I think 40 percent of the patients there
are not residents of the State.

So the plans can cross State lines and integrated delivery sys-
tems could certainly do that. They would obviously have to be li-
censed in each State, and the insurance plans would have to be li-
censed in those States. But as the insurance system now works,
somebody living in Connecticut, for example, can go to New York
to get their care, or somebody living in Nevada can go to California
to get their care.

This simply extends that insurance coverage to cover those who
don't have insurance, and I don't see that it would limit that plans
capacity to cross State lines if it chose to do so.

Chairman Stark. If a plan chose?

Mr. Thomas. If it chose to do so, which is a statement that I
think in terms of the way in which they are going to be structured,
perhaps enormous ifs. This goes back to what I consider to be one
of the fundamental flaws in the alliance structure, but my concern
and direction is that I think a number of items that are contained
in the President's bill clearly are good and worthy in terms of ex-
panding health care needs to inner-city, urban and rural areas, but
that they are also contained in a number of other provisions, and
that all of these items probably need to be addressed more or less,
regardless of either the funding or the delivery mechanism.

They are long overdue, especially in the area of communicable
diseases and some of the preventive things that we need to do, and
I appreciate your testimony.

Dr. Lee. Thank you very much.

Chairman Stark. Mr. McDermott.

Mr. McDermott. Thank you, Mr. Chairman. I want to follow up
on the line that Mr. Thomas was exploring and that is the whole
question of alliances and the outlines of them. Right now you have
a great controversy on the front page of the Washington Post today
about Tennessee Care and what is happening in rural areas and
where do you have doctors and can you get somebody to sign up
and so forth.

And as I look at the alliances, one of the real problems for me
is the whole question of the standard metropolitan statistical area.
Everybody says you can't split them and I hear people walking
around saying, well, I don't know, maybe you should be able to
split them. And my concern is that if you could take a standard
metropolitan statistical area and split it and drop out 4 or 5 ZIP
Codes, you can probably make it a pretty profitable place, certainly
could in Seattle.

I could tell you which Zip Codes to drop and you would prob-
ably— I could probably get six or seven insurance companies who
want to come into Seattle.

Where I used to live on the west side of Chicago in West Garfield
Park, there isn't any insurance company on the face of the earth
that is going to eagerly run in to take that part of the city.

And my question to you is this: If the bill passes that has any
kind of split in standard metropolitan statistical areas, would you
recommend to the President that he veto the bill?

Dr. Lee. Is that a total bottom line issue? The President has
indicated

Mr. McDermott. It is a bottom line issue to cities, because if you
are going to allow cities to be fractured in any way so that anybody
can leave out the tough parts and get the good parts, you are going
to have the same cherrypicking — ^you are going to have redlining in
health care. From a citizen who lives in a city, represents a city,
it is a bottom line issue, because if they are going to split them,
then we are back right where we are right now. We haven't gained
an inch.

Dr. Lee. Well, as you know, if the President has indicated cov-
erage for everybody, comprehensive benefits, are the bottom line is-
sues, my own view — again, you asked me would I recommend that
he veto it. I would agree with you that this is a fundamental issue.

that everybody has to be assured access to medically necessary and
appropriate care, and if you exclude geographic areas — one of the
things we are trying to get away from, clearly, and one of the prob-
lems today, is redlining.

There are a number of other pernicious practices by the insur-
ance industry that need to be eliminated. In this case, the alliances
are required to include the SMSA in the alliance area. And my own
view is that is the way it should be.

I would say it would be a tough call whether it should be vetoed
on that basis alone, but I think it is an issue that the President
should take a very strong stand on.

Mr. McDermott. Because I anticipate that an amendment
slipped in at the end in the conference committee. That is where
I think it will happen and I think it is one of the reasons why the
single-payer system is the only way to go so that you then have ev-
erybody in the same system. If you allow this system to be put to-
gether and at the end, at the very end you slide in an amendment,
as sometimes happens around here, you wind up perpetuating one
of the major problems we have in our cities and that is the failure
to deliver of health care to the real tough inner-city areas, and I
think it is an issue that needs to be on the table, needs to be in
the record, and it needs to be thought about very hard by all mem-
bers.

Dr. Lee. Of course, there is the option in the Health Security Act
for single-payer. There is even an option for single payer in an
urban area, so that you could do that in a particular urban area
if that seemed to be the best solution.

But I would also think with the chairman participating in the
conference committee, we should be able to preclude that kind of
language from being slipped in at the last minute.

Chairman Stark. Thanks for the endorsement.

Mr. Lewis.

Mr. Lewis. Thank you, Mr. Chairman.

Dr. Lee, I would like for you to explain the President's proposal
to support essential community providers. I understand that essen-
tial community providers will be covered automatically in all
health plans for 5 years. I would like to know why the coverage
ends in 5 years.

What is the rationale for ending this coverage in 5 years?

Dr. Lee. The essential community providers will be automati-
cally continued for 5 years. It would then be reviewed at that point,
and probably a year ahead of time, before any decision was made
to terminate it. And if it was determined that there would be im-
paired access if that requirement weren't continued, it would be
continued.

In other words, we would want to assess the access to care, the
quality of care, the appropriateness of care through that mecha-
nism. I would presume by that time we would see the development
of the practice networks and the essential community providers
would be integrated into either their own plans or broader based
plans, and you would not need to continue that particular require-
ment. But it would be required, as we are currently proposing it,
to review that prior to any termination of the requirement.

Mr. Lewis. Let me just ask you about another area of great con-
cern to me, Dr. Lee. How would the President's proposal provide
mental health and substance abuse coverage for a low-income com-
munity, especially those in the inner cities?

Dr. Lee. The standard benefit package, of course, includes some
benefits, significantly beyond what many plans currently include.
We would also continue the funding through the Public Health
Service through State and local governments for both the mental
health and substance abuse provider network that is there cur-
rently, requiring the States to develop a plan to integrate the pri-
vate and public systems so that we would see how that could be
achieved once full benefits were provided after the year 2001.

There would also be in the interim an expansion of support. In-
creased support is proposed in title HI of $250 million a vear to
strengthen the outreach and enabling and support services for that
population, because we recognize that for some of the chronically
mentally ill, particularly those with dual diagnoses and those who
are, for example, homeless, the kind of safety network we have
needs to be continued, needs to be strengthened in order to assure
the chronically mentally ill population, particularly, access to these
services.

Mr. Lewis. Dr. Lee, is it possible for the proposal to go the sec-
ond mile and do something extraordinary, out of the ordinary in
rural areas and inner-city areas where people have been left out
and left behind so long when it comes to delivery of health care?

Dr. Lee. Well, I would say many of those people, of course, are
uninsured, so providing insurance for everybody is going to be fun-
damentally important, and a comprehensive benefit package. But
the capacity expansion and the other access initiatives, we think,
will be a major element in assuring individuals real access to care
in addition to just being covered with insurance. In addition, the
development of practice networks in inner-city areas and more
training of family physicians and nurse practitioners and physician
assistants, the development of practice networks through the ac-
cess initiative, and potential, at least in fee-for-service plans, in-
creased payments.

Certainly that is going to be true in Medicare, for primary care
in underserved areas, and that would include rural areas, with the
development of — in rural areas, particularly — telecommunications
links, so that the professional isolation that is there would be di-
minished, and the development of enabling services and outreach,
things like transportation.

In rural areas, a very significant percentage of elderly patients,
for example, don't have access because they do not have an auto-
mobile. I was just out in New Mexico visiting a number of Indian
reservations, and one of the primary problems they described in
terms of access to care was lack of transportation, particularly
when the weather is bad. Poor roads, very rurally isolated.

Transportation is an important element, so those outreach and
enabling provisions in the Health Security Act would help to de-
velop the capacity in those areas to help meet these needs in a very
real way.

Mr. Lewis. Thank you. Dr. Lee.

Thank you, Mr. Chairman.

Chairman Stark. All right, Mr. McCrery.

Mr. McCrery. Dr. Lee, I am sorry I missed your presentation in
full, but I need to ask you a couple of questions. We currently have
a system, the Medicare system, and to some extent the Medicaid
system, that at least in some respects resembles what the Clinton
administration is trying to do with the rest of the health care sys-
tem. That is, in the Medicare system, we have budgetary con-
straints and we, from time to time, adjust reimbursement levels
and pretty well dictate what providers are reimbursed for services
in that system.

Is it not so that the Clinton plan would essentially impose that
on the rest of the health care system through its global budgets,
its premium caps, and the regional alliances' budgets?

Dr. Lep:. I think that the proposal by the President differs signifi-
cantly from the current Medicare and Medicaid programs. Medicare
is largely fee-for-service, although there are some capitated, pre-
paid plans, a relatively small percentage of the Medicare popu-
lation.

Medicaid, as well, has a relatively small percentage in managed
care, although that number is increasing.

What the President has proposed is the development of inte-
grated delivery systems that would provide comprehensive care
with a major emphasis on quality. We could look at the evolution
of some of those systems in recent years, and I would use Kaiser
Permanente in California as an example.

In talking with David Lawrence, who is the CEO; he tells me
that they are able to reduce the rate of increase in expenditures or
reduce the premiums that they charge principally because of the
improvements in the quality of their care, which was developed
through a comprehensive, continuous quality improvement pro-
gram over the last 5 years. So quality is a major component in
these plans, and it is within the plan.

Now, you will competition between the plans. Medicare is paying
individual physicians or individual hospitals. It isn't competition,
except for the HMOs which between plans.

The premium cap is in a sense a fail-safe. In other words, if the
competitive plans do not achieve reductions in rates of increase in
expenditures, that is there as a fall back protection, and to ensure
that we can achieve a long-term slowing in the rate of growth in
medical care expenditures. So it is more in a sense of a backup, not
as primary.

The primary approach is plans competing on the basis of price
and quality, and the premium cap and the global budget would be
backup mechanisms. That really differs quite significantly from
Medicare. The capacity wasn't there to have competition, so Medi-
care instituted the DRGs in 1983 and passed physician payment
reforms in 1989, which had significant effects on slowing the rate
of increase. The President looked at that approach and did not
favor that approach, but rather this managed competition ap-
proach, which is really a different way of trying to achieve the
same objective.

Mr. McCrei^y. Explain to me how the subsidy caps would work
in conjunction with the premium caps.

Dr. Lee. How would the — I just want to make clear what is
your—

Mr. McCrery. As you know, the Grovernment is going to sub-
sidize businesses under the Clinton plan.

Dr. Lee. You mean small, low-wage employers, which have a 3.5
percent limit for the

Mr. McCrery. Anything over those. The Government is going to
subsidize, and the Government is going to cap those subsidies. So
how does that fit into the premium caps? How do they work to-
gether?

Dr. Lee. The studies that have been estimated by the economists
and the actuaries estimating what it will take in terms of a pre-
mium, at what level of employment to achieve the necessary re-
sources to fund the program. In other words, what is it going to
take from individuals and from employers. We could certainly get
from Ken Thorpe or Judy Feder the sort of methodology and all the
figures to provide that in a more detailed way, but — we believe
very strongly that managed competition will, in fact, slow the rate
so that there would not need to be additional Government sub-
sidies.

I certainly believe that. I think we can bring down the rate of
increase in expenditures. If we look at what has been happening
recently, whether managed care has had a lot to do with that or
not, we have seen a significant slowing of the rate of increase. We
have certainly seen that in Medicare. So I believe we can bring
those costs down, and I think that other people agree with that, as
did the outside actuaries who looked at the soundness of the fi-
nancing mechanisms, that the subsidies would be sufficient, and
that we could achieve the kind of cost containment objectives that
are outlined in the plan.

Mr. McCrery. I appreciate that, but the fact is

Dr. Lee. But there clearly is disagreement and other people
don't

Mr. McCrei^y. And I don't necessarily disagree, but clearly I
don't know, nor, I would submit, does the administration.

If they don't work, if those market forces don't work, then it is
clear to me thi^t the Government is the ultimate arbiter of what
eventually gets into the system, and we are here today to talk
about rural health care, and, again, I would submit that one of the
primary problems today with maintaining a base of rural health
care infrastructure is the reimbursement system that has been im-
posed on those providers through the Medicare and Medicaid sys-
tems, and they are cost shifting.

They are attempting to cost shift in rural areas to not much avail
because most of their patient load is now Medicare or Medicaid. So
if we are not doing very well providing services in the rural areas
as a result of a current government program, I just question
whether putting the rest of the system at the whim of the govern-
ment in terms of reimbursement and total cost of the system is
going to do much better for the rural areas of this country.

Dr. Lee. Well, it is, I think. One of the problems in rural areas,
of course, is the large number of people who are uninsured. In the
Medicare program, it is intended to raise the payments for under-

served areas for primary care services, to increase the incentives.
So there will be several policies in ternis of just the payment.

We know that payment doesn't do it alone. There are a lot of
other factors in rural practice and rural areas that result in physi-
cians not wishing to settle in rural areas, not the least of which is
the opportunity for their kids to go to school. So these

Mr. McCrery. That is true, but in my area though, the primary
problem with rural hospitals going out of business, shutting their
doors, is not being able to pay for all the services that they have
to provide, and that is primarily as a result of the reimbursement
system with Medicare and Medicaid, and the heavy patient load
with Medicare and Medicaid.

Now, it may help to insure all the uninsured in the rural areas
and then they would have more people to cost shift on, if they could
depend on that cost shift. But under your plan, they would be look-
ing at the same situation, then, with the private pay patients as
they are with the Medicare and Medicaid. They would be looking
ultimately at the reimbursement level being controlled by budg-
etary considerations of the government.

Dr. Lkk. Well, in the President's plan, the goal is to have that
not controlled by the Government, although the premium cap is a
backup, but rather to have quality be the principal thing that
drives it, and with competition, hopefully achieving the cost con-
tainment objectives that are outlined in the plan.

Mr. McCrery. Thank you.

Chairman Stark. Jim, you ever seen a shooting star late at night
flash? Watch tomorrow evening, OK?

Dr. Lee, I was interested in your exchange with Mr. Lewis and
I was intending to talk with you about the sunsetting of the redlin-
ing or essential community providers. So I assume from your an-
swer is you said that you wouldn't want to see that happen and
these communities be left, bang, at the end of 5 years without
these essential community providers.

Dr. Lkk. Absolutely.

Chairman Stark. So I assume that the administration would
therefore support our just making a little change and say, we will
review it and at the end of 5 years and we won't have it automati-
cally sunset, and then if you can convince us it is no longer nec-
essary, we will eliminate it. Would you support that?

Dr. Lee. I would say if Congress judges that is the best way to
go, I would certainly not object to that at all.

Chairman Stark. Great. Now, one other test. I would like to join
in on this cost saving, but Mr. McCrery has done an excellent job
on that. I am concerned, again, on this underserving the inner-city
and rural areas. The Public Health Service insofar as they have
been able, has done a very good job, but in the President's program,
let us focus ahead and pretend that we are in 1998. Leon Panetta
survives as budget director and we are all here and we have a zero
sum budget game and we have a freeze on discretionary spending
and the plan that you have outlined for having the Public Health
Service requires something we are not used to in this committee.

It requires an appropriation of exactly $48 billion. The first year
it is only $1.1 billion. How would you recommend to us that we cut
the President's budget, which is going to be presented to us tomor-

row, by $4 billion to fund the program that you are suggesting?
What areas do you think we should cut in — just to give you the
order of magnitude. This is a year. Where would we cut $4 billion
out of discretionary nondefense, because we can't crossover into
that arena. Where would you just guess that there is an extra $4
billion to continue to provide the community and migrant health
centers that are going to be necessary?

Dr. Lp:p:. In 1995, Mr. Chairman, the $1.1 billion is mandatory
spending outside the discretionary caps. Currently

Chairman Stark. But it isn't in 1998 when it is $4 billion.

Dr. Lp:e. I know, but the administration is committed to working
with Congress to insure that the public health initiative is funded,
so that I think the 1995 approach at least suggests this is one way
to go. And we would work with Congress until that is identified
and the assured funding is there.

Chairman Stark. How about space? Want to cut the
Supercollider? NASA? Roads? Mass transit? Education? Where are
we going to get the $4 billion? I am just trying to figure this out.

I want to show you what we are up against in 1998 when many
of us hope to be back here. We still have the program that Mr.
Lewis is concerned about, but in order for community health cen-
ters and migrant health centers to continue in the central valley
of California, they need $4 billion. We are not talking about $40
million — $4 billion. Where are we going to get it?

Dr. Lp:e. Well, the funding, this secure funding, which has been
achieved in 1995, as employed in the Health Security Act, would
be outside the budget caps, outside the discretionary spending caps,
so that the Congress would not have to make those kinds of deci-
sions.

Chairman Stark. The first year.

Dr. Lee. Well, no, even through the whole period. The adminis-
tration is committed to working with Congress to identify that
source of funding and to assure that it is there, and it is already
there for the first year.

Chairman Stark. We are committed to national security, to na-
tional education, to clean air. We are overcommitted up here. I
mean, we have commitments out there that we aren't going to be
able to pay for for 100 years.

Now, the point is that I am afraid what you are telling me is
that we are going to have to compete with nonhealth discretionary
programs and, in fact, other health programs for that $4 billion,
are we not? There is no guaranteed funding in there for that any-
more than you are guaranteeing educational grants or anymore
than you are guaranteeing to pay for these thousands of cops you
are going to put on the street. That is not guaranteed. That is
going to have to come up against the appropriation process.

Dr. Lee. But the administration would work with Congress to
identify the secured source of funding that would be not under the
discretionary cap, so it would not have to compete with education
or other health programs or Head Start or things of that sort that
would be under the discretionary cap.

Chairman Stark. Where might that be? I don't know any

Dr. Lek. If you look at the budget and the financing for the
Health Security Act, there are several areas where that might
come from.

Chairman Stark. Like what?

Dr. Lkk. Well, if you look at the total budget, you have got to-
bacco tax in there. You have got various savings potentially.

Chairman SiAitK. You want me to take it out of all — remember,
this is 1998. You have already had me take $154 billion out of
Medicare.

Dr. Lee. I am not talking about Medicare because that money is
specifically to benefit the elderly. You are not going to do that.

Chainnan Stark. No, it isn't specifically for the elderly and you
know that. Come on.

Dr. Lee. I think the intention is that the Medicare savings are
going to be used to produce benefits for the elderly.

Chairman Stark. That is not the case. There is nowhere near
that much additional benefits for the elderly in this program. De-
fine for me 154 billion dollars' worth of additional Medicare bene-
fits in this program. I mean, it is nowhere near that. It all goes
to pay for the poor. You are cutting the benefits for the elderly to
pay for the poor and to subsidize low-income workers.

Dr. Lee. You are not cutting the benefits for the elderly. You are
slowing the increase in expenditures to providers.

Chairman Stark. Not your plan, not with $154 billion. Remem-
ber, we had the discussion, you can't get Medicare until Carol gets
it. I can't get it until I am 101. You don't think that is cutting my
Medicare benefit? Of course it is.

Dr. Lee. We are still assured comprehensive coverage.

Chairman Stark. But not at the cost. I have already paid for my
Medicare, just about. I don't have many years to go, and I want it.
And you guys are trying to postpone it for a time beyond which I
am not certain that I am willing or able to wait.

Well, I just wanted to point out to you that when you depend on
appropriations, as you do, there is no guarantee that those provi-
sions will be there, and it does concern us.

I think that Mr. McCrery was kind enough to let you off the
hook, but if these States run short on providing for what has basi-
cally been a Medicaid responsibility, they have got to come back
here for an appropriation if they run out of money halfway through
the year, and that is not to suggest that Congress might not do
that, but our record hasn't been too good and I am concerned.

The only other issue is the question that your alma mater asked
me to raise because they are worried. You basically knock the dis-
proportionate share, you reduce it by about 75 percent. Stanford
wants to know how you expect them to survive when they have
told me recently they have been underfunded for providing care to
the poor and — how are we going to fund these tertiary care centers,
whether it is in San Francisco or Palo Alto, Oakland, if you are
going to knock them in the head 75 percent the first year?

Dr. Lee. Well, I would say, first of all, you need to take a very
careful look at, let's say, an individual institution and see if they
will provide you with the data on what their revenues, in fact, have
been and rather than accepting their assertion, to really look at the
data from those institutions. Because I think that what we want

to do is to provide the Congress with the most accurate information
on which to make these judgments.

On the disproportionate share, the Medicare disproportionate
share, about 78 percent that they are estimating is related to unin-
sured, and 22 percent is related to low income.

Chairman Stakk. Right.

Dr. Lee. And that, as I understand it

Chairman Stark. That is the 78 percent you are going to cut.

Dr. Lee. Right, right, right. Now, Stanford presumably would
then have all these uninsured, that they are presumably taking
care of, covered.

Chairman Stark. Let me try this. Because I don't believe you.

Dr. Lee. Plus we have the academic health center fund that
would provide additional funds for them.

Chairman Stark. That isn't enough. Let's take the District of Co-
lumbia and you are going to put 200,000 people, new, into some
managed-care plan, managed care meaning that some guy is going
to make a profit because you anticipate that these will be profit-
making entities by holding down the cost of care, and let's even as-
sume it is Kaiser, but in this neck of the woods. Kaiser doesn't
have knocks on salary and it doesn't own its own hospital hos-
pitals, so it is contracting, OK?

It is contracting with providers in the district and it is contract-
ing with hospitals and they got a case that should go to Johns Hop-
kins. They are not going to do it. They would lose the revenue and
the minute the patient goes to Johns Hopkins, Johns Hopkins is
the gatekeeper and Johns Hopkins is going to do all the x rays over
again and they are going to want their own MRI study and their
own blood workup and their own physicians to do the primary
workup, and Kaiser knows that so Kaiser is going to say, no, we
are going to keep those people here with our providers, and Johns
Hopkins, as does Stanford, as does Mayos, is going to get cut off
from a substantial part of the referral business they now get be-
cause the managed-care people will not spend the money.

I don't care whether they have been paying 1 percent of their
premiums as a tax to support them. That is just lost money to
them. They still have to pay the entire freight to Johns Hopkins
if they refer a patient there and you have got to make a case why
somebody who is holding out to themselves for their own profes-
sional comfort, that they have adequate staff and specialists and
adequate staff of primary care and an adequate staff of hospital
service, why are they going to refer anybody?

They would admit to themselves that they are no good? You and
I know that isn't going to happen. So I am submitting to you that
not only while you may get these disproportionate share of people
paid for, they are going to be paid for to a plan that we recognize
today is not as good as these specialty centers and they are going
to wither on the vine. That is their worry and I share the worry.

Dr. Lee. Well, there are several things in the plan; I would say
two things. One, we need to look at what is going to happen if the
plan isn't passed past and people aren't insured and we have a con-
tinued deterioration in the system

Chairman Stark. In what regard?

Dr. Lee. If the present trends continue, more people would be
uninsured, fewer people able to access care, so that those centers
which are taking care of more and more uninsured have greater
and greater difficulty doing that.

Chairman Stark. That wouldn't happen if we put people under
Medicare though, would it?

Dr. Lee. If you have everybody insured.

Chairman Stark. Under Medicare.

Dr. Lee. Through whatever mechanism, it wouldn't happen,
whether it is the President's plan or single payer.

Chairman Stark. If you put them all in Humana, they are never
going to see Hopkins or Stanford or Mayos or any of the other med-
ical centers because Humana, you and I know, won't spend the
money.

Dr. Lee. I won't speak about Humana, but let's just speak
about — you mentioned Kaiser. In California certainly

Chairman Stark. That is different. At Kaiser they own the hos-
pital. They have got the doctors on salary and they might on occa-
sion refer out. But here they don't have that luxury and they are
going to have to use whatever hospitals that can remain nameless
in the district and their staff here.

Dr. Lee. But they can — let's say there are two types of referrals
to Hopkins. One is the physician in the plan deciding a patient
needs to be referred for some highly specialized procedure.

Chairman Stark. That physician is on a risk contract and the
first $10,000 comes out of his pocket.

Dr. Lee. Well, there are two things. One is that if the physician
chooses to refer the patient, the plan pays for it. And there is in
the academic health center fund, the additional funding that would
permit that academic health center not to charge the additional
costs related to teaching and clinical research.

Chairman Stai^k. Now, that works and a plan doesn't come down
hard on those doctors for referring out, which I suspected — there
is no protection to stop them.

Dr. Lee. But the fact is that they are competing on the basis of
quality. Now, you mentioned Stanford. Stanford is significantly

Chairman Stark. They don't compete on quality. You and I know
that. People who sign up for the plans, 99 percent of them are
healthy. They have no idea what they are getting into. It is only
after they get sick that they figure out the plan isn't any good and
then they get out. Or they hear about it from their cousin or their
brother-in-law or their mother and dad who are in the plan, but
people don't sign up for plans. They don't have any idea what the
quality is until they get going on it.

They don't take a test appendectomy to see how it feels and then
take a test appendectomy at another place. You only go through
that drill once.

Dr. Lee. That is part of the reason for the quality report card
and the mechanisms to evaluate plan performance.

Chairman Stark. Let me ask you this. Are you willing to evalu-
ate the staff — the faculty at the University or California Hospital
and rank on a scale of 60 as failing and 100 is superb, your col-
leagues in the medical profession and make public your ranking of
how you rate them.

Are you willing to do that or do you know any physician who
would?

Dr. Lee. Well, plans are doing that now. They are doing profiles
on physicians. Kaiser has issued a report card for the public which
compares it with other delivery systems, and-

Chairman Stark. That they wrote. That is like

Mr. Lee. Pardon me?

Chairman Stark. That they wrote. That is like the current ad-
ministration. Your administration is going to give us a great press
release about their plan. I mean, it is going to sound good, I know
it.

Dr. Lee. Well, because you look at what that report card said.
One of the things it said was that they conducted surveys of their
beneficiaries, and one of the problems they found was wait times
in the doctor's office. There was a fairly low level of satisfaction
with that. They also had, infant mortality. They had surgical mor-
tality, they had other measures, but included was consumer satis-
faction. So that would be another mechanism.

The final one to assure this individual option is the point of serv-
ice option that will be included in each of the plans. In other words,
even the group practice and staff model HMOs have to provide in
the plan a point of service option.

Chairman Stark. At higher cost.

Dr. Lee. At higher cost, but that would permit the individual to
then self-refer. ~^

Chairman Stark. If he could afford it.

Dr. Lee. That is coirect. But that choice is there

Chairman Stark. And if they can afford it, the bottom line is
that the institutions are concerned that they will not continue to
see the cases that reasonably are referred to them today, and there
is a concern. This has been a concern that has been expressed to
the committee by these hospitals and doctors, not by me. I couldn't
find half of them on a map. So it isn't us that is dreaming this up
and it isn't the Republicans who are coming to me with this.

This is Johns Hopkins and Stanford and Mayos and the teaching
hospitals are concerned, and you can confuse me, but you have to
answer to them, and they are still concerned. And I hope that you
can address those concerns, because I don't think they are willing
to take the idea that just because suddenly you are turning the
Medicaid population over to Humana, that they are not going to
have a disproportionate share problem and that it is going to be
resolved out of the goodness of the hearts of Humana or Pruden-
tial.

I think they think that those may be the problems. I think it was
Senator Rockefeller who wanted to characterize Prudential as hav-
ing a spot in a warmer climate reserved for it, or at least its chief
executive officer, and I think that there are others who are begin-
ning to catch on as we get further into this bill.

Dr. Lee. Well, we are working with those academic medical cen-
ters. We have met with them on a number of occasions. We are
looking to provide this committee and the other committees of the
Congress dealing with this issue as much factual information as
possible about this issue, about the referral issue, about having
those institutions not supporting a maintenance of inefficient oper-

ation, but to assure that the essential functions are maintained in
those teaching institutions. And I think one of the reasons that the
President's plan puts some of these issues very explicitly on the
table is because we are concerned about it.

We think the approaches we have proposed will deal with it, but
we certainly want to do everything we can to provide you with the
information before you have to make a final decision on this ques-
tion about whether the amounts of funds are sufficient or whether
some of the other policies we have proposed are not adequate.

The whole competitive system, of course, is moving very rapidly
in many parts of the country, including California.

Chairman Stark. Did you get a chance to read that Florida thing
about the competitive system down there with HMOs that I handed
out? I am going to give that to you, make sure you read that care-
fully. It is one thing to encourage the industry, on the other hand,
how do we control this monster after we let it out of the box? Inter-
esting.

Mr. Thomas. No, I will pass.

Chairman Stark. Thank you. Thank you very much, Phil.

Mr. Lee. Mr. Chairman, just a final point. For the record, I
would like to elaborate on my response to Congressman Lewis'
question the other day about providers in inner cities, minority
physicians and others. We developed a little more detailed re-
sponse, and I would just like to submit that for the record to really
clarify it.

Chairman Stark. If you have a copy, would you give it to Mr.
Lewis first and I will have him see that it gets in the record of the
hearing on February 2, 1994, relating to managed care.

Mr. Lewis. Thank you very much.

Chairman Stark. Thank you very much. We are now joined by
a panel of experts on the problems associated with providing health
care to residents of inner-city and rural communities. Sara Rosen-
baum, who is the senior research staff scientist at the Center for
Health Policy and Research at the George Washington University;
James Bernstein, who is the president-elect of the National Rural
Health Association; Larry Gage, who is president of the National
Association of Public Hospitals; and John Silva, president of the
National Association of Community Health Centers, Inc.

We will suspend for 30 seconds.

Chairman Stark. I thank my distinguished ranking member's
indulgence and the indulgence of the witnesses.

Ms. Rosenbaum.

STATEMENT OF SARA ROSENBAUM, SENIOR STAFF SCIENTIST,
GEORGE WASHINGTON UNIVERSITY, CENTER FOR HEALTH
POLICY RESEARCH

Ms. Rosenbaum. Thank you very much for having me here
today. I would like to spend my time with you on those issues that
underserved, inner-city and rural populations need you to address
that go beyond health insurance.

A number of the questions today concerned these issues, which
are probably somewhat less familiar on the Ways and Means Com-
mittee's work plates than health insurance, where you are the
experts.

A couple of things need to be said about underserved urban and
rural communities. First all, about three-quarters of all under-
served Americans are in inner cities, but three-quarters of the un-
derserved geographic areas of the United States are rural. That is
because of the difference in the way underservice is measured.

In rural areas, underservice is more commonly a function of ab-
solute shortage of health care providers. In inner-city areas,
underservice is more a reflection of very poor health status meas-
ures, particularly with respect to preventable diseases and deaths.

The second point that I think is worth noting is that you have
two different problems must be addressed here. The first is the
issue of specific underserved populations with very specific, identi-
fiable needs. These populations live everywhere in the United
States, in suburbia, in urban and rural areas. Addressing their
needs, I think, is a function of the requirements placed on the pri-
vate health care system that everybody uses in those areas, supple-
mented by certain kinds of services that go beyond basic medical
care.

The second serious problem, which is different to tackle, is what
happens when many underserved people live in concentrated areas.
That is the problem that brings remote rural areas and inner-city
areas very close together. The people may be further apart, but the
bottom line is the same. There are too many poor people with too
many health problems comprising too big a percentage of the serv-
ice area.

In the testimony that I submitted, I tried to give you a sense of
how much health care spending happens today and is going to con-
tinue to happen on an out-of-pocket basis. Even under a broad
health insurance reform bill, people need money to buy health care
and related services. Poor communities, whether urban or rural, do
not have the financial wherewithal to support a health care infra-
structure.

Only a portion of health care spending goes into health insur-
ance, and therefore to build a health care system in very, very un-
derserved areas requires public investment beyond insurance.
These investments also should be financed on a mandatory basis.

The one bill that does that right now is the bill sponsored by
Representative McDermott and Senator Wellstone. That bill builds
funding for these services directly into what essentially is the
health insurance premium payment.

I think that this approach represents a very equitable way to do
it because the cost of underservice is a cost that society has
brought on itself through decades of discrimination and segrega-
tion. The cost of building services through facilities development,
through health professions training programs, through enabling
services and other kinds of services mentioned in my testimony and
that of my colleagues is something that is a social obligation, just
as insuring people is.

So I urge you to look at the Wellstone-McDermott bill as a model
for tackling the problem of how to finance this care. Beyond the
issue of the financing is the issue of the civil rights requirements
and the regulatory requirements that you choose to impose on
health plans.

We face two kinds of problems, one being no services at all and
the other being a deluge of underservice bv health plans. We are
not going to correct the later problem without clear, measurable
standards on the performance of health plans. Health plans under
civil rights laws have escaped regulation and have done so because
there is no recognition of poverty as a civil rights issue. That is the
place where the performance standards you impose will have a lot
to do in how they reach underserved populations.

Chairman Stark. Thank you very much.

[The prepared statement follows:]

TESTIMONY OF SARA ROSENBAUM,
GEORGE WASHINGTON UNIVERSITY

Mr. Chairman and Members of the Subcommittee:

Thank you for this opportunity to appear before you today to testify on inner city and
rural populations and national health reform. How these populations fare in health reform
should be viewed as a matter of extreme importance because the health needs of inner city
and rural residents are so urgent and because there are substantial economic and social
consequences if national reform fails to effectively address these needs. This testimony
examines the special issues that inner city and rural populations present in health reform and
the policy reforms that should be included in order to make health reform effective for them.

1. What special issues do inner city and rural populations present in health reform?

In reviewing the special health reform issues presented by inner city and rural
populations, two separate matters must be considered. First, policy makers must identify
various types of urban and rural populations who can be considered vulnerable because of
their special health needs or the conditions under which they live, or both. The second is to
consider the additional problems that are created (and the additional solutions that are
required) when the concentration of vulnerable individuals is so great that an entire urban or
rural community can itself be considered "vulnerable".

The overall numbers: Over 43 million persons can be classified as medically
underserved.' Underserved persons span all ages and live everywhere but are most heavily
concentrated in inner city and rural areas. Seventy percent of all U.S. counties can be
classified as wholly or partially medically underserved based on their depressed health
statistics, the shortage of health care providers or both.^ Of the more than 43 million
underserved persons, 14.2 million are under age 18, 5.7 million are under age 5, and 9.1
million are women of childbearing age.

The populations in question: The causes of medical underservice extend beyond the
absence of health insurance. Persons at risk for medical underservice include:

► Insured low income persons: 60 percent of all medically underserved Americans
have some form of health coverage.'

►■ Residents of inner cities: More than 78 percent of all medically underserved persons

are residents of metropolitan areas; within MSAs, the underserved tend to be
concentrated in central city areas. In the case of the urban poor, underservice is more
frequently a function of depressed health status measures. This indicates a lack of
accessible primary health care services.

► Residents of rural areas: While rural residents comprise only slightly more than 21
percent of all medically underserved persons, rural counties constitute 74 percent of
all medically underserved counties. Among rural populations, absolute provider
shortages are a more common cause of medical underservice.

*■ Members of racial and ethnic minority groups: Racial and ethnic minority

populations comprise a disproportionate percentage of the medically underserved.
This disproportionate level of underservice among minority Americans can be seen in
the disproportionate reliance on publicly funded health clinics by members of minority
groups.

► Homeless persons: An estimated 2 million persons are homeless. Approximately
one-third are believed to have an alcohol or substance abuse problem while 25 percent
have a mental illness.

Daniel Hawkins and Sara Rosenbaum, lives in the Balance National Association t)f Community Health Centers, Washington,
D.C.I993 (1993).

Hawkins and Rosenbaum. t)P. cit

' Ibid.

► Migrant farmworkers and their families: Over 4 million migrant farmworkers and

their families travti throughout rural areas of the nation each year. Their mobility
makes effective health coverage particularly difficult, and their health risks are
especially great.

*■ Persons with HIV and other communicable diseases: Persons with or at risk for

communicable disease are at particularly high need of comprehensive health services.
But persons with high health risks are found in especially concentrated numbers in
underserved communities. While 70 percent of all U.S. counties are medically
underserved, underserved urban and rural counties account for 90 percent of the
nation's hepatitis cases, 93 percent of all cases of tuberculosis, and virtually all cases
of vaccine preventable disease.''

»■ Persons with serious physical, developmental and mental illness, disorders and

and disabilities: Persons with serious physical, developmental and mental health
problems live in all communities. But medically underserved urban and rural
communities account for a disproportionate percentage of health conditions such as
infant low birthweight which are associated with certain types of lifelong disabilities
such as retardation, cerebral palsy, and developmental disabilities.

►■ Persons who speak limited or no English: Medically underserved persons

disproportionately speak limited or no English. Seventeen percent of all rural health
center patients and 13 percent of all urban patients speak limited or no English.

►■ Persons who are undocumented: Estimates of undocumented persons living in the

U.S. range from a low of about 3 million to a high of more than 10 million.
Undocumented pc-sons are among the most vulnerable of all persons at risk because
of the deep impoverishment and substandard conditions under which they live. They
disproportionately are concentrated in central city and rural communities.

While many factors related to geography and personal characteristics can make
populations vulnerable to underservice, the common thread is poverty. Underserved inner
city and rural populations are disproportionately poor. Poverty has major consequences for
both health status and access to health care, and the greater poverty of inner city and rural
communities must be taken into account in fashioning health reform.

Access barriers faced bv underserved populations: Universal health insurance
coverage represents the critical first step in assuring access to health care for all Americans.
But the causes of medical underservice are complex, and studies indicate that underservice
exists even in the face of reasonably adequate health coverage. Even when insured,
vulnerable individuals receive less primary health care and less specialized care. The race
and ethnicity of patients has a measurable, and limiting, effect on the amount of health care
they receive, and the settinp,s in which thev receive it, even when other factors are controlled
for.'

In fashioning a health reform plan that works for underserved inner city and rural

Hawkins and Rosenbaum.

Numerous studies indicate racial and ethnic health rare utilization disparities m care David KindiR, etal "Physician Supply
in Rural Areas with Large Minority Populations" Health Affairs (Summer 19931 p 177-184; Alan Cillelsnhn, et al. "Income, Race and
Suraery in Maryland" American lournal of Public Health Nov 1991, Vol 81. No 11 p 1435-1441; Rodney Hayward, el. al.
"Inequities in Health Services amon); Insured Americans" The New England lournal off Medicine Vol 318, No, 23. p 1507-1512,
Sandra Blakeslee "Studies Find Unequal Access to Kidney Transplants" The New York Times |an. 24. 1 989; Robert Blendon, et al.
"Access to Medical Care lor Blj( k and VVh te Ameru ans" JAMA Ian 13.1989 Vol 261, No. 2 p 278-281. Mark Wenneker and
Arnold Epstein "Racial Inequalities in the Use of Pn)cedures for Patients with Ischemii Hfan Disease in Massachusetts" JAMA Ian. 13,
1989. Vol, 261, No. 2; Kenneth ColdberR, el al "Racial and Communily Far tors Influencing Coronary Artery Bypass Craft Surgery
Rates ffnr all 1986 Medicare Patients" |AM/' Mai< h 18,1992. Vol 267. No 11 |onalhan lavitl, I't al, "UndertreatmenI of Glaucoma
among Black Americans" The New England lournal of Medii me Nov 14,1991 P 1418-1422, Bertram Kasiske. et al "Ihi^ Effec l of
Race on Access and Outcome in Transplanlalion" The New England lournal of Medic me Ian 31,1991 p 302-307, Alfred Sommer,
et. al "Racial Differences in the Cause-Specific Prevalence of Blindness in East Baltimore" The New England lournal of Medicine Nov,
14,1991 p 1412-1417; Suezanne Orr, el dl "Diflerences in Use of Health Si-rvic es by Children Ac c ceding to Race" Medical Care
September 1984 Vol 22, No 9 p 848-85 1

Americans, Congress must consider two separate types of situations. The first involves
communities in which vulnerable individuals are dispersed in relatively small numbers
throughout the general population. Adaptation of existing health care financing and service
delivery arrangements accompanied by the development of certain types of supplemental
services, may prove quitt effective in communities with relatively small numbers of
vulnerable persons; furthermore, the potentially higher cost of treating such persons can be
spread throughout the community.

But decades of residential segregation and deep poverty have led to the
concentration of large numbers of especially vulnerable persons inner city communities
fraught with high health risks. Similarly, many rural communities face deep
impoverishment, not merely pockets of poverty. In urban and rural communities comprised
largely of low income and vulnerable populations the health reform challenges grow, because
as a whole, these communities simply are too poor and high risk to attract and sustain a
decent and functioning health care system without additional direct aid. Health care
financing interventions must be broader than health insurance alone if the overall community
ecology is to be able to support a viable health care system.

The limits of health insurance as a health care financing tool for vulnerable persons
and communities: Many people believe that health insurance coverage alone can achieve a
redistribution of health reso-jrces by improving the market purchasing providers of low
income persons and communities. In areas of the country in which the poor are widely
dispersed, there are clear signs that insurance coverage has a measurable and positive effect
on "mainstreaming. "'

But in urban and rural communities with high concentrations of low income,
vulnerable and underserved persons, health insurance alone is not the only necessary
solution. Many factors such as the race and personal characteristics of patients' and the
quality of the practice environment affect practitioner location. As important may be the fact
that the overall economic environment of underserved communities is too weak to support
health care systems even with improvements in health insurance coverage.

In a country that depends on private health insurance to finance a sizable proportion
of medical care, extending coverage is the obvious first step toward assuring financial access
to health services. But health insurance is only one of the ways that Americans pay for
health care. In addition to health insurance, the nation relies heavily on out-of-pocket
spending to pay medical bills; it is this out-of-pocket spending capability that is virtually
missing in poor and near-poor communities.

According to the Health Care Financing Administration, in 1991 out-of-pocket
payments amounted to $144 billion, 22 percent of all spending for personal health services.
Out-of-pocket spending Wus highest for ambulatory care and services, as shown on Table 1 .

lamp^ F.)5\p|l, |r)hn Pi'lprvin, Mdry l?inR, "Public Smtiir Primjry Cdri' drill Mcdii did; Irddmn Ai ( psMbilily lot Mdinslci'dming."
lournal ill Hpdilh Pdlitin. Pplicv dnd 1 dw, 14:2 ISummiT 1989) pp. 309-125

David KindiR dnd Gun Van, "Phy.i< ijri Supply in Rutdl Ari'd'. wilh IjrRc Miniinly l'o(iuljli(ins ' Hpdilh Alljirs ISummpr, 1993)
pp. 17S-184.

Table 1
Out-of-Pocket Spending* as a Proportion of Total Personal Health Spending

Service

Proportion Paid Out-of-Pocket

All personal health services

22%

Hospital care

Physician services

18%

Dental services

54%

Drugs and other non-durables

73%

Vision products and other medical non-
durables

62%

* Excludes premiums

Source: Letsch, Lazenby Ixvit and Cowan, Health Care Financing Review 14:2 (Winter,

1992)

Out-of-pocket health expenditures cover a variety of things, including uncovered
health services (for both medically necessary and purely elective care), deductibles, and
coinsurance. It does not include items and services essential to good health such as food,
shelter and other health-related services.

In setting insurance premium rates, actuaries assume the availability of out-of-pocket
expenditures. These assumptions are reflected in overt limits on coverage (such as
psychiatric visit limits) as well as in deductibles, coinsurance, and annual and lifetime
maximum coverage limits. Moreover, out-of-pocket expenditures are covertly built into
health coverage schemes as well, through administrative techniques such as appointment
scheduling delays or long waits for prior approval that are designed to discourage the use of
insured services and encourage out-of-plan service utilization."

Given the limits of health insurance as a health care financing mechanism, health
providers derive a sizable proportion of their annual revenues from aut-of-pocket payments.
Furthermore, it is probably safe to assume that whatever health reform plan finally emerges
will continue to depend on sizable out-of-pocket spending by insured persons, simply because
the plan will not be financed in a manner that avoids the need for supplemental personal
spending on medical and health related services.

Constrained premium rates, dependence on out-of-pocket payments for uncovered
health services, the desire to avoid high medical risks will mean that many health plans will
continue to avoid communities with high concentrations of poor persons. These communities
also will remain at a major disadvantage in attracting and retaining sufficient numbers of
primary and specialized health care providers. Even with health insurance, poor communities
as a whole are incapable of making the types of out-of-pocket medical and health-related
expenditures on which a privately financed health system depends.

Over time, poor broader insurance coverage and an increased emphasis on primary
health care training may have a redistributive effect on health care providers. But this
evolution will be slow in coming, given the overall shortage of primary health care providers
(the shortage of primary care physicians is estimated to stand at between 50,000 and 70,000)
and the plentiful opportunities to practice in more affluent communities. Even if health
insurance payment rates are increased to compensate for the lack of out-of-pocket spending.

Milton Roemer and William Shonik (1973) "HMO Pertormant e; The Rpcenr tvidenrf" Milbdnk Mpmoridl Qudrterlv pp. 271-
317 (Summer).

the continued presence of uninsured, sporadically insured, and underinsured persons (such as
undocumented persons, migrant farm workers and homeless persons) will detract providers.

At the same time that many poor communities may continue to experience a shortage
of health personnel, other poor communities may experience "mirror-image" type of
problem: the movement into the community of underfinanced prepaid health plans that
depend on an excessive reduction in health care service utilization to show a profit. There is
already ample evidence from the past and recent history of managed care under the Medicaid
program of the impact of under-financed managed care on vulnerable patients and
communities.' Indeed, some health plan executives report that, far from representing a loss,
Medicaid managed care may yield high profits (at least in the short term) because the poor
are such low users of care and are easily deterred from seeking services.

Thus, even with health insurance reform, the urban and rural poor remain vulnerable
to two basic health care access problems. The first is a complete lack of services in
communities that cannot afford to attract and maintain health care providers of good quality.
The second is the burgeoning number of underfinanced prepaid health plans that require
providers (however fragile) to organize into prepaid networks that place far too high a level
of financial risk on individual practitioners and institutions, and that ultimately are forced to
depend on systemic under-service for economic survival.

2. What do vulnerable urban and rural populations need in health reform?

Over the past 25 years, countless studies have analyzed what makes a health system —
both health insurance and health care services - responsive to the needs of vulnerable
populations and communities. From these studies, three basic points emerge. First,
responsive health systems take special steps to make insurance coverage itself accessible,
affordable and of good quality Second, responsive systems ensure that health care providers
serving vulnerable populations have access to additional direct financing in the form of
capital development and operational support. These added direct supports are provided in
recognition of the fact that health insurance alone does not offer providers for the
underserved a sufficiently adequate financial base. Third, a responsive system emphasizes
provider practice adaptations to fit the health needs of their patients. Adaptation examples
include location, hours, languages spoken, the mix of health and social services offered, and
other community-responsive services.

a. Making insurance affordable, accessible and of good quality: To be appropriate
for vulnerable populations insurance reforms should include the following provisions:

• Premiums must be kept nominal: Poor patients cannot afford premiums, and near-
poor patients should bear premium burdens that are in keeping with their limited
ability to pay health care costs (3 percent of annual income or lower).

• Cost sharing must be nominal: A large number of studies underscore that premiums
that exceed nominal amounts limit access to necessary health care, particularly in the
case of preventive and primary health care.

• Benefits should adequate: Benefits should be broad enough to cover primary and
acute care needs as well as services for persons with chronic illness and disability.

• Enrollment must be simple and accessible: Enrollment sites should be located
throughout a community and available in the evenings and on weekends. Enrollment
assistance should be made available for persons with limited English-speaking ability
and for persons with special needs for assistance in enrolling in a health plan.

See Mudii'S by r.AO .iiiH diHit.. i hoc in Medirjid and Managi'd Cjri-: A Lileralure Rhvii-w (((itlhiciminn, Kan
I Ihp Future of Medicaid. Wa<.hingn>,i, L/C , 19941.

Special provisions must be made for transient worker populations: Special provisions
should be included for persons who travel for work, such as migrant farmworkers. In
a state-based health reform system in which coverage depends on state residency,
special reciprocal arrangements are needed to ensure that migrants' coverage is
honored by providers in all states and that families are not required to reapply each
time they enter a new state. Fee-for-service or point-of-service plans are of particular
importance so that families are not limited in their use of insured out-of-area,
medically necessary services during travel periods.

Fee-for-service or point-of-service plans should be financially available to all persons
regardless of income. Lower income families tend to have far less stable living
arrangements and may move frequently. Closed-network provider plans are
particularly unsuitable for these families, who may frequently find themselves out of
the plan's service area. This is true in both inner city areas, where 30 city blocks
may place a family "out-of-area", as well as rural communities where distances are
great.

b. Direct financing for the development and support of health providers in underserved areas:

In communities with high concentrations of low income and vulnerable populations, a
resource development strategy is absolutely essential. Without a systematic strategy, these
communities will be unable to attract or sustain health services of adequate quality.
Elements of a provider development and support strategy include:

• Funds to develop primary health care services: Service development needs include
funds to plan the development of new service sites and networks, and funds to acquire
or refurbish facilities, purchase equipment, recruit and train medical, clinical and
administrative staff, set up billing and management and information systems, and
assume other costs associated with establishing a comprehensive medical practice.

• Funds to establish risk reserves in the case of health providers participating in risk
based plans.

• Special reinsurance and stop-loss arrangements to cushion providers against the higher
level of risk incurred in providing health care to sicker patients: Steps must be taken
to limit the financial risks incurred by providers working in underserved areas, with
special consideration given to primary health care services. This can be done through
special payment rates for providers practicing in undeserved areas or special stop-loss
rules designed to lower the financial risk of furnishing more intensive levels of
primary health care. The Federally Qualified Health Centers and Rural Health Clinic
Service programs created by this Committee both are excellent examples of special
payment arrangements. Emerging data suggest that these payments have not only
helped sustain provider practices in underserved urban and rural communities but
have also aided in their growth and expansion.

It is important to emphasize that risk adjusted payments to health plans alone are not
enough. Additional payments to health plans will have little impact on the stability of
individual providers or availability of primary health services if the plans do not
adjust the level of financial risk borne by the providers. The history of prepayment
under Medicaid reveals numerous instances in which plans whose risk capitation
payments may have been reasonably adequate to begin with nonetheless failed to
appropriately control the level of financial risk passed on to individual health
providers and left communities at risk for underfinanced primary health services.

• Grants to pay for health related and social services not covered by insurance:
Health providers in underserved communities must be able to furnish more than
traditional medical care if their services are to be appropriate, community-responsive,
and effective. Of particular importance are case management, translation.

fli-AR^ r\ — OA

transportation, social work, outreach and social support services. None of these
services are financed by traditional forms of private insurance Providers who offer
these services today normally do so through operating grants.

Funds to cover the cost of uninsured and underinsured patients: In the event that
health reform excludes insurance coverage for undocumented persons, health reform
should provide for the direct support of health services. Funding is needed both for
the overall health and safety of these individuals and the communities in which they
reside and to avoid the continued need to shift the cost of care and services onto other
payers. An adequately financed successor program to the existing Medicare and
Medicaid disproportionate share program will be needed. Similarly, support is needed
to cover unpaid deductibles and coinsurance, uncovered but necessary health care and
services for persons with chronic illness and disability care for persons who
temporarily lose their coverage, and services for patients who are unable to obtain the
care they need from providers affiliated with their health plan networks.

Rules to ensure that health plans allow full participation by providers to underserved
populations and do not use exclusionary practices to limit their own financial risk
exposure. This means minimum guaranteed contracting requirements on terms and
conditions at least equal to those extended to other providers.

c. Adaptation of health services to the needs of underserved and vulnerable populations and
communities:

In addition to supporting health providers that traditionally have served inner city and
rural populations, health reform legislation should include provisions to measure the
appropriateness and quality of health care to all patients. Health outcomes indicators are
important but not sufficient by themselves. At a minimum, data must be collected by race,
ethnicity and socio-economic status to assure that variations in health outcomes for vulnerable
sub-populations are detectable from the norm.

Process-of-care criteria also must be developed to assure that health plans and
providers furnish services that do not readily lend themselves to immediate health outcomes
measures but that are nonetheless essential to the overall health and well-being of patients.
Examples are night-time and weekend hours, location of services, language accessibility,
linkages to special community health programs, health education, and other services.

Finally, a critical quality of care measure for vulnerable populations and communities
is the community orientation of health plans and participating providers. Examples of
community orientation include services such as assistance in enrolling in SSI, WIC, job
training and social service programs, offering on-site patient support and community service
programs, offering services located off-site and at accessible locations such as schools and
community centers, participation in the development of special education services plans for
children with educational disabilities, and other community-oriented practices.

This nation has a long history of developing and supporting community-oriented
health programs with federal, state and local funding. Examples can be found in the
programs created under the Public Health Service Act and in the special community based
ambulatory care and inpatient programs and providers developed and supported with state
and local funding. The nation's health budget should include a base of funding for the
maintenance and growth of these programs. In addition, the community-oriented practice
arrangements which many of these programs have pioneered should be preserved and
replicated — not diminished - by health reform. The practice modes which these providers
have developed should be supported financially, and their essential elements incorporated into
quality of care measures applicable to all health plans in all communities.

Chairman Stark. Mr. Bernstein.

STATEMENT OF JAMES D. BERNSTEIN, PRESIDENT-ELECT,
NATIONAL RURAL HEALTH ASSOCIATION, AND DIRECTOR,
NORTH CAROLINA OFFICE OF RURAL HEALTH

Mr. Bernstein. I am representing the National Rural Health As-
sociation, whose membership is comprised of small rural hospitals,
community and migrant health centers, rural health clinics, pri-
mary care physicians, nonphysician providers, educators and other
concerned rural citizens.

NRHA urges serious consideration and passage of a health re-
form plan that ensures universal access to health care for all popu-
lations. NRHA distinguishes universal access to basic comprehen-
sive primary health care services. In our estimation, providing a
health care card and offering health care benefits does not go far
enough to providing quality primary health care services.

American citizens, particularly those in isolated rural and fron-
tier communities, must have access to primary health care provid-
ers as a way to enter the health care system.

NRHA urges serious consideration and passage of a health re-
form plan that ensures universal access to health care for all popu-
lations. Three intertwined components of health reform are of a
special concern for us.

First is the work force issue. Unless this issue is addressed in
a multifaceted way — I truly believe not only will rural communities
not be able to replace existing providers, but many of them will
move to urban and suburban communities.

A managed competition reform strategy will create a feeding
frenzy for primary care providers, the likes of which I do not be-
lieve any of us can predict. If we do not prepare carefully and com-
prehensively for this foreseeable outcome, rural Americans could
find themselves seriously disenfi'anchised from the health care sys-
tem.

Therefore, we recommend significantly increasing funding for the
programs that train primary care providers and encourage ambula-
tory training in rural communities. For an off-campus program to
be successful, the physicians doing this training need to be reim-
bursed for their time. Not only will this make for a larger and bet-
ter strategy, but it is fair.

Other innovative incentives, both carrots and sticks, need to be
explored for professional schools and students to encourage rural
primary care practice.

The second concern for us has to do with how reform will be fi-
nanced. Rural health providers of Medicare part A and part B
health services feel extremely threatened by the administration's
proposal to finance part of health reform from cuts in the Medicare
program.

Rural America not only has a higher proportion of elderly citi-
zens, but most rural providers are dependent on Medicare reim-
bursements.

Another financing concern relates to services for primary care. I
never did understand how one reconciled the two policies — one of
reimbursing rural providers less than urban providers; and two a

policy to encourage primary care providers to practice in rural and
other urban underserved communities.

If we want to recruit and retain primary care physicians to rural
and inner-city areas, we probably will need to consider reimburse-
ment at higher rates than the rest of the country. As far as essen-
tial community providers are concerned, we will always need them
to serve certain parts of rural America.

The third major concern focuses on communitv-based health sys-
tems development strategies. With all the talk about managed com-
petition and integrated systems development, especially by the
llarge insurance companies, HMOs, and tertiary care hospitals, we
tend to forget who is providing care in rural America today — local
private MDs, small hospitals, health departments, and other
community -based organizations like community health centers and
rural health clinics.

We believe a successful health reform strategy will recognize this
fact and attempt to build on the strengths of a community-based
system combining them appropriately with integrated systems de-
velopment.

It is important to remember these big HMOs and hospitals, in-
cluding teaching centers, have had relatively little success and in-
terest in rural America over the past 25 years.

The membership of the National Rural Health Association appre-
ciates this opportunity to provide you with input to the national re-
form development process.

I would like to conclude by saying I am very concerned about the
attack last week by various groups on what I believe are the very
basic tenets of health reform and urge you not to compromise uni-
versal access.

Thank you.

Chairman Stark. Thank you.

[The prepared statement follows:]

STATEMENT OF THE NATIONAL RURAL HEALTH ASSOCIATION TO THE HOUSE
WAYS AND MEANS COMMITTEE, SUBCOMMITTEE ON HEALTH, PRESENTED BY
JAMES D. BERNSTEIN, PRESIDENT-ELECT, FEBRUARY 7, 1994

Chairman Stark and Members of the Ways and Means Subcommittee on
Health. My name is James Bernstein, President-elect of the
National Rural Health Association and Director of the North
Carolina Office of Rural Health. I am representing the National
Rural Health Association whose membership is comprised of small,
rural hospitals, community and migrant health centers, rural health
clinics, primary care physicians, non-physician providers,
educators and other rural health advocates.

The National Rural Health Association appreciates the opportunity
to testify on the implications of national health reform on rural
communities.

The National Rural Health Association urges serious consideration
and passage of a health reform plan that ensures universal access
to health care for all populations. NRHA distinguishes universal
access from universal coverage by defining universal access as
access to basic comprehensive primary health care services. In our
estimation, providing a health care card and offering health care
benefits does not go far enough to providing quality health care
services. American citizens, particularly those in isolated rural
and frontier communities must have access to primary health care
providers.

NRHA must insist that universal access includes the following
elements:

(1) Health Systems Work Force

(2) Health Systems Financing

(3) Community-Based Health Systems Development.

HEALTH SYSTEMS WORK FORCE CONSIDERATIONS

Any national health plan should provide policy direction and
funding for the education and training of a sufficient number and
mix of appropriate health care providers to meet the personnel
needs that exist throughout rural America. Our specific
recommendations include but are not limited to:

* Significantly expand programs and increase funding for health
care personnel training programs, scholarships and other
subsidization and innovative programs to prepare and retain
providers.

* Adopt financing progriuns that encourage zunbulatory training
experiences in rural areas and create incentives for training
programs and rural delivery sites, including payments to providers
in these settings who teach.

HEALTH SYSTEMS FINANCING ISSUES

There are two major issues in financing health systems reform that
must be considered in implementing national health reform. These
are: (1) how to finance the overall system and (2) how to pay for
services as well as reimbursement focusing on the patient/provider
relationship.

NRHA recommends that reform of the health system cannot take place
by reducing Medicare. Rural areas, with their disproportionate
number of elderly, will suffer inordinately with any decrease in
Medicare funding.

COMMUNITY-BASED HEALTH SYSTEMS DEVELOPMENT STRATEGIES

A major element of health care reform is the restructuring of the
health care delivery systems. It is critical to rural citizens
that there be access to at least basic health care services and
ideally to a set of choices of comprehensive community-based health
care services.

It is equally as critical that there be a mechanism that recognizes
and maintains the contributions of essential community providers —
those community-based providers who have established themselves and
demonstrated their ability to provide access for residents of rural
underserved areas. There must be assurances that essential
community providers participate and be protected in payment

agreements during the initial five year transition. Moreover, it
is imperative that the underserved residents that essential
community providers serve be given assurances that they will always
have access to comprehensive primary care services.

NRHA supports the development of strategies to retain rural
community -based health care services, and incentives to encourage
the development of stable systems of care that combine community
development principles with integrated systems development.

MEDICARE FINANCING/MEDICARE SAVINGS

The President's plan to achieve $124 billion in savings over five
years by reducing the rate of growth in Medicare spending would
have the greatest impact on the rural elderly. Reflecting a
population that is disproportionately older and poorer, rural
providers are more dependent on Medicare and Medicaid programs.
Thirteen percent of rural residents are 65 years of age or older
compared to 10.7 percent of urban residents.

Most rural hospitals under 49 beds receive over 50 percent to 70
percent of their net income from acute Medicare patients and in
excess of 66 percent of their patient days being Medicare.
Statistically, HCFA reports much less than this, but they include
referral centers and larger rural hospitals adjacent to urban
facilities.

In 1992, the Prospective Payment Assessment Commission (ProPAC)
reported that nearly 28 percent of all rural hospitals had negative
total operating margins, while 39 percent of rural hospitals of
less than 50 beds had negative total margins.

In the State of North Carolina, there are 126 PPS hospitals. 77
hospitals or 61 percent are rural. Medicare reimbursement
represents 47 percent of the revenue to all North Carolina
hospitals. Medicare payments represent 54 percent of the income
for rural hospitals versus 40 percent for the urbans.

In 1991, the overall operating margin was 6 percent for all
hospitals. For rural hospitals, the overall operating margin was
5 percent. However, PPS margins on average for rural hospitals
were a negative 10 percent. Of the 77 rural hospitals, 12
hospitals or 16 percent of the rural hospitals had negative
operating margins. We anticipate that upon review of the 1992
data, we will see a trend toward higher negative PPS operating
margins for rural hospitals.

Preliminary estimates by the North Carolina Hospital Association
anticipate that reductions in Medicare payments would total $1.9
billion for the period of 1995-2000.

with the implementation of Medicare Prospective Payment System,
(PPS) , rural hospitals reduced inpatient capacity and increased
capacity for outpatient services. Now, rural hospitals receive
more than 50 percent of their Medicare reimbursement from
outpatient services.

The loss of rural Medicare Geographic reclassification status,
coupled with the Medicare cuts imposed by OBRA 1993, (particularly
the reductions in capital and outpatient spending) , will only
exacerbate the problem of access for rural citizens to viable rural
providers.

Rural health care providers are only seeking assistance in leveling
the playing field in access to capital. The definition of capital
projects must be broadened. National health reform will require
capital infrastructure development of community-based health care
institutions. It will require expenditures for bricks and mortar,
as well as systems transitions and acquisitions.

The National Rural Health Association recommends continuing
Medicaid disproportionate share hospital payments to those
hospitals serving a disproportionate share of low-income patients
during the five year transition period.

We also recommend not eliminating the Medicare adjustment for
outpatient capital costs for rural and inner city health care
facilities.

Further, we recommend increasing access to capital, including
projects of less than $300,000 for facility Improvement or
development of rural community-based health care facilities.

Moreover, we recommend that accessible and affordable funding
should be available to rural institutions to fund planning and
construction costs of converting existing facilities to other
models when appropriate.

REIMBURSEMENT RATES BASED ON HISTORICAL COSTS

The National Rural Health Association recommends that historical
costs not be used to determine the level of reimbursement for rural
providers. Rural providers have, over the past two decades,
suffered inequitable federal reimbursement. Particularly since the
implementation of the Medicare Prospective Payment System, rural
hospitals were placed at a distinct disadvantage to urban
hospitals. Despite the fact that rural hospitals pay the same or
higher prices for drugs and other supplies and the same or higher
salaries for medical personnel. Medicare has, over the years,
reimbursed rural facilities at rates up to 40 percent less than
urban hospitals.

Biases exist in the historical payment to rural primary care
providers. The Medicare reimbursement for office visits are
substantially lower than the cost of providing the services.
Medicare fees simply do not begin to cover the time and material
that it takes to serve rural elderly residents.

The experiences of rural health clinics best illustrates the
inherent biases in historical payments to rural providers. Rural
health clinic reimbursement has been artificially suppressed as a
result of the placement of caps that were not increased for many
years. Any future payments based on historical experience will
continue to place rural providers in an untenable financial
position.

The National Rural Health Association recommends that practice
expense payments for primary care services should be Increased as
advocated by the American Academy of Family Physicians.

HEALTH SYSTEMS WORKFORCE

Increases in incentives for primary care providing training for all
disciplines is critical to rural areas. It is the hope of the
rural constituency that greater emphasis on quality training at
rural ambulatory, hospital and non-hospital sites will become a
recruitment point for luring primary care physicians and non-
physician providers to practice in rural communities.

NRHA supports direct graduate medical education reimbursement to
rural ambulatory, hospital and non-hospital sites and paying of
local providers for their time to teach.

The National Rural Health Association promotes a policy which
adequately redirects graduate medical education payments to achieve
a goal after a five year phase-in period of at least 50 percent of
new physicians being trained in primary care rather than in
specific specialty fields in which an excess supply currently
exists.

Mr. Chairman, the National Rural Health Association Is committed to
working with the Congress and the President to ensure universal
access through a national health reform plan this year.

Chairman Stark. Now Larry Gage is going to tell us that all
these big-managed care providers and HMOs are just gobbling up
more patients in the inner city which is why they don't have time
to come out and see you in the rural communities.

STATEMENT OF LARRY S. GAGE, PRESmENT, NATIONAL
ASSOCL\.TION OF PUBLIC HOSPITALS

Mr. Gage. I may tell you that later. We know they are gobbling
up premiums. We are not sure they are gobbling up patients.

I am Larry Gage, president of the National Association of Public
Hospitals. NAPH has just 100 members, but these hospitals and
health systems have combined budgets of over $16 billion and they
provide 71 percent of their services to Medicaid and other low-in-
come patients. I might add that in addition to systems like Ala-
meda and Santa Clara County and Grady Memorial Hospital in At-
lanta, we have rural systems like San Bernardino County, Kern
County and Riverside County in California.

The point I wanted to make to augment some of the things said
today is that it is essential that you understand as you debate
health reform that the importance of these hospitals and health
systems extends services they provide to their entire communities
and not just to the poor. For example, they often serve as the only
provider of many costly specialized medical and public health serv-
ices such as trauma care, burn neonatal intensive care et cetera.

By way of example, let me refer to news stories that graphically
illustrate this community-wide mission. I have some visual aids
here. One of these dated Tuesday, January 18 was headlined, "A
Tidal Wave of the Walking Wounded."

It refers to the extraordinary services provided to thousands of
California earthquake victims by the hospitals of the Los Angeles
County health system, generally, and in this case, the county's
Olive View Medical Center in particular. You can see row after row
of emergency patients who being treated in the hospital parking
lot.

The second article dated January 7 headlined, "Girl Beats Odds
After Devastating Ski Run Accident," describes Brooke Sebold who
was a 12-year-old girl, the daughter of a Texas physician. Brooke
was brought by air ambulance from Vale, Colo, to the State's only
level 1 trauma center at Denver General Hospital with a severely
lacerated liver, multiple injuries and a less than 5 percent chance
of survival.

Two weeks later, she walked out of Denver General after a re-
markable team of 20 physicians and a brandnew trauma center
saved her life.

The point of these examples is that even if health insurance is
available to pay for the specific care provided to Brooke Sebold and
many California earthquake victims, health insurance alone will
never adequately pay the substantial standby costs of these essen-
tial systems and services.

These services are available only because they are currently sup-
ported by a fragile web of funding sources, including local taxpayer
subsidies. Medicare and Medicaid disproportionate share and
teaching adjustments, and a very limited amount of private sector
cost shifting.

These stories are not isolated or unique. In just the last year or
two, we have seen many other examples of the need to preserve
such essential standby services, from Hurricane Andrew to the
Midwest floods to the World Trade Center bombing to the Los An-
geles riots, to the recent measles epidemic in Milwaukee in which
two-thirds of the hundreds of unimmunized children hospitalized
were already members of Medicaid-managed care plans.

NAPH member hospitals have for many years served as the most
essential providers in their respective urban communities, playing
this role despite many fiscal and administrative obstacles which
are documented in detail in my prepared testimony.

We are concerned also about the statements made by a number
of organizations last week and by the increasing polarization of the
debate. For this reason, in conclusion, NAPH decided 2 weeks ago
to endorse the major principles and key provisions of President
Clinton's Health Security Act.

It is not that we believe that the President's proposed bill is per-
fect or that it cannot be improved. Indeed we are concerned that
the untested concept of managed competition cannot in the foresee-
able future meet all of the health and social needs of low-income
residents of our Nation's inner cities.

We are also concerned about the funding levels and continuation
of many of the programs that you were discussing with Dr. Lee
earlier today. However, we are convinced that the Health Security
Act offers you a excellent and realistic foundation upon which to
build a comprehensive universal mandatory health plan.

We are unanimously committed to working with the President
and the members of this committee to achieve enactment of univer-
sal mandatory health coverage as swiftly as possible.

Thank you very much.

Chairman Stauk. Thank you.

[The prepared statement follows:!

Statement of Larry S. Gage
President

National Association of Public Hospitals

before the

Subcommittee on Health

Committee on Ways & Means

U.S. House of Representatives

Washington D.C.

February 7, 1994

Mr. Chairman, Members of the Subcommittee, I am Larry Gage, President of the
National Association of Public Hospitals (NAPH). I am pleased to have this opportunity to
testify before the Subcommittee on the importance of universal, mandatory national health
reform to America's urban health safety net hospitals and health systems.

NAPH's members include over 100 of those safety net institutions. With combined
revenues of almost $16 billion, they provide over 71% of their services to Medicaid and low
income uninsured and underinsured patients. In other words, these hospitals already serve as
"national health insurance" by default in most of our nation's urban areas. At the same time,
they train a substantial proportion of our nation's doctors, nurses, and other health
professionals.

As you begin to deliberate health reform, it is essential that you understand that the
importance of urban safety net hospitals and health systems also extends to the services they
provide to their entire communities, not just the poor. For example, they often serve as the
only provider of many costly, specialized medical and public health services, such as trauma
care, bum care, neo-natal intensive care, high risk pregnancy services, and emergency
psychiatric care. By way of example, let me refer you to two recent news stories that
graphically illustrate this essential community-wide mission.

One of these, dated Tuesday, January 18, 1994, was headlined "A Tidal Wave of the
Walking Wounded", refers to the extraordinary services provided to thousands of California
earthquake victims by the hospitals of the Los Angeles County health system generally, and
the County's Olive View Medical Center in particular. A photograph accompanying the
article shows trauma physicians treating row after row of emergency patients spread out
across the hospital's parking lot.

The second article, dated January 7, is headlined "Girl Beats Odds After Devastating
Ski Accident". It describes Brooke Sebold, a 12 year old girl, the daughter of a Texas
physician, who was brought by air ambulance from Vail, Colorado to the state's only Level I
trauma center at Denver General Hospital, with severely lacerated liver, other multiple
injuries, and a less than 5% chance of survival. Two weeks later, Brooke walked out of
Denver General, after a remarkable team of 20 physicians saved her life.

The point of each of these cases is that even if health insurance is available to pay for
the specific care provided to Brooke Sebold and many of the earthquake victims, we believe
it is highly unlikely that the President's plan - or any of the other reforms being proposed —
will adequately pay the substantial standby costs of making sure the essential systems and
services are going to be available when they are needed. These services are available only
because they are currently supported by a fragile web of funding sources, including local
taxpayer subsidies, Medicare and Medicaid disproportionate share and teaching adjustments,

and a very limited amount of private sector cost shifting. And these cases are not isolated or
unique. In just the last year or two we have seen many other examples of the need to
preserve such standby services, from Hurricane Andrew to the Midwest floods to the World
Trade Center bombing to the Los Angeles riots to the recent measles epidemic in Milwaukee,
in which over two thirds of the hundreds of unimmunized children hospitalized were already
members of Medicaid managed care plans.

NAPH member hospitals have for many years served as the most "essential"
providers in their respective urban communities, playing this role despite facing many fiscal
and administrative obstacles. The situation of many of these urban safety net hospitals
continues to worsen today, even as the significance of their community wide services
continue to be emphasized by recent events. The nation's urban public hospitals continue to
be burdened by multiple crises - including persistent state and local budget shortfalls —
escalating federal and state curbs on Medicaid eligibility and spending -- continuing increases
in the number of uninsured and under-insured -- and an increasing inability or unwillingness
of many providers to shift uncompensated costs to privately insured patients.

For all of these reasons, NAPH decided in late January to endorse the major
principles and key provisions of President Clinton's Health Security Act.

It is not that we believe that the President's proposed bill is perfect, or that it cannot
be improved. Indeed, we are concerned that the untested concept of "managed competition"
cannot in the foreseeable future meet all of the health and social needs of low income
residents of our nation's inner cities. However, we are convinced that the Health Security
Act offers you an excellent foundation upon which to build a comprehensive, universal,
mandatory health plan.

NAPH members believe that President Bill Clinton has offered Americans our best
opportunity in over half a century to join the family of civilized nations that make adequate
health care a basic right of citizenship. NAPH strongly supports President Clinton in this
historic effort. NAPH members are unanimously committed to working with the President --
and with the members of this Committee -- to achieve enactment of universal, mandatory
health coverage as swiftly as possible. We simply cannot afford to let this opportunity slip
away, like so many others in the last 50 years.

In the remainder of my testimony, Mr. Chairman, I have provided the Committee
with new information quantifying the scope of the crisis facing urban safety net hospitals and
health systems, and have also spelled out a number of concerns and possible amendments we
would like you to consider as you move ahead to mark up health reform legislation.

Less than two weeks ago, Mr. Chairman, NAPH released a new 170 page Special
Report on the crisis facing urban safety net hospitals in America today. Let me illustrate the
urgency of this crisis with a few facts from that new Report (copies of which have been
provided for the members of the Subcommittee):

Safety net hospitals today are bursting at the seams, with an extraordinary
volume of inpatient and outpatient care. 60 NAPH member hospitals across the nation
averaged over 270,000 emergency room and outpatient visits and 14,000 admissions, and
totalled 17.3 million emergency and outpatient visits, in 1991. Despite overcapacity in many
parts of the hospital industry, NAPH members averaged a 79% occupancy rate in 1991,
almost 27% greater than the overall average for hospitals in the 100 largest cities for 1990.

Between 1980 and 1990, low income patients were increasingly concentrated in
just a small handful of inner city hospitals. Public general hospitals saw an increased
Medicaid utilization during this period of 43.5%, and the increase in public university
hospitals was over 39%, compared with reduced Medicaid utilization in private university
hospitals of nearly 14%. The proportion of self pay patients also increased nearly 17% in
urban public hospitals between 1980 and 1990, as compared with decreases of 16-41% in all
other categories of hospitals.

In the largest 100 cities in the 1980s, the use of inner city hospital emergency
rooms and outpatient departments increased by over 39% between 1980 and 1990, to
nearly 100 million visits. Urban public hospitals represent just 7.4% of all hospitals but
provided 18% of outpatient care and 19% of emergency care in 1990.

Some of the largest urban public hospitals provide a staggering volume of
emergency and outpatient care that could be provided in a more appropriate setting if
one were available. For example, Atlanta's Grady Memorial Hospital provided nearly
865,000 emergency and outpatient visits in 1990; Cook County Hospital, over 670,000; Los
Angeles County+USC Medical Center nearly 645,000. Urban public hospitals in the
northeast experienced the highest average volume of outpatient and emergency hospital care,
with an average of 413,000 visits in 1990.

Emergency and clinic patients are waiting longer to see doctors or be admitted.

58% of NAPH hospitals reported periodic waits by emergency department patients of 12
hours or more for admission, and half of all hospitals surveyed reported that some patients
were forced to wait more than 24 hours.

Safety net hospitals continue to concentrate their services on low income patients
- serving as both hospital and family doctor for the uninsured. In 1991, 24% of all
discharges and 20% of all inpatient days in NAPH member hospitals were not sponsored —
even by Medicaid. 37% of all outpatient and emergency room visits were also by uninsured
patients.

Safety net hospitals also continue to be uniquely reliant on governmental funding
sources. Just 12% of the gross revenues of safety net hospitals were derived from private
insurance and 16% from Medicare in 1991, while 71% were attributable to Medicaid and
"self pay" patients. Average gross revenues at NAPH member hospitals were $92 million for
Medicaid patients and $78 million for self pay patients (who are typically uninsured and
thus "financed" only by direct local governmental subsidies and other mechanisms such as
Medicare and Medicaid disproportionate share hospital adjustments).

In other words, carrying out their missions of serving the poor and providing
essential community-wide services, NAPH member hospitals would have lost $3.2 billion
dollars in 1991 without local taxpayer subsidies and Medicaid "disproportionate share
hospital" (DSH) payments. Such payments enabled these hospitals to break even and
keep their doors open; yet both sources of fmancing have come under pressure from
federal, state, and local governments in recent years. 67 NAPH members surveyed had
total revenues of $12.2 billion and total expenses of $12.4 billion. They would have
experienced significant losses, however, if not for local taxpayer subsidies of $2.1 billion.
In addition, we estimate that these hospitals received net Medicaid DSH payments totalling
approximately $1.4 billion based on an analysis of 1992 DSH data. On average, surveyed
hospitals relied on Medicaid DSH payments for 12 percent of their total revenue.

As a result of this funding crisis, the many community- wide services provided by
safety net hospitals are in danger of deterioration as well. Trauma centers, high risk
obstetric units, emergency psychiatric units, emergency drug abuse treatment programs, bum
centers, neonatal intensive care units - all are overflowing, at a time when state and local
budget crises often require reductions, not increases, in funding.

1 . WITH RESPECT TO THE CONCEPT OF "ESSENTIAL COMMUNITY
PROVIDER", NAPH STRONGLY RECOMMENDS THAT HOSPITALS AS WELL AS
CLINICS (AND OTHER FEDERAL GRANTEES) BE DESIGNATED ESSENTIAL
COMMUNITY PROVIDERS, IN ORDER TO ENSURE CONTINUED ACCESS FOR
LOW INCOME PATIENTS WHO RELY ON THESE PROVIDERS AND CONTINUED
AVAILABILITY OF THEIR COMMUNITY-WIDE SERVICES.

NAPH accepts the concept of managed competition in principal and believes it can be
given an opportunity to work wherever feasible. However, based on our extensive

experience serving the urban uninsured, we are concerned that managed competition may
prove ineffective for many years in meeting the needs of some areas, including inner cities
and isolated rural areas. We believe this is true for several reasons, including the lack of a
sufficient number and variety of plans and providers to guarantee access and choice even for
individuals who have been issued their "card", and the checkered history of efforts to
introduce competitive models to such areas (such as the California PHP scandals of the early
1970s and the Florida scandals of the 1980s).

It must be recognized, in implementing "managed competition", that the playing field
is not currently level for either providers or patients in the inner cities and remote rural
areas. To be equitable, and to guarantee access for patients in such areas to the broadest
range of health and social services, a plan must ensure that all safety net providers (including
public hospitals that currently serve a high volume of low income patients, as well as health
centers and other federal grantees) are automatically determined to be ECPs and given the
opportunity to participate in (and be paid by) all plans serving these patients.

In that regard, the Administration includes in its plan the designation of certain
providers as "essential community providers" (ECP), and provides additional support and
assistance to the providers so designated (including the guarantee that they will be paid for
services rendered to enrollees of all plans in underserved areas). While hospitals are eligible
to apply to the Secretary to be designated ECPs, they are not granted the automatic
designation granted to several other categories of providers. NAPH believes it is essential
that any statutory definition of ECP provide for automatic designation of certain
hospitals as well as health centers and other providers. For your information, I have
attached to my testimony a copy of a position paper provided to the Administration early last
year on this subject. Included in this paper are suggestions for a number of criteria that
might be written into the statute in order to carefully target any automatic designation of
hospitals as ECPs, including criteria already used in the past by this Committee in areas such
as Medicaid drug pricing and the requirement under Section 1923(b) that all states designate,
at a minimum, the highest volume providers of Medicaid and low income care as
"disproportionate share hospitals".

The remainder of my testimony will describe a number of other NAPH concerns and
recommendations with respect to health reform generally, and the Clinton plan in particular.

2. HEALTH REFORM MUST NOT BE FINANCED THROUGH
ELIMINATION OR SUBSTANTIAL REDUCTION IN DISPROPORTIONATE SHARE
HOSPITAL PAYMENTS UNLESS OTHER PROTECTIONS AND PAYMENTS ARE
SUBSTITUTED FOR THE HIGHEST VOLUME PROVIDERS OF CARE TO OUR
MOST VULNERABLE POPULATIONS.

NAPH strongly supports a broad array of financing mechanisms for universal
health coverage, including taxes on excess employee health coverage, so-called "sin taxes"
on alcohol and tobacco, sliding scale cost sharing for higher income insured individuals, and
increased Medicare cost sharing. We would also support a tax cap on the deductibility of
premiums by both corporations and individuals.

NAPH's most serious concern in the areas of financing has to do with the apparent
proposal to finance a substantial part of health reform through Medicare and Medicaid
reductions generally, and through elimination of the so-called "disproportionate share
hospital" (DSH) adjustments in particular. The DSH adjustments - which this Committee
has played a major role in enacting and improving over the years — have been of great
importance in helping safety net hospitals provide the broad range of additional services
needed by low income patients and urban (and remote rural) communities.

With respect to Medicare, since the Medicare program will remain largely outside of
health reform, we believe the Medicare DSH adjustment should remain intact. We further
recommend that Medicare DSH payments be strengthened for the very highest volume DSH

providers (especially if there is an elimination or substantial reduction in Medicare graduate
medical education funding, as is also proposed).

With respect to Medicaid, NAPH acknowledges that there have been numerous
instances where states have used DSH funds for other than their intended purpose, and that
with the phase-in of universal coverage this adjustment is unlikely to be preserved in its
current form. However, it is important to point out that there are also many states which
have not treated Medicaid DSH adjustments as a scam or a new form of revenue sharing -
which have used the adjustment as it was intended to be used, to fund substantial additional
programs and services to Medicaid recipients and the uninsured poor. New data collected by
NAPH and provided to Subcommittee staff shows, for example, that 100 of the highest
volume providers of care to Medicaid patients and the uninsured collected over $2 billion in
net Medicaid DSH payments in 1992. These payments were essential to their ability to keep
their doors open and preserve access for both insured and uninsured patients in many
underserved urban areas.

NAPH therefore strongly recommends that Medicaid DSH be carefully phased
out, not terminated abruptly, if universal mandatory coverage is enacted, with residual
DSH payments targeted on the highest volume providers of care to the poor. Moreover,
even if Medicaid DSH is carefully phased out, as noted in the previous section of my
testimony, many residual community-wide public health and social services will continue to
be needed even after most uninsured Americans have been given their "card". For these
reasons, NAPH strongly supports the inclusion of the "vulnerable population" adjustment
proposed in the Clinton plan, although our research and analysis indicate that this adjustment
should be in the range of $3 billion nationally rather than the $800 million currently
allocated.

3. NAPH IS CONCERNED ABOUT THE PROVISION AND FUNDING OF SERVICES
FOR MANY INDIVIDUALS WE CURRENTLY SERVE WHO MAY NOT BE
ELIGIBLE -- OR WHO MAY FACE SIGNIFICANT BARRIERS TO ENROLLMENT -
- UNDER THE PRESIDENT'S PLAN.

One of NAPH's most important principles is that national health reform must be
nothing less than universal and mandatory for all residents. While the President's plan
has expressed the goal of universality, and appears to be mandatory for those who are
eligible, NAPH is especially concerned that there are certain populations who will continue
to fall through the cracks — either intentionally or unintentionally — and that there are other
potential barriers to enrollment that, if not adequately understood and addressed, will have
the same effect as being ineligible for coverage in the first place.

Two populations likely to be excluded from coverage that have generated considerable
discussion to date are illegal immigrants and prisoners. NAPH members and other urban
public hospitals serve a very substantially disproportionate number of both populations and
will be especially hard hit if they remain wholly outside the system.

With respect to illegal immigrants, the vast majority of health care currently
accessible to this population is in urban and rural safety net hospitals and clinics. This care
is funded by a precarious patchwork of federal, state and local funding, augmented by cost
shifting wherever possible. Recent federal programs such as SLIAG, which was targeted at
legal (not illegal) immigrants, have in the past been able to pay for some of these services.
However, most such funding has now been reduced or terminated, and House efforts this
summer to add more money to the budget reconciliation bill failed. Unless either coverage
or funding is made available in health reform, the potential exists for the situation of the
population to become far worse. With the expressed goal of "converting" Medicaid and
other current revenue sources into premium income for those populations who will receive
coverage, it is likely that there will be far less ability in the future even than there is in
already inadequately funded system today to pay for the care that will continue to be needed
by this large population. We cannot make illegal immigrants — or their health needs —

simply disappear by refusing to cover them under health reform. We must make some sort
of provision for their care if we are to have a truly unified system.

With respect to prisoners, the issue is equally complex. Prisoners are today excluded
from Medicaid coverage and denied many other rights. Their care is sometimes paid for by
the criminal justice system that incarcerated them, sometimes by state or local governments
through other means, and sometimes the cost of their care is simply absorbed by the public
hospital that treats them. Because it is an unfortunate fact that many prisoners today come
from segments of the population that had not previously been eligible for health coverage,
the problem in the past has perhaps been less obvious and less troubling than it will be after
health reform. In the future, however, all prisoners who are legal residents will theoretically
have been eligible for coverage prior to their incarceration, and will again become eligible
following their discharge. And while safety, security and the needs of the criminal justice
system require simplicity in any health system, there is no logic to maintaining prisoners
outside the new nationwide system if our goals are universality, cost containment through
prevention and earlier treatment, and the broadest possible sharing of risk. While
mainstreaming prisoners in alliances and plans may be impractical, clearly the entire system
will benefit if targeted plans, perhaps backed by a nationwide risk pool, can be developed for
prisoners.

In addition to immigrants and prisoners, NAPH is also concerned about other
populations that may fall through the gaps or be unable or unwilling to enroll under health
reform even if eligible. These populations include the homeless and the deinstitutionalized
mentally ill.

As our experience with Medicaid demonstrates, there may be other significant barriers
to enrollment even for many individuals who may otherwise be eligible — especially in inner
cities and isolated rural areas. In fact, given the complexity of the system and the need for
cost sharing by all but the poorest enrollees, it is virtually guaranteed that many people will
simply not sign up for a health plan, even if it is considered mandatory. Rather, they will
present themselves to providers in the future as they do today -- sick or injured, addicted or
mentally ill, homeless, often unable to provide us with basic information about themselves.
Our experience also tells us that some inner city residents will actually sign up for multiple
plans, either inadvertently or intentionally, or may conceal their previous enrollment in order
to obtain care at a more convenient or familiar location. For these reasons, it is therefore
imperative that the eligibility process be kept as simple as possible, that the additional costs
to providers of treating and enrolling certain populations be taken into account, that providers
must be able to rely on the presumptive eligibility of any individual who shows up in their
emergency room, that careful outreach and patient education be provided, and that new
systems include maximum protections against patient misunderstanding or abuse.

In addition, NAPH applauds the concept of a "risk adjusted" premium for plans to
take into account the special needs of individuals with more serious illnesses, injuries,
conditions, or personal situations (including income status). However, we are concerned that
the development of such an adjustment may be complex and take longer than envisioned, and
that many alliances and plans may well become fully operational well before such an
adjustment is in place. In addition, we are concerned that the President appears to propose
only that a risk adjustment factor be added to plan premiums, with no additional
requirements or assurances that "risk-adjusted" payments also be made to those providers
who will treat disproportionate numbers of those patients determined to be at risk of greater
needs and higher costs.

Also of concern is the possibility of adverse selection and "targeted marketing" by
some plans - cream-skimming, if you will - that will leave the sickest and the poorest to
enroll in "public plans". NAPH believes that there must be substantial safeguards, including
mandatory open enrollment, limitations on advertising, and mandatory random assignment of
"high risk" patients. Both tough rules and strict enforcement — including criminal penalties -
- must be included.

4. THOUGH ADEQUATELY COMPREHENSIVE IN MOST RESPECTS, THE
PROPOSED BENEnT PACKAGE WILL RESULT IN MANY UNCOVERED COSTS
FOR SOME URBAN RESIDENTS WHO SUFFER FROM ALCOHOLISM, DRUG
ABUSE OR MENTAL ILLNESS.

NAPH is please that the basic benefit package provides an emphasis on (and in most
cases, first dollar coverage for) primary and preventive care. We also agree that it
appears generous and adequate in most cases.

Our two major concerns with the contents of the benefit package are with the
proposed limitations on mental health and substance abuse benefits. We are extremely
concerned that, while these limitations may make good policy sense for healthy, educated,
employed middle class Americans, they fail to address the much greater needs of many
residents of our nations inner cities. For many individuals, these diseases are primary, not
secondary, diagnoses, and substantial barriers to effective functioning. Left untreated, they
have substantial implications for the quality of life of all urban residents, significantly
increasing (for example) the likelihood of crime and violence in our nation's inner cities.

NAPH is also concerned with reports that some categories among currently eligible
Medicaid populations — and especially poor women and children who are eligible for
Medicaid but not AFDC or SSI payments - may lose many of the additional benefits they
now receive.

5. IT IS ESSENTUL THAT ANY MAJOR SHIFT IN THE FUNDING OF
MEDICAL EDUCATION TAKE INTO ACCOUNT THE SPECL^L NEEDS OF
SAFETY NET HOSPITALS AND UNDERSERVED PATIENTS.

NAPH strongly supports the need to develop more rational and broad-based funding
mechanisms for medical education, and to shift our emphasis in medical education (as well as
in patient care) away from specialization and towards primary care and prevention.

Because most NAPH member hospitals are major teaching hospitals, and rely on their
medical education programs for both education and patient care, we have several concerns
with certain ambiguities in the President's proposal, as follows:

• Major urban public teaching hospitals must be eligible to be designated academic
health science centers or "affiliated hospitals" of such centers.

• With the reduction in specialty residencies, the criteria for allocation of such
residencies in the future must include a clear reference to the importance of patient
care as well as educational needs.

• In the shift away from specialty residencies, attention must be given to the fact that
there are still many parts of the country — such as inner cities and remote rural areas
-- where there remain severe shortages in many medical specialties.

• Where a residency program encompasses several different and unrelated centers or
hospitals, clear criteria must be spelled out for allocating the proposed medical
education funding and ensuring an equitable apportionment among all major
components of the program.

• The impact of health reform on the training of allied health professionals and on
the ability to improve the proportion of minorities in all health professions must also
clearly be taken into account in any such sweeping reform of our medical education
system.

• The new system must also be carefully phased in over a period of time, and
transitional funding must be available to affected hospitals and health centers whose
teaching programs will be reduced or changed.

6. FINALLY, IN ORDER TO ASSURE ADEQUATE ACCESS AND A
CAREFUL TRANSITION TO A NEW SYSTEM, SOME URBAN AND RURAL
SAFETY NET PROVIDERS WILL REQUIRE ASSISTANCE IN GAINING ACCESS
TO CAPITAL TO REBUILD THEIR INFRASTRUCTURE AND DEVELOP NEW
NETWORKS AND PLANS.

Many supporters of various national health reform proposals have suggested that, if
reforms were enacted, there would no longer be a need for an institutional health safety net.
We can only note that the same thing was said about the enactment of Medicare and
Medicaid. Given the strong likelihood that future changes will continue to be incremental
and piecemeal, NAPH believes that there will continue to be a strong need for the public
health safety net in our nation's metropolitan areas.

We must thus be extremely careful about dislodging any current institutional funding
mechanisms for public health systems in general, and safety net hospitals in particular, unless
we are certain that we have a workable and fully implemented system to take their place.
Moreover, we must continue to press forward with more targeted programs and reforms that
support "stand by" health and social services and safety net providers.

For example, essential urban and rural safety net hospitals are likely to face a
substantial need for assistance under health reform in obtaining adequate capital to rebuild
and equip our nation's health infrastructure. A 1993 NAPH study estimates that there are at
least $15 billion in unmet capital needs among these essential urban providers. Yet these
hospitals also face significant barriers in obtaining access to capital, as well as in their ability
to repay incurred debts entirely from patient care revenues. In order to meet these needs, a
new Federal capital financing initiative is clearly needed. NAPH has assisted with the
drafting of a major new urban/rural capital financing initiative that was first introduced in
1992, and was reintroduced last year in both the House and the Senate. While its cost to the
federal government would be only $1 billion per year, this bill would create federal-state-
local and public-private partnerships to finance up to $15 billion in capital improvements for
safety net hospitals, through loan guarantees, interest rate subsidies and grants to meet both
general and specific safety net capital needs. We strongly urge that this bill be adopted as
a separate new title of any health reform legislation.

In addition to capital needs, there are other areas in which infrastructure and
"enabling services" must be funded to ensure a smooth transition to universal coverage. For
example, it is important that funding be made available to improve the ability of urban and
rural safety net providers to develop and finance regional provider networks that include a
full range of services, including ambulatory and preventive care in addition to acute inpatient
care, and to participate as effectively as possible in managed care programs and initiatives.
It is also essential that the many hesdth and social programs jmd services currently provided
by public hospitals and public health departments be continued, and that the implementation
of health reform not be permitted to diminish or reduce support for these progrjuns and
services.

In conclusion, for many reasons, even if national health insurance were adopted this
year, America's safety net institutions will need continued support well into the future:

• Any new health reform system is likely to be phased in over a long period of
time.

• Even with coverage, many of our current uninsured will be little better off
than Medicaid patients, who today find their access restricted in many states to those
"open door" hospitals and clinics who will serve them.

• Many of the currently uninsured and underinsured also suffer from a variety of
health and social problems very different from those of middle America. Conditions
such as AIDS, substance abuse, tuberculosis, and teenage pregnancies are often
augmented by homelessness, joblessness, and lack of education. While no health care

provider can fully cope with all of these problems, in many areas, our urban safety
net hospitals are the only ones even trying to do so today.

• In addition, many safety net hospitals are simply located in the geographic
areas where most of our uninsured Americans reside — areas which, even if national
health coverage were fully implemented, most other health care providers will
continue to be unwilling or unable to serve.

• Finally, with the dramatic cost containment efforts already being imposed by
both public and private payers, we must recognize that many expensive and
unprofitable community-wide "standby" services (such as bum care, and neonatal
intensive care, and the emergency and trauma services provided by Denver General,
Los Angeles County and many of their counterparts around the country) are already
under pressure and in danger of being reduced or eliminated in some areas; unless
they are taken into account in health reform, the result will be a significant reduction
in the security and health status of all of our citizens, not just the uninsured poor.

It is clear that there are many parts of our health system today that are not functioning
properly, that need to be restructured or reformed. But it is essential to understand that we
have relied heavily for many years on a fragile network of safety net institutions to fill in the
huge gaps in our system, and this reliance will continue into the future even as we phase in
universal health coverage. In other words, we have a network of unique hospitals in our
nation today who have always been ready, willing and able to serve as "providers of last
resort" -- to keep their doors open and their services accessible to all persons, regardless of
race, creed, income, or insurance status. If the federal government generally, and this
Committee in particular, are not willing to adequately support the existence of this "provider
of last resort" capacity, it is clear that no one else will do so either, and this capacity will
disappear.

I would be pleased to answer any questions you may have at this time.

Chairman Stark. Mr. Silva.

STATEMENT OF JOHN M. SILVA, PRESIDENT, NATIONAL
ASSOCIATION OF COMMUNITY HEALTH CENTERS, AND
EXECUTIVE DIRECTOR, FAMILY HEALTH CARE CENTERS, ST.
LOUIS, MO.

Mr. Silva. Thank you, Mr. Chairman and members of the com-
mittee for the opportunity to testify before you. As the president of
the National Association of Community Health Centers, I represent
over 700 community, migrant and homeless health centers that are
located in rural and inner-city communities throughout the coun-
try.

These are collectively known as federally qualified health cen-
ters, a term which, as you know, Mr. Chairman, this subcommittee
played a central role in establishing in law.

I also serve as the CEO of Family Care Health Centers, located
in St. Louis, Mo. I will attempt to bring some issues to your atten-
tion, both from a national as well as a front line inner-city perspec-
tive. I want to make three points for your consideration.

My first point is that health reform must include guaranteed uni-
versal coverage for a comprehensive benefits package defined in
law, and that does not diminish the coverage the underserved now
receive under Medicaid. We applaud the President and the Con-
gress for getting down to the serious business of providing health
care to all Americans.

As front line providers to the underserved, we are counting on
you to hold firm on the line in the sand on universal coverage.

Moreover, that coverage must be affordable for everyone, at all
income levels. I am deeply concerned that some of the proposals
now under consideration would not provide affordable coverage, re-
quiring some people to pay up to a sixth of their income for cov-
erage.

At my health center, as in all health centers across the country,
we operate a sliding fee scale, based upon Federal poverty guide-
lines, which assures that people who are uninsured and cannot af-
ford to pay for services nevertheless have access to health care.

Currently, over 40 percent of Family Care Health Center's 18,000
patients participate in our sliding fee scale arrangement for their
health care. Now imagine this population, which cannot currently
afford the most basic necessities of life, having to pay 10 or 15 per-
cent of their meager income for coverage, plus copayments for each
service they seek. That would be devastating for the very poor, es-
pecially mothers with sick children.

The result is that rather than seek care as soon as health prob-
lems arise, low-income people would be forced to delay care until
health problems become emergencies, endangering their health and
increasing their costs as well as society's.

Further, if certain bare bones healtn plans offer particularly low
out-of-pocket premiums, low-income people may have no choice but
to enroll in them, reinforcing economic and racial segregation in
the delivery of health are. That simply cannot be allowed to hap-
pen.

My next point deals with access to care or the underserved. As
many in the Congress have already noted, for health care reform

to succeed — particularly the goal of cost containment — it must pro-
vide universal access to primary and preventive health care serv-
ices as well as universal coverage.

As we know all too well from our experience over the years with
Medicare and Medicaid, possession of a "health security card" will
not necessarily guarantee access to health services. Nowhere is this
more true than in America's inner-city and rural medically under-
served communities.

Who are the underserved? In simplest terms, they are people
who can't get care when they need it, when it makes the most
sense, when it can prevent the onset of illness or treat it early, be-
cause of who they are, where they live or ironically because of their
complex health and social conditions.

A recent report by mv organization and the George Washington
University found 43 million such people, living in urban and niral
communities all across the country. These Americans need more
than universal coverage and comprehensive benefits; they need a
medical home that responds to their unique needs.

Health reform must therefore include a substantial commitment
of resources for primary and preventive care infrastructure devel-
opment in underserved areas, on a guaranteed funding basis, as a
central part of health reform.

I am pleased to note that several of the bills under consideration
including those sponsored by Mr. McDermott, Mr. Gephardt, Mr.
Thomas, and Ms. Johnson all call for significant new funding to
these very programs.

I should add, however, that only Mr. McDermott's bill calls for
guaranteed funding for this effort; and that his bill, as well as
those by Mr. Thomas and Mr. Gephardt, call for roughly equivalent
levels of support, which would meet much, but by no means all of
the need out there. It is no secret that the health center programs
have been uniquely successful over the last 30 years.

It is also no secret that they continue to be horribly underfunded.
America's health centers are currently reaching only 15 percent of
the 43 million underserved and funding for the program has not
kept up with the general inflation rate. If you and the Federal Gov-
ernment are sincere in your interests to provide health care to all
Americans, you must guarantee access to community-based,
consumer-directed, affordable, quality, primary and preventive care
to all, and especially to the underserved. The model is out there,
it just has to be replicated.

My health center will provide over 70,000 patient visits this year.
It will provide the majority of those visits in a 12,000 square foot
converted grocery store that maxed its capacity back in 1985 when
the organization provided 24,000 patient visits annually.

You can imagine how cramped we are as we continue to meet the
demand for service. We simply do not have the physical capacity
to be able to accommodate the demand for service, and not being
a large hospital or HMO with a huge capital reserve, we can't sim-
ply go out and expand or build a new facility.

We have recently, however, opened a smaller satellite health cen-
ter in another high-need and I might add, high-crime area of St.
Louis, and literally before the doors have opened, we are at max
capacity.

Any health care reform legislation that seeks to only reform the
way health care is financed clearly and completely misses the
point. For health reform to work in underserved areas, if the un-
derserved are to have access to health services to stay healthy and
hold down costs, it must build on what has worked in those com-
munities and include a substantial infusion of capital into those
high-need areas, not only to expand current primary care providers
and develop new ones where needed, but to support the operational
costs of caring for a very sick and hard-to-serve population. The un-
derserved also need the assurance that their medical home will not
be driven out of business due to excessive financial risk or inad-
equate reimbursement, simply because they care for those who are
sickest and hardest to reach.

I think all of us here know that much of the managed care indus-
try and "established" providers are not going to care for the inner-
city and rural underserved, the poor, disadvantaged minorities and
other vulnerable populations whether they have third-party cov-
erage or not.

The incentives in managed care are all wrong when it comes to
the underserved. It is easier for the managed care industry to just
avoid these people than it is to try to understand their needs and
manage their care. This is the Achilles' heel of managed competi-
tion, or any reform plan with roots in managed care: If underserved
populations' primary and preventive care needs are not met, cost
containment goes out the window.

These are exactly the kinds of people who end up on emergency
room doorsteps. In this context, health reform must also offer
strengthened contracting rights and safeguards for federally quali-
fied health centers and rural health clinics assuring the preserva-
tion of the existing "safety net" in underserved communities and
their full participation in the new health system.

Currently, the President's bill and, to a lesser extent, Mr. Thom-
as' bill, call for such safeguards, but they need to be strengthened
even further. My health center colleagues from New York to Texas
and California have been approached by the big health plans like
Aetna and Cigna, who want them to take care of their sickest en-
rollees, but are not willing to pay them a rate that recognizes the
inherently higher costs of serving such a population.

One closing thought: If my single health center, located in St.
Louis, Mo. had access to capital dollars for infrastructure develop-
ment, we estimate that last year alone instead of 18,000 patients
we could have provided services to 30,000 patients, which would
have represented not a little over 70,000 patient visits, but close
to 125,000 patient visits to the medically needy, the medically un-
derserved, the poor, and high-risk or special populations.

Instead, those folks that can't get into centers like mine or have
to wait, and instead become part of the crisis within emergency
rooms and the health care system. Give us the tools and the re-
sources; we have proven we can make it work.

Thank you for the opportunity to appear before you today, Mr.
Chairman. I will be glad to answer any questions you may have.

[The prepared statement follows:]

STATEMENT OF

THE NATIONAL ASSOCIATION OF COMMUNITY HEALTH CENTERS

ON NATIONAL HEALTH CARE REFORM

AND UNDERSERVED AMERICANS

MR. CHAIRMAN AND MEMBERS OF THE COMMITTEE, the National Association of
Community Health Centers (NACHC) is the national membership organization of over
700 community, migrant and homeless health centers providing comprehensive
primary care services to over 7 million medically underserved Americans in 1400 sites
across the countpy.

NACHC and its member health centers are well av»/are of the failures of our health care
system, in particular because we care for millions of Americans who have been
forgotten or left behind - unserved, or poorly served at best - by the existing health
care system. In this context, health centers strongly support the President's call for
meaningful health care reform to provide universal coverage to all Americans that
can't be taken away, and improve access to care - especially to preventive and
primary care, and contain health care costs.

The needs of the underserved in health care reform are clear, and attainable this
session of Congress:

• The underserved need a place to go for entry into the health system — a
medical "home" that responds to their unioue needs, that is geographically and
physically accessible, culturally and linguistically competent, and available
during evening and weekend periods; and that offers comprehensive primary
care and "enabling" services, like transportation, translation and outreach.
Universal coverage, though essential, is not enough, as health insurance alone
will not necessarily guarantee access to needed health care services;

• The underserved need an adequate supply of physicians and health
professionals who are trained to understand and respond to their unique needs
and health care problems; and -

• They need the assurance of knowing that the essential community providers
which have historically served them will be able to continue doing so. through
initiatives that provide adequate reimbursement (taking into account the
inherently higher costs of caring for them) and risk contracting safeguards
designed to protect their fiscal solvency.

Clearly, we now have the best opportunity in over half a century to extend access to
affordable, quality health care to every American. We want to work with the
President and Congress to capitalize on this golden opportunity -- let's make health
care reform work for all Americans. As presented, the President's plan makes several
vital contributions toward improving access to health care and ensuring health security
by:

• extending comprehensive coverage to millions of people who are currently
uninsured or inadequately insured, with benefits equal to or better than those
offered by many of the largest companies;

• eliminating the most brutal current health insurance industry practices of
denying or discontinuing private insurance coverage because of previous or
current health conditions, or due to a change or loss of job;

• proposing to substantially reorient our health care system -- including the
training of physicians and other providers - to focus more on low-cost, high-
payoff preventive and primary care, including coverage of important preventive
services;

• proposing to expand and improve preventive and primary health services in
underserved rural and inner-city areas;

• recognizing and safeguarding the key role of health centers and other "essential
community providers" in caring for low income and underserved communities.

With the inclusion of these elements, President Clinton's proposal lays a solid
foundation for achieving effective national health reform, and for ensuring that every
American - no matter what their circumstances - has access to affordable, quality
health care. Many of these elements are shared by the single-payer proposal
introduced by Representatives McDermott and Conyers, and to lesser extent, the
Senate Republican proposal written by Senator John Chafee. However, with the
notable exception of the single-payer plan, many of the other proposals for health care
reform - particularly the "managed competition" approaches, which have received so
much attention of late - contain elements that raise concerns about how well or
poorly the system will meet the needs of the underserved.

The proposals, most notably the Health Security Act and the Managed Competition
Act sponsored by Representative Jim Cooper, rely heavily on a system of managed
competition, under which several health plans - most of the managed care type - will
compete for Health Alliance enrollees, ostensibly on the basis of price and quality of
care. This focus on managed competition could work to assure care and at the same
time contain costs for most Americans. Yet while managed care has been cited
frequently for its successes in effectively organizing available local health resources
to hold down the cost of care, there is no evidence that the presence of managed care
in a community has successfully increased the level of available resources there, a
critical factor in improving the health of underserved communities.

Moreover, most manaoed care entities and HMOs have historically avoided the
underserved because of their unique needs and inherently higher costs. In a market-
based, competitive health system with a foundation in managed care, the most
expensive patients -- the underserved and those in greatest need of health care --
could encounter significant discrimination and barriers to obtaining health care
services. For some areas and populations - in particular low income, rural and inner-
city minorities, and other at-risk Americans - this approach may not improve access
to care, and could even prove detrimental. What is absolutely clear to us is that a
safety net will still be needed in a reformed system under a managed competition
approach -- a "front door" into the health care system that is significantly influenced
by the medically underserved themselves.

Our concerns are further heightened by the limited nature of proposed federal cost-
sharing assistance for low income persons and families in the various proposals for
health reform. In this respect, the President's plan is among the most generous; other
bills have severe limits. Nearly all bills would limit subsidies to the premium charges
by plans that are at or below the weighted-average premium. This limitation could
effectively restrict the choice of poor persons to only low cost plans, thus running the
risk of creating a de facto two-tier system. Similarly, even the poorest Americans will
face some cost sharing, including copayments for doctor visits and prescription
changes. This burden will have its most telling effect on pregnant and postpartum
women, infants, and those with chronic or complicated illnesses, because they will
need frequent care and multiple medications.

Some of the many potentially serious problems that could be faced by low income
Americans and the working poor in a managed competition-based system include -

• Severely Restricted Choice of Plans or Providers: Because of the restricted
subsidies under the managed competition proposals, individuals with family
incomes below 150% of the Federal poverty level are unlikely to be able to
afford the premium surcharges for higher-cost plans. By this standard, 60

million people -- 25% of the entire population -- will be able to choose only
among the lowest-cost plans, and will be subject to the discrimination and poor
quality often associated with the Medicaid program. It is unclear whether or
to what extent low-income and other medically vulnerable populations will be
assisted to enroll in plans, select a plan that works best for them, and to obtain
the care and services they need, which in many cases go beyond the care and
services included in the required package and furnished by traditional plans.

• Lack of Plan Capacity: Those who can afford only a low-cost plan may find
there are not enough such plans available with enough capacity. Few plans will
be willing to market coverage at the premium charged by low-cost plans, and
will instead target employer-insured families.

• Increased Discrimination and 'Redlining': If the new systems is inadequately
financed, health plans will have every incentive to avoid areas with high
numbers of low-income people. Fly-by-night or "lowball" plans may well be the
only providers bidding for coverage in these low income-areas -- resulting in
diminished access and lower quality services for aM enrollees there. Depending
on how Alliance and plan service areas are delineated, major redlining could
occur, with low-income, racial/ethnic minority, and high-risk populations
gerrymandered into segregated Alliance and plan service areas and subject to
less oversight and poor quality care. The experience with redlining under
Federal voting rights and credit lending laws suggests that no duty not to
redline can counteract wide discretion in drawing identifiable service areas.

• Obstacles to Soecialtv Care: Lower-cost plans are more likely to require stricter
utilization review and place more obstacles between low-Income patients and
specialty care. In particular, persons with chronic illnesses or disabilities may
be adversely affected if plans are permitted to severely restrict out-of-plan
referrals or payment for specialized care and services. Also, plans will
presumably be required to cover out-of-area services (at least for
emergency/urgent care needs). However, it is not clear yet how this will work
under the President's or Representative Cooper's plan. This is a critically
important issue for migrant farm workers, transportation employees and others
whose work requires frequent and extensive travel, and involves multiple
employers.

• Inadecuate Monitoring of Quality and Access: Based on the experience with
fVledicaid, states and Alliances may not be able to adequately monitor quality
and access in low-cost plans, especially when faced with the pressing need to
hold down the cost of care.

Simply put, underserved Americans are in the health care predicament they are In
because they have been rejected by the private market. The community and migrant
health center programs were enacted by the Federal Government in response to the
failure of market forces to meet the needs of underserved and vulnerable populations.
Thus, if market forces work for health care like they have worked in other sectors of
the economy, underserved people and communities run the risk of being red-lined,
short-changed and, in the end, getting far less care than they need or deserve.

Finally, undocumented persons will be ineligible for coverage under virtually all major
proposals, and are barred from receiving public subsidies or employer-subsidized
benefits under the managed competition approaches (thus disqualifying millions from
the employer coverage they now have). All hospitals presumably would still be
required to furnish emergency care to undocumented persons under Federal anti-
dumping law, but potentially hundreds of millions - if not billions -- of dollars in
uncompensated care would remain, with as yet no clearly identified funding source
to cover the cost.

These concerns underscore the critical need for a substantial. Federally-administered
"safety net" for millions of disadvantaged and underserved Americans, even after
reform is implemented. The Health Security Act acknowledges this principle, but its
response falls seriously short on some key elements. For example:

• Access to Care: The Health Security Act's Access Initiative calls for a vital
investment of about $4.5 billion over 6 years in the expansion of primary care
services in underserved areas, in assisting in the formation of service delivery
networks, and in furnishing key 'enabling services,' such as transportation and
translation services, to those living there. Similar efforts are proposed in many
of the other bills, as well. We sfongly support the basic purpose of this
Initiative and believe that the levels proposed by the President are minimally
adequate to meet the need for such efforts (greater efforts are called for in the
single-payer bill, at $4.8 billion over 6 years, and in the Chafee bill, at $5.6
billion over 5 years). However, nearly all of the President's funds would be
administered under a totally new, discretionary program, which would give
greatest preference to entities, including non-publicly assisted HMOs, private
doctors and other institutions, with little or no community involvement or
accountability; publicly-funded providers who band together are given a lower
preference for receiving support.

What's more, we see it as a vote of no-confidence on the ability of
disadvantaged and minority communities to positively influence the structure
and character of their community's health care system. In our view, this
represents a significant change of heart by the Administration on its early
guarantees that health reform would help empower medically underserved
communities.

Further, the discretionary nature of this new program (which is also found in
other health reform proposals, with the exception of H.R. 1200) raises the
distinct possibility that existing programs, such as the health centers, Family
Planning, MCH, and Ryan White, which will continue to fill vitally important
purposes even after reform is implemented, will be pitted against proposed new
programs for scarce federal resources. Senators Fritz Hollings and Tom Harkin
and Congressmen Dave Obey and Lou Stokes have fought as hard or harder
than most other IVlembers of this institution for funding for these programs, yet
have been unable to keep their funding on par with general inflation, much less
health inflation. A discretionary funding construct for a health reform access
initiative raises the distinct probability that funding levels for these programs
will never be adequate. The Managed Competition Act contains exceedingly
limited resources, none of which could be used to expand capacity in
underserved areas. The Chafee and House Republican bills do contain
resources for this purpose, but as put forth, could not be used for the formation
of community-based networks and plans. Only the single-payer bill guarantees
funding for these purposes. Given what is at stake, we feel that mandatory
funding is the only viable approach.

• Essential Community Providers: We applaud the Health Security Act for its
unique and vital provisions that would recognize those who currently care for
the underserved (such as community, migrant and homeless health centers,
family planning clinics, and Maternal and Child Health clinics) as "essential
community providers" (ECPs), and extend certain rights, such as contracting
and payment requirements, for the first five years after reform begins. These
protections are found in only one other legislative proposal - that of Senator
Chafee, where they would apply only to providers serving the Medicaid
population, or about 15% of all eligible Americans.

Under the President's bill, all health plans are required to contract with ECPs In
their service area. ECPs that elect to contract on an "in-plan" basis (most

health centers are likely to do this) will be paid no less than other providers for
the sanne services by the Plan. ECPs that contract on an "out-of-plan" basis
(most likely, school-based clinics, health care for the homeless, etc.) will be
paid based on the Alliance-developed fee schedule or the most closely
applicable Medicare methodology (for a health center, FQHC cost-based
reimbursement), at the ECP's choice.

While these safeguards are critically important, we fear they do not offer
adequate protections for ECPs. Most importantly, ECPs get precious few
safeouards from risk-based contracting by health plans. Risk adjustments and
reinsurance are required only for the health plans; there are no provisions
requiring that they be shared with contracting providers - not even the ECPs
who, more than any other, will face the inherently higher costs of caring for
sicker and harder-to-serve patients. A possible scenario, even with the Health
Security Act's safeguards: a health plan agrees to contract with the ECP, but
on a risk basis; the health plan assigns the ECP the sickest patients, and pays
the ECP no less - but no more - than other providers for the same services,
with the ECP at risk for any costs in excess of the health plan's capitated
payment. The ECP is out of business in 2-3 years.

NACHC believes that one overriding policy should govern the construct of an
Essential Community Provider initiative: those providing comprehensive primary
care services to the underserved should be paid an adequate rate, and should
be exposed to minimal risk. Ensuring the continued function of essential
providers will be absolutely critical if we are to encourage more caregivers to
provide primary care, especially where it is most needed, and ensure that more
of the underserved receive primary care and preventive services.

Health Professions Education and Placement: The Health Security Act, as well
as most of the other major reform bills, calls for substantial reform of the
nation's health professions education and training efforts, and restructures its
financing. However, it leaves the lion's share of the resources in the hands of
the nation's medical schools and teaching hospitals -- which have played no
small role in the current oversupply of specialists and our critical shortage of
primary care physicians.

None of the legislative proposals effectively involve health centers in the
training and education of health professional, again with the exception of H.R.
1200. Community health centers affiliated with teaching programs have
produced hundreds of family physicians, general internists and general
pediatricians - exactly the kinds of doctors our health system desperately
needs - yet they get nothing in the way of direct funding to continue or expand
their educational efforts. Currently health centers with teaching programs are
required to affiliate with a sponsoring medical school or teaching hospital.
Payment for the costs of the health center's educational program is made on
a "pass-through" basis with the sponsoring institution. The result is that many
"teaching health centers" end up eating a substantial portion of the costs of
their educational efforts. Further, the availability of residency opportunities in
community and migrant health centers is directly linked to the availability of
teaching hospitals willing to engage in educational partnerships with them.

We'd like to have direct access to medical education funds so we can provide
practice opportunities for medical residents and expose more medical students
to the benefits of providing primary care in an underserved area. The available
literature shows that where medical residents and other health professions
students are exposed to primary care training in a community-based setting,
significant numbers enter primary care as a practice. For the reformed health
system to function successfully, it will have to generate significant numbers of
new primary caregivers. Community and migrant health centers anxiously

await the opportunity to participate in those professionals' education.

Making Health Reform Work for Underserved Americans

We believe that, if health reform is to work for underserved Americans, it must
empower medically underserved communities to develop workable, permanent,
responsive community health care systems, through steps to provide:

• a substantial investment of guaranteed resources for the formation of
community-based, consumer-directed health plans and networks, and to
increase access to primary and preventive care in underserved areas: throuoh
support for key programs that now support vital services to disadvantaged and
underserved populations (including the health center programs. Family Planning,
and others).

• strengthened safeguards for Essential Community Providers that assure
preservation of the existing safety net in underserved communities, and their
full participation in the new health care system, including safeguards against
excessive risk in contracting with health plans and payment of rates that
acknowledge the inherently higher costs of serving underserved populations;

• direct funding for community-based training programs for primary care health
professionals in order to assure adequate primary care educational opportunities
for students in the most appropriate settings - where they are needed most.

NACHC is in the process of developing perfecting amendments to the various health
reform proposals to meet these critical objectives.

The most pressing need of - and the most rational response to -- the medically
underserved under any health care reform approach is increased availability of
community-responsive, consumer-directed, comprehensive primary health care
services, particularly under a market-driven approach to reform where the bottom line
will take absolute precedence. Yet more can and should be done than just investing
in service development: the lesson of the health center programs is that, although it
may not be possible to empower communities to take control of the entire new health
system, it is possible to empower them to own and operate their own entry points
into it. Health centers were founded with a vision of community and consumer
empowerment, and their experience over the past 30 years provides an object lesson
on how consumer involvement and community empowerment can succeed where
other models have failed. In this sense, health centers may be the last, best hope for
communities in shaping their health care system and making it responsive to their
needs. For obvious reasons, we strongly believe that any access initiative worthy of
the name should retain and significantly expand upon the health center model
because:

o it is a proven model of getting Federal funds to improve the health of hard-to-

reach populations to the areas that need them most;

o health centers represent a multibillion dollar investment by the Federal

government in primary care infrastructure in underserved communities over the
last 30 years, and attracting and retaining health professionals in shortage
areas;

0 have proven their effectiveness, cost efficiency and quality, and success in;

o it is a proven model of empowering underserved communities to manage their

own points of access into the health system, and to tailor the services provided
by the center to the unique needs of the community;

o the centers' are accountable for efficient utilization of Federal funds and quality

of services provided, and are subject to strict monitoring and oversight by
Federal agencies, unparalleled in the private sector.

Policymakers should look hard at what has worked and why, and what has not
worked for the underserved:

o Who has provided culturally competent care and ACCESS to these

communities? Who has not?

o Who has seen all regardless of the ability to pay? Who has not?

o Who has kept costs in check while developing Innovative approaches to

meeting the health needs of these communities? Who has not?

o Who has attracted, trained and kept physicians and qualified health

professionals in underserved communities? Who has not?

o Who has genuinely empowered communities to develop long-range solutions

to their health care needs? Who has not?

Members of Congress can and must make sure that health care reform "stays on
track" and works for our Communities. Congress knows what works and should
renew its commitment to Community Health Care. This is not about a program, but
rather an approach to empower communities to develop and direct long range
solutions that will work for them - in keeping with the President's principle of
responsibility, which we all support.

In summary:

• President Clinton made a commitment to equality of access to health care. We
fully support that pledge, and believe that health reform must work for all
Americans, and especially for the medically underserved.

• There is much to admire and support in the President's proposed plan and those
of other Members; at the same time, some elements cause considerable
concern about how well these plans will address the most pressing needs of
underserved Americans.

• Health care costs will never be controlled unless high-risk, underserved
populations have access to primary and preventive care. Health insurance
while essential, will not alone guarantee access to needed health services.

• Health reform should build on what has worked: the community, migrant and
homeless health center programs. Nothing else has our uniquely successful,
30-year track record of controlling costs, providing access to quality care,
retaining health professionals where they're most needed, or empowering
communities to develop long-range solutions to their health needs. Health
reform should invest in such successes.

• We are committed to support and work with the President and the Congress
to ensure the earliest possible passage and enactment of an effective,
comprehensive national health reform plan this year.

Thank you.

Chairman Stark. Mr. Thomas.

Mr. Thomas ok California. We have looked at all these statis-
tics, but the thing that keeps coming home, when you say that 21
percent of the folk are rural, the answer I get from my people is
I may be 21 percent to you, but I am 100 percent to me. That is
even more so of the three-quarters of the folk who are urban.

I understand where you are coming from in terms of supporting
the single payer. My only question is what is the price tag?

Ms. RosENBAUM. If you take just the community health center's
program it would probably take several billion dollars to both build
the number of facilities that are needed and provide them with the
operating subsidies that they require above and beyond the insur-
ance payments they would receive. That is they would need sub-
sidies in order to provide uncovered services, to provide the ena-
bling services to protect themselves against undue financial loss.

I am sure John has better statistics than I do. I would guess that
the cost shows up not even a measurable fraction of a percentage
of the Federal health care budget. Now whether or not Congress
chooses to adopt a single-payer insurance system, the strength of
the Wellstone-McDermott bill on this particular issue is that the
payment for the capital and grant moneys needed to develop serv-
ices and keep them going in poor communities, underserved com-
munities, is built into the payment structure. It is certainly plau-
sible to imagine taking that kind of a model and using it in a pri-
vate insurance system just as the President's bill does for academic
health centers.

Mr. Thomas of California. That was why I was pleased that
Mr. Silva was knowledgeable enough to indicate that most of the
comprehensive plans, even if they don't endorse either single-payer
structure, or a government-run system or even the President's
mandatory structure, that we are all concerned about the area and
that we are all putting money in the area and sometimes holding
your own or treading water is ahead of the game if other areas are
slipping. My concern is that this area under any plan will not get
the kind of attention that is necessary.

Mr. Silva, my question to you goes to testimony that that we had
several days ago. Frankly, I was a little bit excited about it. In my
area there are some programs that appear to be making some
headway. Both my counties are part of the pilot program for man-
aged care under the Medicaid shift. But in terms of clinics, testi-
mony from Boston, which is now extended to the entire State of
Massachusetts, testimony in the Chula Vista area of San Diego and
the entire State of Arizona has indicated that there seems to be
some folk out there who are making the current system work and
work in a very positive way.

Have you seen some creative approaches to dealing with this
question in terms of the underserved area? In other words is it
really structure — it is always structure to a certain extent? I was
struck by these people who didn't let the structure get in the way
and they didn't complain about the fact that there wasn't any
money. In fact, they have gone out and organized it in such a way
that other affluent groups are trying to attach themselves to them.

Are these anomalies and did we wind up with an efficient staff
finding a couple of folk who could present a bright picture that isn't

going on out there? With all the changes at the State level, isn't
there some innovation going on that we might point to as models
that don't necessarily take just more money but take creativity and
an understanding of what works?

Mr. SiLVA. I think that you could look at the community migrant
health center program in toto and go into almost any community,
even a rural area where there is a community or migrant health
center and basically say the same thing. To give you an example
of that, there are so many entrepreneurial and innovative
approaches that are being taken by community-based programs
that it is literally staggering, but I need to stress that they are
community-based and consumer driven, and a lot of times they
have had to survive without mainstream medical support, without
mainstream financial support, without any type of State or admin-
istrative support.

Mr. Thomas of California. Are you saying that sometimes,
maybe, that is the reason they are succeeding?

Mr. SiLVA. No, I think they are succeeding despite it. I some-
times am awed by the thought that, if there was ever a time when
there would be administration and establishment support for these
types of grass roots organizations, what kind of constructive things
that they could do. If there were additional resources that were
available based on their track record of entrepreneurial develop-
ment and services, how many more people they could provide serv-
ices to.

Mr. Thomas of California. That is one of the reasons that we
put the component that you were kind enough to mention in my
bill, because in my rural central valley California district the mi-
gratory health centers are one of the bright spots. Not just by
meeting the needs of the underserved but by creating cutting edge
technical opportunities for people who would otherwise participate
in an ordinary medical structure, and are being attracted there so
there is a coming together of all parts of the community in the cen-
ters.

At one time, there may have been a slight stigma attached to
them but there is a great deal of pride now. The new construction,
the new building, the dentist facility, all those are tied to these
health centers. I think there is a great opportunity in terms of a
willingness to just do the job and be creative, but the funding has
to be there.

Mr. Bernstein, there has been a lot of verbiage about coverage
versus access and access versus coverage and we don't just want
access, we want coverage. I think I understood what you meant in
terms of you want to stress access rather than coverage. You are
talking about the ability to deliver rather than the comfort of say-
ing that you are covered. What good is a plastic card if you don't
have a place to use it; is that basically what you are saying? I
know that is a kind of a mine field when you get into coverage ver-
sus access. Maybe you ought to spend a minute to make sure ev-
erybody understands that you are not choosing sides in the political
rhetoric contest here. You really mean something when you say you
want access. Coverage is important, but access is primary and
fundamental.

Mr. Bernstein. That is what I mean. I have some suggestions
but they are my own, they are not the association's on the issue.
It seems to me the more you Hsten to the debate the more I under-
stand the cost of the reform is going to be — could be quite astro-
nomical, and I enjoyed the little repartee between the chairman
and Dr. Lee, but I think we are going — most of the plans are going
about the concept of access and missing the boat on one very im-
portant issue. They are not to me recognizing where the real eco-
nomic force is in this whole managed competition debate. The force
and what the plans are trying to do — and I believe we need to do
this — is to put a lot of money into grant programs and I am all for
that. I am involved with many, many programs, whether public
health, community health centers, national health service — we
need that money but we are betting the house that you can fund
those programs. I think in addition to that we need to recognize
that these big companies, insurance companies, HMOs, these big
hospitals, the forces that they want to play in this game — and if
we don't harness them in some way so that they benefit rural and
inner-city underserved areas, we are missing the boat.

What I mean here is that we need to figure out creative rules
and I don't see rules in these managed care bills. We need to figure
out rules that say if you want to play this game, then we need a
strong infrastructure. You need to support our community-based
programs. We need to add to them in our rural inner-city areas.

We let you do that collaboratively. We will let you combine Kai-
ser, put money in and Prudential, put money in but we would set
the standards for inner-city and underserved areas and rural areas
so they wouldn't be able to participate — like you were talking about
redlining, that is a must. If you let them chop off the best parts
of the geography we really have a problem. But if we make them
participate, invest in these areas, I think we can cut down on the
overall cost of the total program.

But if we are going to just add on money that the Government
has to come up with, I am concerned about that.

Mr. Thomas of California. I think all of our concern is rather
than sit in an academic criticism of the current system and make
changes in the law and assume it is going to be fixed is, those folks
who identify themselves in whatever percentage group understand
they are 100 percent of themselves and that if they aren't getting
the kind of medical coverage they at lease define as minimum,
whether you call it access or coverage, they have been left out and
that is the last thing that we should be doing.

Thank you, Mr. Chairman.

Chairman Stark. Mr. Lewis.

Mr. Lewis. Thank you, Mr. Chairman.

Ms. Rosenbaum, I was struck and moved by your testimony as
it relates to inner cities. You make a strong and compelling case
that because of years of neglect, maybe generations of neglect,
many of the health problems that we are facing in the inner cities
of our country and in many of our rural areas is because of what
we failed to do in the past.

I would like for you to give us some idea about your thoughts
and concerns how we can provide civil rights protection in a new

world of health reform or the new world order of, the American
order of health reform.

Ms. RosENBAUM. As we move into health reform and rewrite
health policy for the United States we are also rewriting a huge
raft of related laws.

One of the great bodies of law that is being rewritten and should
be rewritten to reflect a changing health system is the body of civil
rights law in the United States. I have spent 20 years as a health
and civil rights lawyer now and have spent a lot of time with col-
leagues talking about what kinds of protections would be required
based on our experience with discrimination in health care and the
kinds of plan that seems to be emerging.

As Representative McDermott pointed out before, very strong
protections are needed at the level of drawing the market areas or
the service areas, the pooling areas for the organization of the
health care financing system. Whether those organized areas are
voluntary or whether they are mandatorily drawn as in the case
of the President's plan, there is great concern on many persons'
part, and I believe it is one of the great strengths of the President's
plan, that those boundaries not been drawn in ways that either in-
tentionally discriminate, or the effect of discriminating.

I recommend that in addition to the establishment of standards
for drawing the boundary lines that Congress give serious consider-
ation to something akin to the kind of preclearance process used
under the Voting Rights Act. Depending on the kind of bill that is
developed, you could have a gerrymandering of health service areas
that for all practical purposes, whether or not patients can go inter-
state, intrastate, or anywhere else for services, makes the financing
of care virtually impossible in poor areas.

Beyond that and most profoundly from my experience is behavior
of health plans themselves. As we move into managed care, wheth-
er we getting there under the gun of a bill or because we are drift-
ing there anyway, we have now collapsed the financing of care with
the access to care and along the way have come a series of unfortu-
nate incidents, some of which you heard about last week in the
managed care testimony. We see these problems every day.

The most important issues in managed care are nondiscrimina-
tion provisions in the selection of the marketing and service areas,
with nondiscrimination standards not only on the basis of race and
national origin but on the basis of socioeconomic status, perceived
health status, gender and other suspect classifications.

If we use a community rating system, the whole risk underwrit-
ing of health insurance is basically gone and we have to rethink
what it means to discriminate. When it is your job to discriminate,
you get to be exempt from civil rights laws. When you no longer
can risk underwrite, then the bases for discrimination on the basis
of actuarial assumptions also goes up in smoke.

Another great concern is the role that essential provider provi-
sions play for people. Those provisions have received the most pub-
licity with respect to certain health providers who either do have
the status or can apply for the status. The real purpose behind
those protections had much less to do with protecting providers
than as a means of preventing health plans from cherry picking
providers who only see certain patients. If you take people's normal

source of medical care which is a community health center or pub-
lic hospital and you shut that normal source of care out of a man-
aged care network, people are cut off from their services. The im-
mediate impact is a dramatic drop in use of care because people
are afraid to come to a new provider or they don't know how to get
through the door of a new provider. They have lost their health
care home.

When you think about the essential provider protections you
should think of them in the same category as any provisions tnat
directly relate to nondiscrimination by the plans. I would be happy
to go through the issues in greater detail with you, but it is at both
the alliance level and the health service delivery level that you
need to be concerned.

Mr. Lewis. I appreciate your response. Mr. Silva, what else can
we do to encourage the creation and continuation of medical homes.
I understand community health centers need funding. What else
can we do as a Congress; is there anything we can do under this
proposed administration?

Mr. Silva. I think there are a number of things that Congress
can do and can propose from a front line perspective: Access to cap-
ital, infrastructure investment, dollars. I know everybody comes be-
fore Congress and wants dollars. I think it would be fair for me to
say that an analysis of the community, migrant homeless health
center programs will show you probaoly the best investment of
Federal, private and community-based resources that has been ex-
perienced since the days of OEO.

I was going to say earlier that under the chairman's leadership
with Federally qualified health center status, even in my same
cramped quarters, we went from providing 43,000 patient visits 3
years ago to 71,000 patient visits this current year in basically the
same space, and that was due to an influx of additional resources.
If the infrastructure is developed and invested in we can take care
of an awful lot of those 43 million uninsured. But when forced to
compete with what we call the big boys, the large HMOs, the major
health plans, we can't compete at that level.

We can compete in the communities and bring people into health
care. I think an acknowledgment of that and I think we need some
basic controls on Medicaid waiver approvals to make sure that in
the name of cost savings that we are not throwing the baby out
with the bath water as we appear to be doing in Tennessee and
some other locations where we are literally decimating those pro-
viders of care to the uninsured, the poor and rural Americans in
the name of Medicaid reform.

If Congress looks at the waiver process and how it is being ap-
plied, I think those two activities more than any I can think of
right now would assist us in expanding those services. You know,
in Atlanta you have some of the best health centers doing some of
the best work in the country. We just need more of them.

If you are going to invest resources, start at the grassroots and
work your way up and invest in community and migrant health
centers.

Mr. Lewis. Mr. Gage, you mentioned Grady. You mentioned that
in 1990, Grady provided nearly 865,000 emergency or outpatient
visits. Along these lines can you explain the importance of financ-

ing for capital improvement for public hospitals like Grady? You
know Grady is undergoing a $300 million capital improvement
effort.

I think most of those resources came from the citizens of two
metropolitan counties that serve Atlanta and De I^lb County.

Mr. Gage. Well, Grady is in the middle of a major rebuilding
process and the fact that they have among other things, I think it
is the single highest total of outpatient emergency visits in the
country of any public hospital, 865,000 sounds right. There are oth-
ers that were cited in the testimony.

To follow up on the response to your earlier question, Grady was
quite fortunate that Fulton and De Kalb Counties, which are the
two counties that formed the hospital authority that operates
Grady, are growing, are reasonably prosperous, they have very sig-
nificant problems with the inner-city and with underserved areas;
but Atlanta is one of the success stories certainly of the southeast,
and therefore they were able to sell bonds basically that were
backed by the citizens of the counties. That is very important to
understand because it means that infrastructure support in Fulton
county didn't cost the taxpayers directly.

They were able to sell bonds and the Grady and the hospital au-
thority itself will pay those bonds back over a number of years out
of revenues from current patience and certainly from the counties.
They get well over $100 million at Grady from the two counties for
normal operations and clearly some of that goes to pay for debt
sei^ce. Hopefully over time with health reform much of those
resources can be shifted to resources that are tied to patients who
have some form of coverage. But it is clear that not all of those are
going to be able to be shifted, and it is clear that many of the serv-
ices Grady provides are going to be essential to their entire
community.

Grady is an entire health system, not just a hospital. It runs the
emergency medical system, it runs a number of health centers, sat-
ellite hospitals and clinics. But on the other hand, Grady's renova-
tion can be financed without a lot of up front capital from the Fed-
eral Government or from the citizens of the county.

We have a piece of legislation that we have worked closely with
the community health centers and the rural health association that
Chairman Stark is the primary sponsor of in the House a few small
provisions of which have been included in the Health Security Act.

We urge you to look at that. We think that for $1 to $2 billion
a year you can meet all the infrastructure needs through
leveraging these dollars, through loan guarantees and interest sub-
sidies so that a lot of this capital can be acquired in the private
markets.

Mr. Lf:wis. Thank you very much. Thank you, Mr. Chairman.

Chairman Stark. Mr. McCrery.

Mr. McCrery. Thank you, Mr. Chairman.

Mr. Bernstein, prior to coming to the Ways and Means Commit-
tee, I was on the Budget Committee and we fought hard to just get
language included in the budget report, begging the Ways and
Means Committee to assist in leveling the reimbursement rates be-
tween rural and urban hospitals. So I am a supporter of rural hos-
pitals. I support the incentives that you included in your testimony.

Having said that, though, there are a lot of rural hospitals that
have gone out of business already because they couldn't generate
enough revenue to pay their expenses, and there are more that are
on the verge of going out of business. Where do we draw the line,
or should we, between letting market forces have their will and
running a rural hospital out of business and interjecting govern-
ment aid, government support to keep that facility alive?

Are there some places in rural America that simply shouldn't
support what I will call a full service hospital, but perhaps could
support something less than that? And if so, are there any changes
in Federal law that would help to accomplish that?

Mr. Bernstein. Wow

Mr. McCrery. You may not be able to fully answer that ques-
tion.

Mr. Bernstein. I can't answer the last part, but I think I can
answer the rest of it. Each State — in North Carolina, and we are
getting together tomorrow for this week — first of all, a lot of hos-
pitals probably need to — not a lot, but there are a number of hos-
pitals that need to get out of the acute care business, and it is just
a change in how medical care is delivered over time, and somehow
we are just going to have to figure a way to deal with it.

I don't think that the supply and demand method of dealing with
that is fair or appropriate for certain parts of rural America. So by
necessity we are going to have to have some sort of planned way
of supporting some hospitals that need to be in the acute care busi-
ness to some extent and then adding more incentives like the
EACH program which needs to be tuned up some to entice hos-
pitals to move quicker out of inpatient care into out patient care.
I think it can be done. A lot of States are trying different ways.
We are developing our own way in North Carolina.

The legislation you are talking about, the problem with getting
them to move that way is the reimbursement system that we have
now with part A, part B, the Medicaid system, the whole thing
doesn't lend itself to get hospital boards to make the move, because
they don't see a funding source for the outpatient care or the emer-
gency care that they need if they give up their inpatient care. We
need to rethink that. That is what the EACH program is trying to
do, and that concept needs to be refined.

Mr. McCrery. Thank you.

Chairman Stark. Mr. McDermott.

Mr. McDermott. Mr. Gage, I always try and understand how
things would work and I understand that your organization has en-
dorsed the President's plan; is that correct?

Mr. Gage. We have endorsed the general principles and the key
provisions of the President's plan, yes.

Mr. McDermott. Because I have worked at some of these hos-
pitals, I try and figure out how it would actually work and I would
like to know your vision of how Cook County Hospital will be in-
volved with managed care plans would it be Prudential that would
want to contract with them or Cigna or Humana — how do you actu-
ally see it working, the Alameda County Hospital in his d.istrict or
Harbor View in mine, or Cook County where I used to work — how
do those hospitals get integrated? Who wants to take the people
that usually come to them?

Mr. Gage. Well, we have actually taken a hard look at that ques-
tion. In fact as the chairman was asking Dr. Lee earlier, we are
actually taking a stab at quantifying it in a way that can let us
look at different scenarios for a hospital like Harbor View or Cook
County that may lose half of its uninsured population but retain
half the population as insured patients.

There are many different answers, depending on a variety of fac-
tors. Cook County Hospital needs to be renovated or rebuilt in a
new site. It is hard to imagine Cook County Hospital in its current
configuration competing very effectively except in areas like trau-
ma care and burn care and neonatal and other services where they
in fact provide the services to the entire community and not just
to the poor. The fact is, we think there are provisions in the Presi-
dent's bill which we believe are inadequately funded and articu-
lated, but with some help from this committee could well provide
the access to the capital needed to rebuild the Cook County health
system in its current — in a new configuration that would make
them not just a key player for Prudential and others, but would
make them an essential component for many years to come.

Cook County has what a lot of hospital and health systems lack
in Chicago and elsewhere. It has a fully integrated medical staff
that is largely on salary, medical departments that talk to each
other about patients that share information. The information sys-
tems may need upgrading, but there is a strong commitment to
low-income patients who are going to still be low-income patients
even after they have a little insurance card to wave around.

We speak many different languages that are spoken at cook
county but not at other hospitals. So we think there are strong rea-
sons why hospitals like Cook County with adequate assistance will
be able to compete effectively. Harbor View is an example of a hos-
pital that probably is miles ahead of Cook County right now be-
cause of its location, its role in the community, the fact that it has
been involved in a major way in managed care. But it too has those
benefits. I understand your question was how under the Clinton
plan versus some other plan. It was not an easy decision to come
out and let people say we endorse the Clinton plan.

We see the Clinton plan as being on one side of a very clear fence
that has been erected by a lot of players that we have no control
over. We see your bill on one side of the fence too. Nothing would
make us happier than to see a merger of the concepts. We felt we
had to declare in favor of universal and mandatory coverage be-
cause if we don't honor those key principles, we don't think we will
get anything and Cook County and Harbor View will be in a worse
situation than they are today. We believe the Health Security Act
needs a lot of amending before it can guarantee that Cook County
Hospital can be a player on a level playing field under health re-
form, but we think the foundation is clearly there.

Mr. McDermott. If I could pursue for a second — it sounds like
your vision is that Cook County or whatever big city hospital would
become a health network. They would market themselves and be
a certified health plan under the President's proposal, that they
would take those folks who live in the neighborhood, since they
have been alwavs gone there, they would just keep coming there
and that would Be the certified health plan for that area?

Mr. Gage. I think survival of any system or institution is going
to be based in part on developing tneir own networks, and in part
on being able to participate in the networks and the plans of oth-
ers. I don't see an institution the size of Cook County which by the
way is already a major network, it is not just a single hospital sit-
ting there on its site — it has satellite hospitals, arrangements with
many health facilities and clinics. They have been talking for sev-
eral years about merging the city's clinic system with the county.
They are entering into an affiliation with Rush Presbyterian that
would not have been thinkable 5 years ago but now makes a great
deal of sense.

Cook County is going to position itself to be part of a larger sys-
tem that will compete effectively, probably will and should develop
plans of its own, and will also compete an a provider in the plans
of others.

Mr. McDermott. One of the things that it seems to me happens
in the President's plan is that if a plan is full they can say we have
all that we want and then the alliance can direct people to some
other place. It looks to me like that the big city hospital with its
health net will be the kind of receptacle for those people who aren't
quick and fast enough to join other health plans and will really be-
come I won't say a poor people's system, but a system of those who
aren't quick on the draw.

Mr. Gage. I am not even sure it is so much the patients who will
be quick on the draw as it will be plans. We share the concern that
has been expressed here today about what will happen when cer-
tain health plans that may not even exist today grow up to compete
in Chicago or Seattle or Denver or Los Angeles and they are look-
ing only for healthy patients who aren't going to utilize services or
maybe at the other end of the spectrum the homeless and the dein-
stitutionalized mentally ill who they will sign up who will never
going to Cook County Hospital no matter how much educating you
do. We do have concerns.

However, we serve all of those patients now and we are not going
to turn away patients just because they are sicker. We do believe
that there are going to need to be risk adjustment factors and ena-
bling services and other things, payments to these hospitals that
will enable them to care for these patients, and we do hope that
there will be also protections as discussed earlier, including civil
rights protections that can be brought both by patients and by gov-
ernmental entities against plans that engage in dumping and other
kinds of activities, redlining, cream skimming, whatever you want
to call it. We have concerns about that.

We also believe by the same token that the Harbor Views and
Cook Counties will be able to compete effectively for patients they
don't now have, because we think they will position themselves in
most cases in networks that are going to be attractive to those pa-
tients.

Mr. McDermott. It will be a surprise to me if anybody wants
them in their network services except for selected services. In Se-
attle if you have a bum the only place to go is Harbor View. I can
see why people would make those kinds of arrangements, but I
can't see them making those arrangements for obstetrical, and gen-
eral surgery and those sorts of things. I don't see why anybody

would contract with them to bring them into the net. That is why
I think they are going to wind up upsetting their own. Thank you,
Mr. Chairman.

Chairman Stark. I was curious about that myself. Am I reading
that your endorsement is that you are afraid if we don't have the
President's plan we won't have anything or are you saying of the
plans you are aware of including Mr. McDermott's, you think it is
the best? There is a difference there.

Mr. Gage. There is a third statement to be made which is look-
ing at the universe of plans that perhaps are going to serve as the
realistic and politically acceptable basis for final passage, and I un-
derstand that Mr. McDermott's plan probably still has the largest
number of house cosponsors of any plan.

Chairman Stark. You can write him off.

Mr. Gagk. I am not writing him off.

Chairman Stark. You wrote me off too.

Mr. Gage. We just think — put it this way. The President's plan
is as far to the right as we are willing and prepared to go, and yet
we can see the potential for compromise on the right not just the
right hand side of this committee but of the many other committees
that are going to be looking at this legislation. That was really
what under

Chairman Stark. It is pretty hard to get much further to the
right and still have a plan.

Mr. Gage. I think that is probably a decision we made. To be
honest with you, we are very concerned about what we hear from
business groups and others who are rejecting what we consider to
be genuine health reform and may leave us worse off than
before

Chairman Stark. But none of those business groups give you
guys 10 cents anyway. Even Kaiser doesn't give 10 cents to High-
land Hospital, and wouldn't. They are not a bad plan, but they
haven't done anything for the poor or disproportionate share popu-
lation in our area. They have been cherry picking for 50 years
which is why they could do quite well. They are nice guys, but they
are not exactly tne County Welfare Department. I guess that is a
concern.

I want to go back to Sara's issue on some of these cost sharing
and/or ventures for people into new plans. We have had some expe-
rience in California with contracting out medical, Medicaid, only to
find that people wake up and they can't go to their community
health clinic any more and they really are devastated. You and I
might say there is another hospital down the street; we will go
there.

But I have a hunch that much of the census of these clinics are
there because of language barriers or initially cultural barriers that
led them to be very timid about getting in there in the first place,
and after they reach a level of comfort, to have that removed seems
to me to take them out of the system.

Now, this may not be a large part of America, but a large part
of America, 70 percent, already have good plans. They are like us.
They have Blue Cross and all these generous plans. They are good
plans today, but they aren't going to Cook County Hospital or to
Highland either.

If you have Blue Cross, you sure won't go near those places. First
of all, they are full of poor people who don't have any insurance.
Why wait in the line? You can go down the street to Alamades,
which is half empty, and they will give you champagne while you
wait and Blue Cross will pay for it. Those folks are OK They are
going to be in trouble if their employer quits footing the bill, and
I think the President rightly perceives that.

Sara, let's talk a little more about this concept that is subtle of
the payments, the copayments, or having to participate in a plan
that requires going someplace to sign up and how that will, in ef-
fect— and I am not talking about some a sophisticated gatekeeper
here. I am just talking about a well meaning bunch of white,
middle-aged suburbanites on both sides of the aisle who decide we
are going to go help poor people, who we have not had much con-
tact with for a great number of years.

What are we doing to them if we pass the President's bill?

Ms. ROSENHAUM. If you look at basic economics of any family, a
family can probably afford to spend anywhere from 5 to 10 percent
of its disposal income on health care, that amount and no more.
And you would have to factor in premiums, deductibles, coinsur-
ance, and uncovered costs that would be part of the

Chairman Stakk. Drugs?

Ms. RosENBAUM. Anything, and including a lot of services that
may be health related. For example, if you nave a child with asth-
ma and have to get an air-conditioner, if you have to adapt your
home in some way, if you have a child in special education who
needs a related service of some kind. All of those are health ex-
penditures, people really don't have very much disposal income for
health care.

Based on some preliminary review of the various plans now
under consideration, that there are two proposals on the table that
certainly keep within some realistic framework the amount of
money that an average family would have to pay in premium costs,
and that is Congressman McDermott's bill and the President's bill.
If you look at low and moderate income working families, under the
President's bill, because of a lot of the health insurance costs are
underwritten by employers, there is a financing source and the pre-
mium payments are reasonable. Of course, the cost sharing is high-
er than under the McDermott bill, which has none. By definition,
the President's bill has higher cost sharing. But for a health insur-
ance plan for an average family, it is certainly within reason.

The other bills that do not keep the spending levels reasonable
at all for an average family. A lot of attention has been focused on
business and government exposure. Last week when the Governors
were in town, when big business was in town, we heard a lot about
the burdens that they would have to bear. But during that whole
week, of course, we lost any focus on the burdens that families
would have to bear.

And if you assume that financing health care is a three-way
proposition in the United States, among business, government, and
individuals, which it seems to be under many different plans, then
this whole third player was completely absent for 8 days. And that
third player does very poorly when there is no assured financing
source, whether it is Government payments directly, as under the

McDemnott bill, or whether it is an employer premium, as under
the President's bill, or a combination of the two.

Somebody has to pay for it, and if nobody comes up to the bar
and pays for it, then we are left, as John Silva mentioned, with
plans that purport to assure access to services and access to the
coverage, but are completely unrealistic for a family that can
maybe afford to pay, if it is a minimum wage working family,
maybe $20 or $30 a month at best, toward the cost of a premium
and even that is ridiculous, and certainly almost nothing in out-of-
pocket copayments and deductibles.

So I guess from my time with families, I have been mystified by
a lot of the discussion about universal access. I don't really care if
you call it voluntary or mandatory. You can call it whatever you
want. If a family can't afford it, it can't afford it.

Now, I think that too much time is being spent on the ultimate
test without filling in everything that comes before. This is all an
issue about who is going to bear the burden for paying for this and
how those burdens will be allocated.

If I were designing a plan for very low-income people, I would
charge them no premiums, nothing at the point at which they actu-
ally had to enroll in a plan and that would keep them from enroll-
ing in a plan. No matter what you do to punish low-income people
for not enrolling, they won't enroll. And I would use cost sharing
very selectively.

There is some literature that suggests if you give people a health
care home that they like, that you certainly can tell them, yes, you
can go to an emergency room but you better be sure that that is
what you need and that you haven gone to your health care home
first.

Mr. Thomas. Excuse me. On that point, do you think that even
a very modest deductible or copay is a useful educational device if
it doesn't raise any money or not? What is your attitude on that?

Ms. RosKNHAUM. It is an interesting question. In the area of pe-
diatrics, which I know better than internal medicine, adult medi-
cine, cost sharing has either a complete impact that you don't want
or it has no impact. And by that, I mean at the point at which you
want a child to receive a preventive service or a primary service,
the effect of a copayment is horrendous.

At the point at which a child is very sick, the copayment does
nothing but reduce the amount of payment that goes to the pro-
vider because nobody at that point stands between the provider
and the patient.

There have been some relatively creative uses of cost sharing to
encourage such cost saving measures as substitution of generic
drugs, if appropriate, and one appropriate, one therapeutically
equivalent, or attempts to steer people into less costly care settings.
For example, if you have an emergency room and on the same hos-
pital campus an outpatient clinic and you say if you go to the emer-
gency room, we will charge you $10, but if you go to the clinic, we
will only charge you $1 or $2, that is realistic.

Anything beyond that, I think, is either punitive to the patient
or it is just a way of reducing outlays to the providers. If you want
to reduce outlays to the providers, there are probably more equi-
table means of achieving that goal than cost sharing.

So, you know, you can't load cost sharing on people who have no
money to pay for health care.

Chairman Stark. Or much else.

Ms. RosENBAUM. Or much else. And so you have got to be realis-
tic about what you expect people to pay. If you expect them to pay,
you have to get it out of them in a way that they will be able to
budget and plan for, so that they don't have to come up with it at
the point of the service.

Now, that is one of the great strengths of programs like commu-
nity health centers. That is one of the reasons to find health de-
partments, community health centers. If we decide that we can't af-
ford to reduce cost snaring within the insuring mechanism, then
the great value of publicly financed health programs is that in com-
munities where there are lots of poor people, you can target grant-
based programs so that for the uncovered services, they can get
those services on a sliding fee scale.

I am a great believer in the fact that health insurance is only one
way to pay for care. I think we spend too much time in the United
States on health insurance as the exclusive means to pay for care;
one area of compromise is to combine the two in high poverty com-
munities.

Chairman Stark. Thank you. Thank you very much. If there are
no other inquiries, I will thank the panel for their participation and
ask them to stay close, because as this exercise gets going in the
next month or so, we are going to need a lot of help.

Thank you very much.

Chairman Stark. Our final panel will be led off by our former
colleague on this subcommittee, Hon. Jim Moody, who is here in
his new capacity as a visiting professor at the Wisconsin Medical
College. I presume you are a professor at the Wisconsin Medical
College and you are visiting us. Perhaps it is the other way around.

Mr. John Vice, who is president of Children's Hospital in Wiscon-
sin, representing the National Association of Children's Hospitals
and Related Institutions. Dr. Barbara Staggers, who is the director
of adolescent medicine at Children's Hospital in Oakland, Calif.,
representing the California Children's Hospital Association, accom-
panied by Susan Maddox, who is president and CEO of the associa-
tion; Martin Goldsmith, president and CEO of Albert Einstein Med-
ical Center, in Philadelphia, representing the National Association
of Urban Critical Access Hospitals; and Hon. Edward McNamara,
the county executive of Wayne County, Mich., I presume represent-
ing Wayne County, Mich.

Welcome to this subcommittee. Jim, why don't you lead off with
your statement?

STATEMENT OF HON. JIM MOODY, VISITING PROFESSOR,
HEALTH POLICY INSTITUTE, MEDICAL COLLEGE OF WIS-
CONSIN, MILWAUKEE, WIS.

Mr. Moody. Thank you, Mr. Chairman, and former colleagues. It
is delightful to be back here among you and to be in this hallowed
room where I spent so many long hours on the other side of the
red light bulb.

I wanted to make several points about the inner city and its
health needs based on my 10 years representing a district that in-

100

eluded an inner city and my study since leaving the Congress on
the issues that they face.

At first glance and taken as a whole, Wisconsin appears as a
state to be in good shape, almost a prototype of state for the Clin-
ton health care plan to succeed in, well-known for good govern-
ment, hard working and compassionate people imbued with stand-
ard middle class values. We are at the top or near the top among
States in education, very low in poverty. Only 8.2 percent of popu-
lation have no health insurance, which is virtually half of the Na-
tion's number. On unemployment, we continue to be one of the low-
est states in the Nation. On the surface, all looks well.

Chairman Stark. Just don't drink the water,

Mr. Moody. Pardon me?

Chairman Stark. Don't drink the water.

Mr. Moody. Don't drink the water, right. In terms of health indi-
ces, we are in good shape too. But beneath this rosy surface, there
are two worlds in Wisconsin — and I suspect in a number of other
states — one world where these average indices apply, and another
world where the numbers tell a far, far different story. These two
worlds for Wisconsin are that 4.5 million people inhabit 99 percent
of the State's land surface, and on the other hand, the 300,000 who
inhabit its compact inner city.

In stark contrast to the rest of the state, the inner city is plagued
with rising crime, soaring teenage pregnancy, grossly substandard
public schools, high dropout rates, double digit unemployment, de-
caying housing stock and deteriorating tax base. During the past
decade, about 10,000 jobs left Milwaukee City, while employment
in the surrounding suburbs increased by over 7,000 jobs. In 1980,
32 percent of Milwaukee's residents jobs were in manufacturing
which traditionally offers minorities and many others opportunities
for family supporting jobs with benefits, usually including health
insurance. But as of 1990, only 22 percent of the jobs were in man-
ufacturing, a drop of about a third. And by the way, this dramatic
shift has created legions of involuntarily retired pre-Medicare
workers who have a huge stake in the retirement coverage issue
in the Clinton plan.

The statistics of distress distinguish the world of Milwaukee's
inner city from the rest of the state. Milwaukee leads the Nation
in teenage pregnancy. Half of its African -American households are
headed by women and over 80 percent of the infants born to those
households are born to unmarried women. Infant mortality is 18.4
per thousand live births among Milwaukee's African-American
community compared to only 7.5 among whites. Low birth weight,
12.9 among black newborns versus 4.7 for whites.

Child abuse continues to rise in Milwaukee's economically de-
prived neighborhoods, white and black. The percentage of
nonvaccinated school children is only 4.2 Statewide, but is 9.5 in
the inner city. Over half of the ninth graders in Milwaukee will not
graduate. Almost half of these dropouts have a substance abuse
problem. About 30,000 homeless live in Milwaukee, a third on the
streets. Milwaukee has half of the AIDS population of the entire
State.

So it is obvious that Milwaukee's inner city has extraordinary
and compelling health needs. Compared to the suburbs and outer

101

regions of the city, the inner-city residents are 320 percent more
likely to be treated for pregnancy complications, 370 percent more
likely to face a threatened pregnancy, 200 to 800 percent more like-
ly to be admitted for substance or alcohol abuse, and 143 percent
more likely to be admitted for bums.

But in addition to these obviously lifestyle-related indices, the
data shows that for illness after illness, inner-city residents are far
more often hospitalized on an urgent or emergency basis, as the fol-
lowing examples show. Kidney, urinary tract, 32 percent more like-
ly to be hospitalized on an emergency basis; immunity systems: 138
percent higher likelihood; nervous systems: 72 percent; eye condi-
tions: 39; ear, nose, throat: 41 percent. The examples go on and on.
Those are, in general, not lifestyle issues or issues directly related
to poverty. Something much deeper is going on. And these indices
have gotten worse over the last decade.

At the same time as these extra health needs for inner-city resi-
dents have been growing, city hospital capacity has been decreas-
ing. Four city hospitals nave closed or moved to the suburbs and
only one remains viable. Milwaukee's county large public hospital
system and a very excellent children's hospital, are at the suburb
of Wauwatosa, which is some 4 or 5 miles out of downtown.

Only three private practice physicians remain in Milwaukee's
inner city as a result of low Medicaid reimbursement rates, al-
though there are four very important clinics struggling to serve
about 25,000 low-income patients per year with personnel, includ-
ing doctors.

Implications for the Clinton plan. The chief point I would like to
make is that a health care reform plan that may work well, even
very well for a State like Wisconsin as a whole and many States
like it, may not work well at all for the inner city in places like
Milwaukee, the other world I speak of.

The Clinton plan relies heavily on market forces to deliver health
care on a high quality, reasonable cost basis to health conscious
and cost conscious consumers who will make educated, informed
choices between an array of plans and providers. Assuring this ap-
proach works well across the country — and I hope it does if it is
passed — this does not at all assure that it will work without exten-
sive nonmarket interventions in places like Milwaukee.

The fear that health resources for inner-city providers will be in-
adequate is heightened by the administration's announcement that
a reform plan will cut into Medicare and medicate funding, includ-
ing the disproportionate share funds for hospitals that now have a
high proportion of Medicaid and Medicare patients, and into direct
and indirect medical education.

But the two larger questions, it seems to me, for inner-city resi-
dents are, one, how will the essential community provider feature
of the Clinton plan be actually organized? And, two, how will
health alliances be structured in urban areas? The essential com-
munity provider aspect of the Clinton plan recognizes that
nonmarket features must be grafted onto the plan. Hopefully, this
initiative will build on and learn from the extensive experience of
the community health centers and clinics which have done much
in a city like Milwaukee to fill the gap created by closing and re-
treating hospitals. For these existing health centers and clinics, the

102

key issue, of course, will be availability of resources. For example,
will alliances be required to pass on to such inner-city providers
the financial benefits of the so-called risk adjustment payments, or
will they be able to keep them to enhance the financial strength
of the alliance itself? The inner-city clinic would normally not have
enough economic bargaining strength to require these transfers,
absent legislative requirement.

Second, will the alliances in States like Wisconsin with cities like
Milwaukee be required to risk pool inner-city residents along with
large noninner-city populations? Or will the alliance be able to
avoid such high-risk groups? This has been discussed in earlier
panels and I won't dwell on it here. Obviously the size of the opt
out requirement will also impact this. The smaller the size of the
opt out, the more companies with a healthy work force will opt out,
leaving behind the inner city with the high health needs and high
health costs.

This leads me to my final point regarding outreach and preven-
tion. For cities like Milwaukee, the Clinton plan must place a spe-
cial emphasis and inducements on prevention, an emphasis far
above what might be necessary in the rest of the State. The 1989-
90 measles outbreak in the city of Milwaukee offers a glimpse of
why an ordinary managed care system, such as that proposed in
most health care reform plans now before Congress, might not
work well in the environment of a typical inner city. Over 70 per-
cent of the 1,000 Milwaukee children struck by measles in late
1989 and early 1990— of which 260 had to be hospitalized and 3
died — were in fact enrolled in HMO-type managed care programs
funded by Medicaid. It also turns out that two-thirds of the HMO-
covered children were unvaccinated even though it was clearly in
the financial interest of the HMO to do so. It had not vaccinated
those children.

Postcrisis analysis shows that the HMOs had totally failed to en-
gage in the type of aggressive outreach effort to families to vac-
cinate their children. When the city's Public Health Department fi-
nally stepped in, over 11,000 children were quickly vaccinated
under a city-run program of public information and outreach,
which included family involvement and support.

The measles incident is not an indictment of HMOs or managed
care in general, but it shows that it can likely — very likely to be
necessary to, one, bridge the knowledge and communication gaps
that exist in economically distressed communities, and two, bring
publicly provided health resources to supplement those induced by
market forces alone.

In summary, I would say the Clinton health reform blueprint
promises to fundamentally alter the coverage, the cost and the fair-
ness of the American health care system. But beneath the surface
of glossy averages, there are pockets of disadvantaged population
in our country, especially in our inner cities, which will need two
things: One, targeted resources far beyond those created by market
forces or managed competition, and two, policy adjustments to the
proposed legislation if these disadvantaged groups are to share in
the promise of dramatic improvement.

[The prepared statement follows:]

103

TESTIMONY OF JIM MOODY
MEDICAL COLLEGE OF WISCONSIN

Wisconsin, the "Model" State

At first glance, and taken as a whole,
WiBConsin appears in good shape, almost
a proto-type state for the Clinton plan
to succeed in. It is we 13 known to be
a hard-working, good - government,
compasBionate state embued with standard
middle class values. At or near the top
in education scores, fourth lowest in
incidence of poverty, etc. Only 8.2% of
its population has no health insurance --
nearly half the national proportion.
Wisconsin's state wide unemployment is
one of the lowest in the nation.

In terms of health indices, Wisconsin as
a whole also does well: 3rd lowest in
measles and other vaccine -preventable
disease, 2nd lowest in drug and alcohol
abuse related hospitaD admissions, etc.

But beneath this rosy surface, there are
two worlds -- the world where these average
indices apply and another world where the
numbers tell a far, far different story.
These two worlds are (1) the 4.5 million
people who inhabit 99% of the state's land
surface, and (2) rhe 3 00,000 who inhabit its
compact inner city. In etark contrast to the
rest of the state, the inner city is plagued
with rising crime, soaring teenage pregnancy,
grossly substandard public schools, high drop out
rates, double digit unemployment, decaying
housing stock and a deteriorating tax base.

Milwaukee contains 90% of the state's minority,
and about 95% of the state's African-American
population. Over 3 0% of the city is Black, about
6% is Hispanic and another 3.5% is Native
American or other minority.

104

During the past decade, about 10,000 jobs
left Milwaukee city, while employment in
the surrounding Milwaukee suburbs increased by
over 7,000. In 1980, 32% of Milwaukee
residents' jobs were in manufacturing,
which has traditionally offered minorities
opportunities for family- supporting jobs
euid benefits, including health insurance.
As of 1990 only 22% of the jobs were
in manufacturing, a drop of about one third.

statistics of Distress

The statistics of distress distinguish the
world of Milwaukee's inner city from the
rest of the state. Milwaukee leads the
nation in teenage pregnancy. Half of its
African American households are headed by
women and over 80% of its infants are bom to
unmarried mothers.

Infant mortality is 18.4 per 1,000 live
births among Milwaixkee'a African Americans,
compared to only 7 . 5 among whites . Low
birth weights is 12 . 9% among black newborns
vs. 4.7% for whites. Child abuse continues
to rise in Milwaukee' s economically
deprived neighborhoods. The percentages
of non-vaccinated school age children is only
4.2V statewide but is 9.5% in the inner city.
Over half of the 9th graders in Milwaukee will
not graduate. Almost half of these dropouts
have a substance abuse problem. About 3 0,000
homeless live in Milwaukee, a third of which
live in the streets. Milwaukee has over half
of the state's AID'S patients.

Health Needs in nhe Inner Citv

With the economic and demographics figures cited
above, it is obvious that Milwaukee's inner city
has extraordinary and compelling health needs.
Compar-ed to auburb^n and oiit^T- regions of the
city, inner city residents are:

105

320% more likely to be treated

for pregnancy comp.H. cat ions,

3 70% more likely to face a
threatened pregnancy,

200-800% more likely to be admitted
for alcohol or substcmce
abuse, and

143% more likely to be admitted
for burns .

But in addition to these obviously "life-style"
related indices, the data show that for illness
after illness, inncir city residents are far more
likely to be hospitalized on an urgent or
emergency basis . The following examples show
these increased percentages :

Kidney/urinary tract 32%

Blood/ immunity system 138%

Nervous system 72%

Eye condition 3 9%

Ear/nose/throat 41%

Respiratory system 3 9%

Circulatory system 63%

Digestive system 29%

Hepatobiliary system 51%

Musculosketal system 21%
Skin/subcutaneous tissue/breast 97%

Infectious parasitic disease 53%

Theee indices have gotten steadily worse over
the decade. At the same time as these extra
health needs for inner city residents have been
growing, city hospital capacity has been de-
creasing. Four city hospitals have closed or
moved to the suburbs , and only one downtown
hospital, Sinai Samaritan remains vxahle.
Milwaukee County's large public hospital whose
emergency room B«rvec as family medicine
provider for thousands of inner city residents,
is located in the suburb of Wauwatosa about
five miles from downtown. Only three private-
practice physicians remain in Milwaukee's
inner city, although there are four public
clinics struggling to serve about 25,000 low
income patients per year with a variety of

106

personnel, including somft physiciems.

Implicationfl for the Clinton Plan

The chief point. T would like to make is that
a health reform plan that may work well -- even
very well -- for Wisconsin as a whole, and many
states like it, may not work well at all for an
inner city like Milwaukee's. The Clinton plan
relies heavily on market forces to deliver health
care on a high quality, reasonable cost basis to
health-conscious and coet-conecious consumers who
will make informed choicna between an array of
plans and providers. Assuming this works well
across the country -- and I hope it does --it
does not assure that without extensive, non-
market intervention there will be adequate and
appropriate provision of health services to
the inner city, and a meaningful range of
choices placed before its residents.

The fear that health resources for inner
city providers will be inadequate .is h^^ ' yhtened
by the Administration' fl announcement tLw
tifie reform plan will cut into Medicare and
Medicaid funding, including the "disproportionate
share" funds for hospitals that now have a high
proportion of Medicaid/Medicare patients into
direct and indirect medical education funding
for teaching hospitals, most of which have a
high nroportion of inner city patients.

But the two larger questions for inner city
residents are :

(1) How will the "Essential Community
Provider" feature of the Clinton
plan be organized?

(2) How will the Health Alliances be
structured in urban areas?

The Essential Community Provider aspect of

the Clinton plan recognizes that non-market
features must be grafted onto the plan.

Hopefully, this initiative will build on
and learn from the extensive experience of
the community health center and clinics whici^

107

have done much in citieG like MiHwaiikee to
fill the gap created by closing and retreating
hospitals. For these exisiting health centers
and cliniccs, the key issue, of course, centers
around availabi.l Ity of resources. For example,
will Alliances be required to pass on to such
inner city providers the financial benefits
of the "risk adjustment" payments, or will
they be able to keep them to enhance the
financial strength of the Alliance itself?

The inner city clinics would normally not
have enough economic bargaining strength to
require these transfers .

Will Alliances in states like Wisconsin with
cities like Milwaukee be required to risk pool
inner city residents along with large non-inner
city popu? ' *• ions , or will Alliances be able to
avoid such i^igh-risk groups? The fractions here
are important. If one Wisconsin Alliance is
required to cover all 300,000 inner city
inhabitants, obviously its cost structure will
be very different than if it covers, say, only
one tenth of them, v/ith nine other alliances
dividing up the rest .

The Crucial role of Prevention Outreach

The final point I would make is that for
cities like Milwaukee, the Clinton plan
must place special emphasis and inducements
on prevention - emphasis far above what might
be necessary in the rest of the state. The
1989-90 measles outbreak in Milwaukee offers
a glimpse of why an ordinary managed care
system, such as proposed in most health reform
plans now before Congress, may not work well
in the environment of a typical inner city.
Over 70% of the 1,000 Milwaukee children
struck by measles in late 1989 --of which
260 had ro be hoepi nalized and t.hree died --
were in fact enrolled in an HMO type managed
care program funded by Medicaid. Two thirds
of the HMO covered children turned out to be
unvaccinnated . even though it was clearly
in the HMO's financial interest to do so.
Post-crisis analysis showed that the HMO's
had totally failed to engage in the type of

108

aggressive outreach effort to families to
vaccinate their children. When the city's
public health department finally stepped in,
over 11.000 children were quickly vaccinated
under a city-run program of public information
and outreach which included family involvement
amd support .

The measles incident was not an indictment of
HMO' s or managed care but it shows that it can
be necessary to (1) bridge the knowledge and
communi cation gap £3 that exist in economically
distressed communities , and (2) bring publ leal ly
provided health resources to supplement those
induced by market forces alone .

The Clinton health reform blueprint promises to
fundamentally alter the coverage, cost and
fairness of the American health system. But
beneath the surface of glossy averages, there
are pockets of disadvantaged population in our
country, especially in our inner cities, which
will need targetted resources beyond those
created by market forces of managed competition
and some policy adjustments to the proposed
legislation, if these disadvanteged groups are
to share in the promise of dramatic improvement.

109

Chairman Stark. Mr. Vice.

STATEMENT OF JON E. VICE, PRESIDENT, CHILDREN'S
HOSPITAL OF WISCONSIN, MILWAUKEE, WIS., ON BEHALF OF
THE NATIONAL ASSOCIATION OF CHILDREN'S HOSPITALS
AND RELATED INSTITUTIONS, INC.

Mr. Vice. Mr. Chairman, I am Jon Vice, President of Children's
Hospital in Wisconsin. Thank you for the opportunity to testify for
NACHRI, which stands for the National Association of Children's
Hospitals and Related Institutions.

Children's hospitals are located in metropolitan areas, meeting
the primary as well as specialty care needs of children in the inner
city. They are central providers of care to the poorest children.
They are regional referral centers for children with special care
needs, centers of pediatric medical education and centers of child
health research.

Consider our hospital. We are an essential provider for the poor-
est children. Although there are 24 hospitals in the Milwaukee
area, we care for 86 percent of all hospitalized children. We devote
nearly half of our care to children covered by Medicaid, despite the
fact that we incur annual payment shortfalls in the millions of dol-
lars. Children's Hospital is a regional referral center. We have the
State's only level one pediatric trauma care unit. Our pediatric in-
tensive care unit is filled to capacity. We serve children with highly
specialized care needs from both the inner-city and remote rural
areas.

Consider this: Less than 8 percent of all of our patients account
for more than half of our revenues because they require such ex-
traordinary care. Our hospital is also a center of pediatric medical
education and research. More than 70 percent of the pediatricians
practicing in the State and more than 75 percent of the pediatric
nurses receive their training at Children's Hospital. Because of
that fact, medical education accounts for 9 percent of our costs.

Health care reform has been a major issue for several years, but
recently public leaders have begun to ask whether there is a health
care crisis. We think the bottom line is the fact that more than 1
in 3 children now are uninsured or rely on Medicaid. Because these
children's numbers are growing, their need and their parents' need
for universal coverage are growing, too. Many in the Congress and
the President want to build reform on the commercial managed
care market. Whether it is managed competition or incremental re-
form, many proposals will result in more children being enrolled in
managed care.

Children's Hospital has quite a bit of experience with managed
care. The majority of our patients today are in managed care. We
established and ran a capitated managed care plan with 30,000
Medicaid enrollees. We believe the principle of managed care, cre-
ating incentives that reward access to timely, appropriate and cost-
effective care has great potential for children. But we also know
from experience that managed care's potential is not easily realized
when cost reduction is the primary goal and the system is not de-
signed, implemented and monitored for children.

When managed care becomes only managed pricing, there are no
incentives to pay for the cost of treating the poorest patients or the

110

sickest patients or training the next generation of providers. In
that kind of market, the children's hospital with a mission of clini-
cal care, education and research, will be forced to make difficult
choices, give up its underfinanced care or fail to compete, give up
its care for the most difficult cases or fail to compete, give up its
responsibility to train the next generation of pediatric providers or
fail to compete.

Associations like to talk in slogans, and NACHRI is no different.
In health care reform, we need to manage the competition so kids
win too. Based on our experience seizing children in Milwaukee's
inner city as well as our State's most remote rural areas, that slo-
gan translates into several specific proposals.

First, NACHRI recommends that reform recognize the role of es-
sential community providers that serve children, based on service
to the underserved population, not on geographic location. Reform
should designate not only publicly funded primary care clinics, but
also public hospitals and children's hospitals devoted to the medi-
cally underserved. Plans should contract with essential providers
and negotiate payment adequate to the cost of care.

Second, NACHRI recommends reform should change the way we
finance medical education. Since managed care plans don't have in-
centives to pay for the cost of medical education, all payers should
contribute to the cost.

Third, NACHRI recommends that reform should recognize the
role of designated centers of excellence to meet children's needs.
They need to be part of every health plan and enrolled children
need to be assured they will get access to sub specialists trained
to care for children, not adults.

Finally, NACHRI recommends that reform should explicitly ad-
dress children with special care needs. They represent less than 5
percent of all children. They will get lost in the statistical margins
of error if benefits, provider networks, financing and public ac-
countability don't fit them. Even after a decade of experience, our
State Medicaid program still does not enroll certain children with
special needs, such as a child with AIDS or the child who is men-
tally dependent in managed care because HMOs know how expen-
sive they are.

Mr. Chairman, that concludes my remarks. I would be glad to
answer any questions you might have.

Chairman Stark. Thank you, Mr. Vice.

[The prepared statement follows:]

Ill

Writ:t:en Remarks

Mr. Chairman, I am Jon E. Vice, President of Children's
Hospital of Wisconsin of Milwaukee, WI .

; am also a former chairman of the Board of Trustees of NACHRI
— the National Association of Children's Hospitals and Related
Institutions. On behalf of NACHRI, which I represent today, I want
to thank you very much for the opportunity to testify before your
subcommittee regarding health care reform and children of the inner
city and rural areas .

NACHRI represents more than 130 institutions in the United
States and Canada, including free-standing acute care children's
hospitals such as my own, pediatric departments of major medical
centers, and specialty children's hospitals devoted to specific
services such as rehabilitative care for children.

Children's Hospitals in the United States

Children's hospitals are driven by missions that commit them
to serving all of the children of their communities, including the
sickest, poorest, and those in need of the most specialized care,
through the delivery of primary and subspecialty care in both
inpatient units and outpatient clinics. Children's hospitals also
are driven by missions that commit them to serving the children of
tomorrow through medical education training the next generation of
pediatric health care professionals and research advancing the base
of knowledge and the state of the art of children's health care.
For example:

• Essential Provider to Low Income Children Virtually all
children's hospitals are non-profit and located in major
metropolitan areas, meeting the primary as well as the
specialty care needs of the children of the inner city,
especially the children of the lowest income inner city
neighborhoods. On average, children's hospitals devote nearly
50 percent of their care to children who depend on Medicaid or
are uninsured.

• Specialized Regional Referral Centers Children's hospitals
also are regional referral centers, meeting the specialized
care needs of children from the most distant rural areas as
well as the the closest inner city neighborhoods. On average,
a children's hospital devotes more than 70 percent of their
care to children with chronic or congenital conditions .
Freestanding children's hospitals represent only one percent
of all hospitals, but they care for 25 percent of all
hospitalized children with chronic or congenital conditions
and the majority of children with specific specialized care
needs. Children's hospitals and the pediatric departments of
university medical centers together represent only seven
percent of hospitals, but they care for the vast majority of
children with specialized care needs.

• Centers of Pediatric Medical Edncation Although they
represent only one percent of the nation's hospitals,
free-standing children's hospitals train a quarter of all
pediatricians. Together with pediatric departments of major
university medical centers they train the majority of
pediatricians and virtually all pediatric subspecialists in
the United States.

• Centers of Child Health Research More than one in three
children's hospitals is the formal sponsor of research on the
cause, prevention, and treatment of illness in children. Many
more participate in research through universities with which
they are affiliated. For example, it was a children's
hospital which first identified AIDS in children, and it was a
children's hospital that first cultured the polio and measles
viruses .

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Children's Hospital of Wisconsin

Children's Hospital of Wisconsin is a 222 bed private, independent,
not-for-profit pediatric medical center. It is typical of the
nation's children's hospitals. For example:

• Essential Provider to Low Income Children There are 24
hospitals in the metropolitan Milwaukee area, but one
hospital. Children's Hospital of Wisconsin, hospitalizes 86
percent of all children, including children from every zip
code except one in the city. We devote about half of the care
we provide to children who depend on Medicaid to pay for their
health care, either directly or through their enrollment in
managed care plans . We serve children not only through
inpatient services but also through extensive outpatient
clinics, including primary and urgent care clinics in inner
city neighborhoods. We provide care in more than 65,000
emergency room and urgent care visits and more than 100,000
outpatient clinic visits each year.

• Specialized Regional Referral Center Children's Hospital of
Wisconsin is the only level one regional pediatric trauma
center in the State of Wisconsin. Our pediatric intensive
care unit regularly operates at more than 90 percent capacity.
In addition, our hospital serves children with specialized
care needs from throughout the region, including children with
cancer, malfunctioning hearts, cerebral palsy, AIDS, and many
other conditions . These are children who require very
specialized care not only when they are very sick but also
when they just need basic primary and preventive care.

• Center of Pediatric Medical Education Through its affiliation
with the Medical College of Wisconsin, Children's Hospital of
Wisconsin is a major center of pediatric medical education.
Approximately 70 percent of all pediatricians practicing in
the State of Wisconsin trained at our hospital. And all
family practice residents affiliated with the Medical College
of Wisconsin receive the pediatric portion of their residency
training at our hospital. Through our affiliation with nine
nursing schools, more than 75 percent of all nurses trained in
pediatrics in Wisconsin received their training at Children's
Hospital of Wisconsin.

• Center of Child Health Research Children's Hospital of
Wisconsin conducts pediatric research through our affiliation
with the Medical College of Wisconsin, whose chairman of the
Department of Pediatrics is our Physician-in-Chief . We have
specialized in research related to blood disorders, unrelated
bone marrow transplants, and pain management. Children's
Hospital of Wisconsin also is a growing center of pediatric
nursing research.

In addition to all of the above. Children's Hospital of
Wisconsin is plays important roles as a partner in public health
promotion with the City of Milwaukee and as an advocate of
children. We have joined with Milwaukee's Public Health Department
in a multi-year campaign to improve immunizations rates
dramatically. We are engaged in a prenatal care education program
targeted at high risk women. We administer a multi-year grant
program to assist clinics not run by the hospital to serve
uninsured and underinsured children in the inner city. We speak
out and address issues affecting children's health, education,
safety, and security in our community. For example, in response to
dramatic increases in the numbers of children injured and killed by
firearms, Children's Hospital of Wisconsin has become a leading
champion of firearms control, including a ban on all handguns.

In speaking about health care reform, NACHRI and its member
hospitals have sought to make two basic points:

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• First, children's hospitals believe children especially need
health care reform that guarantees universal coverage, because
children often are the first to be hurt by the continued
erosion in private health care coverage and rapid changes in
the health care marketplace.

• The second point children's hospitals make on health care
reform is this: We believe that all reform must be tailored
to fit children's needs, and reform specifically based on
competition must be managed so kids win, too.

I will elaborate on these two points later in my statement,
but for the purpose of the panel discussion, I would like to focus
my oral remarks on NACHRI ' s specific recommendations that relate to
children of inner city and rural communities. These children
depend not only on the community and other public funded health
centers serving the medically underserved, but also on institutions
such as children's hospitals with missions of serving low income
children, serving children with special care needs, training future
health care providers, and advancing health care research.

Based on this, NACHRI offers four sets of core
recommendations .

1 ) First, health care reform should recognize the role of the
" essential commnnity provider . " These are the publicly
financed providers upon whom people living in medically
underserved inner city and roral areas depend for care,
because the comntercial marketplace does not meet their needs.

NACHRI recommends that health care reform legislation
designate not only publicly financed primary care clinics but
also public hospitals and children's hospitals serving a
disproportionate share of low income patients as "essential
community providers . " Health plans should be required to
contract with essential community providers, to cover the care
given to people living in medically underserved areas, and to
negotiate payment rates that meet at least minimum standards.

2) Second, health care reform should recognize the need to
separate the financing of graduate medical education from
patient care reimhui-sement.

NACHRI recommends that all payers should be required to

finance the direct and indirect costs of graduate medical
education. Within federal guidelines, the total number,
division among subspecialty care, and allocation of
residencies should be determined by health care professionals
independent of the political process . This is especially
important if national policy on GME is to recognize how
different pediatric medical education is, with 85 percent of
all pediatricians already practicing primary care, and the
need for our health care system to train both more general
practice and subspecialty pediatricians . Finally, funding for
graduate medical education should be allocated to the teaching
institutions that incur the direct costs of GME and the
indirect costs of being academic health centers .

3) Third, health care reform should recognize the role of
"centers of excellence* and specialized centers of care
established to meet the needs of children.

NACHRI recommends that health care reform ensure children's
access to designated pediatric centers of excellence through
their inclusion in health plans and the ability of enrolled
children to receive care from them.

4) Fourth, health care reform should explicitly and coherently
address the needs of children with specialized care needs.

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NACHRI reconunends that reform establish a process for defining
children with special care needs, define standard benefits
tailored to fit their needs, require plans to offer parents
the ability to receive care from appropriate pediatric
subspecialists for the care of these children, and establish
Pleasures of cost, quality, outcomes, and consumer satisfaction
that are specific to their needs. Precisely because children
with special care needs represent less than five percent of
all children, special focus must be given to their needs in
health care reform. Otherwise, they will be lost to
statistical margins of error in any evaluation of reform.

These four recommendations are by no means the limits of the
issues that should be addressed to meet children's health care
reform needs. But from the perspective of children's hospitals, it
is imperative that reform recognize clearly the roles of essential
providers, teaching institutions, and centers of excellence for
children, and establish a clear focus on children with special
needs .

Mr. Chairman, in the balance of my written testimony I would
like to expand upon NACHRI ' s views on health care reform and its
implications for children.

Children Need Universal Coverage

Children in particular need reform that guarantees universal
coverage, because they are often the first to be hurt in the
continued erosion in commercial health care coverage. Studies show
that in the struggle to cope with rising health insurance costs,
both employers and individuals often draw the line first at paying
for dependent coverage. Loss of dependent coverage, as well as
pre-existing condition exclusions and life-time maximums on
coverage, hit children hard, especially those requiring the care of
a children's hospital.

As a consequence, more than one in three children in the
United States now depends either on Medicaid, which is a critical
but often underfinanced poverty program, or is uninsured. That
proportion continues to grow. In 1992, 13.5 million children under
age 18 depended upon Medicaid and another 9.5 million children were
uninsured, representing 35 percent of the nation's 65.1 million
children, according to estimates based on U.S. Census Bureau survey
data.

Medicaid has become the nation's safety net for children's
access to health care — particularly children with special care
needs. The emergence of Medicaid as children's health care safety
net has been a tremendously important development. But we know
that Medicaid often has been challenged to fulfill its promise to
children because of inadequate resources for eligibility, outreach,
and payment. We also know that many states are now stretched to
the financial limit by their Medicaid programs. In today's fiscal
and political climate, Medicaid and charity are an imperfect and
ultimately financially unsustainable safety net for children.

Children also are at the frontlines of change in the health
care delivery market place, and the pace of that change is about to
step up substantially because of Medicaid. In health care
marketplaces around the country, we are seeing a significant surge
in the conversion of traditional indemnity coverage for
fee-f or-service health care into managed care coverage, including
enrollment in risk-bearing, capitated health plans.

Many state Medicaid progreuns are contemplating what the State
of Tennessee has received federal pemnission to do — enrollment of
all Medicaid recipients into capitated managed care plans in
a matter of only months, regardless of the experience of either the
state or its commercial markets with capitated managed care. Since

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half of all Medicaid recipients are children, and 70 percent are
mothers or children, the conversion of Medicaid fee-for-service to
capitated managed care will be especially significant for children
and their ability to receive the care they need.

If implemented carefully, managed care holds great potential
for children by creating incentives for them to receive health
services when they can benefit most from them. But make no mistake
about it, the statewide Medicaid managed care experiments upon
which states are embarking at times of extraordinary fiscal crises
are experiments that will be undertaken primarily with children as
their subjects. The issue is not managed care; it is the adequacy
of time and resources to undertake these statewide experiments and
the adequacy of the focus on their impact on children.

That is why we believe health care reform, based on mandated
employer- financed health coverage, is so important for children,
both to give all children coverage of uniform health care benefits
and to influence the way in which health care is financed so that
coverage translates into access to appropriate care.

Health Care Reform Should Be Tailored to Fit Children's Needs

Many Members of Congress have visited a children's hospital —
as a parent, family member, or friend of a patient or as a guest of
the hospital. You know that our institutions look and feel very
different from other hospitals. You know that the care givers who
work with our institutions often have different training and
different experience than care givers in other hospitals have.

All of these differences that define the character of a
children's hospital might be summed up by the slogan: "When it
comes to children, one size won't fit all. We must tailor health
care to fit their needs." This slogan may have a simplistic ring
to it, but it has profound implications for the way we deliver care
to children. Just last summer, the Institute of Medicine
highlighted this point by issuing a major report on emergency care
for children. It concluded our health care delivery system fails
to meet the needs of children who suffer from injury or trauma,
because all too often our emergency and trauma care services are
designed to fit the needs of adults or "average" people, not the
needs of children.

For example, because children have smaller veins that often
are not receptive to emergency injection of fluids, such injections
may need to be made directly into their bone marrow. And because
children's blood supply is smaller, injured children frequently
experience a much faster drop in blood pressure. As a consequence
of emergency services not being designed to fit these kinds of
different needs, children's survival and recovery from injury or
trauma suffer.

The children's hospitals believe it is equally true that when
it comes to health care reform, one size won't fit all. We must
tailor the requirements of reform to fit children's needs. I would
like to give you examples of what I mean by focusing on four areas
of bipartisan agreement on health care reform between members of
both political parties. These -.reas of agreement involve
commitments to uniform benefits, managed care, cost containment,
and Medicaid's reorganization.

Uniform Benefits Members of both political parties have
advocated that the federal government establish, by act of Congress
or independent commission, a uniform benefit package for all
Americans, with special emphasis on primary and preventive care.
That is a very important, bipartisan commitment, which is sure to
benefit children, for whom preventive and primary care often are
the least expensive and promise the best financial returns in terms
of well-being and future productivity. However, as experts in the
care of children with special care needs, children a hospitals know

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uhat it is equally important to focus attention on how the benefits
will cover the needs of the child with a chronic or congenital
condition, such as cerebral palsy.

For example, if they limit coverage for rehabilitation to
treatment of a condition resulting from an 'illness" or "injury" or
related to an "acute care episode, " uniform benefits could be
subject to the risk of interpretation that they do not cover
congenital conditions, which are not the result of illness, injury,
or acute care episode. Similarly, a limit on coverage to treatment
that results in "improvement" of function could deny coverage of
therapies that would enable children with special needs to
"maintain" a level of function, allowing them to attend school or
live at home. Or it could deny coverage of therapies prior to
surgery that could be essential to a successful outcome. In
addition, an "improvement" standard may not recognize the need for
"habilitation" to help children attain function for the first time.

That is why children's hospitals say that the uniform benefits
in health reform must be tailored to fit all children, including
children with special care needs who require access to ongoing
specialized care, which is not the same as long term care.

Managed Care Members of both political parties believe that
in order to restructure the way in which we deliver care, we need
to promote more enrollment of individuals and families into
risk-bearing, capitated health plans competing with one another in
the marketplace. Whether they call it managed competition, managed
collaboration, or something else, they believe we should give
health plans an incentive to manage the care needs of individuals
cost-effectively by having them compete for a single, fixed per
capita payment -- adjusted for the risk associated with the
individual's health needs — for every individual enrolled.

Managed care has great promise to meet the needs of children
if financial incentives facilitate their access to primary and
preventive care. Indeed, through the provision of
multi-disciplinary care involving the family, many children's
hospitals have pioneered in managed care in the best sense of the
word by trying to make sure the child receives the most appropriate
care, including inpatient care, only when it is truly necessary.

But if managed care is purely cost-driven, it can have the
opposite effect for children, denying them access to appropriate
care instead of assuring it. The fact is that many of the
protections essential to managed care — risk adjustment, public
cost reporting, measures of quality and outcomes — have not been
developed for children, in particular children with special care
needs. At the same time, because so few children require
hospitalization, they are much more dependent than adults on having
access to regionalized centers of care. They see a large enough
volume of pediatric patients with specialized conditions that they
are able to achieve and maintain both expertise and efficiency in
pediatric care.

Such institutions -- children's hospitals — also carry the
added costs of their commitments to serving a disproportionate
share of low income patients, training the future generation of
peditaric health care professionals, conducting pediatric medical
research, and caring for the sickest of patients. If driven only
by costs and lacking adequate tools for risk adjustment or measures
of quality for children, managed care plans often will refer only
the sickest and most expensive patients to children's hospitals and
other pediatric specialized facilities, making them financially
unsustainable. Or plans will refer children requiring specialized
care to hospitals with with adult but not pediatric subspecialists.
To gain competitive advantage, managed care plans will seek to
prevent children's hospitals from contracting with multiple plans,
which often is essential for the hospital to ser\'e a large enough
population of children to sustain its specialized services. These

117

are not concerns borne out of speculation; they are the real life
experiences of children's hospitals seeking to fulfill their
missions in competitive markets driven by managed care.

That is why children's hospitals believe it is so important
;hat health care reform built upon capitated health plans must
manage the competitive market to ensure children's access to the
rare they need. It is important to require that health plans:

• provide access to pediatric specialists and subspecialists ,
including at least one hospital that specializes in the care
of children, so that when a child needs a cardiologist or
pulmonolgist or other subspecialist, it is one who is trained
in pediatric cardiology or pediatric pulmonology or other
pediatric subspecialties;

• give parents choice among providers for both primary and
specialty care, including choice of specialists to deliver
primary care to children with special care needs, should they
demonstrate the capacity to provide such care;

• allow pediatric providers to contract with multiple plans;

• contract with and refer patients to hospitals that have
demonstrated themselves to be "essential" to the children of
low income and medically underserved communities;

• contract with and refer patients to recognized centers of
excellence and specialization for pediatric trauma care, level
III neonatal intensive care, pediatric intensive care, high
risk perinatal care, and other, highly specialized services;

• separate the financing of graduate medical education from
patient care reimbursement, by requiring all payors of care to
contribute to a pool of funds , which are used to meet both the
direct and indirect costs of graduate medical education and
are paid to the institutions that incur those costs; and

• account to the public for the costs and quality of care,
consumer satisfaction, and health status of the population
served in terms that are specific to children and their needs.

The net effect of such public policy requirements should be to
foster the development of integrated pediatric care networks ,
either within health plans or independent of them. An integrated
pediatric care network would assemble a team of family practice
physicians, pediatricians, and other primary care givers as well as
pediatric subspecialists. They would have an identifiable mission
of service devoted to children, expertise to meet children's needs,
resources measured in terms of children's needs, and accountability
for the cost, quality, outcomes, and consumer satisfaction specific
to children's experience. Indeed, it may well be worth considering
that health reform policy should require health plans to
demonstrate to consumers that they have such integrated pediatric
care networks .

Children's hospitals believe these kinds of policies will be
needed to manage competition so kids win, too.

Cost Cont.a 1 nment There has been much disagreement both
between Democrats and Republicans , and within their respective
parties, about whether and how to cap the growth in health care
spending nationwide, the growth in commercial insurance premiums,
or the amount of reimbursement given to individual providers .

However, as institutions that devote a major portion of care
to children assisted by Medicaid, children's hospitals are struck
by the fact that members of both political parties strongly agree
on capping the growth in Medicaid, at least at a per capita level.
That is the equivalent of a de facto spending cap on health care
spending for children. Children's hospitals do not support the

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principle of government imposed caps on health care spending, but
they already live with the reality of caps on Medicaid. We believe
it is imperative to talk about the need for cost containment
strategies to be adjusted to fit children's needs.

Let me explain why this is so important. Children have
different health care resource requirements than adults have, and
the patients of children's hospitals have different resource
requirements than children receiving care in general hospitals.
For every hour in the hospital, a child on average requires 31
percent more routine nursing care than an adult; a child younger
than two requires 45 percent more care than an adult. The
patients of children's hospitals require even more intensive care,
because they are younger, sicker, and more likely to have a chronic
or congenital condition than the pediatric patients of general
hospitals. Since nursing care is a major portion of the expense of
hospitalization, these differences can have significant
implications for the resource requirements of children.

Too often, strategies to cap health care spending fail to take
into account these differences. We see proposals to cap either
national health care spending or Medicaid based on an extrapolation
of historical rates of health care expenditures, in which the costs
of children's and adults' care have been averaged together. In
addition, children have been disadvantaged in historical spending
— because they have been disproportionately poor, dependent upon
Medicaid which has inadequately reimbursed care, and dependent upon
primary and preventive care, which indemnity plans traditionally
did not cover. Caps on health care spending will not make sense
for children if they are based on historical spending, instead of
an assessment of children's real health care needs.

Most advocates of capitated payment for health care have
recognized the importance of risk adjustment — adjustment of
capitation for the risk of higher or lower costs of care associated
with an individual. Without such risk adjustment, a health plan or
health care provider who cares for a population that is
disproportionately sicker would be at financial risk. This is
exactly what a children's hospital is — an institution which
specializes in caring for higher risk children with the most
complex care needs. However, experts have testified before this
subcommittee that risk adjustments specific to the needs of
children — particularly children with special care needs — do not
exist, and will take years to develop. We must begin now to invest
in risk adjusters for children, even before embarking on health
care reform. And if reform is implemented before pediatric risk
adjusters are developed, interim measures, such as mandatory
reinsurance for a wide range of children's chronic and congenital
conditions, or exclusion of these cases from capitation, will be
necessary.

Children's hospitals have learned the necessity of adjusting
cost containment strategies to children's needs through years of
living with state Medicaid programs and private payors, which have
adopted the Medicare diagnosis related groups (DRG) payment
methodology, even though it was not designed for a pediatric
population. According to financial experts whom the federal
government often has used for payment policy analysis, no
children's hospital could survive financially if it were subject to
the Medicare payment system unadjusted for the needs of children in
general and the needs of children's hospitals' patients in
particular. In fact, these experts have stressed that in health
reform based on competition, it is essential that the adjusters be
based primarily on children's needs.

That is why children's hospitals believe that in health care
reform, cost containment strategies must be tailored to fit
children ' s needs .

Medicaid According to opinion surveys, most people think
Medicaid is either a welfare program or Medicare. But to

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children's hospitals, Medicaid represents the nation's largest and
most important child health program. No single program, public or
private, affects more children nationwide or more children in
children's hospitals. Therefore, it is especially important that
great care be given to how health care reform transforms Medicaid.

Let me give you an example. Many members of both political
parties have called for the elimination of Medicaid
disproportionate share payment adjustments — extra payments given
to hospitals that serve a disproportionate share of low income
patients . They contend that such disproportionate share payments
are only needed to pay for the costs of care of charity patients.
With the achievement of universal coverage, they believe, such
payments no longer will be necessary.

However, to children's hospitals, disproportionate share
payments represent something entirely different. In many states,
the Medicaid program makes disproportionate share payment
adjustments because the base Medicaid payment rate is substantially
inadequate to cover the costs of care. These payment adjustments
have been critical to the ability of children's hospitals' ability
to play such an important role in providing access to care for
children of low income families.

If Medicaid financing continues at historically inadequate
levels, exacerbated by the elimination of disproportionate share
payments , health plans and communities with larger numbers of low
income people will be particularly hard hit, as will the
institutions devoted to serving them. This will be doubly true for
institutions such as children's hospitals, which serve large
numbers of both low income and high risk patients .

Similarly, most people are not aware that contained within
Medicaid is an extremely important national health policy for
children. It is a commitment, through EPSDT, that every Medicaid
eligible child is entitled to medically necessary care, regardless
of whether the services required to provide that care are otherwise
provided by states to adults under Medicaid. Proposals that
eliminate Medicaid need to preserve this commitment to medically
necessary care to the most vulnerable children, so that they are
not worse off as a result of national reform.

These are examples of why children's hospitals say Medicaid's
replacement needs to be tailored to fit children's needs.

Conclusion

NACHRI has applauded the President's leadership in making
health care reform a national priority and we have supported many
principles reflected in his legislation: universal coverage,
comprehensive benefits, employer-based coverage, assurance of
choice among health plans, recognition of the roles of essential
providers of care to low income patients and academic health
centers treating rare conditions , separating the financing of
graduate medical education from patient care reimbursement,
sustaining Medicaid eligible children's access to medically
necessary care, and more.

A number of other important proposals also attempt to address
these basic principles, and in the months ahead, this subcommittee
will help lead the Congress to forge a winning consensus to achieve
what all Americans, and especially parents, hope for: reliable and
affordable health care coverage that meets our needs and our
children's needs. NACHRI believes it is important for that
consensus to be shaped by an understanding that reform must be
tailored to fit children's needs, and if it is based on
competition, the competition must be managed so kids win, too.

Mr. Chairman, thank you for the opportunity to present
NACHRI 's views on health care reform.

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Chairman Stark. Dr. Staggers.

STATEMENT OF BARBARA STAGGERS, M.D., DIRECTOR OF
ADOLESCENT MEDICINE, CHILDREN'S HOSPITAL OAKLAND,
ON BEHALF OF THE CALIFORNIA CHILDREN'S HOSPITAL
ASSOCIATION; ACCOMPANIED BY SUSAN MADDOX,
PRESIDENT AND CHIEF EXECUTIVE OFFICER, CALIFORNIA
CHILDREN'S HOSPITAL ASSOCIATION

Dr. Staggers. Thank you, Mr. Chairman. It is my pleasure to
be here. What I would like us to think about as we move toward
considering fiscal manners regarding health care is that we don't
overlook the extremely vulnerable population of children in this
country. In addressing matters of health care reform, managed
care, all the things we have been talking about today, issues of who
consents to care for children, issues of adolescent confidentiality,
access to care, et cetera, are often ignored or never addressed. And
my concern is if this happens, those of us who work in children's
hospitals and care for children like I do, literally end up picking
up more bodies.

Therefore, there are some things that we thought about at the
California Children's Hospital Association and my colleagues in ad-
olescent medicine that we think are important when you consider
or when you propose any health care reform legislation.

One in the area of adolescent health care is that any health care
reform must understand that adolescents really still are children.
They are not adults. They have highly specialized needs, and the
health care reform must address adolescent needs in terms of their
ability to make consent, their ability to access care, and confiden-
tiality which they have a right to in terms of their own medical
services, and we are extremely concerned about that.

As I represent the California Children's Hospital Association,
there are three things we are concerned about. One is that any leg-
islation ensure that specific language in the reform bills designate
children's hospitals as essential providers, or another similar des-
ignation given to safety net or traditional providers, require all
managed care plans to contract with children's hospitals and keep
their pediatric networks in place, to keep pediatric primary care
and specialty care appropriately available to children.

Children's hospitals are special. They are designed, implemented,
and planned to meet the needs of children, youth and their fami-
lies. They do this in a way that helps promote transition from in-
fancy to young adulthood. It is important to understand and under-
score the special services children's hospitals give when you are
talking about health care reform.

Also, preservation of disproportionate share payments is impor-
tant to supplement Medicaid programs if they continue to exist, or
funding some sort of equivalent program to ensure coverage for
vulnerable populations. Children's hospitals average 60 percent
Medicaid in some cases and cannot make up that shortfall through
cost shifting or other windfalls, since I have never seen a windfall
yet in our hospital.

Even for those of us who are adolescent service providers, it is
even more critical because in the State of California, even if your
parents own General Motors and you want to come in for confiden-

121

tial services, you are eligible for Medi-Cal, which means that as an
adolescent, for you to get health care access, you are going to be
on a State supplemented program. So 90 percent of my patients are
Medi-Cal, which does not make me real attractive to the hospital
for obvious reasons on specific things.

Third, that title V programs that we know that work well in
California for children with special needs, like diabetes, like sickle-
cell disease, like cystic fibrosis, asthma, that they stay in place, be-
cause they are good demonstration projects for targeting children
with special needs. These children require timely interventions in
very high specialty referrals and service networks.

In California, California's service programs, CCS as it is known
by us, is the oldest, most successful managed care program in the
State. We consider it a model. We are looking at integration of the
CCS program into the California's Medi-Cal managed care system,
and pilot programs, like those that are happening in California,
need to be looked at when you are making decisions about health
care reform.

As a provider, I know the four things I talked about in terms of
issues for adolescents, in terms of them accessing and appro-
priately utilizing any health care plan, issues of preservation of
title V programs, ways to reimburse the hospital in terms of dis-
proportionate share payments, and specific language making chil-
dren's hospitals essential providers will be critical for maintaining
the level of health care services we have for children, and that con-
cludes my comments.

Chairman Stark. Thank you, Dr. Staggers.

[The prepared statement follows:]

122

TESTIMONY OF BARBARA STAGGERS, M.D.
CALIFORNIA CHILDREN'S HOSPITAL ASSOCL\TION

Mr. Qiairman and members of the Committee, my name is Dr. Barbara Staggers and I
am the Director of Adolescent Medicine at Children's Hospital Oakland in California On
behalf of Children's Hospital Oakland and the families it serves, I thank you for the
opportunity to testify before the Committee today.

Children's Hospital Oakland treats children up to early adulthood and integrates patient
care, teaching and research. TTie medical center serves children from 46 of Cahfomia's 58
counties, drawing patients from surrounding states and Pacific Rim countries and offers
satellite subspecialty services in the cities of Fairfield, Pleasanton, Santa Rosa and Walnut
Creek With 205 beds and 32 subspecialties. Children's Hospital Oakland also has an
impressive team of pediatricians and subspecialists — 130 based in the hospital and 450 in
the coirmunity

Children's Hospital Oakland is very much attuned to the inner city problems existing
in our neighboring communities where teen-age rape and pregnancy, child abuse and juvenile
crimes are unfortunately common incidences that are on the rise. We not only provide
specialty care services but also primary care to meet the needs of children in the inner city.
We see approximately 25,000 patients a year in our primary care clinics — these children are
considered "mentally and socially fragile". Mental health services are extremely diflScult to
find for these children.

In the Adolescent Medicine department which 1 direct at Children's Oakland, we see
almost 12,000 youths between 1 1 and 19 years old who belong to a new at-risk population of
children in the United States - teenagers. To give these difBcult-to-reach young people access
to healthcare, we have developed a comprehensive community collaborative healthcare system
which operates a Teen Clinic at the hospital, school-based clinics at Oakland high schools,
peer counseling/adolescent advocacy programs, and a spectrum of treatment from preventive
care to intensive hospitalization.

The leading causes of death among young people are motor vehicle injuries, suicide
and homicide. Make no mistake about this: it's the same leading preventable causes of death
whether the teenager comes from an inner city or a wealthy suburb. For me, all high-risk
behavior such as teen pregnancy, escalating violence and substance abuse are all syrrptoms of
a larger disease. A lot of youths are looking for love and support in all the wrong places.
We need to look at eveiy teen and say, "What's going on in your life? How can we help you
grow?"

It takes extra time, special skills and expertise to work with adolescents, to find out
that a patient who presents with asthma or a broken arm is also dealing with having been
raped, experienced violence at home or attempted suicide last week.

This is not ti^aditional medicine, or the medicine 1 was tramed for. But it's the kind of
healthcare that children's hospitals are uniquely qualified to provide because they specialize in
the needs of children, youth and their families.

We also have a Center for the Vulnerable Child that provides an innovative approach
to the relationship between poverty and children's health. The Center sees approximately
1,200 patients per year and provides comprehensive services to children reported to have been
sexually abused, those in foster care, and to chemically dependent women and their drug-
exposed infants. Our neighboring communities have seen a rise in the number of Asian
refiigees. Children's Hospital Oakland opened a Southeast Asian Qinic in March, 1980, and
now serve approximately 2,600 patients per year. Many of these children have parasites, are
anemic, have positive TB skin tests, poor growth associated with poor nutrition and some
have malaria, pneumonia or war scars and bums.

123

Children's Hospital Oakland is by no means the only facility serving children in need.
The seven Qiildren's Hospitals in California all serve their communities and children in very
much the same way that we do. As a member of the National Association of Children's
Hospitals and Related Institutions (NACHRI), Children's Hospital Oakland supports
NACHRI's recommendations on health care reform and children. I am here today to speak to
California-specific issues that concern the seven Children's Hospitals in California, including
Children's Hospital Oakland. These concerns have been expressed through the work and
representation of the California Children's Hospital Association (CCHA).

The California Children's Ifcspital Association

CCHA, under the leadership of President and Chief Executive Officer Susan Maddox,
represents seven not-for-profit children's hospitals located in Oakland, Palo Alto, Fresno, Los
Angeles, Long Beach, Orange, and San Diego. Together these institutions, which represent
less than 2% of the state's hospitals, provide approximately 30% of all hospital care needed
by Medicaid-eligible children in Cahfomia and an even higher proportion of the care for
children with special health care needs. CCHA's mission is to strive to advance the health
and well-being of children by taking a leadership role in advocacy, public policy, educatioa
and research in support of a Cahfomia children's health care delivery system CCHA
advocates a balanced approach to health care reform which improves child health status by
increasing access to prevention and primary care services for ^ children while preserving
access to high quality specialized care when still needed. In the maintenance of this balance,
CCHA supports the protection of the well-being of children in health care reform, ensuring
Qiildren's Hospitals as "essential providers," maintaining existing sources of fionding during
the transition to managed care, and encouraging the development of integrated pediatric
networks

The Children's Hospitals flilly understand the fiscal pressures facing the state and
federal government. Given that financial resources are scarce, the Children's Hospitals
strongly advocate that, at a minimum, all children in the US. should come first and be taken
care of Children are our country's most precious resource and are our fiiture.

The seven Children's Hospitals have concerns regarding health care reform and the
potential effect on California's children. These concerns stem fi-om key Cahfomia-specific
statistics and the unique role of Children's Hospitals fi-om other adult facihties.

1. Children's Hospitals have the highest concentration of Medi-Cal (California's
Medicaid program) patients of any hospital type. Over 60% of their
patients are covered under Medi-Cal, versus ^ut 15% at contracting
hospitals statewide.

2. A disproportionately high number of children served by Children's Hospitals
have special health problems and needs — approximately 70% of the
Medi-Cal days in Children's Hospitals are for Medi-Cal children with
medical conditions so serious that they qualify for the California Children
Services (CCS) Program the state's version of its Children With Special
Health Care Needs (CSHCN) Program under Medicaid's Tide V program
These are truly society's sickest children. Over 67% of the patients seen at
Children's Hospital Oakland are Medi-Cal children quahfied for CCS.

3. Children's Hospitals treat sicker patients than most genera! hospitals Almost
33% of Children's Hospitals' beds are designated for intensive care, compared
to an average of 1 1% in general hospitals. More than 80% of Children's
Hospitals' beds are occupied on an average day, while the statewide average
is just over 50%.

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4 California has the highest number of illegal immigrants residing in the state.

There are over 2 million illegal immigrants, over 50% of the nation's total,
living in California It is estimated that 392,000 illegal immigrant children
are between the ages 5 to 17 These children did not make a conscious
decision to break the law to cross the state border.

5. In 1992, there were at least %,000 Medi-Cal children (40% of all Medi-Cal
births) bom to illegal immigrants.

6. The exorbitant number of illegal immigrants has placed a high burden on the
state. It is estimated that federally mandated services, including health, cost
California taxpayers $2.5 billion per year

7. Children's Hospitals have long recognized their responsibility to the children
of California and have steadfastly upheld their long-standing mission to care
for all children, regardless of ability to pay and citizenship status.

8. In California, approximately 70% of the patients in an average Children's
Hospital are either charity patients or are covered by government programs
(such as Medi-Cal or CCS Program) where the basic payments fall far short
of the cost of care.

9. During the 1991-92 fiscal year, Children's Hospitals lost $22 million dollars
on outpatient services provided to Medi-Cal children. This loss figure is

the difference between actual costs (not charges) and reimbursement received
Preliminary data fi-om six Children's Hospitals ^ow that our member hospitals
have experienced, on average, a 5% increase in Medi-Cal outpatient visits with
an estimated shortfall of $33 million dollars in 1992. This represents a 50%
increase in the shortfall from the 1990-91 fiscal year.

10. The state's on-going recession and high unemployment rates (higher than the
national average), coupled with the fires and recent earthquake in Los Angeles,
places increasing burden to California residents and state budget.

In the context of health care reform, the Children's Hospitals urge you to keep in mind the
following points:

Elnsure that Children's Hospitak receive status as 'tessential provideis" or another sinilar
designation given to safety net provideis — Children's Hospitals are safety net providers by
virtue of theu" high concentration of Medi-Cal patients (on average over 60% of each of their
total patient load) and represent a wealth of experience in providing the broadest range of
services to all children, from primary to long-term care. As a result. Children's Hospitals
should receive "essential provider" status to ensure that all managed care plans and the
children within their plans have access to pediatric experts and services.

Preserve disproportionale share payments (DSH) to supplement the Medicaid program
shortfall or fund an equivalent program to ensure coverage for vuhieraMe populations —

Vulnerable populations — children bom to illegal immigrants, children on Medicaid, and
those with special health care needs — are at greater risk of receiving inadequate care. This
risk will dramatically increase if certain protections are not in place as health care reform
unfolds. Children's Hospitals recognize their responsibility to all children and have
steadfastly upheld their mission to refiise no child that enters their hospital doors. During the
health care reform debate and early stages of implementing changes to the nation's health care
delivery system, Children's Hospitals advocate for the preservation of DSH payments to
supplement the Medicaid program to ensure that every child is able to receive needed health
care services and to ease the shortfall experienced by providers, such as Children's Hospitals,
dedicated to serving vulnerable populations Charitable donations and cost shifting to the few
insured patients is inadequate Molicaid disproportionate share hospital payments will

125

continue to be critical to Children's Hospitals as long as the basic payments fail to cover the
costs of the care delivered. Universal coverage alone will not protect the disproportionate
share safety net hospitals when only sixty cents on the dollar of cost is reimbursed. It is also
imperative that prepaid health plan (PHP) Medicaid days be counted in the calculations for
DSH allowances.

Preserve Tide V Progtnms, particulariv funding for programs for children >vilh special healtti
care needs — Approximately 70% of the Children's Hospitals Medicaid recipients are
children with special health care needs served by the California Children Services (CCS)
Program, the state's version of its Children With Special Health Care Needs (CSHCN)
Program under Medicaid's Title V program. The CCS Program is designed to assist families
meet the financial burden of caring for children under 2 1 with severe physically handicapping
conditions. The program helps to ensure that the state's children receive only the most
appropriate and highest quality pediatric care possible. CCS is one of a limited number of
programs that sets medical standards for its CCS-approved providers (physicians, nurses,
physical/occupational therapists, and hospital facilities such as special care centers) to treat
children with CCS-eligible conditions. These standards ensure that chronically ill children are
cared for by professionals who have significant experience in pediatric specialty care. The
CCS Program serves as a model for other health systems trying to control rising health care
costs and ensures that care is provided using the most cost-effective means by emphasizing
early intervention and access to primary care. CCS provides a unique combination of case
coordination and case management rarely found in state programs. CCS case management
goes beyond the mpatient utilization review common witfi other programs by assuring that
appropriate outpatient and follow-up care aie given by qualified providers

Encourage innovative state progiams and/or demonstration projects taigeting children widi
special healfli care needs — California has taken a unique approach towards health reform
within the state. The Cahfomia State Department of Health Services Strategic Plan, "
Protecting Vuhierable Populations," details the Department's commitment to expand managed
care for Medi-Cal beneficiaries as the most cost-effective way to improve access to quality
preventive and primary care services. The Strategic Plan recognizes that traditional managed
care E^'^oaches may inadequately serve the needs of children with chronic or acute
conditions, such as those with CCS-eligible conditions. These children require timely
intervention and specialty referral. The Strategic Plan excludes CCS services fi^om the
expansion of Medi-Cal managed care. The Children's Hospitals, in collaboration with other
providers in the community, are currentiy working with the state in developing and
mplementing pilot projects to test a variety of managed care models tailored to the needs of
this most vuhierable population. The Children's Hospitals strongly advocate that a similar
approach be taken at the national level, perhaps in the form of federal demonstration projects,
to protect these children as the country moves towards health care reform

Conclusion

The seven Children's Hospitals in California commend the President in making health care
reform a priority on the national agenda We strongly urge the President and members of
Congress to keep m mind the needs of aU children in the U.S. They are the next generation
and the fiiture of our country rests on thera tvEnimallv, the early stages of health care reform
should ensure that our children are protected fifst before anyone else. Mr. Chairman and
members of the Committee, 1 thank you for the opportunity to present the views of
California's Children's Hospitals. We stand ready, as always, to assist in any way that we
can.

126

Chairman Stark. Mr, Goldsmith.

STATEMENT OF MARTIN GOLDSMITH, PRESIDENT AND CHIEF
EXECUTIVE OFFICER, ALBERT EINSTEIN MEDICAL CENTER,
PHILADELPHIA, PA., ON BEHALF OF THE NATIONAL
ASSOCIATION OF URBAN CRITICAL ACCESS HOSPITALS

Mr. Goldsmith. Thank you, Mr. Chairman. My name is Martin
Goldsmith. I am president of Albert Einstein Medical Center in
Philadelphia and I am here today in my capacity as president of
the National Association of Urban Critical Access Hospitals.

Our group consists of urban hospitals that depend on govern-
ment to an unusual degree to pay for the care we provide. By
urban critical access, we mean that we are private nonprofit, lo-
cated in cities, large and busy. We are the largest providers of care
to the elderly, the poor and the underinsured, fulfilling much the
same role as public hospitals in the many cities in whicn there are
no public hospitals, and in other communities working alongside
those public hospitals.

Because much of this care is paid for by Medicare and Medicaid,
the outcome of the health care debate will have a major impact on
us. More important, that outcome will have a profound and lasting
impact on our communities. For the unusually large number of el-
derly and poor people who rely on us for care, we are essential and
irreplaceable.

We are in favor of health care reform. There is much in H.R.
3600 that we support. We enthusiastically support the extension of
medical benefits to all Americans, portability of benefits, the end-
ing of limits on those with preexisting medical conditions, and the
integration of Medicaid population with the rest of the public.

Despite these improvements, H.R. 3600 also includes several pro-
visions that would jeopardize our ability to continue serving our
large urban poor and elderly communities. We think it is essential
that you preserve the worthy provisions of H.R. 3600, correct those
that cause problems, and adopt reform legislation this year. There
really is a health care crisis and we can't afford to wait another
year to do something about it.

Now I would like to outline a few of those problems I mentioned.
First, the Medicare cuts proposed in H.R. 3600 would be devastat-
ing and it would hit our member hospitals much harder than the
average hospital. According to a study based on the bill and on
HCFAs testimony before this committee in December, the 10 hos-
pitals that meet the criteria for urban critical access in my own
city, Philadelphia, would each lose on average $116 million during
the first 5 years of this plan, jeopardizing our long-term ability to
continue providing our poor and elderly patients with the quality
and scope of service they deserve and that everyone else would be
receiving.

Hospitals in the city of Philadelphia as a whole would lose $1.5
billion in Medicare revenue during that same period and thousands
of jobs would be unquestionably lost. We can provide you with a
summary of losses in other cities and explain how we arrived at
those figures.

Second, under this bill, we would continue to be responsible for
a good deal of uncompensated care, especially for the many undocu-

127

merited aliens in our inner cities. In addition, many people will be
unable to afford their copayments and deductibles, and some may
refuse to purchase insurance. The financial impact of providing this
additional uncompensated care would be much greater on us than
the average hospital.

Third, while this committee's jurisdiction does not extend to Med-
icaid, I would like to mention that H.R. 3600 would eliminate Med-
icaid disproportionate share payments before those payments
would be replaced by universal coverage. This would be yet another
devastating blow to us.

The most important thing, of course, is what this means to our
inner-city communities. Our hospitals have long been the primary
care providers — the primary providers of care for the urban, elderly
and poor, but portions of H.R. 3600 would jeopardize our existence
and discourage others from fulfilling that void.

We believe that H.R. 3600 is basically a sound bill and can be
amended to rectify these problems and insure the future of urban
critical access hospitals.

First, these hospitals should be designated as essential commu-
nity providers. Bv any reasonable measure, we are essential to our
communities and need to be preserved. Second, eliminate the in-
equitable impact of the proposed Medicare cuts because of the de-
structive effect they would have. Third, reimburse these hospitals
appropriately and directly for the continuing and substantial un-
compensated care they provide. Fourth, restore our Medicaid dis-
proportionate share payments until they are fully replaced by uni-
versal insurance or another mechanism, and insure providers they
will be paid adequately to care for Medicaid recipients. Risk adjust-
ing payments to plans does not provide any assurance of adequate
payment to hospitals. And fifth, through statute, create a rapid re-
sponse system to monitor the effects of the changes stimulated by
reform and create a system which will correct any unanticipated,
undesirable effects on our community quickly.

This would be the desired outcome. We continue serving our com-
munities, the poor and elderly receive the care they deserve, and
you implement an effective, efficient groundbreaking program with-
out sacrificing access to care for the elderly and poor who need it
the most. I appreciate this opportunity to address the committee
this afternoon and will be delighted to answer questions.

Chairman Stark. Thank you.

[The prepared statement follows:]

128

Testimony of

Martin Goldsmith

President

National Association of Urban Critical Access Hospitals

before the

Subcommittee on Health

of the

House Ways and Means Committee

February 7, 1994

Greeting

Good afternoon. Mr. Chairman and members of the committee, my name is Martin
Goldsmith, and I am president and chief executive officer of the Albert Einstein Medical Center
ill Philadelphia. I am here today to address the Health Subcommittee of the House Ways and
Means Committee on behalf of the National Association of Urban Critical Access Hospitals, to
express our support for the vast majority of H.R. 3600, including its goals and its basic
approach, but also to describe to you how and why we fear that certain aspects of this bill will
jeopardize access to health care for the poor and elderly in America's inner cities. I also will
outline how this problem can be addressed and corrected.

About the Association

I would like to begin by telling you briefly about our organization. The National
Association of Urban Critical Access Hospitals was formed last year to represent urban
hospitals that depend to an unusual degree on government reimbursement for tlie care we
provide. This is the case because so many of the patients we serve are elderly and poor and
receive Medicare and Medicaid benefits.

We call ourselves "urban critical access hospitals" because we believe we are essential
to access to care for the residents of many urban communities. We define "urban critical
access" as consisting of the following qualities: our hospitals all are private, non-profit, and
located in cities as defined by the census bureau; we are reimbursed for at least fifty-five
percent of our patient days by the combination of Medicare and Medicaid, and at least ten
percent by Medicaid alone; and our total hospital days must be at or above the sixtieth percentile
of hospitals in comparably sized Metropolitan Statistical Areas (MSAs). In our view, the
combination of these characteristics maices us essential to access to care in our communities and
virtually irreplaceable to those communities. In many of those communities, in fact, urban
critical access hospitals fill the same role as that of public hospitals: we care for the poor, the
elderly, and the uninsured - that is, for people who frequently have nowhere el.se to go for
medical care.

Not many hospitals meet our criteria for "urban critical access hospitals." According to
our research, fewer than five percent of this country's hospitals, only 276 of 6600, qualify for
this designation.

Our View of Health Care Reform

As providers on the front line of the health care delivery system, we are enthusiastic
about the prospect of health care reform. Many of the reform proposals we have seen have a
great deal to offer, and most would be a vast improvement over the system we have today.

We are here today to speak about H.R. 36(X), which was introduced by Majority
Leader Gephardt, and again, we find a great deal to applaud in this bill. We iue especially

129

delighted by the steps it would take to bring health care coverage to unprecedented numbers of
Americans. We also support the portability of benefits it would provide.

Despite these significant improvements, we are troubled by several aspects of this plan.
Before we address those aspects, though, we want to reiterate our view that on the whole, this
proposal has great promise. We do not want that message to be lost amid everything else we
say today.

Summary of Three Major Problems in H.R. 3600

With that said, I would like to turn now to the three major problems we have identified.

First, we are gready troubled by the size of the proposed Medicare cuts and the uneven,
inequitable manner in which they would affect American hospitals.

Second, we believe that the plan may not address the uncompensated care issue as
completely as some observers feel and that this may cause continuing problems for some
providers, especially urban critical access hospitals, and for the largely low-income and elderly
communities that they serve.

And finally, we are concerned about several of the potential side-effects of how the plan
would serve Medicaid recipients.

Problem #1:

The Use of Medicare Funds to Finance Health Care Reform

■ The Unequal, Inequitable Impact of Proposed Medicare Cuts

Our first concern is the proposal to use reductions in the growth of future Medicare
spending to finance health care reform. These sizable and unprecedented cuts specifically and
directly hit urban critical access hospitals, and they would be devastating to us. The proposed
cuts in graduate medical education, indirect medical education. Medicare disproportionate
share, capital payments, and the rate of growth of future DRG rates especially affect hospitals
such as ours, and they clearly would hit us hardest. If adopted, they would fall most heavily
on urban critical access hospitals, tlie same hospitals that provide most of the care to the elderly
and the poor in our nation's cities. They would affect all hospitals, but they would hurt ours
the most.

These conclusions, moreover, are based not on assumption or conjecture but on hard
data. We suspected instinctively that these cuts would hurt us, but we knew we needed some
numbers to substantiate our fears. With this in mind, we made financial projections based on
H.R. 3600. Using the analysis of the Prospective Payment Assessment Commission,
testimony before this committee by Bruce Vladeck, administrator of the Healdi Care Financing
Administration, other publicly available information about the plan, and 1990 Medicare hospital
cost reports, we developed computer models to simulate the effect of the Medicare spending
cuts on all hospitals, not just on urban critical access hospitals.

The result of tliis modeling was startling - and bad news for us, exceeding some of our
worst fears. We found that together, all hospitals would lose an average of 7.16 percent of
their Medicare revenue a year for the first five years under H.R. 3600. As we feared, this
burden would not be evenly or fairly shared. Hospitals that are not urban critical access
hospitals would lose less than that average, only 6.93 percent, but urban critical access
hospitals would lose far more than that average -11.5 percent of their Medicare revenue a year
during the first five years. Our loss would be almost twice that suffered by other hospitals.

This country's urban areas and the hospitals that serve them would suffer extraordinary
financial losses. New York City's hospitals, and the city's economy, would lose an
astounding $4.4 billion, just in Medicare inpatient revenue, during the first five years, and
along with that money an as-yet uncalculated number of jobs. Other cities would suffer, too.
Philadelphia would lose $1.5 billion, Los Angeles $715 million, Chicago $1.3 billion, Boston
$954 million, Houston $575 million, and Seattle $316 million.

Not surprisingly, these lopsided geographic losses of Medicare revenue translate into a
simihirly skewed effect on individual hospital revenue. These spending cuts would cost the
average hospital that is not an urban critical access hospital 1.38 percent of its overall revenue,
but urban critical access hospitals would lose 2.37 percent. That may not sound like a big

130

difference, but it is when you consider that our loss would be seventy-two percent greater, and
it is when you realize that hospital operating margins typically are only in the lower single
digits.

■ The Financial Impact on Individual Hospitals

Let me give these numbers some immediacy with an example that hits very close to
home for me: how they would affect my own hospital, Albert Einstein Medical Center. In the
first year alone under H.R. 3600, we would lose $15.8 million. In the second year, we would
lose another $21.3 million. During the first five years under the plan, Einstein would lose
$140.5 million.

I do not think I have to tell you that this is an extraordinary amount of revenue for a
hospital to lose. Even so, I would like to take a moment to outline what that loss would mean
to a hospital such as Einstein and to all of the other urban critical access hospitals that would
find themselves in similar positions.

Those losses would come right out of our operating margins, which would decline and
in some cases disappear. Like many other hospitals, the losses we would suffer will exceed
any margins we have ever made. Without doing anything wrong, without failing to implement
cost-saving measures, without losing even a single patient, we immediately would fall a huge
step behind other hospitals in our service areas.

Operating margins are important to hospitals. They provide the cash fiow we need to
pay bills, service debt, and maintain our current facilities - that is, to pay for the things we
must do to ensure that those whose rely on us for access to the health care delivery system
enjoy the same high quality of care as everyone else. The money we need to provide these
services comes from our operating margins, but suddenly, those margins will be gone.

The losses we would suffer would be both absolute and relative. As I noted a moment
ago, we would lose much more on a dollar-for-dollar basis than other hospitals. For every
$100 in Medicare revenue that hospitals that are not urban critical access hospitals receive, they
would lose an average of $6.93; we would lose $1 1.50. This is a large and significant
difference.

But even that does not tell the entire story, because Medicare is a bigger and more
important part of our payer mix than it is at the average hospital. A hospital three or four miles
from us may receive twenty or thirty percent of its revenue from Medicare, but urban critical
access hospitals receive forty or fifty percent. This means that the difference between $ 1 1 .50
and $6.93 is multiplied many more times for us than for other hospitals.

■ The Impact on Urban Critical Access Hospitals

This difference has significant implications for the ability of urban critical access
hospitals to coinpete for patients. Keep in mind that one of the goals of hcaltli care refonn is to
eliminate cost-shifting. In the past, we would have sought to make up this difference by
passing it along to other payers. In fact, govemment, by underpaying us for Medicare and
Medicaid, has effectively encouraged us to do so. Now, though, government suddenly wants
us to reverse fields. In a managed competition environment, anyone who tries to pass along
costs to other payers will lose that competition and will not have other payers.

Consider, moreover, that one of the primary ways that we hope to control rising health
Ciue costs is tlirough greater use of managed care. In the future, hospitals will compete to be
parts of managed care networks, and that competition will really be decided based on just one
consideration: price. The hospitals that offer the best prices to managed care plans will
become part of their provider networks; the others will be left out in the cold.

But urban critical access hospitals are going to suffer significantly larger Medicare
losses that we will need to make up, so we will have to price our services accordingly. We
may have to charge a little bit more than hospitals that do not suffer those losses, or that lose
less. As a result, we may lose in our bids to become part of those networks. That is not
managing competition: it is limiting competidon.

There is a certain irony here that is hard to miss. Much of health care reform is about
using market forces to control escalating health care costs, but the very plan that purports to put
those market forces to work would put some of the competitors at a major disadvantage before
the competition even begins.

131

So what, you may ask. If managed competition means that a few hospitals fail and
close, is liiis really a problem? In theory it may not be, but in practice, it is.

By virtue of how we define ourselves, urban critical access hospitals play an unusually
large role in the care of the elderly and the poor in their communities. We are their essential
link to the health care community, in some cases their only link, because historically, just a few
of us provide most of the care to the elderly and the poor. Whether it is because our services
are more oriented to their needs or because our location is more accessible or because we have
consistently made a point of reaching out to them, we have become the primary providers for
many people.

If we are not there to provide this care, it is likely that no one else will be, either, that
no one else will be willing to step forward to fill the void that we would leave behind. The
proposed reform, in fact, would punish them for doing so. Having a health security card will
be meaningless if there is no one to provide care when people need it, so we think it does
matter whether our hospitals survive. We are irreplaceable resources in our communities.

While the proposed Medicare spending cuts could threaten hospitals that care for the
poor, providing unprecedented coverage and access to care for the uninsured at the same time
that we propose significantly underpaying for Medicare services could jeopardize access to care
for the elderly. If health care providers suddenly are paid much better to care for the poor than
for the elderly. Medicare recipients would become a much less attractive pool of patients for
providers.

For these reasons, H.R. 3600's plan to finance health care reform with cuts in future
Medicare spending could have the unintended effect of reducing access to care in our
communities. These cuts in graduate medical education, indirect medical education. Medicare
disproportionate share, capital payments, and the rate of growth of future DRG rates hit urban
critical access hospitals esf)ecially and disproportionately hard. They would jeopardize our
ability to compete in a managed competition environment and they would jeopardize our ability
to survive.

■ Impact on the Urban Poor and Elderly

Now, let us take a moment to look at what really matters: how all of these numbers and
projections and prognostications would affect the people and the communities we serve and
how we serve them.

TTiese changes most likely would have their greatest impact on the elderly and the poor.
The significant reductions in hospital revenue that I described will jeopardize the financial
wherewithal of many hospitals that care for especially large numbers of Medicare patients. In
some cases, those hospitals may have to reduce or eliminate individual patient services that lose
large amounts of money because of these spending reductions. Special outreach programs, for
example, or services designed specifically for the elderly, might have to be ended. In some
communities, lliat may even be a best-case scenario, because we believe that the proposed
Medicare spending reductions may very well force some hospitals to close entirely, leaving
large numbers of elderly patients to fend for themselves, to find new sources of care in an
environment in which new public policies have made Medicare recipients the least desirable
patients a hospital can attract.

In cities, moreover, elderly people tend to be low-income as well, and they tend to live
among other low-income people. This, in turn, means that if hospitals serving large numbers
of Medicare patients reduce services or close, the large numbers of poor patients that those
same hospitals serve also would find themselves suffering greatly reduced access to care.
Thus, for the elderly and the poor, health care reform, as currently proposed in H.R. 3600,
could be an unmitigated disaster.

H.R. 3600 provides for the designation of selected hospitals as "essential community
providers" and for those hospitals to receive special consideration when necessary. We believe
that urban critical access hospitals truly are essential community providers. We serve
unusually large numbers of people who are totally dependent on government for their medical
care; we do so in communities where there are no other providers, not enough other providers,
or where other providers specifically seek to avoid serving these patients; and our
disappearance would cause irreparable harm, leaving many of the urban low-income, elderly,
and poor without adequate access to medical care. By any reasonable measure, urban critical
access hospitals are essential community providers and deserving of such designation.

We do not believe for a moment that it is the Administration's intention to jeopardize the
future of these hospitals, nor do we believe it is this committee's desire. We share your
commitment to controlling healtli care costs, but not at the expense of reducing access to care.

132

If we do, we truly will control costs, because for some people, there will be no care, and from
tlie narrow perspective of those who keep the books on these tilings, no care will cost us
nothing, although we would pay a fearsome price of an entirely different kind.

■ Our Recommendation

To address this problem, we propose that urban critical access hospitals be
among those designated as "essential community providers" under H.R. 3600 and
thai hospitals with such special missions be accorded appropriately special consideration. The
Medicare reimbursement provisions ofHR. 3600 then would be re-evaluated and readjusted
with the unique situations of these hospitals in mind. Further, because it may be difficult to
predict whether the adjustments ultimately made will adequately resolve the problems they were
implemented to address, additional provisions should be made to monitor their
effectiveness through a specifically designated mechanism such as an annual
review or report to Congress; those same provisions should authorize the Administration
to make any adjustments found necessary based on these reviews. Such steps are
essential if we are to assure tliat health care reform reaches the inner-city communities where
such reform is needed most.

Problem #2: Continued Uncompensated Care

The second issue I would like to address today is what we fear will be a continued
problem with uncompensated care.

Beyond any reasonable doubt, H.R. 3600 would, if enacted, greatly reduce
uncompensated care. Contrary to what has been suggested, however, uncompensated care
would not disappear completely, and its continuation would most affect urban critical access
hospitals.

■ Four Areas Where Uncompensated Care Will Continue

Uncompensated care would endure through four primary means.

First, most health care plans would require their members to make co-payments and
reach deductibles, yet some people, especially the poor and the unemployed who are not
eligible for Medicaid or other government subsidies, would not be able to afford these
payments. Hospitals would be expected to absorb those costs.

Second, some people would be unable to purchase health insurance or would choose
not to do so, but they would continue to seek care. When they do, hospitals will not turn them
away; again, they would provide the care and absorb the cost of doing so.

Third, some Americans are "lost" today. They are not employed, so they would not be
covered through their place of business; they are not old, so they would not be covered by
Medicare; and while tliey are poor, they do not receive Medicaid or other government benefits.
Most are homeless, and when they come to a hospital, they would be lost no longer. At that
point, they would join tlie ranks of the insured, but the cost of their first hospital visit, whether
for a scrape suffered in a fall or a near-fatal illness, may have to be absorbed by the hospital.
Insurers may not be expected to provide retroactive coverage for new enrollees.

Fourth, this country has a significant number of undocumented aliens who would not
be covered by health reform. While H.R. 3600 proposes some funding for the care of
undocumented aliens, that sum is nowhere near the cost of the services that those individuals
would consume. As a result, undocumented aliens would continue to receive hospital care, but
hospitals would not be paid for their services.

All of the groups that avoid the umbrella of protection raised by health care reform - the
poor, the lost, and the undocumented - can be found in especially large numbers in America's
cities. In those cities, the same basic core of hospitals - critical access hospitals - would be the
providers to which they tum. Consequently, urban critical access hospitals would bear a
disproportionate share of the cost of caring for them.

Again, you may question whether this really is a problem, and again, we must express
our view that it is. One of the ways that H.R. 3600 seeks to contain rising health care costs is
by fostering price competition among health care providers. By failing to accommodate tlie
remaining uncompensated care, the plan would add to the operating costs at a relatively small
number of hospitals, placing those few hospitals - mostly, urban critical access hospitals - at a
decided financial disadvantage before the competition even begins. In so doing, it threatens the

133

financial survival of tlie very hospitals that are and will continue to be the providers of choice
among the poor and the elderly in most American cities.

We also must not lose sight of the human factor. Under these circumstances, some
people who cannot afford insurance or co-payments or deductibles will try to put off seeking
medical attention for as long as they can. Some who are sick will get sicker, some who have
contagious diseases will pass them along to others; some who support families will no longer
be able to do so; some who are pregnant will give birth to unhealthy babies; and some who
have treatable diseases will die. This should not be the legacy of health care reform. We can
do better, and we must.

■ Our Recommendation

Tlie National Association of Urban Critical Access Hospitals supports H.R. 3600's
goal of ensuring universal access to health care yet notes that the bill does not guarantee actual
health care for all. The Association feels that providers must be adequately reimbursed
for the uncompensated care they provide, regardless of to whom they provide
it. Anything less leaves just a few hospitals, America's urban critical access hospitals, to
sitoulder a financial burden that should be the entire country's to bear.

Problem #3: How the Reform Proposal Would Affect Medicaid

Finally, I would like to turn to the manner in which H.R. 3600 deals with Medicaid.
Because Medicaid does not fall under the jurisdiction of this committee, 1 will touch on this
subject just briefly.

■ The Premature Phasing Out of Medicaid Disproportionate Share

Our first concern is the bill's call for phasing out Medicaid disproportionate share
payments by 1997. While we understand the rationale for ending these payments, we are
mystified by the timetable for their termination.

Even the most optimistic estimates do not envision the full implementation of universal
healtli insurance by 1997. Consequently, Medicaid disproportionate share payments could be
eliminated well before the changes that are supposed to make their elimination possible are even
implemented. Tliis may leave a gap of a period of years during which disproportionate share
hospitals would continue caring for unusually large numbers of poor patients without the
supplemental support of their Medicaid disproportionate share payments. This could place an
enormous financial burden on these hospitals - especially on urban critical access hospitals,
with their large numbers of Medicaid patients.

■ Our Recommendation

The National Association of Urban Critical Access Hospitals believes that Medicaid
disproportionate share payments should not be phased out before the rest of
the reform plan, including universal health coverage, is phased in. To do

otherwise could expose disproportionate sliare hospitals, and especially urban critical access
ho.tpitals, to potentially devastating financial losses. This, in turn, could jeopardize access to
care in the communities that these hospitals serve.

■ Providing Private Insurance for Medicaid Recipients

We also are concerned about how H.R. 3600 may change the way Medicaid recipients
are served. Under the plan, Medicaid recipients would join the premium-paying public in
choosing from a selection of insurance plans. Their choice, though, would be limited to plans
that are at or below the weighted average of cost for plans available through their health
alliances.

We believe this fxjiicy may have the unintended effect of creating Medicaid-only health
plans. Because Medicaid recipients would be required to choose from among the lowest cost
plans, they may, from the very beginning, constitute unusually large proportions of the
members of those plans. Eventually, we believe those plans may come to be viewed as plans
primarily for Medicaid recipients and that people who have a choice may specifically choose
not to join these "Medicaid plans."

134

The result could be that some plans may consist primarily or even entirely of Medicaid
recipients. We believe this could have a very undesirable effect. Historically, the poor are
sicker than others and correspondingly more costly to treat. As a result, we may be directing
the most expensive patients into the lowest-cost plans. Because they have the lowest
premiums, those plans may have to pay the lowest rates to their contracting providers. Thus,
hospitals that care for Medicaid recipients could be responsible for the extra costs incurred
through the higher utihzation that comes with treating a poorer, sicker population, as well as
for tlie kinds of supplemental services that many Medicaid recipients need but that are not
reimbursed by Medicaid or other payers - services such as outreiich efforts, home visits, and
providing money for carfare or day care to enable patients to keep appointments with their
doctors.

And who will those providers be? In many cases, they will be us: America's urban
critical access hospitals. We are the providers of choice for unusually large numbers of
Medicaid recipients today, and we are likely to remain the providers of choice for them
tomorrow as well.

■ Our Recommendation

In the past, Congress fias made it clear that it does not approve of Medicaid-only
managed care plans. We have regulations against their use, and obtaining a waiver from those
regulations is extremely difficult. While HM. 3600 does not explicitly call for the creation of
Medicaid-only plans, we believe that it ultimately may have that effect. We believe that any
new method of providing health care coverage to Medicaid recipients should
ensure that Medicaid-only health plans do not develop. Only through such a policy
can tlie prospect of such plans and the continued inadequate reimbursement for Medicaid
services be prevented. In addition, a means should be devised to assure adequate
reimbursement to hospitals for the full cost of treating Medicaid recipients.

Summary of Recommendations

• Classify urban critical access hospitals as "essential community providers," a
designation created in the bill.

• Alleviate the devastating impact of the proposed Medicare cuts by reducing
those cuts. If that is not possible, refocus the proposed cuts in graduate
medical education, indirect medical education. Medicare disproportionate
share, capital payments, and the update factor so they do not have as
devastating and disproportionate an impact on urban critical access
hospitals.

Develop a mechanism to reimburse urban critical access hospitals for the
disproportionately large amount of uncompensated care they would continue
to provide under H.R. 3600. This mechanism only needs to bring their
uncompensated care obligations in line with those of other hospitals; it does
not have to eliminate those obligations entirely.

• Refrain from phasing out Medicaid disproportionate share payments to these
hospitals until everyone, including all Medicaid recipients and tlie
uninsured, has complete access to health insurance. Currently, there would
be a gap between the end of disproportionate share payments and the
beginning of universal insurance coverage, leaving urban critical access
hospitals responsible for millions extra in uncompensated care.

• Create a means of assuring tliat the requirement that Medicaid recipients
choose from among health plans at or below the weighted average of cost
among those offered by their health alliances does not result in the de facto
creation of "Medicaid-only" health plans.

• Devise a method of adjusting risk for providers that serve Medicaid
recipients. Historically, Medicaid recipients are more expensive to treat than
the general population, so a mechanism is needed to protect insurers that
pay for their care and providers that deliver that care.

• Create a statutory mechanism that directs the Administration to conduct periodic
assessments of the impact of the changes outlined above on urban hospitals and the
delivery of urban health care and to report those results to Congress. This
mechanism also should authorize the Administration to make any adjustments
necessary based on the results of these reviews. The purpose of such review is to

135

ensure that tliese changes are having the desired result, that the finances of urban
critical access hospitals are not jeopardized, that the urban elderly and poor continue
to have appropriate access to medical c^e, and that those hospitals are neither over-
compensated nor under-compensated for their special role in serving the urban
elderly and poor.

Conclusion

As I noted a few ininutes ago, our organization views many aspects of H.R. 3600 with
great enthusiasm. By appearing before this committee today, we hope only to call attention to a
few of the bill's shortcomings, not to suggest that it be discarded entirely. We also urge you to
act to pass health care reform this year; this issue is too important to wait another year.

As it is written today, H.R. 3600 could seriously jeopardize access to care in many
American cities. It would penalize hospitals that care for large numbers of elderly and poor
patients by detracting from their ability to compete for the opportunity to care for patients who
are neither old nor poor, and this, in turn, could jeopardize access to care for the urban elderly
and poor. It would leave some hospitals, mostly urban critical access hospitals, with an
enduring uncompensated care problem while declaring this problem to be cured, and this could
lead to new health problems among those who lack the meaiw to pay their share of their health
care expenses. And it would threaten to create a two-tiered health care system in which
Medicaid recipients are alone in the second tier.

All of these problems are very real, and they concern us greatly, but we think that with
proper attention, all of them can be rectified. By designating urban critical access hospitals as
"essential community providers" under existing provisions of H.R. 3600, special efforts can
be launched to refocus the cost-savings provisions of the proposed Medicare spending
reductions so that they do not have a devastating impact on the very providers most involved in
caring for the urban elderly and poor. In so doing, we can ensure that health care reform
reaches the inner-city communities of America, where it is needed most.

We look forward to an opportunity to work with this committee, others in Congress,
and the Administration to address these problems and move forward with reforms that truly
benefit all Americans.

136

Chairman STARK. Mr. McNamara.

STATEMENT OF HON. EDWARD H. MCNAMARA, COUNTY
EXECUTIVE, WAYNE COUNTY, MICH.

Mr. McNamara. Mr. Chairman, members of the subcommittee,
thank you for allowing me the opportunity to testify before you
today. In Wayne County, Mich., we have for the past 7 years been
tackling many of the problems of urban health care delivery that
have now moved to the front of national debate. I am hopeful that
some of our experiences may help your discussions.

With more than 2 million residents, including the city of Detroit,
Wayne County is Michigan's largest county and America's 8th larg-
est county. We have every problem of size, poverty and economic
development that you can imagine, but we have also been success-
ful in addressing many of these challenges in a productive and
cost-effective manner.

We are here today because President Clinton's health care re-
form legislation calls for a radical overhaul of the Nation's health
care system. We have already done that. While media attention
was focused on other programs in New York and Hawaii, we think
we have had some useful experiences in health care reform in
Wayne County. We believe it would be helpful for us to tell you
what we have learned along the way.

As Congress moves forward with consideration of health care re-
form, our experience in managed health care can serve as a na-
tional demonstration of delivering health care to the medically un-
insured and underserved. If our experience can make your way
easier, we are at your service to provide information. In other
words, we have already groped around in the dark on this matter,
stubbed our toes, banged our heads and now that we found the
light switch, we hope we can help you avoid some stumbles in the
path to health care reform.

Wayne County supports managed care as an effective way of pro-
viding health care to poor urban residents and controlling govern-
ment costs. When I took office in 1987, Wavne County faced a defi-
cit of $135 million, due largely to uncontrolled indigent health care
costs. Until that point, our poorest residents had no access to pre-
ventive health care. A woman with high blood pressure couldn't get
medication to control it. She had no guaranteed access to treatment
until she had a stroke and was taken to an emergency room. A
man with diabetes had no doctor to write regular prescriptions for
insulin. He needed to go into insulin shock and head for the emer-
gency room. As you well know, emergency room care is as expen-
sive as it gets. Untreated illnesses were killing our residents and
the cost of the treatment was killing us.

Wayne County has no deficit today, thanks in large part to
CountyCare, the managed care program for indigents we instituted
in 1988. CountyCare was one of the first programs in the Nation
to provide a comprehensive range of inpatient, outpatient, and
home care service to the indigent population. Nearly 50,000 enroll-
ees are members of our managed health care system which pro-
vides an HMO type approach to delivering health care services.

Under CountyCare, we bid our service contracts to private sector
health care providers who treat enroUees for a flat rate of $80 per

137

month per person. This puts the incentive on providers to offer con-
venient, preventive care. It is far more profitable to pay for blood
pressure pills than heart surgery. As a result, enrollees are treated
with respect, dignity, and old fashioned customer service.

Each CountyCare enrollee membership card gives them access to
geographically convenient clinics and a 24-hour hotline. Services of-
fered include office visits, outpatient treatment, hospitalization,
prescription drugs, vision, and hearing services and dental care.

We have few cases of enrollees abusing the privilege of the sys-
tem. Instead, people seem to take advantage of the opportunity to
take better care of themselves. We have reduced the average length
of hospital stays by 1.1 days and our annual costs have increased
by an average of only 1.5 percent. That compares favorably with
the annual rate of increase of more than 11 percent for Michigan's
Medicaid program.

CountyCare and its current successor, renamed PlusCare, have
had positive effects in a wide range of areas. The program has
helped the financial health of our hospitals in Wayne County,
which have seen a decrease of more than $100 million a year in
unreimbursed cost due largely to decreased emergency room visits.
County health care providers have created jobs. Our $135 million
deficit has been eliminated and indigent health care costs are prob-
ably less of a concern today than employee health care costs.

Our success with CountyCare has inspired us to attempt a log-
ical expansion of the managed care system into an area of health
care for the working poor. Wayne County's health choice program
will commence operation this month. In its pilot phase, four health
care providers will offer services for up to 8,000 low-wage workers
for a single rate of $108 per person per month.

Before I give brief details of this program, let me explain why we
are doing this. There are more than 1 million uninsured persons
in the State of Michigan and 150,000 of them are in Wayne Coun-
ty. That is a disturbing figure.

More disturbing is the fact that two-thirds of Michigan's unin-
sured adults have jobs. Almost 60 percent have high school or col-
lege degrees. These people are caught in a trap. They earn too
much to be eligible for traditional public sector health care like
Medicaid, Medicare and PlusCare, but their low-wage jobs make in-
surance impossible. One serious illness may mean unemployment
and a whole wave of new public costs to support that person.

Wayne County targeted this population with the health choice
program. The attractions to employees are obvious. We felt employ-
ers would be attracted by the prospect of offering the sort of bene-
fits that would significantly reduce turnover and training costs. A
qualifying employer is one who has no health plan for its employ-
ees since January 1993, 90 percent or more of its employees must
be located at a workplace in Wayne County. The company must
employ at least five people and not less than 50 percent of all em-
ployees must have an hourly wage of $10 or less.

Qualifying workers must be without health care benefits and in-
eligible for Medicare or Medicaid, ineligible for other employer
sponsored health care coverage, work an average of 20 hours a
week or more, and enjoy an anticipated work future of more than
5 months.

138

The premium fee structure is one-third employer paid, one-third
employee paid, one-third health choice subsidy. Covered services
include office visits, outpatient treatment, hospitalization, prescrip-
tions, ambulance services and home care services. Supplemental
services can be purchased by enrollees for physical therapy, dura-
ble medical equipment, vision, contraceptives and unlimited hos-
pital stays.

HealthChoice is employer driven. You can't sign up for the pro-
gram unless your employer does. We are currently marketing the
program to such employers as fast food outlets, family owned Dusi-
nesses and service industries.

We think HealthChoice is a positive step forward, but it will not
solve all the health care problems of Wayne County's uninsured
population. Financing, health status and access issues must be ad-
dressed at a State and Federal level. At Wayne County, we actively
support ongoing efforts to address these problems. We believe our
programs can serve as a national demonstration available for dupli-
cation in other areas of the country. We have learned a lot about
the challenges of serving this population and we look forward to
sharing our lessons. Our Congress continues the debate on health
care reform.

Wayne County is proud to be in the forefront of change. We are
concerned about access to care, especially to urban residents. We
endorse universal coverage and applaud the efforts of the adminis-
tration and Congress to resolve this longstanding problem.

Congress must face up to the challenge. Municipalities have
struggled with horrendous financial problems created by unfunded
Federal mandates. In the Federal haste to eliminate disproportion-
ate share hospital payments and the Medicaid program itself, mu-
nicipalities must be protected against increased financial burdens
caused by uncompensated care or underfunded initiatives.

We urge that any health care legislation passed by Congress
allow local jurisdictions the flexibility and creativity to tailor our
solutions to health care problems to local needs. Specifically with
respect to establishing regional health care alliances, we ask Con-
gress to consider an option that allows municipalities, such as
counties, which meet certain size and demographic requirements,
or with significant experience in managing health care, to be quali-
fied by statute for a designation as a regional health care alliance.

Wayne County, with a population larger than 16 States, must be
allowed to tailor our programs to the needs of our citizens, employ-
ers and government. We should not have to depend on the State
of Michigan to design our programs for us. We are prepared to
meet specific Federal standards. We need the flexibility to meet
those standards with a system that will work in an urban area that
bears few resemblances to the rest of our State.

Wayne County supports the public health related improvements
in the President's plan. Given Wayne County's large indigent popu-
lation, the essential community provider provisions of the legisla-
tion are also of pivotal importance. The experience and success we
have had in and the coalitions we have built with CountyCare,
PlusCare and HealthChoice, position Wayne County to serve as a
demonstration to the Nation of how to design and operate a man-
aged health care system that works.

139

We appreciate the opportunity to share our experiences with you
and hope we can be of continuing services as this critical debate
moves forward.

Thank you.

Chairman Stark. Thank you. In CountyCare or PlusCare, you
pay a flat rate of $80 per month per person. Who do you pay that
to?

Mr. McNamara. You pay it to a health care provider. There are
four health care providers that have bid competitively, and of the
50,000, each one has in the neighborhood of about 12,000 patients
or

Chairman Stark. They provide primary care as well as special-
ists?

Mr. McNAMAitA. Yes.

Chairman Stark. They provide hospitals?

Mr. McNamara. They in turn contract with hospitals to provide
that service.

Chairman Stark. And there is no cost to the county?

Mr. McNamara. The county puts $15.5 million in the program
each year.

Chairman Stark. $15 million?

Mr. McNamara. Yes, but we know that it is costing us $15 mil-
lion. Seven years ago, it was costing us $22 million.

Chairman Stark. So about $300 a head of county resources in
addition to about $1,000 that you pay, no other costs. So you are
averaging $1,300.

Mr. McNamara. It is roughly $1,000 per year per capitated per-
son in the program.

Chairman Stark. That is the $80 you pay.

Mr. McNamara. Yes.

Chairman Stark. What about the $15 million?

Mr. McNamara. Mr. Chairman, the $15 million is a part of the
total cost of the program. We put $15 milHon in. The Federal Gov-
ernment puts — matches a portion of that. The State puts $7.5 mil-
lion in for a total of about $51 million.

Chairman Stark. $51 million?

Mr. McNamara. Of that— that is correct. We serve almost 50,000
people.

Chairman Stark. So that is where you get your $1,000?

Mr. McNamara. Yes.

Chairman Stark. That is what I couldn't quite add up.

How are you doing in your new plan, HealthChoice? As I read
it, if the employer decides he doesn't want to spend any money, you
can't get in. In other words, the employer has to participate.

Mr. McNamara. That is correct. It is employer driven. We have
several very interested employers, such as Little Caesar's, and I
think what they see is a program that permits them to keep em-
ployees that might otherwise leave the employ and go on to a

Chairman Stark. How long have you had the enrollment open in
this?

Mr. McNamara. It has been open about 30 days and we have
about seven prospects. Again, the people that are going to sell this
program are the health care providers that we have designated to
go out and search out

140

Chairman Stark. I will tell you what is happening in California.
I can't compare the plans, but the State has got some kind of a new
HIPC for the same population. If there are 35,000 enrollees now
and only 3,500 of them are previously uninsured, the rest of them
are all just employers who switched to this plan because it is
cheaper, and I at that rate, we figure it will take about 83 years
for California to cover its uninsured, but I hope you have better
luck than we are having in California.

I am — a bit of nostalgia here. Jim, as you know, I was born in
what is now Mount Sinai and had my tonsils out in Mr. Vice's hos-
pital, and was a member — auxiliary member I suspect — of the Ca-
melia or Azalea branch, whatever those things were in Children's
Hospital 1,000 years ago, although I am not sure I did my fair
share, and I welcome these hospitals here.

I would ask Dr. Staggers and Mr. Vice that, you are worried
about this essential community designation, but that is only critical
if we have managed competition approaches, isn't it? You get paid
under Medicare and Medicaid now. You don't need any special des-
ignation, right?

Mr. Vice. I guess my comments are we get paid under Medicaid
now.

Chairman Stark. I am not talking about the amount. I am just
saying if you don't get into managed competition, you aren't going
to get paid any more by Aetna than you do by Medicaid. Don't hold
your breath.

Dr. Staggers, same thing is true for you. If we go on with the
insurance and the reimbursement systems as they are, you don't
have to be designated anything.

Ms. Staggers. Well, I am not sure that is — our experience has
been that there is still this whole issue of nonpediatric hospitals,
the adult facilities being able to take as good care of children as
children's hospitals can. Same with private insurance companies,
the issue has come up, so I am not sure it has to do

Chairman Stark. Private. It doesn't come up with Medi-Cal or
Medicare.

Ms. Staggers. With the whole managed care movement

Chairman Stark. That is what I am saying. If you get managed
care out of here, you don't have any problem. Blue Cross pays you,
right?

Ms. STAGGEits. Theoretically, you are right.

Chairman Stark. Medicare pays you, Medi-Cal pays you.

Ms. Staggeils. That is true.

Chairman Stark. I am not going to argue about the rates with
Mr. Vice either. Kaiser doesn't pay you, or very seldom, right?

Ms. Staggers. Right.

Chairman Stark. And I don't know who you get as a big HMO
in Milwaukee, but they aren't coming to you very often, I would
imagine, either, are they?

Mr. Vice. We see more and more of them in negotiating. Get us
all back to managed care. If managed care is not there, it won't be
as bad.

Chairman Stark. That is what I wanted to hear. Let's have that
answer again for the record. If managed care isn't there, it what?

Mr. Vice. Won't be as bad.

141

Chairman Stark. All right. That is what I thought you wanted
to say.

I don't know. Mr. Goldsmith, you anticipate some losses. Do you
think that those will mostly come from that reduction in the dis-
proportionate share adjustment?

Mr. Goldsmith. Well, we are looking at all the reductions, the
Med Ed reductions, the dis-share reductions really across the
board, and they are obviously very substantial and hit our mem-
bers very, very hard.

Chairman Stark. Jim, you give us a pretty graphic picture of the
neighborhood around the area in which Mount Sinai exists, and it
still has an emergency room, right?

Mr. Moody. It does.

Chairman Stark. The only other place is County Hospital way
out for the next emergency room going west?

Mr. Moody. Well, there are — Columbia and St. Mary's have
emergency facilities, too, on the east side. There is a very well-
known burn center in St. Mary's, for example.

Chairman Stark. St. Mary's on North Avenue, right by the wa-
terfront?

Mr. Moody. Right, exactly.

Chairman Stark. Then you go to the south side.

Mr. Moody. On the south side, there are several.

Mr. ViCK. I have got to add, Mr. Chairman, we work with Sinai
and actually run an urgent care clinic in the evenings and week-
ends adjacent to their ER so we can help them with the children
there.

Chairman Stark. I don't know what kind of managed care
groups you have showing up in Milwaukee. I am more familar with
Dr. Staggers. It isn't so bad. I just don't know how many of them
actually refer to Children's. I doubt if Kaiser does. In our county,
half the people belong to Kaiser, half.

Ms. Staggp:rs. Yes.

Chairman Stark. So you are dealing with the other half of the
people, and I don't suppose anybody else has the hospital resources.

Ms. Staggkrs. No, but

Chairman Stark. They own. So you get your crack at the other
half of the kids.

Ms. Staggers. Right, but there is some Kaiser crossover. As I
said, since I am in adolescent medicine, if you don't want to be seen
because your parents are at Kaiser, your family is at Kaiser, you
would come into Medi-Cal and see us.

Chairman Stai^k. Is that the Medi-Cal rule? You have just got
to be under 18?

Ms. Staggers. It is 12 to 18 for confidential services.

Chairman Stark. That is good. Jim, I wish you were still here
to help us get this problem worked out.

Mr. Moody. Thank you very much.

Chairman Stark. We are going to have a tough time. I think
that the hospitals that you all represent are ones that we will — in-
sofar as this subcommittee is concerned — do our best to see that
you continue to get funded. I think you will have better luck with
us than you will with Prudential, but vou can take vour choice, and
like my friends in the previous panel who decided to endorse the

142

President's plan, I wish them a lot of luck, but I think if they will
think it over, they have had better luck with this committee then
they are ever going to get out of the Jackson Hole group. Of course,
it is a free country and you can take your choice.

Mr. McNamara has decided to do it on his own and not wait. I
presume that you wouldn't like a mandatory alliance forced on the
State of Michigan because then you would have to comply with
that and you would just as soon have the flexibility to work out
programs that work best for Wayne County, is that your

Mr. McNamara. Well, obviously we believe that health care
should be there for everyone, whether they like it or not, but cer-
tainly we would like to work them out. We think that if the user
does have some input in the form of contribution, it is going to be
a more effective plan and it is probably going to be a little more
cost contained than some of the Blue Cross plans that are out there
floating around today.

Chairman Stark. Do you still have to operate a county hospital,
a municipal hospital?

Mr. McNamara. We sold it 7 years ago. We have the medical
center that is made up of numerous hospitals that are part of this
prograni and benefit from it.

Chairman Stark. I want to thank you all for your assistance. I
hope that whatever we do the next month or so, I am quite sure
it will take care of the concerns that you represent. Whether we
can hang on to that as we wind through the procession of the other
committees and the other body is another question. But we will try
and we appreciate your assistance here today.

Thank you very much. The committee is adjourned.

[Whereupon, at 5:30 p.m., the hearing was adjourned.]

[Submissions for the record follow.]

143

ADA SHEN-JAFFE

EVERGREEN LEGAL SERVICES

YAKIMA-KITTITAS OFFICE

510 LARSON BUILDING

e SOUTH SECOND STREET

YAKIMA. WASHINGTON 98901

February 25, 1994

Chairman Pete Stark

Subcommittee on Health

House Ways and Means Committee

1114 Longworth House Office Building

Washington, D.C. 20515

Attention: Janice Mays and Tricia Neuman

RE: Health Care Reform and American Indian/
Alaska Native Populations: The
Federal Obligation to Preserve
and Enhance Indian Health Programs

Dear Chairman Stark:

We have participated in numerous National Indian Health Care
Reform meetings and discussions in the past 12 months. We have
also reviewed the National Congress of American Indian (NCAI)
December 3, 1993, resolutions regarding health care reform, and
January 31, 1994, testimony of NCAI and the National Indian Health
Board before the Senate Committee on Indian Affairs. While we are
writing specifically in behalf of our low-income American Indian
clients, we are confident that our views are largely shared by
national Indian leaders.

We ask that the following comments be added to the record of
your January 31, 1994, hearing on Health Care Reform and Urban and
Rural Populations. This letter discusses the unique and overriding
obligation of the federal government has to promote and enhance the
Indian health care delivery systems and several important Indian
issues which we believe would arise under your proposal (as we
understand it) to join Medicaid with Medicare into a new federal
program.

The Federal Government Is Obligated To Enhance Indian Health
Programs

The Administration's Health Security Act, H.R. 3600, expressly
acknowledges the unique status of Indian health programs, but
further reduces funding to already underfunded Indian health
programs and otherwise weakens the Indian health care delivery
system. Other health care reform bills have no language describing
Indian health programs' interrelationship with new health care
delivery systems. We are greatly concerned that no federal
proposal for health care reform has adequately recognized the
federal government's moral and legal obligations to provide health
care for Indians and Alaska Natives.

144

The federal government's unique obligation to provide health
services to American Indians and Alaska Natives should not be
jeopardized by including the Indian health care in either one
national health care reform plan or in a separate plan for rural
and urban populations, without consideration of the legal, moral,
and cultural reasons for maintaining a separate, strong Indian
health care system. Nor should health care reform be used to
further cut back resources to Indian health programs which are
already greatly underfunded.

Congress and the federal courts have protected the sovereignty
of Indian tribes for 170 years. Congressional statutes and
appropriations have been used to provide health care for Indian
people even longer. The promise of health care was a major element
of the treaty negotiations of the last century, in which Indian
tribes ceded vast tracts of land to the federal government and non-
Indian settlers. Senator Inouye calls health services to Indian
people "the nation's first prepaid health plan."

The Indian Health Care Improvement Act of 1976 was Congress'
first attempt to codify the broad scope of the federal obligation
to provide health care to Indian people. It does not repeal or
replace the earlier treaties or congressional declarations. The
1976 statute does provide a useful definition of the federal
government's obligation to provide Indian health care, which should
not be overlooked during the current health care reform debate:

(a) Federal health services to maintain and
improve the health of the Indians are
consonant with and required by the Federal
government's historical and legal relationship
with, and resulting responsibility to, the
American Indian people.

(b) A major national goal of the United States
is to provide the quantity and quality of
health services which will permit the health
status of Indians to be raised to the highest
possible level and to encourage the maximum

participation of Indians in the planning and
management of those services.

25 U.S.C. §1601

The federal government has committed itself to providing localized,
culturally appropriate health services to Indian people and to
assuring that the services are increasingly provided by Indian

145

professionals and, at the tribe's option, through Indian-controlled
programs. While inadequate funding has been a chronic problem, not
until the current health care reform debate has the federal
government ever wavered in its support for independent Indian
health programs.

The importance of culturally-appropriate health services for
Indian people, especially for the many of our clients who are
elderly, cannot be overemphasized. They need health services which
are based in their community and where Indian culture is understood
and respected. Many tribal elders need interpreters for languages
that are unwritten. Fluent English is spoken by relatively few.
It is not fair to them to be forced to turn to health care
providers who do not possess the deep and broad sensitivity of
existing Indian health programs.

Indian Health Programs Need Better Access To Federal Medicaid and
Medicare Funds

Indian medical services through IHS are limited by very
inadequate budgets. To stretch its limited budget, IHS has
declared itself to be a "payor of last resort." This unpopular
policy requires Indian health programs to look first at Medicaid,
Medicare, and private insurance reimbursements before spending IHS
funds for medical services.

Because of the "payor of last resort" rule, Indian programs
are very affected by Medicare and Medicaid reimbursement rates and
by the relationship of the federal government to state Medicaid
programs. Your Subcommittee's Medicaid and Medicare proposals
could provide badly needed increased revenue to Indian health
programs .

As we understand your proposal, Medicaid, except for long-term
care, would become a fully-federal program and would be folded into
a new program possibly called Medicare Part C. We can see two
potential improvements for Indian health programs:

(1) Reduction of State Involvement in Medicaid

If Indian health program must depend on Medicaid revenues then
the Medicaid monies should be more accessible. Presently Indian
patients must apply separately to the state Medicaid program and to
IHS for coverage of medical expenses incurred outside of Indian
health facilities. Development of a single IHS Medicaid
application/screening instrument has long been needed for use by
Indian programs, but remains unfeasible if 50 different state

146

Medicaid eligibility standards are involved, as present. A single
federal Medicaid/Medicare program would be in a much better
position to coordinate health coverage with Indian health programs
than are the 50 states.

A second major problem that arise with state Medicaid is the
requirement of a state percentage Medicaid contribution. Because
the states do contribute to Medicaid costs, tribal programs must
have state consent to access Medicaid monies. The federal Medicaid
statutes allow 100% Medicaid reimbursement for medical services
performed at an Indian Health Service facility , but the same full
reimbursement rates do not apply to tribally-funded health
facilities. 42 U.S.C. §1396d(b) . Thus most tribes may only access
Medicaid under state guidelines.

While some tribes have the technical resources and/or a
political relationship with their state which allow them to work
out acceptable agreements regarding access to Medicaid monies, most
tribes do not. Again, we believe a chance to deal directly with a
single, federal program on reimbursements or direct funding for
Medicaid-type services would be a great improvement for most Indian
health programs. The higher federal rate of reimbursement would
also benefit Indian programs (state reimbursement under Medicaid is
usually lower) .

(2) Greater Access to Medicare Funding

We hope that health care reform will also give Indian health
programs better access to Medicare resources. The present system
of Home Health Care Agencies, for example, is too highly regulated
and expensive for Indian tribes (even the largest, the Navajo
Nation) to administer. Further, Indian programs without IHS
hospitals or facilities are not eligible for Medicare
reimbursements at all. We hope, in developing a proposal for a
Medicare/Medicaid combined program, that the final program funding
would be much more reasonably accessible to Indian health programs.

Health Care Reform or Wrap-around Coverage Should Not Be Paid for
from Existing or Future Indian Health Service Budgets

Indian Health Programs need assurance that federal funding for
any standard benefit package or wrap-around benefit package will
not diminish the Indian Health Service Supplementary Benefit
appropriations. One of the distinguishing features of Indian
health programs is its own type of wrap-around services which have
developed in response to the unique legal status and unusual health
problems of Indian people. For example, IHS has a highly developed

147

public health delivery system with a heavy emphasis on preventative
health care, and a safe water and sewage program that funds well
digging and installation of septic tanks in rural areas.

Tribal leaders are greatly concerned that existing and future
funding for IHS supplementary services will be diverted to cover an
expansive standard medical benefit package under health care
reform. Funding for health care reform should increase services to
Indian health consumers so that existing IHS funding can be used to
finally meet its obligation to provide the IHS supplementary
services package. One example of current underfunding: the IHS
sanitation program is presently underfunded by $1.64 billion, IHS
has budgeted only $600 million over the course of a 10 year plan to
meet this critical need, and the Administration has requested no
sanitation funding in its FY 95 IHS budget. If additional federal
money is available to pay for present IHS medical services under
health care reform, then IHS should be better able to more
adequately fund its existing supplemental benefit programs.

We hope that you include Indian leaders and Indian
organizations in your discussions of health care reform. Please
call us if we can provide more information, or contact Gordon
Belcourt, Executive Director of the National Indian Health Board
(303-759-3075), or Rachel Joseph of the National Congress of
American Indians (202-546-9404) . All Indian leaders are greatly
concerned that American Indian and Alaska Native health care needs
are not being given adequate consideration in the national debate
over health care reform. We would be happy to work with your
Subcommittee to help ensure that its proposals enhance present
Indian health care delivery systems.

Helen Spencer "^
Evergreen Legal Services
Native American Program with

Thomas N. Termaine
Spokane Legal Services,

Steven C. Moore
Native American Rights Fund
SuDDort Center

National Congress of American Indians
National Indian Health Board

148

STATEMENT OF GEISINGER FOUNDATION

The Gelsinger, Health Care System ("Gelsinger") wishes to provide this written
statement on the health reform issues relating to rural communities.

Geisinger, as a rural health care system, serves approximately 2,300,000
residents in a 31-county region of central and northeastern Pennsylvania.
Geisinger Medical Center is one of four rural referral tertiary-care centers
of 500 or more beds in the United States. With its full-time, salaried,
mul tispecial ty group practice, it was the basis for the present Geisinger
health care system. (Geisinger's organization and service area are described
further in Appendix A).

149

GeisingeKs Principles for Health Care Reform -1993

In the spring of 1992, as the current national health care debate was being joined,
Geisinger adopted a statement of reform principles (see Appendix B).

In brief, these principles encapsulate the thoughts of Geisinger's management
concerning the accessibility, affordability, and accountability of health care, and the
place of medical education, research, and public health in the refomi debate from a
rural health care system perspective.

During this year, Geisinger has been cited three times as a potential model for
reformers to follow. (See Appendices C, D and E). That national attention has made us
aware of two critical facets of the health care reform debate.

• First, a considerable amount of reform is occurring, without government
intervention. And Geisinger is among the leaders in that reform movement.

• Secott(/, there are specific areas in which federal action can empower and
amplify those private efforts.

ACCESSIBILITY

The Geisinger experience shows how a private institution can effectively improve
the accessibility of health care in a large rural region. Over the past 12 years, Geisinger
has established 26 rural medical practices and expanded a number of additional
existing practices. That has resulted in the addition of many physicians to our service
area — the majority of them specializing in primary care. Geisinger physicians now
reprint 9.4 percent of primary care physicians in the 31-county area we serve.

Because of Geisinger's charitable charter, Geisinger physicians provide service
without regard to ability to pay, which improves accessibility to medical care for all the
residents of the area we serve. The declining economic state of rural providers,
exacerbated by health reform initiatives, has led to many collaborative discussions on
how best to restructure the combined resources of providers to meet the health care
needs of the population. Those discussions focus on such issues as : Tlie continuing
need for certain rural providers entirely or as as "full-service" hospitals; the ability of
private, primary-care practitioners to continue in solo practice; and the conversion or
establishment of urgent-care centers and other alternative-delivery fedlities, including
the restructuring of home health services. Home health services represent a delivery
alternative that is growing in importance in our rural setting.

150

But Geisinger currently has 66 vacancies for primary<are physicians.
Recruitment in priniary care has become increasingly difficult in recent years.
Recognizing that we will be unable to recruit, nor possibly afford, all the primary-care
physicians we need, Geisinger is emphasizing the necessity of expanding alternative-
care providers in support of our clinical programs and is actively considering the
development of training programs for such professionals.

Additionally, we will no longer be able to afford or recruit the high level of
^Tedalization that has been traditional throu^ut our workforce. We are studying
ways to shift to a broader-based workforce and to alter the work we do in order to
downsize and reduce our overall operating costs.

In order to continue, and pertiaps to enhance, access to our services, Geisinger
has established a technololgy strategy to link together our provider network for
accessing and sharing medical informatioa Although an appropriate goal, it will be
very difficult to accomplish in an environment of declining reimbursement and
increased cost-containmenL

RECOMMENDED FEDERAL ACTIONS:

Improve the quality of care and the quality of rural practice as a career
choice by:

• Using incentives to increase the number of physicians entering the
primary care specialties.

• Using incentives to increase the number of primary care physicians who
choose rural practice.

• Providing assistance to private institutions to devdop rural practices.

• Supporting puUic transportation in ruml areas, with a focus on
mcreasing access to medical practices.

• Supporting research and development of communication and
information technology to link ruml generalists with specialty centers.

• Provide demonstration-project funding for hospital facility conversions to
altemative<are facilities associated with health care networks.

• Use incentives to enhcnce the altemative<are professions and increase
the number ofswJi practitmers, especially those wSling to locate in
rurdareas.

151

AFFORDABILITY

Geisinger is demonstrating the effectiveness of an integrated health system in
improving the affordability of health care. Geisinger's health maintenance
organization, Geisinger Health Plan, has the lowest premiums of any HMO in
Pennsylvania. It has the lowest premium of any HMO option being offered to federal
employees in 1993. Yet the Geisinger Health Plan is able to provide high-quality care
within a fixed budget and still contribute to the support of Geisinger's charitable,
educational and research activities. Geisinger Health Plan now covers approximately
160,000 people and provides one-third of the total support of the Geisinger system.

In response to Geisinger Health Plan's success, we are seeing changes in the rest
of the area's health care economy. Competition among providers (the typical medical
arms race) is being replaced by competition among systems (in which the most efficient
win). Meanwhile, competing health plans are moderating their premium increases and
improving their managed care operations.

Employers in the area we serve are actively fostering competition by favoring the
low-priced options in their employee health-benefit plans. They are already creating
"manage/ competition" on their owa

Thus, directiy and indirectiy, Geisinger is having a positive impact on the
affordability of care.

RECOMMENDED FEDERAL ACTIONS:

• Encourage the states to develop managed competition at the state and
load leveL allow waiver of the "ERISA preemption " of state laws
pertaining to emplajee health benefits.

• Protect the access of non-profit institutions to low-cost capital by
clarifying the criteria for charitable tax exemption (Section 501(c)(3)), to
include health plans and other non-profit components of integrated
systems engaged in the support and advancement (/federal health policy.

• Encourage efficient integrated systems to enroll Medicare and Medicaid
benelidarks. That would include hirther improvement of the risk contmct
payment methodology (the AAPCC), and legislation to permit HMOs to
Hmction as medicare supplemental plans.

• Reduce the administrative costs associated with health care through an
expanded use of communications technology such as Electronic Data
Interchange (EDI).

152

ACCOUNTABILITY

Geisinger has come to ^ncM accountability as more than periodic acaeditation,
even as acaeditation and licensing requirements continue to be among our most
important public accountabilities.

In the past year, one of our hospitals placed in the top ten percent of national
reviews by the Joint Commission on the Acaeditation of Healthcare Organizations
(JCAHO). Geisinger Health Plan voluntarily went beyond the requirements of
Pennsylvania law for external quality review, and applied for full accreditation by the
National Committee on Quality Assurance (the HMO industry's accreditation body).

Beyond aareditation, we are working with a major corporate client to design a
scorecard of quantitative and qualitative measures demonstrating quality and quality
improvement to that employer.

Geisinger conducts formal, statistically significant patient surveys. We monitor
the technical quality of care in a variety of ways; to do so, in &ct, we conducted more
than 400 studies last year. We track patient complaints and concerns, and we report
tiiem for management response. Results are considered major management
accountabilities, and Geisinger's group practice structure makes our physicians
continuously accountable to their peers in the group.

In general, however, the threat of litigation impedes public accountability for
quality improvement in the health care industry, in the event that peer review data are
made public

RECOMMENDED FEDERAL ACTION:

• Increase the willingness (/health care institutions to publish comparative

information about quality: enact a more equitable approach to identifying

medical malpractice and compensating patients.

153

EDUCATION

Geisinger's support ior education dates from our earliest days. Since our
founding, we have trained more than 2,400 interns, residents and fellows, graduated
more than 3,200 registered nurses, and developed training programs in nine allied
health professions. Total registration for the 1993 - 1994 school year was 181 resident
physicians, 16 graduate fellows, 190 nursing students, and 72 students in allied
technologies. Many of those students will remain in rural service when they complete
their training.

Geisinger operates nine schools of allied health education:

• Cardiovascular Technology

• Dietetic Internship

• Histotechnology

• Medical Technology

• Nurse Anesthesia

• Nursing (diploma program)

• Radiation Therapy Technology

• Radiographic Technology

• Pastoral Care

increased competition, however, will reduce the ability of medical institutions to
subsidize the cost of education from patient revenues.

RECOMMEM>ED FEDERAL ACTION:

• Provick direct support for educational programs, especially those that
advance federal poliq/, such as primary care and rural practice.

RESEARCH

Geisinger operates an $9 million basic science research program. Of that, nearly
$4 million is supported by grant funding and endowment Geisinger supports 11 full-
time scientists and 408 separate research projects.

154

In addition, Geisinger has also begun research in health services arul outcomes.
The first project, measuring the short-term savings and health improvement from
smoking cessation, has already produced encouraging data. We have seen a high
cessation rate and nearly inmiediate savings from the reduced use of medical services
among those who have successfully quit

RECOMMENDED FEDERAL ACTION:

• hoBOse support for outcomes research, especially in the setting of
integrated health systems.

• Suj^port methods to rapidly disseminate results of outcomes research.

PUBLIC HEALTH

The medical community's interest in public health concerns has feded in
prominence with the improvements in sanitation, immunization and treatment of
disease that have characterized the second half of this century. Over the years,
Geisinger, like most institutions, had adopted a reactive posture in public health
matters. We are a major source of care for accident and illness for much of our area. We
are the place to go if a man, woman or child is sick, and especially if that man, woman,
or child is sick and uninsured.

Geisinger employees, often acting on their own initiative, have continued a long
tradition of voluntary public education about hygiene and safety in the communities we
serve. Now, as an institution, we have come to recognize again the need to specifically
incorporate a public health role in our business plans, and to support encourage, and
recognize the individual initiatives among our employees.

RECOMMENDED FEDERAL ACTIONS:

• Provide support and recognition for health care institutions that adopt
active public health agendas. Look to the nation 's emerging integrated
health systems as logical allies of federal and state agencies in identifying
and ameliorating public health hazards.

• Support a public-private partnership to greatly improve the level of public
knowledge about disease prevention, diet, exercise, safety, stress
management, and the risks of chemical abuse.

155

SUMMARY

In summary, the past few years have seen most of the components of proposed
national health care reform develop in the private sector. Geisinger is a practical
example. Managed care, managed competitioa public accountability, access
improvements: all can be found to some extent in various sections of the natioa The
time is ripe for federal action to encourage the growth and spread of those developing
systems.

While major reform is being debated, we suggest a package of more modest
reforms to amtinue that signi/tcani private sector activity.

Appendix A

156

GEISINGER« HEALTH CARE SYSTEM

Corporate Structure

tola

■EOICAL
CENIER

«77«id Riband

oon>o(UTioii

UgOMatmHp:

Gemvl

U«ntenHpC«nM .

Gdsln^er.

•-GcsmgerbiregtttovdicmceouffcofGeamga-Founlaoca for opcntkig medical, ouniog nd otber bealih
care educabootl progrwps through i muld-iostitutioDil beahh cue lystem. 'nnougbout thii docuoMni, die torn
Gcnbger itfen lo dK eiuc lystoD of health eve comprved of Ge^JBger FouD^^
affiliated with or coolroUed by Geif ioger FouidatiofL

Geisinger — A Regional System of Health Care

Hospitals and Group Practices *'g^!:::i1-*~

167

Geisinger Overview

Mission Statement

The Geisinger health care system serves more than 23 million Pennsyhonians
across 31 primarily rural counties, from the state's northeastern comer to its midpoint
— and thousands of others through widely distributed outreach programs. That broad
focus is consistent with the Geisinger mission:

To improve the health of the people of the Commonwealth through an integrated
system of health services based on a balanced program of patient care, education and
research.

Geisinger's primary values are enumerated as a commitment to constancy of
purpose, continuous improvement, people caring, teamwork, tradition and financial
stability. The New Yorit Times, in a front-page article on March 18, 1993, applauded
Geisinger's integration of its medical and administrative staffe in ways that contribute
to cost-effective medical care.

The character of Geisinger health care management is recognized nationally. The
National Committee for Quality Health Care last September offered the Geisinger
approach as one of several national models for reforming American health care. TTie
Geisinger management style integrates continuous fonral planning and problem-
solving methods with day-to-day control systems that assure efficient operating
perfomiance.

Geisinger's four driving corporate strategies are articulated succinctly this way:

• Geisinger functions as one organizatioa

• Clinical programs and clinical process improvements size and drive the Geisinger
system.

• Managed care is Geisinger's primary business strategy.

• Geisinger seeks collaborative opporhmities to increase access to cost-effective
services.

Geisinger is focusing on its managed-care system, replacing fee-for-service
business with capitated populations. That strategy will permit an even more effective
management of limited resources, offer greater value to central and northeastern
Pennsylvania consumers, and position Geisinger as the provider of choice in its region.

1S8

Geisinger's History

Crucial to the Geisinger concept of managed care is Geisinger Health Plan (GHP),
which now has approximately 160,000 members. Founded in 1972 as one of the first
rural health maintenance organizations in the United States, GHP is now the nation's
largest rural HMO. The Geisinger Clinic's approximately 520 employed physicians offer
GHP services at 45 primary care locations and 13 community hospitals in all or parts of
25 Pennsylvania counties. And, also through the Geisinger Clinic, GHP has agreements
with 433 privately practicing physicians in central and northeastern Pennsylvania to
deliver services complementing those that Geisinger specialists offer. GHP enrolled its
500th employer group during the past year.

Geisinger has introduced a variety of strategies to strengthen and improve its
operational perfomiance. Those strategies were aimed at sizing our system to respond
to changes in the healthcare environment, and they included a system-wide workforce
reduction.

A resiliently adaptive frame of mind is ingrained in the Geisinger approach to
health care. Throughout its history, in fact, Geisinger has been a consistent example of
the efficiency, effectiveness, and flexibility of medical group practice. The Geisinger
group practice has changed in form and function over the years to respond to changing
socioeconomic environments, but it has not deviated from the intent of its founder,
Abigail A. Geisinger. Nearly 72 years after her passing, this organization retains Mrs.
Geisinger's commitment of service to mankind.

History and Development

Founded in 1915 as the George F. Geisinger Memorial Hospital, Mrs. Geisinger's
gift to her community in memory of her husband, the hospital was designed as a
comprehensive regional health care institution that would offer specialized services to
people in rural areas.

Harold Foss, M.D., was Geisinger's first chief of staff, and he served in that
capacity from 1915 until 1958. Trained at the Mayo Clinic, Dr. Foss advocated the
group practice of medicine and hired specialty-trained physicians who formed the full-
time, salaried, closed staff of the hospital. The original hospital of 70 beds has grown to
be one of the nation's four largest and most modem rural medical centers and now has
577 beds.

159

In 1%1 the George F. Geisinger Memorial Hospital became Gdsinger Medical
Center. Twenty years later, in 1981, Geisinger Medical Center and its affiliates
underwent a corporate reorganization and became a system of health care delivering
medical and health-related services under the conunon control and direction of
Geisinger Foundation.

A Geisinger Overview

• Approximately 520 physicians provide the excellence of Geisinger healthcare
throughout central and northeastern Pennsylvania. Some of those physicians
practice in small family health centers and some in large medical groups. Wherever
they practice, Uiey have access to hundreds of support services provided by the entire
Geisinger system.

• Geisinger has two hospitals. Its 577-bed Geisinger Medical Center in Danville delivers
specialized care — emergency medicine, cardiovascular surgery, newborn intensive
care— actually 75 specialties and subspedaities in all. Geisinger Medical Center
operates two medical helicopters, provides comprehensive trauma care 24 hours a
day, and conducts oub'each, educational and research programs in trauma care. ITie
medical center is also home for tiie Janet Weis Children's Hospital, now under
constaiiction and scheduled for completion in 1994. Its other specialized care centers
focus on kidney, neurosdences, h^uma, heart cancer, and infertility b-eahnenL
Geisinger Wyoming Valley Medical Center in Wlkes-Barre is a 230-bed secondary
referral center serving as the eastern hub of the Geisinger system. Geisinger
Wyoming Valley Medical Center cares for patients in the Greater Wyoming Valley and
western Pocono region with comprehensive maternity programs and pediabric
services, five medical/surgical units, the new Frank M. and Dorothea Henry Cancer
Center, and a complete emergency department Geisinger Wyoming Valley Medical
Center also offers an extenave community-health eduction program.

• The Geisinger program for alcohol and chemical detoxifiation and rehabilitation is
system wide. It includes the 56-bed Marworth inpatient b'eatanent center in Waverly,
Pennsylvania, which addresses the physical, social, psychological and family issues of
dependency and recoveiy and coordinates outpatient chemical dependency services
wherever Geisinger provides health care.

160

> Geisinger's health maintenance organization, GHP, offers members a variety of
medical services for a flat fee. Medical expenses such as hospital and doctor bills are
pre-paid under the plan, as are routine check-ups, immunizations, well-child care,
and inoculations.

► ISS, a Geisinger afifiliate in Plymouth Meeting, Pennsylvania, has responded to the
requirements of the Joint Commission on the Accreditation of Health Care
Organizations by offering hospitals clinical technology-management programs that
can improve the quality of patient care while reducing hospital costs. ISS is one of the
nation's largest independent clinical engineering firms. It has served hospitals and
clinics throughout the mid-Atlantic region since 1972 and now has more than 160
corporate clients.

» Geisinger Foundation serves as the parent organization for the Geisinger system,
which also includes Geisinger System Services and the Geisinger Medical
Management Corporation. Geisinger Foundation coordinates fundraising, manages
telethons, and facilitates community services.

161

1993 Fiscal Year

Admissions

30.000
2S,000

15.000

10.000

s.ooo

«l_

I I I I

i I if

i 1 1 1

ino laei isu lan

Clinic Visits

1.500.000

1.200.000
S00,000

600.000
300.000

I I I I

I II I

1990 1991 1992 1993

CME Programs

III
III

1901 1992 1993

Number of Physicians

iHH^

111 I
1 1 1 1
I 111

1990 1991 ISSe 1993

Number of Clinic Sites

J^_JS_J!?_|1

I I 11

II 11

CME Attendance

10.000
S.000

iiii

II II

19C0 1991 1992 1983

GHP Members

120.000
60,000

n.ooo

IIII
IIII

1980 1981 1982 18

Active Research Projects

S_S_

III
III

1990 1991 1992 1983

*all figures as of June 30, 1993

162

1993 Fiscal Year

GEISINGER STATISTICAL SUMMARY

(for fiscal year encdng 6130193, except where noted )

Patients

GHP Enrollment (asofio/3i/93) 149,193

Outpatient Visits 1,225,556

Hospital Admissions (inclmiing newborns) 30,616

Life Flight Helicopter Retrievals 1,236

Employees

Physicians 520

Physicians in Training 207

Employees (including physicians and physicians in training) 7,301

Education

Residency Programs 15

Fellowship Programs 6

Medical Education Programs 146

Medical Education Participants 7,347

Research

Research Expenditures $9,215,000

Research Projects 408

Financial Indicators

Total Revenue $786,564,000

(including operating and nonoperating revenues)

AUowances 278,245,000

(to insurers, government, third-parties,

charity care, and uiwollectible accounts)

Total expenses ...■480,649,000

Funds Available for Reinvestment 27,670,000

Less Transitional Obligation (14,683,000)

Less Loss on Defeasance ( 2,273,000)

Total Funds for Reinvestment ...$ 10,714,000

Public Support $8,259,000*

(includes gifts and grants, plus revenue associated =^=^=^^

with the Children's Miracle Network Telethon)

Charity Care, Policy Deductions ...$ 12,040,000*

Uncompensated Care

* included in the totals listed above

163

Appendix B

Geisinger's Principles for
Health Care Reform

Introduction

Government is a partner in the
health care system.

Over time, the cost of this
partnership has fer exceeded original
expectations.

As a result, and in the absence of
a coherent federal health care policy,
government's decisions about health
care have been budget-driven, not
pfogram-driven.

This budget-driven approach has
created confliaing incentives between
patients and health care providers, and
access issues for the uninsured and
underinsured. Health care policy
reform is key to the improvement of our
nation's health care system.

Integrated regional systems of
health care, like Ceisinger, have a vital
role to play in the delivery of health care
and health care policy reform.

A national consensus on health care reform
is yet to emerge. However, while no single
proposal can claim majority support, we believe
certain basic principles are already held in
common. Th'ese principles, in tum, can serve as
aframeworktogukle the design andconstruction
of the actual components of reform.

Central to reform are the accessibiUty,
affonUbUity, and KcountabOity of health care
services. In addition, to be comprehensive, re-
fomi must also address medical educatioii,
loearch, aivl public health.

Health can miut b« accessible. Effective
reform must remove barriers posed by cost and
geography.

• A basic set of essential services must be
available to anyone, without regard to medical
history, employment status, or ability to pay.

• These basic services must be physically
aaessible in the urban core and the rural coun-
ties, as well as the populous suburbs.

Health care must be affordable The cost of
care, both to society ar>d to the individual, must
be within our means.

• bilegrated regional systems which com-
bine the finarxiing and delivery of health care in
a single economic unit offer the best mechanism
to reward efficiency and penalize waste.
Whether HMO's, PPO's or managed care net-
works, the formation and growth of such
systems shouW be actively encouraged

• In the long temi, a competitive market-
place is the only effective means to control cost
Price controls and global budgets, unless cre-
ated with perfect wisdom, produce perverse
incentives and shortages. This is demonstrably
true in any industry, including health care.

• Competition must be among integrated
systems, competing in the private sector on the
basis of quality and cost Competitkm on quality
alone has produced excess capacity. Competi-
tion on cost alone has produced inadequate
coverage and exclusion of individuals with pre-
existing conditions among Insurers. Lack of
competition rewards unnecessary procedures
and duplicative services.

• There must be adequate financing, both
public and private, to ensure ttiat no one is
excluded from the marketplace by personal
financial circumstances. The affordability of
the basic set of services must be assured. In
addition, individuals or groups wish'ing to pur-
chase additional services or coverage should be
free to do so.

• The market price for the basic set of
benefits must reflect true cosL Hkkien subsi-
dies, pricing by regulatioa and cost shifting
must be eliminated for the market to functron.
Tax subsidies should be limited to the cost of the
set of uniform basic benefits. State mandated
benefit levels above the basic set of benefits
should be eliminated.

Health can must be actountahfc. To en-
sure a fair marketplace, the integrated regional
systems providing patient care must be publicly
accountable for the cost and quality of their
services. The marketplace itself must be ac-
countable for its structure and operatioa

• Integrated regional health care systems
should demonstrate the ability to measure and
improve the quality of care, as a condition of
participation in the competitive marketplace.

• Tort refonr^, to encourage rather than
impede public accountability for quality, is a
necessary corollary.

• To permit comparison among competing
systerru, all partkipants in the marketplace
must offer, at a minimum, a uniform basic set of
essential services.

• Establishment and modification of the
bask set of essential servkes must, itself, be an
accountable process. It must be directed to pro-
mote the general welfare, not secure private
interests. Experimental procedures shouU be
included only upon demonstrated efficacy.

Medical t<luatk>ii must be supported and
directed. Medkal education should be financed
arxl managed to produce an appropriate distri-
bution of personnel among professions,
specialties and localities, based upon anticipated
public need.

Medical research must receive adequate
support and direction. In addition to advancing
the scientific frontier, medH:al research must
focus on improving the quality and efficiency
of current technology. Research shouU focus on
practke guidelines to kientify the best approach
from among competing opinions and tech-
niques. Research funding should be separate
from patient care finaiKing.

Public health must be reinvigorated.
Improved control of preventable diseases and
conditions could dramatically reduce the cost of
patient care, while permitting the rededlcation
of resources to improve both accessibility and
quality.

• Public educatkin in health promotion
and disease prevention should be greatly ex-
panded. The message needs to be carried beyond
our schools, into workplaces, shopping malls,
and homes.

• Publk law and publk funds must be
dedicated to produce further reductions in envi-
ronmental risks.

• Pressing publk health needs must be
given greater prominence In medical education
and medkal research

• The health care system must educate
patients to assume additional responsibility for
their own health through healthier life-styles
and partkipatkn In medical treatment deci-
sions.

Appendix C

164

This article has been
iqrinted with
pamission from
TheNewYorkTimes

If you would like ftmher
, information about the
Geisinger health care
system, please write:

Geisinger

100 Ncxth Academy Ave,

DanvUe, PA 17822-3013

Gelslnser.

Sl^e ^m Jjark §Jlme$

NEW YORK. THURSDAY. MARCH IS. 1993

Doctors Say They Can Save
Lives and Still Save Money

B; ERIK ECKHOLM

Special to The New York Times

DANVILLE, Pa. — Dr. James C.
Blankenship. a cardiologist with a health-
maintenance organization in central
Pennsylvania, performs costly, risky pro-
cedures in which tubes are pushed to the
heart to help find whether coronary ves-
sels are clogged.

In his catheterization laboratory, he
studied X-rays revealing a partly blocked
artery in a 55 -year-old man. "What are the
chances this will shut off. causing a heart
attack, versus the risks of surgery?" he
asked. 'The studies differ."

"I'll advise him to watch and wail,"
said the doctor, whose salary would not
be affected one way or the other. "I want
to do everything that's necessary, but not
too much."

As Americans consider a more frugal
medical future, possibly dominated by com-
peting H.M.O.'s or other forms of "managed
care" that limit consumer choice, urgent
questions are rising about the quality of care
and how to protect iL Will people be pushed
into health plans staffed by sullen, rushed
doctors whose decisions are second-guessed
and who are paid ettra to scrimp on costly
tests and operations?

Room for Judgment

Or will they find sensitive doctors who
have no financial incentive to do too much
or too little, have ready access to the best
technologies and hold down costs by pre-
venting illness and avoiding procedures
with little benefit?

Medical experts are scrutinizing better
health plans around the country to see how
large savings might be gained through ef-
ficiency and prudence, not through
shortchanging the sick. And the evidence
suggests that institutions that foster physi-
cians like Dr. Blankenship and allow them
to exercise professional judgment may be
in the best position to pursue that goal

In the case of the 55-year-old man.
some doctors would have recommended
immediate surgery, but Dr. Blankenship
fell sure, based on available science, thai
a trial period of drug therapy was in his
patient's best interest.

At his organization, the Geisinger Foun-
dation in Danville, the decision about how
much is enough is left to the doctors. Their
cautious style of medicine has held costs
well below the national average. Increases
here have still averaged 8.6 percent in re-
cent years, though, raising questions about
whether the counuy will be able to lame
medical infiation without culling into the
quality of care.

The 530 salaried doctors who work
here, and offer care through a prepaid in-
surance plan, do receive prodding from
above. But it involves not consiant sec-
ond-guessing or rewards for scrimping, but
rather a steady How of research news and
tips that helps suffuse the institution wiih
an ethic of conservative care.

"Here, we don'l police; we trust our
doctors." said Dr. Howard G. Hughes, who
directs the H.M.O., the Geisinger Health
Plan.

In Danville, a lown of 6,000 people,
Geisinger runs an advanced 577-bed hos-

;65

piial is well as a network of clinics over a
wide area of central and northeastern
Pennsylvania. Its growing H.M.O. serves
142.000 members, while the same doctors
and clinics also provide the same style of
care to hundreds of thousands more people
covered by government or other insurance.

The doctors insist that their brand of
medicine improves on a system laden with
incentives to overuse procedures.

And they are saving money The
H.M.O. has the lowest rates in
Pennsylvania, according to the state insur-
ance department, with monthly premiums
this year of $109.70 for individuals and
$285.22 for families for a plan covering
nearly everything but prescriptions.

But the numbers suggest, loo, just how
severe the challenge is. The health plan's
charges have risen by an average of 8.6
percent a year since 1985. Dr. Hughes said.
That is a good record compared with that
of most insurers: nationwide. H.M.O. rates
grew by an average of 11.7 percent per
year from 1986 to 1992. and rates for tra-
ditional feefor-service plans rose annually
by 14.2 percent, according to A. Foster
Higgins & Company, a consulting firm.

But it remains well above the national
goal of steady real spending set by Presi-
dent Clinton. Recent increases have mainly
reflected the rising cost of nurses, techni-
cians and other personnel, the soaring price
of new drugs and other factors, officials
said.

At What Point
WIfl Savings Stop?

Geisinger doctors and administrators,
most of ihem practicing physicians, insist
that through steady refinement they can
save much more without compromising
care. Just how much and how fast, though,
no one is sure.

"Price competition doesn't scare me."
said Dr. Stuart Heydt, president of the
Geisinger Foundation. "If this model can't
hold down prices enough, then I'm not sure
it can be done in a way that fulfills the
medical expectations of society."

While America's medical costs are in-
creased by administrative waste, excess
equipment, incentives to use procedures
lavishly and outright fraud, in the end

spending mainly reflects the routine deci-
sions of physicians. They decide when a
patient needs a $70 electrocardiogram,
when to order a $100 dollar antibiotic in-
stead of a $10 one, and when $40,000
bypass surgery is truly likely to improve
a patient's chances of survival or quality
of life.

"The best way to control costs and pre-
serve quality is to have the physicians do
it," said Dr. Arnold S. Relman, the former
editor of The New England Journal of
Medicine. "The whole health-care system
is built on the behavior of doctors, and
that behavior is greatly influenced by the
way health care is organized."

Dr. Relman. who has been studying
health plans around the country, praised
Geisinger for high doctor morale and a
system of mutual review that promotes ex-
cellent care.

While no organizational structure guar-
antees quality care, Geisinger has several
traits that promote it. The bedrock, offi-
cials here say. is the careful selection of
doctors who share the group philosophy
and are happy to work for a salary Since
they are not paid piecework, they make
decisions with no direct financial interest
at stake. (Nationally, doctors are salaried
in some but not all H.MO.'s or other forms
of managed care.)

The salaries here arc enough to support
an affiuent life in this rural region, but for
many doctors they are well below poten-
tial earnings in private practice.
Primary-care doctors have starting salaries
in the range of $75,000 to $90,000. while
among the most experienced specialists
who might earn several limes as much else-
where, "very few go beyond $300,000."
said Dr. Laurence H. Beck, senior vice
president charged with improving effi-
ciency and quality.

Morale rests on the pleasures of patient
care, collaboration, teaching and research,
said Dr. Francis J. Menapace. the director
of cardiology. "We look for a different
type of physician, one who still looks at
medicine as a profession, not a business."

Less Reliance
On the Specialists

As in most H.M.O. 's. all patients must
choose a primary-care physician in the
plan. Usually trained in family practice,
internal medicine or pediatrics, these doc-
tors provide most care and refer sicker
patients to specialists only when neces-
sary, holding down costs.

Now about 30 percent of the plan's doc-
tors provide primary care, but studies
suggest the proportion should rise to close
to 50 percent. Dr. Beck said. This means
cutting back on specialities, a painful and
controversial topic among the medical
staff.

Dr. Ernest W. Campbell, a primary-care
physician and head of the Geisinger clinic
in the nearby town of Bloomsburg, had
been in independent practice for 18 years
before he and his partner decided to join
the salaried group in 19SS.

"We looked at the H.M.O. and liked
what they were saying," he said. "It's more
geared toward preventive medicine, keep-
ing people healthy rather than just meeting
the acute needs as they arise." He said the
switch involved a significant loss in in-
come, but offsetting this was a drop in
work time to 60 to 70 hours a week so he
could see his family more.

Far from feeling pressure to avoid
needed care. Dr. Campbell said, "I think
the quality if anything has gone up." Since
patients are in a prepaid plan, he said, "now
we can tell them they have no excuse for
not coming in when they are ill."

A large unified system like Geisinger's
can also avoid duplication of costly equip-
ment and readily monitor its use. For
example, all cardiac catherizations, which
are Dr. Blankenship's diagnostic specially
and require a million-dollar laboratory, are
performed at the main hospital in Dan-
ville, as is open-heart surgery. This does
mean, though, that some patients have to
travel up to 100 miles for major proce-
dures that in a less efficient system might
be available at a community hospital.

166

With central control, too, can come im-
balances in stafHng, sometimes yielding
long waits for non-urgent appointments.
Currently, for example, because of a short-
age of gynecologists in the group, an
appointment for a routine pelvic checkup
can take several months. Officials insist
that is a temporary side effect of rapid
growth and a national shortage, not a long-
term shortchanging of patients.

But in surveys of H.M.O. patients that
generally Hnd high satisfaction with care
and doctors, intermittent dlfnculty in get-
ting quick appointments has been the most
common complaint, said Dr. Duane Davis,
medical director of the health plan.

When Supervision
Is From Within

For all its emphasis on efficiency.
Geisinger does little of the routine over-
sight that is now so prevalent in the
health-insurance industry and so annoying
to doctors. Instead, the doctors, with lead-
ership from department heads, are expected
to watch themselves for unjustined varia-
tions in individual practice and
opportunities for improvement.

"We have a high awareness of what our
colleagues are doing in the next room,"
Dr Blankenship said. "There's lots of in-
tercommunication, lots of informal second
opinions. If someone is consistently doing
something inappropriately, too much or too
little,^ we'd notice."

Peer review is, however, increasingly
backed up with research and suggestions
from above. The H.M.O. , for example,
keeps track of prescribing patterns and
sends out newsletters urging physicians to
prescribe cheaper drugs or generic versions
where they have been shown to be equally
effective. One recent flyer warned that a
drug company was "actively encouraging
pharmacists to call physicians to switch
patients" from current diabetes drugs to
its new product, priced 40 percent higher
even though it offers "no therapeutic ad-
vantage."

In another example, officials studied
whether patients who were put on an ex-
pensive cholesterol-lowering drug were
first asked to experiment with dietary
change. By sharing the results with other
physicians and stressing the recommended
course, doctors found that the proportion

of patients trying diet changes had risen.
Some will end up needing the drug any-
way, but some will avoid indermite use of
a drug that can have dangerous side ef-
fects.

As the country seeks to flatten out its
health costs, the question is how far even
the best-organized providers can trim back
without choking off tests and treatments
of significant potential benefit.

Dr. Beck said he believes that Geisinger
and other similar groups still have large
opportunities to wring out expense. In-
creasingly important, he said, will be
reliance on clinical guidelines that reflect
research, done locally or nationally, on
what sequences of tests and treatments
yield the best results for particular condi-
tions.

Still. Dr. Beck said, "At some point
there will be tradeoffs between cost and
quality." If price controls are too severe,
he said, society will have to openly face
the issue of rationing.

167

Appendix D

Modem Healthcare

September 7. 1992

Provider groups finding success with
managed care, study says

Managed care, a key cost-contain-
ment and quality-improvement tech-
nique included in almost every local or
national healthcare refonn proposal, is
being implemented by provider groups
in communities across the country.

That's the finding of the National
Committee for Quality Health Care, a
Washington-based coalition of provid-
ers and suppliers, which has put together
a rq»rt profiling 19 successfiil provider-
based managed-care programs
throughout the United States.

The report, "Reinventing Health
Care: The Revolution at Hand," will be
released to the public late this week.

The study was prepared by New
Dire^ons for Policy, a fiscal policy con-
sulting group based in Washingtoa

It 's meant to be a companion study to
last year's report by the NCQHC describ-
ing several successful managed -care
projects initiated by healthcare buyers,
said William Dwyer, director of corpo-
rate account development at Abbott
Laboratories and chaimian ofNCQHC's
managed-care subconunittee.

Many providers also have devel-
0{>ed effective models of
community-based managed-care pro-
grams, but policymakers aixl analysts
have tended to overlook them because of
all the publicity garnered by the corpo-
rate efforts, Mr. Dwyer said.

The report shows that decision-mak-
ers can learn much from these
lesser-known examples of how to con-
strua successfiil quality-improvement
programs and operate them within a co-
ordinated healthcare system, he said.

The provider oi^anizations profiled
represent essentially two models for de-
livering services: those based on group
practices, such as Lovelace Medical
Center and Health Plan in New Mexico
and Geisinger Medical Center and
Health Plan in Pennsylvania, and hospi-
tal-based network systems, such as Sharp
Healthcare in San EHego.

They represent a "small selection" of
what provider- initiated programs can ac-
complish in reforming the healthcare
system when they become leaders in
promoting community health and
wellness, he said.

—PaulJ.Kenk£l

168

Appendix E

Networking

by Frank Ceme

Sizing up Pennsylvania

Geislnger aims to reshape its delivery system

'// we as a nation are going to gel a handle
on the escalation ot tiealtli care costs and it
we are going to be able to provide better
healin care to more people tor less cost, su-
ing tt>e delivery system is a tundamental pari
olmalang that happen ' — Sluarl Heydl,
M.D , president and CEO ol Geismger Foun-
dation, Danville, PA

Ai Geisinger health sysiem. righl-
sizing has become a creed, shared
by executives and physicians
alike, thai drives an organization
singled out by some health care ex-
perts as one of several models for na-
tionwide reform.

Geisinger's structure and operat-
ing su'ategies are buill on the assump-
tion that "we are going to have to pro-
vide better care to more people for less
cosi." says Heydt.
■* Efhciency is the fundamental
pnnciple thy aJlows Geisinger to ac-
complish that mission, from the care-
ful selection of pnmary care and spe-
cially physicians — most ol whom are
salaned — to the placement of health
<&e personnel and technology accord-
ing to patient needs o\ cr a wide geo-
graphic area.

Integrating system components

Founded in 1915 as the George F
Geisinger Metnonal Hospital, a 70-
bcd facility with a mullispecially sala-
ried group pracuce. the hospital evol-
ved into a senes of separate corporate
entities by the late 1980s under the
control of the Geisinger Foundation.
System components include the
Geisinger Medical Center, a 577-bcd
tertiary care teaching hospital in Dan-
ville with 75 specialties and subspeci-
alties; Geisinger Wyoming Valley
Medical Center. Wilkes-Barrc. PA. a
230-bed secondary care referral cen-
ter; a 77-bed inpatient chemical de-

pendency treatment center. Waverly,
PA; a 145.000-member HMO: and the
Geisinger Clinic, a 500-member multi-
specialty group practice.

By 1990, Heydl says, it became
apparent that Geisinger's management
structure and corporate strategies had
to change in response to foreseen
changes in the health care environ-
ment, primarily the increasing empha-
sis on vertical integra-
tion of services and
managed care.

Geisinger execu-
tives then identified
siraiegies that would be
needed to carry the orga-
nization into the future:

• Geisinger functions as
cwf organization.

• Clinical programs and
clinical process im-
provements determine
the size and direction of
the Geisinger system.

• Managed care is Gei-
singer's primary busi-
ness strategy.

•Geisinger seeks col-
laborative opportuni-
ties to increase access
to cost-effective ser-
vices.

Although Geisinger
still maintains separate
corporate entities for le-
gal purposes, there an: no
independent boards or
management structures
thai identify them as
such: Geisinger has corporate and re
gional managers for the system's east
west and central regions.

The sysiem spans i 1 counties in
north-central Pennsv Ivania, a rural re-
gion with a population of 2. 1 million.
Heydl says that Geisinger's approach

to "sizing" the system is Co design the
network in the most efficient and ef-
fective manner

To achieve that goal, Geisinger
has esublished a network of 45 pri-
mary care clinics staffed by salaried
physicians employed by the Geisinger
Clinic. The physicians offer services to
Geisinger Health Plan (GHP) mem-
bers, as well as to other patients.

GHP also con-
tracts with other rural
primary care clinics,
13 community hospi-
tals and approxi-
mately 450 pnvate-
practice physicians in
central and northeast-
ern Pennsylvania

Heydt says that
physicians and man-
agement determine
how to best distribute
resources throughout
the system to build a
vertically integrated
network of primary,
secondary and tertiary
care that provides the
appropriate level of
care lo communities.

"Wc know that
we have to size the
system according lo
the needs of the popu-
lations we sen'e."
Heydl says. "That
way you not only pro-
vide greater access to
high-quality services,
but you also avoid duplicating services
and adding expensive technology."

The right physician mix

"Sizing' the sysiem means placing
physician specialists and referring pri-
mary care physicians in areas where

PARTICIPANTS:

•Geisinger Medical Center

•Geisinger Wyoming \felley

Medical Center

•Geisinger Clinic

•Geisinger Health Plan

•Marworth Chemical Dependency

Treatment Center

UnUZAnON(FY1993)

Admissions: 30,616

Clinic^sites: 45

Clinical vi^: 1.2 inillion

HMO members: 144.296

PAYER MDC (FY 1S92)

Medicate: 37%
Commercial (includes GHP) 32K

Medicaid: 10%

Blue Cross/Blue Shield: 16%

Selfpay/othen 5%

EMPLOYEES (Fri992)

Physicians: 499
Physicians in training: 198
Total employees: 7,656

169

^ Gelstnger medical group locations Q Gelsinger inpatient facilities | Geislnger health plan service area Q Geisinger service area

lhe\ ire most needed

■'ir you assume in j rural area ilui
people wili visit ihcir luniilv physi-
cian, tiow man\ pcdiaincun-^ and pc-
diainc subspeciaiisiv do ytm need u*
lla^■e ' ^^'herc would ihey h-j located in
order m provide support lor laniiK
practice phvsicians'" Hc\di a^k'^-

Geisin^'cr plans to find tne ansuer
to those questions b\ anahzuvj the ra-
tios of pnmarv' care physicians lo spe-
cialisis in populations ser\'ed b\ other
sysiems isuch as Kaiser Foundation
Hospiials). and h> analyzing it^ own
demographic and cpideniioloLiical
data. js\ cxiremelv diflicult process.
Heydi says

"AVe realize we can t sininls huiid
J system to sujl our needs We ha\e w
make sure thai our icsourcev conc-
spond to the actual needs ol tlic popu
lalionv ue serve." he says

Geismcer has 500 sjlaned physi-
cians. and 30 percent o! the s\sicm s
clinical practice comes from iis HMO.
so the alignment of physician iiicen-
iives is a cr\JCial pan ol Geisineci s
St rate c>

Heydt says the system needs lo he
more creative with physician incen-

tives in the future, with capitation ex-
pected 10 become the dominant pay-
ment method Nearlv 30 perceni ol
Geisincer s jjross patient service re\ -
enues come trom GHP

"The concept ol prospective pay-
ment lor a dehncd population on a
pcr-capita. risk-adiusted basis, with
ph\sicians manjL'inL' that financial re-
source. IS someihini! we need lo learn
to do," Heydt says "We need to be a*,
nsk in terms of utilizing resources to
ireai a dehned population."

Heydi says gualit\ assurance and
utilization review actniiics are made
easier by Gcisingers structure a salj-
ned multispecially group practice.
w hich allows physicians to police
themselves

The Geisinpcr Health Plan con-
tributes to (his process by central!)
collecting and disseminating informa-
tion aboui all of Gcismger's qualiiv
improvcmcni activities

"Ue are also trying to hnd wa\s
of milking more inlormation from our
grossing medical claims data base so
thai we can learn more about the prac-
tice of medicine as we conduct it.' ac-
cordinc lo Wjlham MacBain. a senior

\ice president and administrative di-
rector of GHP

Expansion through collaboration

GHP IS licensed to offer coverage in
25 Pennsyhania counties and has con-
tracts wuh 5(X) employers Managed
care i-- the s\ stem s stated business
sirateg\. so Geisinger is looking for
panners lo integrate into its neiwork-

.\rcasir. which Geisingei will
seek expansion will depend on the
needs of the population, and on w here
resources need to be located lo best
^er\c thai population,

Heydt sa>s Geisinger has ap-
proached pro\ iders in the region to de-
termine hou ihe\ can share their com-
bined resources lo better serve the
needs ol the populations ihe> |Ointl>

Such discussKMis ha\e helped
identit> poiential partners, but anti-
trust ctmcems ha\e had a chilling ef-
lect "\^e think such discussions are
appropriate if thc> don'i occur with
the intern ol vioLmng sonic of the
principles of aiiiiiiusi. such as price
living. "" He>di says, "but we'xe had to
tiptoe through this process " ■

170

NAMES

National Associ;

Medica] Equipmeni Services

Written Testimony

of the

National Association for Medical Equipment Services

"Inner Cities and Rural Issues"

presented to the

House Ways and Means Subcommittee on Health

Hearing

Monday, February 7, 1994

The National Association for Medical Equipment Services
(NAMES) is grateful to have the opportunity to provide written
testimony to the subcommittee on meeting the needs of persons with
disabilities and the elderly in "inner cities and rural
communities," NAMES represents over 2,000 home medical equipment
(HME) suppliers, who provide quality, cost-effective HME and
rehabilitation/assistive technology equipment and services to
consumers in the home.

NAMES and the HME services industry applaud the Administration
for including HME services and custom devices as part of its
"standard benefits package" because HME is demonstrably cost-
effective and persons with disabilities and the elderly far prefer
to recuperate from an illness or injury at home. In addition,
NAMES is extremely pleased that the Administration's proposal
includes a long-term care component that allows individuals with
disabilities and older Americans the opportunity to further utilize
HME equipment and services.

However, the following two key issues in the Clinton
Administration's plan need further consideration:

1. Competitive Bidding

As the health care reform debate advances, with the goal of
maintaining and improving quality health care for millions of
Americans, NAMES believes Congress should not consider implementing
competitive bidding for the HME services industry as proposed in
the Administration's plan. Competitive bidding will reduce the
provision of quality HME services for persons with disabilities and
older Americans living in both inner cities and rural communities.

Specifically, the Administration's plan seeks to implement
competitive bidding for oxygen and oxygen equipment, parenteral and
enteral nutrition (PEN) and "such other items and services" as
determined by the Secretary of the Department of Health and Human
Services. This provision is part of the $238 billion in Medicare
and Medicaid cuts over five years that will help pay for the
Administration's proposal.

The provision of HME for persons with disabilities and older
Americans requires extensive services. Providers of HME deliver
much more than just the equipment; the more critical component of
HME is the service rendered, which includes but is not limited to
setting up the equipment, explaining how it operates and
maintaining it. Experience indicates that competitive bidding
systems do not guarantee the maintenance of high levels of quality
service. The bottom line is that competitive bidding will not
ensure quality HME services at reduced payment levels and could
curtail access of home medical equipment to all Americans.

171

competitive Bidding Studies

In 1986, the General Accounting Office (GAO) studied eight
Health Care Financing Administration (HCFA) -initiated competitive
fixed-price contracts, conducted on an experimental basis for
Medicare carriers and intermediaries. After examining seven of the
contracts, GAO concluded that HCFA lost money on four of them
(Medicare - Existing Contract Authority Can Provide for Effective
Program Administration, GAO/HRD-86-48, April 1986). In that same
report, GAO made the following observations:

A major change in the method of contracting used in the
Medicare Program is not justified because the competitive
fixed-price experiments have not demonstrated any clear
advantage over cost contracts presently used to
administer the program;

• The frequent use of this method of contracting could
increase Medicare administrative problems, including the
risk of poor contractor performance; and

• There is potential for disrupted service.

HCFA also has studied and recommended the implementation of
competitive bidding for many years — without success. Between
1985 and 1990, Abt Associates of Cambridge, Massachusetts, was
under contract with HCFA to evaluate competitive bidding as a
method of purchasing home medical equipment. One Abt Report
summary stated that:

"Competitive bidding processes per se will not necessarily
result in lower Medicare costs (service and administration)
for DME or clinical laboratory services in comparison to other
available reimbursement methods. The ability of competitive
bidding to realize savings for Medicare, while safeguarding
quality, depends critically on the design, implementation and
subsequent administration of the bidding system adopted. This
review of the empirical literature has raised a host of issues
for DME and clinical laboratory competitive bidding
demonstrations, while providing considerably fewer findings
that can be put forward with confidence."

From these studies alone it is clear that competitive bidding on
HME should not be an option for the Medicare program. NAMES does
not oppose competition in the health care marketplace, provided
that the quality of patient care and services are maintained.
However, no data has been presented to indicate that inadequate
competition exists today in the HME services marketplace. Indeed,
the increasing number of new entrants indicates that competition is
flourishing.

Complexity of Implementing Competitive Bidding

Competitive bidding for certain HME items has been tried and
subsequently abandoned in a number of states, undoubtedly due to
implementation problems on that level. Even more enormous
complexities would arise in dividing the entire nation into
multiple and reasonable service areas, since few HME suppliers
provide all possible HME services. The following consequences are
probable:

Rural communities across America will be most affected as
they will not have access to hundreds of medical
equipment supply items;

• Successful bidders for oxygen and other major products
will not be able to provide reasonable coverage for the
delivery of the full spectrum of HME items and services
to all of the areas and regions throughout America; and

Successful bidders will be delivering a significant
portion of HME services. Therefore, the smaller
companies that provide and service less costly and lower
volume items simply will not be able to continue to
provide delivery of these items, subsequently forcing
them out of business. Severe delivery delays for

172

equipment and services by large companies that may
maintain their presence through the bid will occur
because of the high cost of delivering HME beyond any
reasonable distance, across urban areas and throughout
rural areas. Thus, hospital discharges to the home will
be delayed and hospital admissions will increase, while
patients are waiting for the required equipment to be
cared for at home.

Cost of Competitive Bidding

Under competitive bidding structures that currently exist for
oxygen in the Veterans Administration (VA) , there are expectations
of equipment delivery time that range from 24 hours to 72 hours
from the time the order is initiated. This delay is necessary to
allow the bidder, who now has the contract, time to service the
large geographic area as well as to be as efficient as possible in
order to stay in business under the lower competitive bidding
rates.

• With delivery delays, there will be an increase of
overall health care delivery costs. Patients will
experience delays in discharge (which will severely
disrupt the current DRG structure under Medicare Part A) ,
while waiting for service.

• Under a competitive bid structure, the service levels
will deteriorate significantly. Follow-up visits by
health professionals that facilitate ongoing and thorough
patient/physician/provider interaction, patient/caregiver
education and monitoring of adherence to physician orders
will be eliminated or considerably reduced.

• Emergency service (24 hours per day) will be compromised
because of the distance that companies typically travel
to care for patients under a competitive bidding
structure. Routine maintenance checks of equipment
servicing will be cut back due to cost constraints,
causing concern for patient safety.

• If only one re-admission for acute exacerbation of COPD
occurs, which otherwise could have been avoided by
providing the high level of in-home service that exists
today, the cost of that admission to the federal
government will exceed the savings achieved under
competitive bidding for that individual patient for
several years.

The Service Component

With any competitive bidding system, the first issue to
consider must be a determination of what level of service provided
by HME suppliers the government is willing to pay. Otherwise, the
government should be concerned that the service component — so
integral to assuring patient health and safety — may diminish or
disappear. As an example of how competitive bidding has not
worked, HME providers from Minnesota have expressed concern about
service-related problems associated with Minnesota Medical
Assistance Contracted Providers, those companies that have been
awarded Medicaid contracts with the state. Some problems include:

• Inadequate patient education and training on equipment;

• Poor professional follow-up services to determine if the
patient is properly using the equipment;

• Irregular equipment checks to determine if the equipment
is properly working; and finally,

• Contracts that allow a wait of as long as 24 hours from
the time the initial physician's order is received by the
supplier until the equipment is delivered and set-up.

173

Americans with disabilities and older Americans alike will
suffer significantly under competitive bidding because access to
the custom, highly specialized equipment that they require will
diminish. NAMES estimates that the small percentage of HME
suppliers who could remain in business under this type of structure
would not be able to provide this type of high cost, low margin and
highly serviced equipment to all corners of the country.

One HME provider in Minnesota, for instance, services
approximately 100 oxygen patients with 90 of them being Medicare
beneficiaries. Typically, he provides an average of three after
hours (evenings and weekends) calls per week to provide emergency
service to patients or new set-ups. If these patients were not
serviced adequately and on a timely basis, then costly
hospitalization would result. Often, new orders for oxygen in the
home are initiated from an urgent care clinic or hospital emergency
room, thereby avoiding hospital admission.

Under competitive bidding, a rapid response time by a limited
pool of providers will not be possible. The upshot could be an
additional and more costly hospital admission.

Other Competitive Bidding Models

Competitive bidding is Jcnown to work poorly both for the
Defense Department and the VA, where this technique already is used
on a large scale, similar to what Medicare would require. VA
hospitals have experienced deficiencies documented by the Joint
Commission on Accreditation of Healthcare Organizations (JCAHO) due
to the poor quality of home care provided by VA competitive bidding
contract winners.

Under the Administration's plan, we would have to expect
similar, if not greater, problems in access and quality. The VA,
once acquiring a signed contract in certain states, has monitored
the provider for provisions of services only to find they have no
awareness of home oxygen and HME items in the areas of: quality;
appropriateness of equipment; various types of equipment; safety
features of equipment; and current pricing of equipment.

British Columbia, Canada, has had a competitive bid process
for HME services in place since November 1991. There, the
government uses a scheme of establishing a "preferred" provider
based on the lowest bid and up to 2 "approved" providers based on
the next lowest bid in each health unit (7 units in British
Columbia) . Typically, this system allows for:

48 hours to set up new patients, from time of initial
order;

A three-year bid period with the government option to
renew every year if the provider is not performing based
on confirmed complaints;

• Concentrators, liquid oxygen systems, portable systems
and contents to be bid and paid for separately. Contents
are based on actual usage;

Government mandates on patient follow-ups/assessments
done every 6 months as a minimum, but can be done more
often if so desired;

• Government mandates that require concentrators to be
maintained at a minimum of every three months and more
often if desired;

The preferred and approved vendors compete on service and
are permitted to obtain clients based on referral,
physician or patient preference, even though providers
will be paid at different rates based on their bid; and

An overall decline in service levels because patients
have remained in hospitals longer. Service delays and
hospital admissions more than likely have increased
because of minimal patient/provider/physician
interaction.

174

Based on the accumulated evidence that demonstrates the
inadequacies of competitive bidding and because of the adverse
impact we predict that such a system would have on persons with
disabilities, HME providers and the entire health care system,
NAMES strongly opposes competitive bidding for home medical
equipment services.

2. Freedom of Choice

Especially important, all Americans should have freedom to
choose their health care providers. The Administration's proposal
encourages health plans to operate as efficiently and cost-
effectively as possible. This objective, while laudable, could
allow health plans to contract only with one provider in a given
field. Such a practice, however, would limit the choices of
available providers from which consumers can select. And, as such,
HME suppliers from whom consumers may have received care in the
past or whose companies are closer to home could be closed out.

NAMES already is beginning to see situations develop where
consumer choice is being severely limited because some HMOs will
contract only with one HME supplier. Our concern is that reducing
the number of providers in a given field will result in decreased
competition, eventually driving up prices, while diminishing
quality of care. No single provider can adequately cover as large
a geographical and populated area, across many miles and through
dense inner cities, as envisioned in the Clinton plan. Suppliers
also vigorously oppose the concept of a competitive bidding system
for HME items that essentially would lead to diminution of services
and quality.

NAMES recommends that the final health care reform legislation
should provide incentives for health plans to contract with as many
providers as necessary to meet the needs of the community. At the
very least, there should not be any disincentives in the system to
allowing full provider participation. As well, administrative
simplification of forms and the processing of reimbursement claims
would help eliminate some of these disincentives.

In the midst of the current health care reform debate, the one
solution to rising costs that emerges as an efficient, affordable,
and compassionate option is HME services as part of home care. HME
suppliers meet the needs of a wide range of individuals who require
medical equipment and services in their homes. Suppliers not only
provide many of the more "traditional" items of equipment such as
those envisioned when the Part B "DME" benefit was first adopted as
part of the Medicare law in 1965; now we also provide a vast array
of highly specialized and advanced services, such as infusion
therapy for the provision of antibiotics and chemotherapy, oxygen
and ventilator systems, and advanced rehabilitation equipment.
Comprehensive health care reform should establish no impediments to
the use of home care and HME services that are currently available
or to the enhancement of care in the home and other non-
institutional settings.

NAMES and HME suppliers are ready to assist Congress in any
way possible as you debate national health care reform, by
providing additional information on the HME services industry's
concerns described above and how they relate to persons with
disabilities and older Americans.

175

TESTIMONY OF GAIASHKTOOS

PRESIDENT, NATIONAL CONGRESS OF AMERICAN INDIANS

BEFORE THE SENATE COMMITTEE ON INDIAN AFFAIRS

INTRODUCTION

Mr. Chairman and Members of the Conunittee on Indian Affairs, good afternoon. My name is
gaiashicibos. I am President of the National Congress of American Indians and Chairman of the
Lac Courte Oreilles Band of Ojibwe Indians of Wisconsin. I would like to thank the Conunittee
for the opportunity to appear before you regarding the most important issue of health care reform
for our nation's first citizens.

The National Congress of American Indians (NCAI) is the oldest and largest federation of
Indian nations committed to the promotion of tribal governments and the protection of Indian
rights. Our membership currently exceeds 162 tribes. Established in 1944 and celebrating
presently our 50th Anniversary, the NCAI is devoted to advocating the interests of American
Indian Tribes and Alaska Natives. It is in this spirit that I appear before you today.

Mr. Chairman, before I begin with the main body of my remarks, I would like to draw the
Committees attention to a resolution passed recently by our membership regarding health care
reform at the organization's annual convention this past December in Reno, Nevada. (See
Attachments). I ask respectfully that the resolution, along with my statement, be entered into the
record.

It is my understanding that the purpose of today's hearing is to solicit commentary generally on
SI 757, the American Health Care Security Act, as it is perceived to affect Indian Tribes, and hear

176

specifically comments on the interface between the President's National Health Care Reform
proposal and the Indian Health Service. Accordingly, my testimony begins with a brief overview
of some of the principals the NCAI believes are essential in order for meaningful health care
reform be achieved for American Indians and Alaska Natives. I further raise what I believe are
some of the more serious questions and concerns about the scope of health care sersaces that will
be provided in Indian country. Indeed, it is imperative that Indian country be provided all the
information that is necessary to weigh carefully, the merits of the President's proposal.

BACKGROUND
It was with anticipation and great hope that I awaited formal introduction of the President's
Health Security Act (S.1557) into both houses of Congress some 2 months ago. I certainly am
among those who believe that health care in this country, particularity for American Indians and
Alaska Natives, is in a state of emergency. At the outset, I am generally encouraged that the
President's health care proposals for Indian country are premised in the recognition of treaty
commitments and the system of health care that has been developed over the years to fulfill the
goverrunent's responsibilities in addressing health care needs of Native Americans by maintaining
as the principal component of the health care delivery system that would serve Indian country, the
Indian Health Service (IHS). There is no doubt that the federal government's responsibility for the
provision of health care to this country's first citizens arises out of commitments that the United
States made upon entering into treaties with Indian nations. Moreover, Mr. Chairman, this is no
doubt that the Native people of this country have paid dearly for the benefits they receive. We've
ceeded millions of acres of land, —in many instances our home lands — in exchange for a promise
of health care. For decades, we have suffered in a system of rationed health care, a system which

177

has been seriously and severely underfunded from the outset. There must now be proper
assurances that health care reform for the Native people of the United States is meaningful and
tangible, and not simply yet another unfulfilled promise by the Federal Government.

QUESTIONS AND CONCERNS REGARDING HEALTH CARE REFORM FOR
NATIVE AMERICANS
There is no question that the Health Care Security Act would have a significant effect upon the
relationship between the Indian Health Service and the population it serves. And, there is no
question that the National Congress of American Indians supports the general principles of the
Health Care Security Act. We believe in the principles of universal health coverage for all
Americans and believe in action to control the soaring costs of health care. However, in order to
fully evaluate the merits of the President's Health Care Reform proposal, and to provide
meaningful input in order to achieve more efficient and effective health care systems for Indian
country, some fundamental questions must be answered and some basic assurances provided.
1. Funding

It is essential that sufficient funding to fully support services for Indians be made
available, consistent with the government's trust obligations to American Indians and Alaska
Natives. The NCAI is very concerned presently that funding for Indian health programs within the
Act is wholly inadequate to support the costs of delivery of the guaranteed benefit package to
American Indians and Alaska Natives. In short, Mr. Chairman, we are concerned that the
President's plan continues a long history of the severe underfunding of Indian programs. The many
worthwhile objectives contained in the Act simply cannot be realized without proper financing. At
best Mr. Chairman, the current level of funding for the health care programs designed to serve

178

Indian people who reside in reservation communities permits the IHS and the tribally operated
programs to address less than 50% of the overall health care needs of the Indian patient
population. Under the IHS operated programs, this includes some 42 hospitals and 65 health
centers. Under the Tribally operated programs, which represent a growing component of the
Indian delivery system, tribes operate approximately 8 hospitals and 93 health centers. And while
the Congressionally mandated mission of the IHS is to elevate severely the health status of Indians
to the highest possible level, limited federal funding has forced IHS to severely ration its services.
I now understand that the President's targeted request for Fiscal Year 1995 for IHS will further
reduce the capacity of the Indian health care system to address the needs of our communities. All
the while, there remains a soaring unmet need for safe water and sanitation systems. According to
its own estimates, only 15 of the nearly 500 IHS facilities currently has the potential to provide
the fill! range of health care services that are part of the comprehensive benefits package
guaranteed to all other Americans under the Health Care Security Act sufficient funding is vital.

We must have some concrete answers to questions about the costs to provide all of the
benefits listed in the Comprehensive Benefits Package (CBP). Further, we must know more
precisely what it will cost to maintain the same level of supplemental benefits which the IHS
currently provides. It would be helpful if Tribes knew what amount the Administration expects
Tribes to spend on renovation and expansion through the revolving loan fund. We need to know
what will happen to the Medicare and Medicaid payments which Tribes currently collect, under
the Act. It is imperative that the Administration and Congress commit to seeking a sufficient level
of funding necessary to provide the same comprehensive benefits other Americans are guaranteed
under the Act, at a minimum the same level of supplemental benefits that currently exists and to

179

achieve the renovation and expansion of facilities called for under the Act.

2. The Govemment-to-Govemment Relationship

In order to be consistent with the principles of Self-Governance, the NCAI believes the
Administration should have consulted with Tribes in drafting the Indian and IHS sections of the
bill. We hope that Congress will listen with a carefully to Tribes throughout the debate on national
health care legislation and its impact on Indian people.

Similarly, we are concerned that the Act has not properly taken into account the govemment-
to-govemment relationship between Indian tribes and the Federal Government. While the Act
provides a number of incentives to states which opt to undergo reform prior to the January 1,
1998 deadline, no such incentives are extended to the Tribes of the IHS. We hope the
Administration will agree to provide the same incentives to tribes that it currently is offering to
states. We also encourage the Administration to take the necessary steps to see that tribes and
states undergo reform at approximately the same time. It troubles me deeply that Indians and
Alaska Natives will have to wait an additional year for health care reform under the current
provision of the Act.

An additional concern under the govemment-to-govemment relationship occurs with respect
to service to non-Indians. I know many tribal leaders share this concern. Presently tribes have
authority to prevent the IHS from immediately extending services to non-Indians under the Indian
Health Care Improvement Act. My understanding is that the President's bill will undermine that
authority. The NCAI encourages Congress and the Administration to restore the requirement of
tribal consent prior to extending IHS and tribal services to non-Indians.

180

3. Additional Issues of Concern

The Act authorizes regional health care alliances to essentially operate as large purchasing
agents for options of health care plans from which alliance members may select the option which
most suits their needs. However, the Act does not resolve the issue of whether the overall IHS
service system could function as an alliance, purchasing health care plans for it's service
population. A principle feature of the health alliances is that they enable the pooling of a
sufiQciently number of a large number of health care consumers to afford an economy of scale in
the purchase of health plans. We are concerned that while the proposal for Indian country may
well offer more flexibility for local tribal government decision making, it may result in the loss of
economy of scale of purchasing power if the IHS were otherwise deemed to have the state us
regional health alliance.

Similarly we are concerned about the retention of the "payer of last resort" policy. I
understand IHS will continue "the payer of last resort" in the new era of health care reform. We
believe that this policy must be eliminated and that to clarify the role of IHS as the primary
provider to Indian people, direct federal reimbursement be provided to Indian Health programs
for services provided to patients eligible for third party reimbursements.

The President's plan lacks a strong health promotion and disease prevention component. We
believe these programs form the comer stone of any effective health care system and are a vital
part of addressing the health care needs of Native populations. We hope that Congress takes the
necessary steps that health plans offer health promotion and disease prevention programs as part
of the guaranteed benefits packages and that allocations and appropriations for Indian health
programs include the cost of these preventive services.

181

I am pleased that President Clinton's health care plan includes long-term care health care
services. However it is unclear just where Indian programs will fit into this system. Under the
current system, states fund many long-term care services for low-income Indians through the
Medicaid program. It is unclear that such services will continue under the Act. We believe a
mechanism should be clearly identified within the President's plan for fijnding the portions of the
various long-term care programs for Indians which would otherwise be paid as part of other state
matching funds. We are further concerned that the IHS has no comprehensive long-term care
program for older and disabled patients We hope the Administration remains committed to a
strategy for improving health care for the Native American elderly and disabled.

An issue to which I am personally committed as a tribal leader is HIV/ AIDS prevention and
education. We are faced with an alarming increase of HIV positive Native Americans and patients
who have developed AIDS. Unfortunately, funding for AIDS programs through IHS has been
sharply reduced. Essential treatment drugs have been eliminated from the IHS pharmaceutical
formulary. It is unclear under the President's plan whether such funding would be restored. I
believe that a meaningful health care plan would provide, at a minimum, essential treatment drugs.

CONCLUSION
Mr. Chairman, I would like to again thank the Committee for this opportunity to peirticipate in
dialogue with the Administration regarding the impact national health care will have on Indian
people and the Indian Health Service system. We certainly have a significant amount of work
before us. We remain hopeful that the President's health care reform bill will provide an
opportunity to address serious problems and improve health care for Native Americans. On behalf
of the National Congress of American Indians, we look forward to working with the

Administration and Congress to provide meaningful, effective and efficient health care services to
this country's first citizens.

182

TESTIMONY OF ROBERT E. BARROW

MASTER OF THE NATIONAL GRANGE

OF THE ORDER OF PATRONS OF HUSBANDRY

I am Robert E. Barrow. I are the Master (President) of the
National Grange of the Order of Patrons of Husbandry, which is
this nation's oldest, general farm and rural public interest
organization. It is a pleasure to speak to you today about the
Grange's views on health care reform, especially as it affects
the farming and rural areas of our nation.

The impact of health care reform on rural America has
received too little attention to date in the public debate on
this issue.

After surveying our approximately 300,000 members across the
nation on this issue, we have found there is a broad agreement
among farmers and rural citizens on many of the basic goals of
national health care reform. Grange members support universal
access to health care for every American regardless of age, race,
income, prior health condition, or where they live. We support
efforts to streamline the administrative costs and to contain
health care's skyrocketing costs. Grange members support main-
taining the freedom to chose one's own doctor.

However, our members are concerned that the unique problems
that are facing health care in rural areas are not magically
solved simply because we can and should find substantial areas of
common ground with our urban and suburban countrymen. Our debate
on national health care reform must focus substantial attention
on critical rural health care issues that affect nearly one out
of every four Americans.

This immense population, distributed across the huge geo-
graphic expense of our nation, means that the United States has a
vast rural health care system that no other industrial nation
tries to maintain. This fact is important because many modern
medical technologies seem to achieve their highest efficiencies
as greater economies of scale are found. Unfortunately, these
economies of scale are concentrated more and more in heavily
populated urban areas.

As a result, rural areas are increasingly facing reduced
access to health care facilities. Rural hospitals are smaller
than urban hospitals and find it difficult to use modern econo-
mies of scale. Rural health care providers have also been sub-
jected to overt discrimination by the federal government's
Medicaid and Medicare programs, which have set lower reimburse-
ment schedules for small rural hospitals than for larger urban
hospitals.

The difficulties and costs of maintaining quality health
care in rural areas can be demonstrated by the experiences of
the state of Pennsylvania. In 1989, the Center for Rural Penn-
sylvania published a report entitled "Health Care Outlook and
Opportunities". In that report, the Center found that nearly one-
half of the rural counties in Pennsylvania either rely exclusive-
ly on small hospitals or do not have a hospital.

The problems concerning access to adequate rural health care
services are not limited to Pennsylvania. The Congressional
Office of Technology Assessment has found that rural areas cannot
recruit and retain qualified health care personnel. One hundred
and eleven rural counties in the United States do not have
resident physicians. Over one-half million rural residents live
in counties that do not have a physician who is trained in
obstetric care. Forty-nine million rural citizens live in coun-
ties that do not have a psychiatrist.

Access to health care facilities is not the only critical
problem facing rural residents. America is an aging society.
Persons who are 85 years of age or older are the fastest growing
segment of our population. As we age, we tend to require more
health care in order to maintain our quality of life. For exam-

183

pie, the average 35-year old uses about $1,000 of health care per
year. The average person over the age of 8 5 uses $6,000 or more a
year in health related services.

This problem of an aging population is especially acute in
rural areas where the average age is 39 years old as compared to
a national average age of about 32 years old. Moreover, the
average age of a farm operator in the United States is 53 years
old. The critical problems involved with dealing with the in-
creasingly expensive needs of an aging population are already
having a tremendous impact on the health care system in our rural
and farming areas.

Other issues are also critically important to the rural
health care debate. Our nation's public and private insurance
systems have systematically discriminated against rural health
care providers by providing reduced reimbursement for the same
procedures or services that are provided in rural areas as
opposed to urban areas. The federal government's policy of not
allowing 100% deduction of health insurance costs for self-
employed individuals has also been a burden on rural areas
because rural and farming communities have disproportionate
numbers of self-employed people.

While the National Grange applauds the efforts of the
Administration and Congress to advance the goals of health care
reform, we can't help but have nagging concerns about the details
of the President's plan as presently formulated. Our chief worry
is that "Health Care That is Always There" will turn into "Health
Care That is Always (Over) There" for rural Americans. We fear
the continued consolidation of health care facilities outside of
areas that are easily accessible to rural citizens. In our view,
forcing farmers and other rural citizens to travel greater
distances to receive primary to secondary health care is not
health care reform. It is merely cost shifting and risk shifting
in another form.

Guarding against discriminatory forms of cost shifting and
risk shifting will require all of us who are concerned about
health care in rural America to remain actively involved as the
debate on health care unfolds over the next few months or years.
There are literally hundreds of issues where rural citizens have
a distinct interest in how the details of health care reform are
finally worked out. I would like to offer a few of the key issues
that the Grange believes will tell us whether or not health care
reform will be beneficial or detrimental to rural areas:

1. Global budgeting - If the President's proposals for
global budgeting rely primarily on historical spending
patterns, then health care reform will only lock-in the
discrimination that has historically occurred in rural
areas.

2. Relaxing the standards of health, safety, or consumer
protection. Several proposals to increase the avail-
ability of health care in rural areas involve relaxing
certain government standards that are related to pro-
tecting the patient's safety or consumer protection.
Related proposals call for expanding the use of non
physician-administered primary health care in rural
areas. We are not opposed to a discussion about these
proposals, per se, as part of the national health care
debate. However, we are concerned that the merits of
proposals like these should be debated for their adopt-
ion by all Americans - not just those who live in rural
areas. Rural Americans and farmers are not second class
citizens who must waive their rights to safety or con-
sumer protection in order to receive adequate health
care. If it is cost effective for registered nurses and
physicians' assistants to deliver primary health care

184

in rural areas, we assume those same efficiencies will
be found in urban and suburban areas as well.

3. Health Care Alliances - The President's proposal envi-
sions large purchasing cooperatives of one million
members or more to contract with health care providers
to provide medical services to the Alliance's members.
In all but a handful of states, it seems unlikely that
most health care alliances will be structured so as to
include a majority of rural residents. More likely,
health care alliances will be structured around urban
and suburban population centers that have significant
numbers of rural citizens lumped into the metropolitan-
based alliances for convenience sake.

This situation may or may not be beneficial for farmers and
rural residents. However, as I have pointed out, rural areas have
unique health care needs that may not be adequately addressed in
health alliances that are 60%, 70%, 80%, or more urban and
suburban based. A key test of the President's reform proposal
will be adoption of a program that allows a wider range of
options in the formation of health care purchasing cooperatives
that recognize, as Revolutionary War hero Ethan Allen once said,
"The Gods of the Hills are not the Gods of the Valleys". Rural
areas will need to be allowed to withdraw from metropolitan-based
health care alliances and form their own purchasing cooperatives
if rural areas are going to be able to determine their own health
care destiny.

The Grange's interest in rural health care dates back for
decades. Many of the State Granges already act as health care
alliances for our members by contracting with HMOs and insurance
companies to provide quality health care services to their
members. State Granges operate half-a-dozen long-term health care
facilities for Grange members across the nation. Dozens of local
Granges across the nation sponsor or actively support Emergency
Medical Services in their communities. Health care is a critical
issue for our state Granges and local Grange chapters.

At the National level, the Grange is sponsoring a multi year
political education and action program called "Health Care in
America". At our request, nearly 1,700 local Granges wrote to
First Lady Hillary Rodham Clinton urging her to consider the
unique problems of rural America as the Administration drafted
its health care proposals. We have published and distributed
nearly 5,000 copies of an information brochure entitled "Health
Care in America: Issues, Questions, and Facts". I proclaimed this
past September "Health Care in America Month" and asked our local
and State Grange chapters to hold meetings on health care reform
and to sponsor free blood pressure screenings to help make people
aware of their personal responsibilities of maintaining good
health as an integral part of any national health care reform.

The National Grange is committed to working with the Clinton
Administration, Members of Congress, and our allies and friends
in rural areas that are represented by colleagues at this table
to secure affordable health care for all Americans. We believe
our job is to make sure that the unique problems and challenges
of providing adequate health care in rural America is incorporat-
ed into any final national health care reform plan.

Thank you.

H.R. 1200, AMERICAN HEALTH SECURITY ACT
OF 1993; H.R 2610, MEDIPLAN ACT OF 1993;
AND OTHER SINGLE-PAYER OPTIONS

WEDNESDAY, FEBRUARY 9, 1994

House of Representtatives,

Committee on Ways and Means,
Subcommittee on Health,

Washington, D.C.
The subcommittee met, pursuant to notice, at 10:06 a.m., in room
1100, Longworth House Office Building, Hon. Fortney Pete Stark
(chairman of the subcommittee) presiding.

[The press release announcing the hearing follows:]

(185)

186

FOR IMMEDIATE RELEASE PRESS RELEASE #26

THDRSDAY, JANUARY 27, 1994 SUBCOMMITTEE ON HEALTH

COMMITTEE ON WAYS AND MEANS
U.S. HOUSE OF REPRESENTATIVES
1102 LONGWORTH HOUSE OFFICE BLDG.
WASHINGTON, D.C. 20515
TELEPHONE: (202) 225-7785

THE HONORABLE PETE STARK (D. , CALIF. ), CHAIRMAN,

SUBCOMMITTEE ON HEALTH,

COMMITTEE ON WAYS AND MEANS, U.S. HOUSE OF REPRESENTATIVES,

ANNOUNCES A HEARING

HEALTH CARE REFORM:

H.R. 1200, THE AMERICAN HEALTH SECURITY ACT OF 1993;

H.R. 2610, THE MEOIPLAN ACT OF 1993; AND OTHER SINGLE-PAYER OPTIONS

The Honorable Pete Stark (D. , Calif. )> Chairman, Subcommittee on
Health, Committee on Ways and Means, U.S. House of Representatives,
announced today that the Subcommittee will hold a hearing on
H.R. 1200, the American Health Security Act of 1993; H.R. 2610, the
MediPlan Act of 1993; and other single-payer health care reform
options. The hearing will be held on Wednesday, February 9, 1994,
beginning at 10:00 a.m., in room 1100 Longworth House Office
Building.

In announcing the hearing. Chairman Stark stated: "A single-
payer health care system, such as the Canadian system, is the
simplest and most straightforward alternative for solving the
problems facing our health care system today. The Congressional
Budget Office has found that such a system has the highest potential
for controlling health care costs. For these reasons a hearing to
explore the feasibility of a single-payer system is a necessary part
of our examination of options for health reform^;*

BACKGROUND:

H.R. 1200, the American Health Security Act of 1993 was
introduced by Mr. McDermott, Mr. Stark, Mr. Rangel, Mr. Lewis (Ga.),
Mr. Gibbons, Mr. Coyne, Mr. Ford (Tenn.), et al.

H.R. 1200 would establish a single-payer model of health care,
providing coverage for all Americans. The provision of health care
services would remain in the private sector and individuals would not
obtain their insurance through their employers. Patients could
select their own physicians and there would be no deductible,
coinsurance, or copayment required. The benefit' package would
include all preventive, hospital and outpatient medical services. In
addition, the plan would cover long term care, mental health
services, prescription drugs, and substance abuse treatment. The
plan would be administered by the States, and providers would bill
the State for covered services.

The plan would be Federally financed. The Federal Government
also would define the standard benefit package and collect the
premiums. Financing would be through payroll deductions, a tax on
tobacco products, and an excise tax on handguns and ammunitions.
Savings from the elimination of health insurance products would be
used to subsidize care for low-income persons.

H.R. 2610, introduced by Mr. Stark, Mr. Coyne, et al, would
extend benefits under the Medicare program to all Americans and is
similar to a proposal introduced by Mr. Stark in the 102nd Congress,
H.R. 650, the MediPlan Act of 1991. The bill would assure health
insurance protection modeled on the Medicare program.

187

It incorporates the national health budget and reimbursement
systems currently included in H.R. 200. The budget would be used to
establish provider payment rates, and to assure that costs are
contained within limits. Total expenditures would be gradually
reduced to the rate of increase in the gross domestic product.

The bill would provide Federal regulation of MediPlan
supplemental insurance. Any additional costs would be financed
through a new lO-percent tax on gross payments received for MediPlan
benefits by health care providers. In addition, every individual
(except lower-income Americans) would pay the MediPlan health
benefits premium (about $1, 500/person; $3,000 per working couple)
through the income tax system, and employers would pay 80 percent of
the MediPlan health benefits premium.

Benefits under Medicare would be enhanced by the bill. Basic
benefits would include Medicare benefits except that a single
deductible of $350 per individual ($500 per family) and an out-of-
pocket limit per person of $2,500 ($3,000 per family) would be added.
Prescription drugs would be added with a separate deductible, and
prevention benefits would be covered without cost sharing.

The bill would encourage States to continue their experiments
with their own reforms. States, subject to minimum Federal
guidelines, could opt out of the national program.

DETAILS FOR SUBMISSION OF WRITTEW COMMEMT8;

For those who wish to file a written statement for the printed
record of the hearing, six (6) copies are required and must be
submitted by the close of business on Wednesday, February 23, 1994,
to Janice Mays, Chief Counsel and Staff Director, Committee on Ways
and Means, U.S. House of Representatives, 1102 Longworth House Office
Building, Washington, D.C. 20516. An additional supply of
statements may be furnished for distribution to the press and public
if supplied to the Subcommittee office, 1114 Longworth House Office
Building, before the hearing begins.

FORMATTING REODIREMEMTB ;

Each statement presented (or printing to tne Commitiee by • witness, any written statement or exhibit submitted (or
the printed record, or any written comments in response to a teQuett tor written comments must con(orm to the guidelines
listed below Any statement or exhibit not in compliance north trtese guidelines will not be printed, but will be maintained in
the Committee files (or review and use by the Committee

1. All statements and any accompanying eihioits to' printing must be typed m single space on legal-size paper and
may not exceed a total o( 10 pages

2 Copies o( whole documents submitted as exnipn material will not t>e accepted (or printing Instead, exhibit
matenal should be re(erenced and quoted o' paraphrased All exhibit material not meeting these specifications
will be maintained in the Committee files for rev«w and use by the Committee

3 Statements must contain the name and capacrty in which the witness will appear or, (or written comments, the
name and capacity o( the person submitting trie statement, as well as any clients or persons, or any organization
(or whom the witness appears or (or whom the statement is submitted

4 A supplemental sheet must accompany each statement listing the name, (uM address, a telephone number where
the witness or the designated representative may t>e reached and a topical outline or summary o( the comments
and recommendations in the full statement This supplemental sheet will not be included in the printed record

The above restnctions and limitations apply only to material being submitted (or pnnting Statements and exhibits or
supplementary matenal submitted solely for distribution to the Members, the press and public dunng the course o( a public
heanng, may be submitted in other (orms

188

Chairman Stark. The committee will come to order.

The chairman would like to announce that the committee is
going to continue its hearings on health reform today and deal with
the single-payer option. The chair has a 2 page opening statement
which lauds the merits of the single-payer system, and I would ask
unanimous consent to dispense with the reading of this laudatory
opening statement and have it appear in the record alongside of
the laudatory statement that I am sure my distinguished colleague
from California, the ranking member, would like to make in nis
opening statement.

[The statement referred to follows:]

OPENING STATEMENT

THE HONORABLE PETE STARK

COMMITTEE ON WAYS AND MEANS

February 9, 1994

Good morning.

Today, the Subcommittee on Health continues its series of
hearings on health care reform proposals with testimony regarding
the so-called "single payer" options for reform.

There are two primary approaches to a single payer approach to
health care reform. The first is HR 1200, the American Health
Security Act of 1993, introduced by Representative McDermott amd
others. I introduced the second alternative, HR 2610, the
MediPlan Health Care Act of 1993.

Single payer proposals meet every one of the President ' s
objectives for health care reform. They would guarantee universal
coverage and limit the growth in total health spending, with
scoreeible savings. In fact, the Congressional Budget Office
estimated conservatively that by the year 2002, reforms along the
lines of H.R. 1200 would reduce national health expenditures by
70 billion dollars, with savings escalating in subsequent years.

Both of these proposals would preserve patients' freedom of
choice. Unlike many of the competing health reform proposals,
the single-payer approach allows every American the financial
freedom to choose his or her own doctor, specialist, and
hospital .

Probably the greatest virtue unique to the single-payer reforms
are their simplicity. Everyone is covered under the same system.
Providers have only one set of rules by which to play. And, in
comparison to every alternative health reform proposal, a single-
payer system wastes the least amount of scarce resources on
excessive administrative costs.

The idea of a single payer system is not radical, as some would
like us to believe. In essence. Medicare is a single -payer
system for the elderly -- and a very successful and popular
system at that .

189

since 1965, Medicare has insured virtually all senior citizens
under a single public plan. Medicare now provides universal and
guaranteed coverage to some 35 million Americans. Individuals
entitled to Medicare benefits have complete freedom to choose
their own hospitals and doctors.

Unlike any private health insurer, Medicare's administrative
costs are between 3 to 4 percent of total expenditures . Given
this record of efficiency, I am hard pressed to justify
alternative health reform plans that recjuire higher payments to
cover the overhead of private health insurers, which ranges up to
40 percent.

Medicare has a proven record of effective cost containment. The
Medicare program has pioneered innovative payment methodologies.
In fact, many private insurers have started to follow the lead of
Medicare in the use of the physician resource-based relative
value scale (RB RVS) and the hospital prospective payment system
based on diagnosis related groups (DRGs) .

Medicare is a popular program. It works. It has been tested by
some of our most critical and outspoken constituents. And they
like it. It is an all-American health insurance system, which
takes good care of our parents and grandparents .

Of course. Medicare is not perfect, and could be improved, as it
has been over the course of the past thirty years. Nonetheless,
I dare say we would be very fortunate indeed if, at the end of
this year, we produce a health reform plan as popular and
successful as Medicare.

A single-payer plan, such as either H.R. 1200 or H.R. 2610, would
provide all residents of this country health insurance coverage
that is guaranteed and portable . It would provide seamless
coverage -- without regard to income, employment or medical
problems.

I urge my colleagues to take a careful look at the merits of
these two bills as we work to pass health care reform legislation
during the next few months .

190

Mr. Thomas. Mr. Chairman, I do not have a written statement
lauding the single-payer system that I would put in the record, but
I would say that I am pleased that CBO has finally given us some
numbers on the President's, so that we can begin to compare other
plans.

We have taken testimony from a lot of people in the health care
industry, and I look forward to begin to hearing testimony from our
colleagues who have spent a lot of time looking at this questions
and clearly have different ways of delivering what all of us are in-
terested in, and that is health care to all Americans.

Thank you, Mr. Chairman.

Chairman Stark. We have an opening panel consisting of three
distinguished members. We are awaiting the arrival of Hon. John
Conyers of Michigan, who is on his way.

We are joined by a distinguished member of our subcommittee,
Mr. McDermott, and my neighbor and colleague from California,
Hon. George Miller.

In the interest of time, Jim, why do we not have you start off?

STATEMENT OF HON. JIM MCDERMOTT, A REPRESENTATIVE
IN CONGRESS FROM THE STATE OF WASHINGTON

Mr. McDermott. Thank you, Mr. Chairman.

I am here today really as the coauthor of H.R. 1200, the Amer-
ican Health Security Act, and I want to thank the subcommittee
for the opportunity to testify about this issue.

This subcommittee and the Congress are beginning a historic de-
bate on national health care reform. It is long overdue, and I know
that many members on this committee have been actively working
on this issue for many years.

President Clinton deserves much credit for placing health care
reform first on his agenda for the Nation. It is now time for the
Congress to respond to the challenge, and I think we all welcome
that challenge.

We are all aware of the need for the reform of the Nation's cur-
rent system of providing and paying for health care. I am not going
to waste your time convincing you of the existence of health care
crisis. The American people know the indisputable reality of this
crisis. And as far as I am concerned, anyone who tries to convince
them otherwise can defend that position at the polls.

The time has come to start making decisions. So far, the debate
has focused really on competing slogans. But we all know that slo-
gans are not going to be enough on this issue, because every citizen
will be personally affected by this vote, and if we mislead them
with slogans, every voter will know it in a very short time.

We are at a fork in the road. Yogi Berra said: "When you come
to a fork in the road, take it." We can now consolidate the control
of the insurance companies over our health care delivery system
and spend all our resources policing how they do the job, or we can
give that control to the American people.

H.R. 1200 will give you the chance to vote for something that will
cost your constituents less and give them more than they have ever
had, and you will be able to explain to them exactly how it will
work. I believe that is a vote that can you defend.

191

Every other option, including the status quo, will cost them much
more and give them much less. They may not understand that
today, but they will figure it out in a very short time, and they will
hold those of us who failed to seize the opportunity for the best ac-
countable.

So let us talk reality and substance. Let us really talk bottom
lines.

I am here today to discuss a proposal which at least 92 other
members, including my colleague, Mr. Miller, feel is the most cost-
effective approach to preserving the best aspects of our current sys-
tem, while taking bold and necessary new steps to correct the in-
equities and shortcomings of our current system of health care fi-
nancing.

In short, H.R. 1200 offers the best approach to health care re-
form because it is simple; it is universal; it is proven; and it is effi-
cient.

H.R. 1200 in a single-payer model of health care financing which
guarantees — and I underline "guarantees" — universal coverage
while preserving the best aspects of the current private delivery
system. This is in sharp contrast to other proposals currently be-
fore the Congress.

President Clinton's plan aspires to universal coverage, but it will
achieve this only through a tremendous disruption of the present
system which has never been tested before. Other proposals before
the Congress do not even pretend to achieve universal coverage.

Most significantly, H.R. 1200 accomplishes the goals the univer-
sal coverage, the preservation of the current private physician/pa-
tient relationship, and offers the most comprehensive benefit pack-
age, while accruing the largest savings compared to any other pro-
posal.

According to the CBO, who was here yesterday, the single-payer
approach will save up to $175 billion a year from the Nation's
health care bill by the year 2003. That compares to $110 billion in
savings in the President's proposal. That is $65 billion a year more
savings.

Moreover, the single payer achieves these additional savings
while providing the most generous benefit package, including full
long-term care and while providing a much more generous growth
rate than the President's plan permits. Our growth rate is politi-
cally attainable, which makes our savings real. In addition, up to
$100 billion will be saved in administrative savings alone.

CBO yesterday did not report any administrative savings in the
President's bill. And as you know, the CBO scoring of the Cooper
bill last year demonstrated that Mr. Cooper's proposal would add
$214 billion in health care spending, while leaving two-thirds of the
uninsured population still uninsured.

Now I am proud to be here as a cosponsor of the only proposal
for health care reform that is fully financed and that guarantees
universal coverage, which is a requirement demanded by 78 per-
cent of the American people in polls. There is no smoke, no mirrors,
no phony numbers, and unlike the Cooper proposal, there is no hid-
den income tax penalties for most middle class Americans in addi-
tion to their health insurance and out-of-pocket costs, and there is
no herding of Americans into HMOs.

192

Indeed, I commend the cosponsors of the Cooper bill for their po-
litical courage in supporting effective income tax increases and
business profit tax without offering to find benefits or coverage in
return. It really intrigues me how 26 Republicans are willing to
support an income tax increase, and I am going to watch with in-
terest how they defend at home this combination of taxes and no
guaranteed insurance.

Under H.R. 1200, every American will know exactly how much
their health insurance is going to cost them in the foreseeable fu-
ture, and 75 percent of Americans will pay less in 1999 than they
are paying today for their health insurance.

Seventy-five percent will pay less for a benefit package that is
the most comprehensive, including home, community-based, and
nursing home long-term care, prescription drugs, comprehensive
mental health and substance abuse benefits, as well as a full array
of preventive and acute care services.

Seventy-five percent will pay less for a plan that will give them
unrestricted free choice of provider, not just free-choice of plans.

Seventy-five percent will pay less for a plan which eliminates in-
terference in the doctor/patient relationship by prohibiting
precertification of medical decisions by some clerk on a 1-800 num-
ber.

Seventy-five percent will pay less for a plan that eliminates for
consumers the need to file the reams of paper with insurers and
will also reduce the administrative burden on providers.

H.R. 1200 numbers are the cleanest numbers in town. The bill
was scored by CBO, and the numbers were sent to Joint Tax to
raise the required revenue, period. We yield a $9 billion budget
surplus by the third year and universal coverage in the first year.
Our payroll deductions for a public health insurance premium for
most small business and for individuals are smaller than the Presi-
dent's plan and definitely less than most businesses and individ-
uals are paying for insurance today.

No one else can tell the American people what their proposal will
cost Americans individually for on major reason. No one else can
tell the American people what their private insurance premiums
are going to cost. No other proposal can verify whether or not these
premiums are going to be affordable.

So let us get one thing straight. Universal coverage is affordable.
The reason our numbers are the best numbers in town and always
will be is because the administrative savings by getting rid of in-
surance company middlemen more than pay for the universal cov-
erage.

Make no mistake about that. The tortured, cumbersome and, in
my opinion, futile attempt to keep insurance companies in the mix
is consuming our resources for universal coverage.

Now ask yourself a question. Are insurance companies worth it?
Does anybody have a constituency who loves their health insurance
company?

Consumers Union found that our bill is the best for all segments
of the population and especially for children and senior citizens.

The American Medical Women's Association endorsed our bill as
the best for women.

193

The American Public Health Association endorsed our bill as the
best reform for our public health infrastructure.

The American people are not looking for another patch on the
health care system. They are looking for a health care system that
is simple to understand with clear guarantees on coverage and af-
fordability.

H.R. 1200 is the only proposal that does that. And when you take
it home to your constituents, you will be able to explain it, and
they will know that they have really gotten something.

Thank you.

Chairman Stark. Thank you.

Welcome to Hon. John Conyers. Would you like to enlighten us
in any manner you are comfortable?

STATEMENT OF HON. JOHN CONYERS, JR., A REPRESENTA-
TIVE IN CONGRESS FROM THE STATE OF MICHIGAN

Mr. Conyers. Mr. Chairman, I am delighted to appear here with
Dr. McDermott and Chairman Miller. We are making a pretty good
team these days, going from committee to committee, pleading our
case for the most popular health care reform bill that has been in-
troduced so far in the Congress.

I am glad to see my former colleague on Government Operations,
Jerry Kleczka, here, where he abandoned his committee of original
first love to join you here.

I just want to fill in a few spots between Dr. McDermott and
Chairman Miller on how this bill came into being, and I think it
is kind of important that we realize that this was not a philosophi-
cally drive bill. It was not ideological.

Years ago, a number of people began looking at the notion of how
this system can be made better. Our committee, Government Oper-
ations, went to Canada, not only to Ontario but into other parts of
the provinces, looking at a system and brought back a plan in
which we took some of the Canadian system's ideas. We did not
mimic this. Is not a foreign operation. This is an American plan
taking the best in our system, and we do have some things in the
health care system of which we can be eminently proud and put
it into a system that we have to move to.

You know, I am proud of the President for daring to raise this
issue in his context when he was asked by a then incumbent: What
health care problem?

But I am now beginning to give him more sympathy than I had
before, because now I am beginning — I think he is beginning to see
how entrenched and formidable the vested interests are in this sub-
ject matter.

There are some people who could care less about what would be
best for the American people. Their interests are too long and deep
and wide, and they are just not going to go about it. i^Jid I refer
to the rebuff that he received from the business organization only
recently in which he has tried to meet them halfway, as it were,
and they are attacking him as if he is the sponsor of H.R. 1200,
and I wish he was.

Some of our issues are in the Clinton bill, some of our goals. But
let me just go a through a few of them, and I will yield this great
honor.

194

Universal coverage, here are the things that attracted me to it.
I did not come with a plan. I started working on one. Marty Russo
started working on one with all of us. It went through infinite
changes. Paul Wellstone came into it. You contributed, yourself,
Mr. Chairman. Greorge Miller has been in this thing for years.

But let us talk about what it is we are looking at — universal cov-
erage, comprehensive benefits, strong cost-containment, one tier of
care — a big star, free choice of provider — fair financing, targeted
assistance to the medically underserved, and a strong consumer
role.

Now in H.R. 1200 — and we have 93 cosponsors — this is what
brought us to the plan. It was not a Democratic plan; it was not
a — it was a people's plan. And on each one of the points that I have
just enumerated, without going into the description, which is my
statement, there is no question about which plan brings forward
the most. And when CBO and GAO, both impartial and sometimes
even critical to the work that is brought to their desks, they scored
H.R. 1200 far higher than all the rest, as has been indicated, $90
billion under GAO and $50 billion under CBO.

It is there. The problem now is whether or not we have the cour-
age to take on our friendly insurance companies and say: Look, fel-
lows, most of the American people, by polls, want to have a regula-
tion. They want health care regulated if it will keep the costs down.
And that is what we have done. Not government-run, not socialized
medicine — underlined, not socialized medicine — not England.

And so what we have done is to have put all of these principles
together in a sensible way.

The Congressional Black Caucus, I am very proud to say here,
has overwhelmingly supported the bill, and we think that as this
understanding settles down, I think that the support around the
principles of our bill are going to grow.

Now I close on one point, and that is on nomenclature. Is it a
premium, or is it a tax? Please tell me. This is a burning question.
Is it out-of-pocket? Is it deductible; is it excludable? Wonderful dis-
cussion, ladies and gentlemen. But the point is, and the American
people have said it to us already, is that no matter what it is de-
scribed as, it is more money than we can continue to pay every
year.

They are saying: Whether it is a premium or a tax, Mr. Presi-
dent, really does not matter. The question is: How much is it every
year? And every year under every analysis — independent, govern-
mental, and private — we have come upon what so far is the best
plan for serious health care reform that we can bring to this com-
mittee at this time.

Thank you very much for your consideration.

[The prepared statement follows:]

195

STATE^IE^r^ of representative john conyers, jr.

ON H.R. 1200, THE AMERICAN HEALTH SECURITY ACT,

BEFORE THE SUBCOMMITTEE ON HEALTH

COMMITTEE ON WAYS AND MEANS

FEBRUARY 9, 1994

Thank you, Chaiiman Stark, for holding this hearing on H.R. 1200, the American
Health Security Act, and for inviting me to testify. It is clear, Mr. Chairman, that the
current health care system needs major surgery, not just a bandaid here or there as some
people advocate.

I know your Subcommittee has been incredibly busy lately, holding hearings every
day. Bob Reischauer of CBO testified before you yesterday to report on the scoring of the
Clinton plan. Based on the news accounts, the CBO report predictably resulted in the usual
charge and counter charge that only serves to confuse the American people.

I believe the American people want straight talk about health care reform. H.R. 1200
provides this because it is built on the most simple and solid foundation of any reform plan.

• Universal coverage: everyone gets it by 1997.

• Comprehensive benefits: the best, including comprehensive long-term care,
mental health and substance abuse, and prescription drug benefits. With no co-pays
or deductibles for most services, unlike other plans.

• Strong cost containment: CBO says we save the most, even as we provide the
most generous benefits. We save at least $75 billion more than the President in 2004,
with much more generous benefits and little or no cost sharing.

• One tier of care: without question. You don't have to pay extra for the privilege
of seeing the provider of your choice.

• Free choice of provider: No one's forced into a managed care plan under H.R.

1200.

• Fair financing: for both individuals and businesses. 75 percent of Americans will
pay less. And the plan is fully paid for.

• Targeted assistance to the medically underserved: We double funding for health
clinics and to place primary care prv>viders in medically underserved communities.

• Strong consumer role: at all levels of the program. Decisions aren't left to huge
insurance companies.

For these reasons, over 80 percent of the Congressional Black Caucus supports H.R.
1200. And that's why I urge this subcommittee to do the same.

I feel bad for the President right now. He's been trying to do the right thing. I don't
believe his health reform proposal is the best way to go. But we all have to give him
enormous credit for drafting a serious proposal that provides universal coverage and now,
according to CBO, would significantly contain costs in the long run.

I believe the strong criticism leveled at the President's plan shows that he made a
major political miscalculation early on.

You can't really solve the health care crisis by appeasing the business community, the
insurance companies, the drug companies, and even a lot of the health providers. Their
financial stake is too high to expect that they would give up the enormous benefits they
derive from the current system. What a surprise that many businesses oppose the Clinton
plan. How many years did business fight family and medical leave — 5 to 10 years? And
that program was unpaid and didn't cost them a cent.

196

The President's program is taking hits all over the place. It's been accused of being
heavy on government regulation and big bureaucracy, it would limit patient choice of
provider, and it's a new tax on employers. These criticisms are all too predictable from the
monied interests that roam the halls of Congress.

The President would have been much better off with a simple and straight-forward
approach to health care reform. One that the American people can understand. That's why I
coauthored, along with my colleagues Rep. McDermott and Sen. Wellstone, H.R. 1200/8.
491, the American Health Security Act. It's a plan that can stand up to the pushing of hot
buttons and phony labeling from the health insurance industry and from our colleagues on the
other side of the aisle. For example:

Government Regulation. Let's consider the charge that the plan is heavy on
government regulation. Business won't support regulation even if it's in their interests ~
such as to effectively control health costs -- because they fear being regulated in other areas.
Health providers ~ well, we know why they don't like regulation.

But the public sure likes government regulation in health care. A Newsweek poll
from this past Sunday found that by 57 to 36 percent Americans support government
regulating the cost of care and drugs. Every other major industrialized country controls
health costs through regulation - by negotiating fair prices with providers. It's tested and
proven.

That's why CBO said that H.R. 1200 would cover everyone by 1997 and save up to
$175 billion a year by the year 2003. CBO said the Cooper bill would leave 25 million
uninsured and raise national health spending by over $200 billion over five years. CBO felt
Mr. Cooper's cost containment strategy was as firm as Jell-0 nailed to the wall.

The answer isn't to back away from regulation. It's to use the bully pulpit of the
Oval Office to tell the American people what polls show they already know ~ it's necessary.

Big Bureaucracv. Let's talk about big bureaucracy. 12-15 cents of every health
dollar a person pays to a private insurance company now goes for bureaucracy. CBO figures
it will be only 3 cents of every dollar under H.R. 1200. CBO estimates we would save well
over $50 billion a year in paperwork under single payer. GAO said we could save 10
percent of health costs under single payer ~ $90 billion a year. It makes no sense to
maintain a fiiU employment program for health insurance companies when that money could
go to care for people.

I'll tell you, Mr. Chairman, my Government Operations Committee wrote the
Paperwork Reduction Act in 1980, which is supported by Republicans and Democrats alike.
There's no greater vote for paperworic reduction that this House could make than to approve
H.R. 1200. It's the biggest paperwork reduction act of all times.

The Clinton and Cooper plans would reduce paperwork barely a shred. Why?
Because they keep much of the wasteful insurance bureaucracy in place.

Free Choice of Provider. This is where the President made his biggest mistake.
Because he was fearful the business community would not accept the government negotiating
provider fees he bought into this unproven and crazy theory of managed competition. Lo
and behold managed competition ~ whether the Clinton or Cooper variety - goes for the
jugular and tears into the most sacred part of our messed up health care system: a patient's
free choice of provider. Everyone gets herded into HMOs or other arrangements that limit
physician choice. If you want more choice you have to pay for it, which means a second
class health system would serve low-income Americans. H.R. 1200 maintains the current
delivery system — but gives everyone equal access to it. Patients and doctors would all have
more autonomy under single payer.

Single payer is not socialized medicine. It's social insurance with private health care.

197

New taxes. CBO said clearly yesterday that the health premiums in the President's
plan are a tax. So, in effect, his plan raises money like we do under H.R. 1200. The
Cooper plan makes no bones about taxes — his plan makes Americans pay taxes on health
benefits that they already get for free.

The real issue isn't taxes. It's spending. If we can save a lot more money by
centrally collecting with one payer in each state the same money that is already being spent
on health care, rather than by using 1,200 different insurance companies, why be bound by
some ideological debate over taxes.

Businesses and individuals can pay premiums to an insurance company, and
individuals can pay for health care out-of-pocket, thereby continuing the waste and
inefficiency of the current system. Or the govenmient can coUect that money as taxes and
run a more efficient, cost effective system, as we do under H.R. 1200. I have every
confidence that the American people can understand this difference, and not be fooled by the
self-serving rhetoric from the insurance industry.

Again, the recent Newsweek poll found that by 51 to 41 percent people want
employers to pay most costs of coverage. And let's put this employer mandate in
perspective. In 1990 Congress increased the minimum wage by 45 cents an hour. We never
heard about significant job loss. H.R. 1200 would cost the smallest employers only about 30
cents an hour. But think of how much it would save employers in reduced health spending
and healthier workers.

Mr. Chairman, the critical condition of our health care system requires that we do
major surgery. Without major surgery the patient ~ all Americans ~ don't have a chance. I
believe we can come together by adopting a program like H.R. 1200, which brings all
Americans together under the same high-quality insurance policy.

198

Chairman Stark. Thank you.
George.

STATEMENT OF HON. GEORGE MILLER, A REPRESENTATIVE
IN CONGRESS FROM THE STATE OF CALIFORNIA

Mr. Miller. Thank you, Mr. Chairman, and let me thank you
and your colleagues on the committee for holding this hearing on
H.R. 1200.

As so often is the case in politics, competition between various
proposals on a single issue not only sheds great light but also great
misunderstanding. The debate over the cost of the competing
health care reforms is significant, but it is not determinant. The
critical question is not whether the plan is paid for through a tax
or through premiums or copayments or deductibles; the critical
question is: Does the legislation deliver what it promises, and will
it provide quality medical coverage for every citizen that they and
our Nation can afford?

The Congressional Budget Office has studied the President's plan
and the single-payer alternative. In 1992, it also studied the Coo-
per plan, the so-called Clinton-Lite. The CBO found that the Coo-
per plan left 25 million people uninsured by the year 2000 and cost
the Nation an additional $19 billion in health care costs by that
same year. It does not reduce costs; it does not provide universal
coverage. The Cooper plan, quite frankly, is not a viable option.
Rather than being Clinton -Lite, it is really Health Care-Lite.

The CBO analysis of the President's plan should not be feared
by the President or his supporters. Being on budget is acceptable
and probably advantageous. The CBO that found that while the
plan would cost more than the President had thought, it still will
generate savings in overall health care costs and ultimately bring
down the Federal deficit after the year 2004. The CBO found that
the plan would not have a serious negative impact on the economy,
and the CBO also stated that we should bear in mind that the
short-term deficit created by the plan offers this country a very real
benefit — health care for all of its citizens.

What did the CBO find when it studied the single-payer plan?
Quite frankly, the single-payer plan wins this particular round of
competition. The CBO found that H.R. 1200, our single-paver plan,
would reduce national health care spending by between $114 and
$175 billion per year starting in 2003. The CBO also found that the
financing method for H.R. 1200 would, in fact, pay for the generous
benefits that the plan prescribes. The single-payer plan will not in-
crease the deficit, because its financing package of payroll and in-
come taxes was written to match the costs of the benefits that it
offers.

It is important to note that the taxes levied to pay for health
care are a substitute for, not an addition to, the premiums that the
consumers pay today. Again, it is not what you call it. But does it
add up and does it deliver on its promises? The single-payer plan
will offer better benefits to all consumers at cost savings to 75 per-
cent of those Americans.

Bear in mind also that comparing the plans, the single-payer
plan offers long-term care. The President's plan and Congressman
Cooper's plan do not.

199

The single-payer plan does not require additional copayments
and deductibles in addition to the premiums. The President's plan
and Congressman Cooper's plan do.

The President's plan and the single-payer plan specify a detailed
list of benefits that would be offered. The Cooper plan has no such
list. The only guarantee under the Cooper plan is that your health
insurance benefits are going to be taxed for the first time by the
Government, unless you go for the lowest possible plan. But there
is no guarantee of what the country will receive in return for the
tax on your benefits. The Cooper plan, like its neighbor, the Chafee
plan, will not meet the test of the American consumer looking for
both affordable health care and universal coverage.

Again, we are left with either the President's plan or the single-
payer model. And in the final analysis, single payer, as offered by
my colleagues, Congressman McDermott, Congressman Conyers
and Senator Wellstone, offers a more generous benefit to more peo-
ple at a greater savings than any other plan.

The single-payer alternative, H.R. 1200, establishes a health care
system that preserves the right of every American to select his or
her own doctor. It affords every American access to care regardless
of his or her employment or medical history. It provides doctors the
ability to conduct their profession as they were trained to do, and
it treats businesses equally and fairly, eliminating the need to cut
employee health benefits as a competitive strategy. It saves money,
over $1,000 per family per year.

What we have witnessed over the past year is that both the
President and Representative Cooper have been playing hide-the-
ball with the American public with regard to health care costs in
this country.

But this committee is far too sophisticated for that. You know
the real cost of health care, and you know that we are all paying
for it in this country, and that there is no free care. Charitable
care, unreimbursed care, shows up somewhere else in the health
care expenditures of this country.

The question that we are going to have to ask is: Are we going
to rationalize the system of payments and reimbursements and
preserve the best of the American system of health care? Are we
going to stop the waste, the inefficiencies, and the anxiety of our
constituents over their health care future?

If we are, then there is no other choice than the single-payer
plan. It is honest; it is straightforward; it is universal; and it pre-
serves the choice of physician. And most importantly, it is paid for,
and there is no other alternative that has been put before this com-
mittee that does that.

I thank you for the opportunity to testify.

Chairman Stark. Thank you.

In round numbers, let me talk about the most distasteful stuff
first.

An 8.5 percent payroll tax raises about $255 billion a year in
round figures? Can you go through these numbers with me?

Mr. McDermott. The actual amount? I do not know the exact
amount it raises, because that is not the way we did it. What we
did was, we defined the benefit package and asked the Joint Tax

200

Committee to raise enough money to pay for the costs outlined by
CBO. So we did not get into exactly what it would cost.

Chairman Stark. OK. I thought you had gotten to $500 billion.
But what I cannot find is the other $450 billion that we are now
spending. Is that savings? How does that

Mr. McDermott. Well, there are certain current revenue
streams that are maintained. For instance, Medicare continues
right on through. So the money that we are raising in
Medicare

Chairman Stark. So 140. And Medicaid, you keep that in, too?

Mr. McDermott. Yes. We keep in 15 percent from the State ef-
fort. And so there are other revenue streams that are in that.

Chairman Stark. What I am trying to get to is that yours is ar-
guably the most disastrous news that anybody could dream up in
terms of saying: This is what you are going to nave to pay. I mean,
you come to it, and you and I and Mr. Thomas and Mr. Miller are
going to have to pay, if it is a 2 percent income tsix, $2,600 a year.
Now currently if we have got

Mr. McDermott. That is on taxable income, not on the gross.

Chairman Stark. I understand. All right. But let us drop that
even to 2. But we are paying $1,200 now for our share of Blue
Cross low option probably, so that is an argument that probably we
should. That is a fair amount. I would hate to make the case that
$1,200 is our fair share of the benefits we get for our health insur-
ance.

Now you take somebody who works in my district, who makes
$40,000 gross, maybe they are going to have to pay $600 or $50 a
month, and they are in a union; they are a teamster, and they do
not pay anything. So we have got to look at them and say: Hey,
if $50 is what you are

Mr. McDermott. If they made taxable $40,000, 2 percent would
be $800 a year.

Chairman Stark. All right.

Mr. McDermott. A year.

Chairman Stark. So that is $75. I was a being a little more gen-
erous to you.

But at any rate, you do what has to be done. And what the Presi-
dent started out to do, but kind of backslided by hiding all of this,
everybody has got to pay something.

Mr. McDermott. Yes.

Chairman Stark. And the question that seems to — and Mr.
Reischauer said that yesterday and, George, as you indicated, it is
time we got it on the table.

The Roundtable and the U.S. Chamber signed up with the Coo-
per plan, pledged to support paying $16 billion a year corporate tax
only. That is what they signed up for.

Now the only question is: Is $16 billion enough out of the cor-
porate? Maybe they ought to pay 30. But at least they are on
record. They seem to think that by voting for — by supporting Coo-
per, it is not going to cost them anything. But it did not. And that
is what they signed up for.

What I want to ask either of you is: Do you or anybody else know
of any way to provide a comprehensive plan to pay for medical care
for every individual in the United States without changing the dol-

201

lar amount that almost every American company and individual
would have to pay?

Now some would pay less; a whole lot would pay more. But has
anybody ever suggested that there is a way to accomplish this goal
without making some change in the amounts that various people
pay?

Mr. McDermott. It is not possible for you not to change the way
the present burden is carried.

Chairman Stark. Precisely.

Mr. McDermott. But the fact is that 75 percent would pay less.
Well, you will have testimony to that in a short period of time.

Chairman Stark. But that is exactly where the debate ought to
be.

Mr. McDermott. Yes.

Chairman Stark. Do poor people pay more? I do not like your
plan, if that is the case. Do rich people pay more? If so, sign me
up. I mean, the argument ought to be: How much do you pay? How
much do I pay? How much will my kids pay?

Mr. Miller. To do otherwise you are insulting the intelligence of
the American people. Come on. There is no poll that indicates that
these people thought that this plan, any plan, was going to cost
them less. But the question is: What is it we are going to get for
this reorganization?

Under single payer, we can show them that they are going to get
dramatic efficiencies. They are going to preserve their freedom of
choice, and they are going to get a better organization of the pay-
ments and the disbursements. And beyond that, there is not much
else you can do, if you want to preserve the best of the health care
system.

You can try to avoid that and suggest to them, as the President
did, that there is this elaborate structure you can create out there,
so you never have to say "taxes," that people are really sending
their premiums to somebody, but it is not — that is all hokum.

Chairman Stark. I know you do not know much about sports,
but it is called a triple reverse.

Mr. Miller. It is something like that. It is hokum. I mean, it is
just — reckoning day was going to come, no matter what, whether
it was CBO yesterdav or whether it was the deliberations of this
committee. And the fact is, if you want to provide universal care,
you have got to pay for it.

Mr. McDermott. That was my driving principle in writing this
bill. It is partly because I am a physician. And I think if you go
to the doctor, you ought to get the truth. And for us to try and put
out a health care bill that was not explicit about what was going
to happen would ultimately lead to the kind of thing that we got
into with catastrophic.

I do not want to create that kind of situation where people think
they are going to get one thing, and then they find out about it,
and then they are angry about it. I would rather have them know
up front how much it is going to cost and what they are going to
be guaranteed to get. I think that is the basic way this bill was
written.

Chairman Stark. Mr. Thomas.

Mr. Thomas. Thank you, Mr. Chairman.

202

I think we can agree that somebody who tries to write a univer-
sal coverage health care package in which either you can pretend
to hide the money on budget or off budget or that you can create
a structure which allows you to call it something for a political
comfort level does not make a whole lot of sense, and I would refer
anyone to chapter 5 of the CBO study, which talks about the alli-
ances and the National Health Care Board and all of the new and
novel responsibilities that they have that have to work out of the
gate the first time as predicted, or the whole thing comes apart.

So in that sense, I commend you for, you know, truth in packag-
ing, except I cannot give you a gold star, because what you describe
basically is something that, if it were true, you would have 435 co-
sponsors on it. And the fact of the matter is, you do not, and the
reason is, it is not all plus; it is not all more for less, because we
have got this equation of cost, choice, and quality, and no one, I
think — and as you say, Mr. Miller, quite rightly, we should not dis-
parage the intelligence of the American people.

Nobody thinks that if they are going to get some cost savings in
the system, there is not going to be a downside, and it depends on
how it is done and where it is done as to whether it is commensu-
rate on choice or quality or both. There has got to be something
that gives in the formula of cost, choice, and quality. And you can-
not have lower costs, complete choice, and world's best quality as
three. You can have two of the three, but you cannot have three.

Mr. MlLLKK. You can. That is where you

Mr. Thomas. I know you think you can.

Mr. Miller. That is where you are missing the equation. That
is where you are missing the equation, because

Mr. Thomas. I think you will find that there will be testimony
later in the day in which people will extol, for example, the Cana-
dian structure for a number of reasons. But frankly, for certain
things important to the American people, more so because of its
high death rate, like cancer, you have got rationing, you have got
long lines, you have to wait. It is inevitable in terms of a system
that begins to be structured along your lines.

But for my purposes, what I need to know — and this is, in part,
an exercise that we have gone through here, but I think people
need to understand this — you get in this business of universal cov-
erage; nobody is going to have universal coverage instantly; it is
going to take time to phase it in just because of the size.

We had testimony from our colleague from Vermont, Bernie
Sanders, who said that it is not universal coverage if you do not —
if you have any kind of a deductible or a copay; it is not universal
coverage. It has to be complete, this is, free.

Now in your bill, you have no out-of-pocket expenses for acute
care or preventive services. The President does. So does the Presi-
dent have universal coverage in his package, or is it deficient be-
cause of the way in which you have provided, "universal coverage,"
or does this debate mean anything?

Mr. McDkrmott. Our bill guarantees universal coverage, and
there is no question about it in our bill.

There are some questions you can raise about the President's bill
in terms of the subsidies and the ability of the average low-cost

203

worker to come up with his 20 percent of the premium, those kinds
of issues.

And that is what the CBO raised yesterday in their analysis. The
President's bill was built on low premiums. The CBO kicked the
premiums up, and when you then look at people making minimum
wage, their ability to come up with that 20 percent

Mr. Thomas. Is much tougher.

Mr. McDkrmott. If you have not got enough subsidy money, you
are going to have some troubles.

Because H.R. 1200 subsidizes those who have not got it on the
whole universe of the United States, we guarantee it.

When you are trying to do it on an individual-by-individual basis,
it is very clear that some people are going to have some difficulty
in the President's plan.

Mr. Thomas. What about under your plan for those folks who
have no acute or preventive services? Is that universal coverage
and no cost, or do they have to pay something?

Mr. McDkrmott. We do not have any copays in our bill. The rea-
son for that — and I am a physician, so I have looked at this whole
question about how you deal with copays — you do not want to put
on copays that keep people away.

For instance, if somebody has high blood pressure and you want
them to come back for monitoring, if you put a $10 or $20 copay
out there, some people who need to come back and have their blood
pressure monitored are going to say: Well, I feel fine; why should
I go back? That may be exactly the person that you want to come
back, because they are having some kind of high blood pressure sit-
uation that you want to monitor.

So you have got to be careful when you try and mold people's be-
havior by using financial means. You may get an unintended effect.

Mr. Thomas. CBO, in its analysis — and I am envious of the fact
that you have a CBO analysis; we are trying to get one
ourselves

Mr. McDkrmott. You have to put your bill in early.

Mr. Thomas. Well, we wanted to see what ideas were out there
and offer the best possible package, which, by the way, Mr. Miller,
if you have not analyzed the Chafee/Thomas package, it does pro-
vide universal coverage and does meet the complaints that you in-
dicated that the Cooper package has.

On page 6, CBO assumes that States would impose copayments
or coinsurance for drugs, nursing homes, durables, and home and
community-based services.

Do you agree with that under your plan? Do you believe that
that is going to occur, or is CBO wrong in its analysis?

Mr. McDkrmott. There are copayments for long-term care.
There presently are. If people are in nursing homes

Mr. Thomas. What about drugs?

Mr. McDkrmott. Not in pharmaceuticals.

Mr. Thomas. CBO assumes States would impose copayments on
drugs, medical durables.

Mr. McDkrmott. The only copays in our bill are on the long-
term care.

Mr. Thomas. I understand that. But that is from the Federal end
of it. They say the States are going to impose them because of the

204

need to, I assume, ration the use of them because of the fact that
there would be an enormous increase in the use.

Mr. McDermott. Mr. Thomas, let me say something.

Mr. Thomas. The copayments moderate the additional demand
for these services because people are going to see them as free and
use them a whole lot more.

Do you agree with CBO's analysis?

Mr. McDermott. No.

Mr. Thomas. You do not?

Mr. McDermott. They gave us the hardest scrubbing of any

Elan they have ever had put before them, and we still come out
etter than the President.

They anticipate a 50 percent increase in utilization. They only
gave us a 75 percent efficiency in controlling costs at the State
level. We did not get any of the benefit of the doubt. And in my
opinion

Mr. Thomas. Well, then, you should not. When you say that ev-
erything is basically going to be free and then say there is not
going to be an increased utilization of the services

Mr. McDermott. But the bottom line is

Mr. Thomas. Something has got to give, and that is the point.
You cannot have everything.

Mr. McDermott. But the bottom line was, in the end they still
gave us more savings than the President's plan with universal cov-
erage.

Mr. Thomas. I understand.

Mr. Miller. Increased utilization of services does not necessarily
mean that you drive up the overall health care expenditures, be-
cause some people will come in where they would not otherwise uti-
lize the service. They will utilize it at a much lower threshold and
much less cost, and you will avoid the later high -intensity care.

Mr. Thomas. I understand. And you folks need to have selective
support of the CBO analysis, just as the President does.

Mr. Miller. No, no, no, no.

Mr. Thomas. What you need to do is tell me why CBO is wrong
in that particular area. But we will be going through that.

Here is a question that I have, because you pretty well indicated
that insurance companies have no constituency and that we ought
to do away with them, and that your plan does just that.

A lot of times when we pass laws, especially from the tax side
of it, you have got a long transition period or a grandfather clause
or something to deal with the current world that changes to the
new world. And there are a lot of people out there who have pre-
paid retirement plans through insurance and the rest.

Did you guys contemplate going from today's world to tomorrow's
world in which insurance is no longer a private-sector concept

Mr. Miller. Sure.

Mr. Thomas [continuing]. And people do not prepay insurance
plans?

Mr. Miller. Sure. We contemplated that you would contemplate
that. And obviously if this committee was to mark up H.R. 1200,
it would make some decisions both about the benefit package that
we would hope would remain universal and whether or not there
are some parts of that benefit package that would be open to some-

205

thing like a Medigap policy or whether or not there would be a
transition period.

Nobody believes that we are going to wake up on January 1 and
have universal coverage. But that is a matter of political delibera-
tion. It is not a matter of the plan that we eventually want to see
in place.

Eventually our goal would be to see this plan in place without
those copayments, deductibles, or additional insurance plans. But
to get from A to B, there is no hostility to those approaches at all.

Mr. Thomas. Well, if that question is going to be left to us, and
if we mark up the bill, then I feel comfortable about not having to
get an answer to them, because that will not happen.

Thank you, Mr. Chairman.

Mr. Miller. And the answer is yes. I mean, that is not a prob-
lem, if the end of the story is H.R. 1200 with universal coverage
and no other out-of-pocket expenses. That would be our goal, abso-
lutely.

Mr. Thomas. Yes, but then the cost and all of the other problems
are far greater as you get

Mr. Miller. No, they are not; no, they are not.

Mr. Thomas. I understand you say that.

Mr. Miller. You cannot use the CBO, just as you do not want
us to use CBO analysis, one way or the other, you cannot either.
The fact is, CBO says that when you do it this way, you get the
greatest savings, no deficit, and the greatest expansion of health
care benefits.

Mr. Thomas. And there is a downside, and the downside is what
has occurred in other countries.

Mr. Miller. No, no, no, no, no, no, no.

Mr. Thomas. I understand you do not believe that.

Mr. Miller. No, no, no, no, no, no.

Mr. Thomas. And that this is the best of all possible worlds. I
am sorry, but there are negatives. And the negatives are those
questions that the American people need to be asked, and that is:
Do you want to give up a degree of quality and of choice, and do
they want rationing, and do they want to wait in line, and do they
want Government to run the program?

Mr. Miller. Or do they want to sleep in the streets like they do
here waiting for their medical care?

Mr. McDermott. May I just make one suggestion? There is an
OTA report on the effectiveness of cost-sharing of deductibles, and
they do not show any effectiveness. You can deter care. In fact, the
Economic Policy Institute says you deter as much needed care as
unneeded care. So there are real serious questions about the use
of copays as a means of controlling costs.

Chairman Stark. Mr. Kleczka.

Mr. Kleczka. Thank you, Mr. Chairman.

Let us expand on the last point that Bill Thomas talked about.
When we go back home and have our health care meetings and we
talk about the single-payer plan, which is the Canadian system in
part or in whole, the criticism we get is (a) it is sociaHzed medicine;
(b) there is going to be rationing; (c) there are going to be long
lines; and (d) if you need the health care in Canada, you run to
America.

206

Those are the things that are oft repeated by my constituents. It
is amazing the level of expertise Americans have on the Canadian
system. At one townhall meeting I had an RN come forward, and
he had moved to this country and is working here now, and he
extolled it as the best in the West.

So what do you folks say when you go back to your townhall
meetings and you get that type of criticism?

Mr. Miller. Well, I think as Dr. McDermott has pointed out, I
think about 80 percent of the Canadians live along the American
border, and the leakage is less than 1 percent by all studies. So the
notion that you are going to get knocked down at the gate if you
try to go north by people coming south for medical care just is not
true.

There is all this sort of anecdotal evidence that people talk about
at cocktail parties. It simply is not supported by the evidence.

The other fact is that this system, I think as Congressman Stark
pointed out the other day in the committee- hearing, that essen-
tially a system very similar to this has been in place in this coun-
try for 30 years. It is called the Medicare system. And most of your
constituents are not asking you to get rid of Medicare to give them
something else. What they really want to know is how can they get
more of it. That is the real question for them. And most people
hope they get to the threshold where Medicare kicks in.

You hear people kind of go: WhssshI I am finally eligible for Med-
icare; I am now safe; I now have my health care taken care of.

For those people in Medicare, the care is not rationed, and they
get to choose their physicians. Now we have deductibles; we have
Medigap; we have a lot of things that you will have to deal with
here. But the fact is, that is the American system of single payer
that has been in place. And the fact is that the hospitals and the
doctors and everybody do very well with that.

What they cannot take is the Medicare reimbursement and then
all the unreimbursed costs or the tremendously low reduction that
they get from a program like Medicaid or no cost at all and com-
bine those and run a profitable operation or a self-sustaining oper-
ation. But Medicare payments across the board, clearly they could
do it.

So we have had this system. And more people are trying to get
into the Medicare system than are trying to leave it. People want
the age threshold lowered. So, I mean, what you hear against the
single payer is cocktail party talk. It simply is not substantiated by
the facts either on behalf of the plan or in attacking the Canadian
system or the German system or the Australian system.

And this whole business of rationing, you know, Gerry, as well
as anybody else, we do it here simply on the basis of tne size of
your wallet. That is how we ration care in America.

Mr. Kleczka. Two more questions before my time runs out,
George.

The State of Wisconsin has more MRIs than the entirety of Can-
ada. Do you have any cost controls or certificate of need provisions
in the bill?

Mr. Thomas. Sure.

Mr. McDermott. Our proposal puts the responsibility on the
hospital. They are given the money to run their hospital, and they

207

can buy any MRI they want, as long as they have the money to
operate it.

We did not put specific certificate of need provisions in this bill
in part because the experience with that whole program across the
country has been very, very mixed. Some States had success with
it; some had absolutely none.

So we said: Let us let the hospitals manage it. Here is the money
for you to run your hospital. If you think you need another one, as
they do in Canada — I had people down from the Ottawa General
Hospital, and they are putting in a second MRI at the main teach-
ing hospital in Ottawa. The reason? Because the other one is fully
used, and they now have an additional need.

And I think the thing that George is talking about, the Canadian
system, one of the reasons why they have been able to control their
costs is they have bought smart.

When I was an intern at the Buffalo General Hospital, there was
often a Canadian patient in one bed and an American patient in
the other bed, the Canadian paying two-thirds of what the Amer-
ican was paying, because the Canadians negotiated with Buffalo
General to get their health care done there.

It is only 50-60 miles from St. Catherine's down to Buffalo, so
it is a very short drive. It is not as though you are sending them
10,000 miles away to get health care. The Canadians have pur-
chased on our side, health care. They do it in Seattle on operations
on hearts, heart transplants. And the fact is that the Canadian
Government discovered that there are — $600 million in fraudulent
claims by Americans in Ontario along.

They found that 60,000 people using the Ontario health care
plan had American drivers licenses. So they have now had to go to
their system and begin to figure out how to put a picture on it, so
that they can actually — right now their card is just an orange-and-
white card with a number on it and your name, and they have now
decided they have got to go to some kind of ID, so that Americans
will quit coming across from Windsor and everywhere else to get
their health care in Canada.

It is a real problem. It is more going across in that direction than
coming this way.

Mr. Klp:czka. That is interesting. Let me give you the $64,000
question now.

I know full well that your single payer this session will not pass
in total. The President has already expressed interest in com-
promise. Cooper is picking up steam from some segments.

When we start, especially in this subcommittee, putting all of
these together to come out with an agreed-upon package that will
do the job, what portions of your bill do you think are most impor-
tant to meld into this compromise version?

Mr. McDermott. We have not seen any reason yet while we
should give away anything. We have got better coverage for less
cost. We guarantee free choice of provider; it is the only plan that
does that, the only plan that gives long-term care, and we do it for
less money.

Mr. Kleczka. Do you cover optician services, because that is
lacking in your own — ^you are kidding me?

208

Mr. McDermott. Well, we are only five votes short, Grerry. I
mean, this process-

Mr. Kleczka. ok. I guess we do not see things-

Mr. McDermott. Let me raise the question about the Cooper
bill, because the Cooper bill, you see, is gaining steam. I do not
know how many people really understand in the Congress the tax
that is buried in that.

What he gives is deductibility for the lowest-cost plan. Every-
thing else to the corporation is not deductible. And if an employer
gives greater benefits to an employee, it has to pay a 34 percent
surcharge.

Now tnat is going to drive employers to push those costs onto in-
dividuals, and individuals cannot deduct it. It is going to be after-
tax dollars, which is an income tax on individuals in this country.

If I were running against him or anybody who supported that
bill, I would eat them alive.

Mr. Kleczka. Let me see if George has a more compromising

Mr. McDermott. Taking away deductibility on insurance bene-
fits.

Mr. Thomas. I think the burden is on the other foot, and that
is this, that they have got to come up with a plan that is superior
to the existing one. And so far, they have not.

The President has taken away all your choice; Cooper has taken
away all your choice. They have raised a lot of money, and they
still do not quite get to the question of quality care and universal-
ity. And that is the problem.

And before we trade this one in, you know, we are not so eager
here to trade the current system in. We think there are overwhelm-
ing problems, but as we constantly have pointed out to us, the vast
majority of Americans are essentially happy with it. They do not
like the insurance companies, but they essentially have their cov-
erage.

Now we are trying to expand the pie to a lot of people who need
it, who get cannot get it for a whole lot of circumstances. But be-
fore we trade it in, we want to see that something better is coming
through the door.

Right now, ours is the only proposal that improves upon that. All
the rest of them kind of rearrange the deck chairs here, but the
system is still going to the bottom of the ocean, and it is not going
to be saleable.

Cooper is going to get his turn in the barrel. The President had
his turn in the barrel, and he did not come out so well. Now Cooper
is going to go in the barrel, and people are going to start analyzing
the kinds of tax increases that are going to through for no listed
benefits, and then we will see where the Congress is. This is going
to look better and better.

Mr. Kleczka. Thank you. Thank you, Mr. Chairman.

Chairman Stark. Mr. Levin.

Mr. Levin. Thank you.

I admire your tenacity, but

Mr. McDermott. I would wish you would admire the plan.

Mr. Levin. But let me just tell you how it plays in a district —
the district that I represent, which in many respects is pretty
typical.

209

There is, I think, deep antipathy toward at least two aspects, of
the single-payer plan. First, there is deep skepticism about shifting
the funding to the tax system.

Second, there is a deep, if not hostility, at least a deep question-
ing about a major enhancement of the role of the Federal Govern-
ment.

And I think that the public's antipathy toward use of the tax sys-
tem and having, in quotes, the government run it, is reflected in
a recent poll that says these feelings are true not only in Macomb
and Oakland Counties, Mich, but across the country. This was from
a poll taken by the Robert Wood Johnson Foundation, and maybe
you saw the report. I do not think they have an ax to grind. The
poll was taken for them by the Harvard School of Public Health
and the Princeton Survey Research Associates.

It showed first of all that we have a long ways to go to really
explain any plan to the American people. A lot of people do not
know the details or really the major contours of any of the propos-
als.

But when the various plans, or at least some of them, were read
to the 1,000-plus who were sampled, here is the way it came out:
40 percent said they would choose a plan like President Clinton's,
requiring employers to pay, while 19 percent they would prefer a
Canadian-style plan.

Mr. Miller. Well, Mr. Levin, I think, you know, we, those of us
who are supporting single payer, are into a marketing nightmare.
To go around and ask people if they want single-payer or a Cana-
dian system — Americans are not big on foreign

Mr. Levin. But that really is not the way it was asked.

Mr. Miller. But let me — no. The point is, you said there is a
deep skepticism about shifting the cost to the tax system and
about — what was the second one, the

Mr. Levin. And a major enhanced role of the government run-
ning it.

Mr. Miller. Ask your constituents if they have those concerns
about the existing system, which is Medicare, where they all pay
a payroll tax, and the Government runs the Medicare system. So,
you know, you have got to ask the question. We do not have the
luxury of asking that about Medicare. We have the luxury of ask-
ing about single payer or a Canadian system.

But the fact is, the most popular plan in the country is the Medi-
care system, and it is done on a payroll basis. The question is:
What is the rate of tax, and are other people going to be covered
by it?

So you have got to, you know — as we all know from polling in
our business — you have got to ask the question right. Go back and
ask those same people about whether or not they like the benefits
of Medicare, where they get freedom of choice, it is paid for, and
all they do is hand their card across the counter.

Now some hospitals, some doctors, do not like the reimbursement
rate, but you have dealt with that now for the last 30 years on this
committee. And so that is the system. That is the system.

Now whether or not you have, as I say — whether or not you con-
tinue deductibles or copayments or Medigap polices, the fact is that
is the American single-payer system, and it is hugely popular, as

210

we know every time we suggest we are going to touch it. It is the
hottest stove in town. Nobody can carry it more than, you know,
more than a second if they suggest that someone how they are
going to deny people access to or benefits under Medicare.

Mr. Levin. All right. But let me just tell you that I think you
are right about the basic popularity of the Medicare system for cov-
ering seniors.

But the dilemma that you face and this Congress faces and the
President faces and all America faces is that people know they
have a Medicare — there is a Medicare system for seniors.

When you ask them if we want to spread a single-payer system
to all America and end the private role for insurance for everybody
and shift the entire burden of health care from the private to the
public arena, the answer is no.

Mr. McDermott. But that is a mischaracterization. You are
talking about financing. Every other plan, including the Presi-
dent's, takes the delivery system in this country and stands it on
its head, and it drives people into HMOs by financial incentives.

Ours is the only plan that says to the American people: You can
still see your same own doctor; you can go to the same hospitals
and every other thing. The only thing we are going to fix is the fi-
nancing system.

Mr. Levin. All right. Let me just say

Mr. McDermott. The President keeps the financing system. He
keeps the insurance companies and stands the delivery system on
its head. And that is why when you take that home to people, you
are going to get chewed up. That is why I will not vote for that
kind of thing that uses financial levers to force people into a deliv-
ery system.

Mr. Levin. Yes, but I am opposed to doing that, and to

Mr. McDermott. That is what the President's plan does.

Mr. Levin. I do not think it does so nearly to the extent that the
Cooper plan does.

Mr. McDermott. That is true. You are absolutely correct. The
worst is Cooper.

Mr. Levin. And lurking behind the Cooper plan is a basic effort
to push people into HMOs.

I am in favor of retaining the choice, a meaningful choice, for
Americans, but they want choice and — they want choice and a
mixed system in terms of funding, and they do not want the gov-
ernment to run it all.

Mr. McDermott. Again, let me go back — I will take you back to
the best model we have in the country. I will go back to Medicare.

Senior citizens get to go to — in my district, they go to HMOs;
they go to fee-for-service doctors; they do to some combination or
in between. If they belong to one, they get referred to another.
They design their own medical care under Medicare. And the pri-
vate sector is involved because there are some things that Medicare
decided it will not cover, and that is under your Medigap, long-
term care and others.

So this is not strange. The problem you describe is relatively eas-
ily solved and understandably so, which is the big trick in this
business.

211

Mr. Lkvin. Well, most Americans want retention of the Medicare
system for seniors. They do not want that model applied univer-
sally, uniformly.

Mr. McDeumott. There is no evidence that that is the case.

Mr. Lp:vin. Wait a minute. Giving people no option other than
that.

Mr. McDermott. There is every option.

Mr. Lp:vin. I mean, that is the meaning of this poll. People know
there is a Medicare system. But when you ask them: Do you want
that to be the single system for this country, the answer is no.

Chairman Stark. Mr. McCrery.

Mr. McCuERY. Thank you, Mr. Chairman.

I want to say that I think your plan, Mr. McDermott, and the
single-payer concept is a legitimate way to address the issue of spi-
raling costs in the health care system in this country. And I ap-
plaud you for coming forward with the plan and putting it out
there as one of the possibilities for reforming our system, particu-
larly the payment system.

I do not agree with your plan because I do think it has some ef-
fects on the system that you have not talked about too much, and
we will hear more about those effects later this morning. And Mr.
Miller denied that there were a lot of those bad effects, but I hap-
pen to think that there will be rationing. And it is true we do have
rationing today, and we are always going to have some kind of ra-
tioning; otherwise, costs would go through the roof even more than
they are today. But I do think yours is a legitimate way to address
the system, and it is an option that should be considered.

Mr. Miller has continually compared your plan to the Medicare
system and holds up the Medicare system as being the most popu-
lar part of our health care system and so why snouldn't we just
kind of enlarge that and make the whole system a Medicare sys-
tem.

Is, in fact, your system basically that? Would your plan basically
just be a big Medicare system?

Mr. McDermott. The way our system is designed in the bill, the
Federal Government decides the benefit package — we wrote it into
the bill — and we collect the money on the basis of a payroll tax. So
you now have a Federal health care trust of money.

The money is then apportioned to the States according to popu-
lation and previous spending patterns, and there are some dif-
ferences in this country, and it is very hard to iron all those out.
You cannot make the same system for everywhere. Louisiana is dif-
ferent than Washington State or Vermont or New York State.

So we said let's put it down at the State level for the administra-
tion, and the delivery system changes. The reason is I was a State
legislator for 15 years, and I have been catching cannon balls from
this town that whole time. Bills always work for California, New
York, Texas, and Florida, and the rest of us are out there trying
to figure out, "Who thought this up?" So I said if I am going to put
a health care plan out there, I am going to let the States decide
how it ought to be delivered.

Now, there will be more HMO activity in the State of Washing-
ton and in the State of California than there will be in Louisiana.
No question about it. We have a long history, long experience with

212

it. So we wanted to have those kinds of decisions made at the State
level with a fixed amount of money that was collected from the
payroll tax, and that then you would decide how in Louisiana will
you deliver this benefit package to everybody in Louisiana. It
would be done using private doctors and private hospitals, as it
presently is today, and that is the basic structure of how it would
work.

Mr. McCrery. So it is very similar to the Medicare system?

Mr. McDermott. Except that it is controlled at the local level
rather than the Medicare system, which is at the Federal level.
And that is an important decision.

I think Mr. Stark and I probably would have a discussion. He
would favor more a single-payer system like the Medicare system
all done in Washington, D.C., or Baltimore. I believe that more of
those decisions should be made down at the State level. That is a
political judgment that obviously we in the Congress will make.

The President has put a lot of State options into his. He allows
for a single-payer option at the State level, and this is really a po-
litical argument about where the control is going to be. And I tend
to think the closer it is down to where you are delivering the serv-
ice, the better off you are. To speak for Mr. Stark and maybe for
some people, they think that you will get inequities in the States,
and some States may not do it so you have to do it at the Federal
level. But we can iron that argument out.

Mr. McCrery. Well, before my time is up, let me encourage Mr.
Miller — and you can respond to this, if you like — to maybe get an-
other model for holding out for examination than the Medicare sys-
tem. One reason the Medicare system is so popular is because peo-
ple get a lot more than they pay for. The Medicare system spends
a lot more money than it takes in, so people are getting a lot more
than they are paying for. And I do not think that is the way you
want the entire system to be; otherwise, the Federal deficit just
goes completely out of control. Some would say it is completely out
of control now, but certainly the Medicare budget is part of the
budget problem in this country. So I think that is one reason Medi-
care is so popular, is people get a lot more than what they pay for.

I assume under your system you would try to equalize revenues
and outgo, and it might not be as popular then when people have
to actually pay for everything they get.

Mr. Mil.LER. To respond quickly, the reason our payroll tax is set
at the level that it is is because of the genius of Congressman
McDermott's request: This is the package that we want to present
to the American people; now what is the money we need to finance
this? So CBO says we do not create a deficit because, in fact, that
package of benefits is paid for.

Now, that might be too rich for the Congress or for this commit-
tee or for the American people. That is open to adjustment. But we
did not do it the other way.

Mr. McCrery. Sure.

Mr. Miller. The other way is to try to fudge the issue as we
have seen now for the last year.

Mr. McCREiiY. With the Medicare system, and I appreciate that,
and I applaud you for that. But I think the analogy with Medicare
breaks down on that basis.

213

Mr. McDermott. I do not think any of us would say that the
Medicare system has been without problems because in some ways
Medicare is just another insurance company, and Medicare is doing
what everybody else does, which is try and shift the cost to some-
body else.

When I was a State Ways and Means Chairman in the Senate,
I used to take the request for Medicaid and cut it in half. And if
you had asked me why I did that, I would say, well, I need money
to pay for the University of Washington, for the Fisheries Depart-
ment and the State Patrol, and I know that I can shift those costs
on to Boeing and to Weyerhaeuser and to U.S. West and all the
other companies in my State.

Everybody has been doing that in this present system. In a
single-payer system, there is no place to shift it. You have every-
body in the same bag.

Chairman Stark. Mr. Lewis.

Mr. Lewis. Thank you very much, Mr. Chairman.

Mr. Chairman, I am delighted to see two of our colleagues, Mr.
McDermott and Mr. Miller, here today.

Up front I must say, Dr. McDermott, I am very proud to be a
cosponsor and a supporter of single payer. I know in our efforts to
reform the health care system, we should come up with a system
that will be accessible to everyone. No one must be left out and left
behind.

With the Cooper plan, with the President's proposal and some of
the others that are floating around, I have been deeply concerned
that we will have a continuation of redlining by insurance compa-
nies and by some health providers. We would segregate people,
gerrymand people.

Tell me what would happen under single payer.

Mr. McDermott. Under a single-payer system, everyone would
have a health care card that would be usable with any physician
or any hospital that the patient would choose.

One of the difficulties in looking at our health care delivery sys-
tem today is that 35 percent of the people live either in rural areas
or in inner cities, both of which are chronically underserved for
their health care needs. And the main problem that you have in
trying to set up a practice either in a rural area or in an inner city
is that most of the people do not have insurance. You find the unin-
sured clustered in these areas, and the fact is that because they
do not have the ability to pay, if you were to open a practice there,
the people coming in would be unable to pay for their health care.
And so people do not choose to go into those areas.

If you have everybody with a card, that is, equal access, the abil-
ity to go in and purchase health care, it would be possible then to
recruit people into those areas, and you will begin to see a shift in
the way the system operates.

I think that all you have to do is look at Mr. Reynolds' district
in Chicago. There is not a single emergency room open in his dis-
trict. No hospital has an emergency room open in that district in
Chicago.

Now, that kind of thing will only be dealt within a single-payer
system that says that everybody who comes to the hospital has the

214

ability to pay because they have their card, their universal Amer-
ican health security access card.

Mr. Lewis. Mr. Miller, would you like to comment?

Mr. Miller. Well, I think that is it. It is the portability of the
care. Today if you belong to various plans, you have got to call an
800 number if you are out of State, if you are out of city, if you
are outside of that plan. Will you be reimbursed? If you do not
make that call, additional tasks are put on you. But clearly, that
is just the problems of not having a single system.

But it also goes to the question of inclusion. If you read all of
these other plans very carefully, there is a very large question
raised about what happens to what we now consider public medi-
cine. The people in our inner cities, people with TB, people with
AIDS, and people with no insurance and no prospect of getting in-
surance, what really happens to them?

Well, there is some notion that they will eventually all sort of
transition into one of these alliances or one of these plans. But the
question is, even among the alliances, do the alliances want to
come in and serve these areas? Are the alliances going to be drawn
in such a way so it does not take in the District of Columbia or
Manhattan or the city of San Francisco or southeast L.A.? Those
kinds of issues are being raised.

That is all, again, because you are trying to fool people about
what the real total national bill is for health care. As long as you
try to do that, then you have to try to shave and manipulate the
system not based upon delivering health care to people and then
paying for it. And the concern that you raise here is, I think, a
very, very real concern in each and every one of these plans be-
cause at some point, under all the other plans, you are going to de-
cide that you simply are not going to extend coverage in one fash-
ion or another and we are going to have constituents that continue
to drop through the gaps in those plans. And that is, again, the
value of the single-payer system.

Mr. Lewis. Thank you very much. Thank you, Mr. Chairman.

Chairman Stark. Mr. Cardin.

Mr. Cardin. Thank you, Mr. Chairman.

First, I want to congratulate my colleagues for having the cour-
age, as the President did, to come forward with a proposal that
would provide universal coverage for every American and have en-
forceable cost containment in your legislation. I look at the CBO
testimony from yesterday as indicating that we now have in the
House of Representatives two proposals before us that would pro-
vide universal coverage and would bring down the cost of health
care: Your proposal — the single-payer proposal — and the Presi-
dent's proposal.

What concerns me about having one payer, a Medicare-type sys-
tem, is that I do not think the Medicare system is very rational in
the way that it reimburses for health care in this country. I do not
think it makes an awful lot of sense.

I have talked to many health care providers, particularly those
who want to locate in communities where there is a large number
of elderly, who tell me it is difficult to do that under the current
system, that the doctors and the hospitals want to locate in subur-

215

ban areas where they have a significant percentage of their pay-
ment in private pav in order to shift costs.

You see, we shift costs in our society today. And there is a con-
cern that if we have only one payment system that it is not going
to pay the fair amount or the rational amount or that a political
body such as this committee or the State legislature will be very
political in the way that it determines how those dollars will be al-
located. And the bottom line is that we jeopardize quality.

I guess that is my major concern on a single-payer system:
Whether we run the risk of jeopardizing quality through diversity
and the protection of having different systems out there to offer the
incentives for developing new ways of providing health care to our
constituents in a more cost-effective way.

So how do you overcome my concern in a single-payer system
that we will not run into a budget crisis here in Washington so we,
therefore, just cut the budget or we cut certain parts of the budget
or that we do things like that; whereas, in a diversified system,
such as suggested by President Clinton, we at least have the pro-
tection of having different models out there to see how they work
in different times and hopefully we get the best from each of the
proposals that are out there?

Mr. McDermott. You raise the question of will the budget be
short and, therefore, we will cut it. The money that is raised by the
payroll tax goes into a health care trust, and it is used for the
health care of the country.

One of Canada's problems is that they mix their health care dol-
lars in with everything else. It is just general fund money. And so
they are now in an economic depression. And so they are making
cuts, and they are making cuts in health care to put roads in or
whatever. In those kinds of decisions, the health care system does
stand the risk of quality being dealt with. The reason, then, for
having a trust is that you have the money and it is going to go
there.

Now, the other question of quality, I come back to this: Who do
you trust? Do you trust the insurance companies or do you trust
the political system to guarantee your quality? And you can say
neither one of those is a good choice, but that is the only two
choices you have.

Mr. Cardin. Jim, let me try to throw out perhaps a model that
builds upon what you are suggesting and maybe we will see which
system works best. Why not pick a market toda^, perhaps the
small-employer market, where we do not have effective competi-
tion, and say, look, we will allow that market to have access to a
public insurance program without any government subsidies at all,
and let that market compete with the private marketplace; and
then we will see whether government is more cost effective or
whether the private sector is more cost effective in developing a
away to finance that type of health care plan.

Mr. McDp:rmott. You are suggesting letting small employers buy
into Medicare, for instance?

Mr. Cardin. Well, into a public — not Medicare because you do
not want it to be the same risk pool. Have an opportunity to buy,
with no government subsidies at all, a Medicare-type plan, and
then let the private sector also be able to sell insurance to that

216

same marketplace, and then we will see who is more cost effective
and who can come up with the better plans and who the consumers
like best, whether they like a government plan better or they like
a private plan better.

Wouldn't that sort of build on your model? Then we can see

Mr. McDekmott. My only problem with that, Mr. Cardin, is that
you are keeping in — or you are giving away the $100 billion in ad-
ministrative savings that CBO said we can get by going to a single-
payer system.

Now, if the Congress decides that they want to keep the private
insurance industry in and they are willing to spend $100 billion
more a year to do that, if they think that is worth an experiment,
I personally say more power to you if that is the way you want to
spend your money. I do not want to spend my money that way.

Chairman Stark. Would you yield on that point?

Mr. Cardin. Yes, I yield.

Chairman Stark. If you add uniform payment structures and
you have, whatever it is, a uniform cost containment system, if not
prices, then the only uncontrolled costs of any major significance
would be the overhead of the private insurance companies, which
would be picked up by private payers. And my theory is that if peo-
ple choose to support their brother-in-law who is selling insurance
for Aetna, be my guest.

Now, one would think that a rational public would soon figure
that scam out and find a better way to put their brother-in-law to
work. But, basically, only a third of any savings in any program
comes in what would be public plans like Medicare and Medicaid,
and two-thirds of the savings goes to private industry.

If they have the option and we put all of the systematic savings
that we can, like universal electronic transfer and so forth, then I
think the difference between you and Mr. Cardin is that the ABC
Corporation and its employees decide they want to stay with Pru-
dential and pay Prudential's 30 percent overhead. And I say if that
is the fight we have, be my guest.

Mr. Cardin. But remember, Mr. Chairman, just to clarify that,
there are two parts to the cost of health care. One is the adminis-
trative cost; the other is delivery system. And there is at least a
belief by some of us that the private sector can be energized to de-
velop a more cost-effective delivery system better than just having
one.

Chairman Stark. But that happens under Mr. McDermott's plan
where he will pay privately run managed-care systems now. So
both your suggestion and Mr. McDermott's would have that oppor-
tunity.

Mr. Cardin. What I am suggesting is that we might want to test
that and see what comes out.

Mr. McDermott. I would just say, Mr. Cardin, that you probably
better than most know that the single-payer system and the all-
payer system are not very different. Maryland has the all-payer
system. It has the hospital that is considered to be number one in
the United States, Johns Hopkins, which operates in an all-payer
system. So the fact that people want to talk about some diminution
of quality clearly under a single-payer, all-payer system, which is —
I mean, the differences are very minimal.

217

Mr. Cardin. But, remember, you can have an all-payer system
without a single source of funding, as we do in Maryland, as long
as everybody

Mr. McDermott. We simply make one source of funding, and
then you will have an all-payer system.

Mr. Garden. Right. But you could very well expand upon an all-
payer system in a multiple-payer concept.

Mr. McDermott. I just do not want to pay the administrative
costs of insurance companies. Thank you.

Chairman Stark. Is there further inquiry of our distinguished
witnesses?

Mr. Thomas. Just briefly.

In terms of the genius, as my colleague from California said, of
asking CBO to price or to figure a mechanism for funding the bene-
fit package, I think when you asked would you rather have insur-
ance companies or the government do it, there was a degree of
snickering out there in terms of the choice. It is because if, in fact,
we run your system the same way — that is, the benefit package
drives what is charged and it is a political decision as to what is
in the benefits package — I do not think anybody is comfortable
with a system in which this committee or any otner committee in
essence has the ability to define a benefits package because it turns
into a political football. And I think you are seeing, to a certain ex-
tent, that today in Germany in which political elections turns on
"health care issues" and that people are going to wind up promis-
ing that if they get elected, they are going to add something to the
benefit package, and you now nave a pure political football in the
benefits package.

But the beauty of your system, I think you would agree, is that
you have got a n)rcea mechanism to fund it, and that is the night-
mare, I think, that most people are concerned about.

Mr. McDermott. You absolutely put your finger on the issue.
You have a system that is decided in a democratic means, out in
front, in public, and if I vote for additional benefits for the people,
then I have to step up and vote for the taxes. That is, to me, true
accountability, and that is what I think has been missing in our
present system — no accountability.

Mr. Thomas. I agree with you. In our plan, what we say is that
if we are going to make savings in the Federal Government pro-
grams, the Chafee-Thomas bill, that we are going to fund the ex-
pansion to universal coverage after you make the savings, not be-
fore.

Thank you.

Mr. McCrery. Mr. Chairman, just briefly.

Mr. McDermott, I listened with interest to your plan to put all
these moneys into a trust fund separate so they will not be com-
mingled with the rest of the budget. And I have not looked at your
design, but I hope it is designed better than trust funds that we
have included in the Federal budget in the past, which we have
seen have not been too successful in keeping from being commin-
gled with other funds.

Mr. Levin [presiding]. I am sure that will be taken into account.

Well, thank you. Your forthright testimony, our two colleagues,
have been very helpful. You can tell by the engaged discussion.

218

Mr. Miller, thank you for all this time, and, Mr. McDermott,
thank you for going on the other side of the table.

Mr. Leven. We will have our second panel now. Unfortunately,
two of the witnesses have been unable to attend because of the
weather — one, Dr. Hsiao from Harvard. There are, I think, a dozen
inches of snow up there. And also Dr. Dans has been unable to join
us. But Gerry Anderson is here and Lisa Priest, if you would join
us.

Dr. Anderson is the director of the Center for Hospital Finance
and Management at Johns Hopkins, and Lisa Priest is a distin-
guished journalist with the Toronto Star. There has been much
mention of our neighbor to the north.

Mr. Cardin. Mr. Chairman, before we begin, if I might. Dr.
McDermott paid a compliment to Johns Hopkins, and I think part
of that credit is deserved by Dr. Anderson, who does an outstand-
ing job for us in hospital finance and management at Hopkins and
has really been a great help to me personally in helping me on
health care issues. It is a pleasure to have Dr. Anderson before our
committee.

Mr. Levin. Well, I guess we are going to go alphabetically in-
stead of in a chivalrous way. So, Dr. Anderson, if you would lead
off?

STATEME>rr OF GERARD ANDERSON, PH.D., DIRECTOR,
CENTER FOR HOSPITAL FINANCE AND MANAGEMENT;
CODIRECTOR, PROGRAM FOR MEDICAL PRACTICE AND
TECHNOLOGY ASSESSMENT; AND ASSOCIATE PROFESSOR
OF HEALTH POLICY AND MANAGEMENT, SCHOOL OF
HYGIENE AND PUBLIC HEALTH, JOHNS HOPKINS
UNIVERSITY, BALTIMORE, MD.

Mr. Anderson. Thank you very much, Mr. Chairman and Mr.
Cardin.

What I would like to do is mention very briefly four design and
coverage provisions which distinguish H.R. 1200 from most of the
other bills, and then discuss in much more detail the cost contain-
ment and financing aspects of the legislation. Specifically what I
want to do today that is not in my written testimony is compare
the financing of H.R. 1200 to the President's bill. Given the work
that you did yesterday, I can now compare the financing in H.R.
1200 to H.R. 3600.

Basically this legislation provides universal, mandatory health
insurance coverage for all citizens and legal residents. It is a com-
prehensive, explicitly defined benefit package covering primary
care, acute care, long-term care, and mental health benefits. It in-
tegrates Medicare and Medicaid into a single plan. And it does so
at much lower administrative costs.

According to the Congressional Budget Office, the administrative
costs will drop from 7 percent of health spending to 3.5 percent of
health spending by the year 2000. In addition, the Congressional
Budget Office estimates that hospitals and other providers will
save 6 percent of revenue by dealing with only one payer.

What I have worked on, however, is the financing and cost con-
tainment aspects of H.R. 1200. By 1997, the American Health Se-
curity Act will rechannel approximately $500 billion from the pri-

219

vate sector to the Federal Grovemmont by eliminating private sec-
tor financing of health insurance and replacing it with an 8.4 per-
cent payroll tax except for small firms with low-wage workers, a
2.1 percent payroll tax, and tax increases on cigarettes and hand-
guns.

Since I did my prepared testimony, I had a chance to look at the
Congressional Budget Office estimates, and what I have been able
to do is to compare the financing for a variety of families under
H.R. 1200 to H.R. 3600.

Let me compare three different two-parent families: One earning
$100,000, one earning $50,000, and one earning $20,000.

Beginning with the family earning $100,000, let's assume that
they work in a large firm where the average wage is $50,000. The
employer would pay 8.4 percent of the average wage in the firm,
or $4,200, and the employee would pay 2.1 percent of their ad-
justed gross income — assuming right now somebody earning
$100,000 doesn't have a lot of deductions and their adjusted gross
income is $80,000— $1,680. This is a total of $5,880 or about 6 per-
cent of their total income. It offers comprehensive coverage, no cost
sharing.

Under the President's plan, the premium alone would be, accord-
ing to the Washington Post today, for that same family of four,
$5,565 in 1994. Inflating that at 4 percent per year to get it to
1999, it would be $6,678, or approximately 7 percent of their in-
come. So somebody earning $100,000 is going to pay more under
the President's plan than they will under Mr. McDermott's plan.

Moving to somebody earning $50,000, again, where everybody
earns $50,000 in the firm, the employer pays 8.4 percent of payroll,
$4,200. The employee pays 2. 1 percent of their adjusted gross in-
come, or, as I estimate it, somebody earning $40,000 in adjusted in-
come, would pay $840. Combined, this is a tax of a little over
$5,000, or 10 percent of their income. Whereas, the President's plan
they would pay the same amount as before, $6,678, or more than
12 percent of their income.

For somebody earning $20,000 or less, they would even pay a
higher percentage, although that is much more difficult to cal-
culate.

So as you can see, basically most of the Americans will pay less
under H.R. 1200 than they will pay under H.R. 3600.

H.R. 1200 does do this by working on rate-setting and a variety
of mechanisms to control health care costs, such as in Maryland,
that have worked successfully, and they do it by controlhng the Na-
tional and State budgets. A global budget has been used by other
countries for years without access or quality problems.

In the United States, a number of States, including Maryland,
have used a form of global budgeting to set hospital rates without
adverse impacts on quality of care or access to care, and Medicare
currently uses a form of global budgeting for physician services.

So what I conclude is that global budgets make sense. As a soci-
ety, we decide how much to spend on defense, space, public edu-
cation through the budget process; no reason why we could not do
exactly the same thing in the health care system.

Thank you very much.

[The prepared statement and attachments follow:]

0 4 ^^e /^ ^ J

220

JOHNS HOPKINS

H t * I- T II r N S T I T I T I 0 N

The Center for Hospital
Finance and Management

624 Nonh Broadway / Third Floor

Baltimore MD 21205

(410) 955-2300 / FAX (410) 955-2301

Mr. Chairman, my name is Gerard Anderson, and I am the Director
of the Johns Hopkins Center for Hospital Finance and Management,
co-Director of the Johns Hopkins Program for Medical Practice and
Technology Assessment, and an Associate Professor of Health
Policy and Management at the Johns Hopkins School of Hygiene and
Public Health.

Today, I wish to speak in favor of H.R. 1200, the "American
Health Security Act." The Act contains numerous provisions that
should be incorporated into the final health care reform
legislation. There are four coverage and design provisions that
warrant special mention:

Universal, mandatory health insurance coverage for all
citizens and legal residents. Many of the other bills
under consideration do not achieve this minimum
standard.

A comprehensive, explicitly defined benefit package
covering primary care, acute care, long term care, and
mental health benefits. The American Health Security
Act is able to provide these comprehensive health
benefits without instituting cost sharing.

Integration of the Medicare and Medicaid programs into
one comprehensive plan. Maintenance of two or more
health care financing systems will increase
administrative costs without improving the health
status of any American.

Much lower administrative costs. According to the
Congressional Budget Office, the administrative costs
under the American Health Care Security Act will
decrease from the current 7 percent of health spending
to 3.5 percent by the year 2000. CBO also estimates
that hospitals, physicians, home health agencies, and
other health care professionals would save 6 percent of
revenue by dealing with only one payer and eliminating
copayments and other billing arrangements.

Financing and Cost Containment

The most controversial and innovative aspects of the American
Health Security Act, however, involve its financing and cost
containment provisions. In my testimony this morning, I would
like to concentrate on three specific issues:

• Shifting the method of financing from the private to
the public sector.

• Using price regulation to control health expenditures.

• Using state and national global budgets to contain
health care expenditures.

221

Public Financing

In 1997, the American Health Security Act will rechannel
approximately $500 billion from the private sector to the federal
government by eliminating private sector financing of health
insurance and replacing the funds with an 8.4 percent payroll
tax, a 2.1 percent income tax, and tax increases on cigarettes
and alcohol. While many pundits have suggested that such a large
tax increase makes this proposal dead on arrival, the method of
financing a single payer plan has considerable merit after
reviewing the data and comparing it to the current method of
financing health care.

In 1997, 75 percent of Americans who are currently insured
would pay less for health insurance under the American Health
Security Act than under current law and this percentage would
increase as the cost savings projected under the American Health
Security Act would increase. According to projections made by
the Congressional Budget Office, the American Health Care
Security Act would save $114 billion in the year 2003 and,
therefore, the average American family would pay over $1000 less
for health care services in the year 2003 compared to current
law.

I have prepared a series of charts that illustrate how the
financing system would affect individual Americans. The charts
show that under the American Health Security Act most Americans
would pay less than they are currently paying for health care.
For low income individuals and individual with chronic illnesses
the amounts would be significantly less. The charts also show
that most employers would pay less if the American Health
Security Act were passed. The charts are based upon numbers
generated by the Congressional Budget Office, Joint Committee on
Taxation, Employee Benefits Research Institute, and the National
Medical Expenditure Series.

Price Regulation

Under the American Health Security Act, hospitals and
nursing homes will be paid on the basis of global budgets.
Physicians and other health care professionals will be paid based
on a variety of mechanisms including annual operating budgets,
fee schedules, and capitation payments.

While no one prefers price regulation to a free market
solution, international and domestic evaluations of price
regulation in the health care industry have shown that price
regulation is able to control costs without an adverse impact on
either access to or quality of medical care. In 1991, I wrote an
article in the Health Care Financing Review summarizing the
published literature on all payer rate setting. The article
reached the following conclusions:

• States with all payer rate setting programs have been
able to consistently lower the rate of increase in
hospital expenditures by 2-4 percentage points per year
compared to other states.

• All payer rate setting programs have been able to
reduce the extent of cost shifting considerably.

• All payer rate setting programs have increased access
for the uninsured because they compensate hospitals for
the care of people without health insurance.

• Most studies have found no evidence that quality of
care declined under all payer rate setting programs.

• HMOs and other managed care organizations have
prospered in states with all payer rate setting.

222

• The diffusion of new technology and access to capital

is comparable in states with and without all payer rate
setting.

The Prospective Payment Assessment Commission, the Physician
Payment Review Commission, and the Congressional Budget Office
have recently conducted independent assessments of the
feasibility of regulating hospital and physician services based
upon Medicare payment rules. They all concluded that a national
payment rate is feasible at this time.

State and National Budgets

The American Health Security Act establishes an annual
global budget for health care, limiting growth in expenditures to
the rate of growth in the gross domestic product. Each state is
given a global budget which the state will use to set budgets for
physicians, hospitals, and nursing homes. Separate budgets for
new construction, renovation, and major capital equipment are
allocated directly by the states. A National Health Board
negotiates prescription drug prices with drug companies.

Global budgets have been used by other countries for years
without access or quality problems. In the United States, a
number of states have, for years, used a form of global budgeting
- prospective rates with volume adjustments - to set hospital
rates without adverse effects on quality of care or access to
care. Medicare currently uses a form of global budgeting for
physician services .

Global budgets also make common sense. As a society we
decide how much we want to spend on defense, space exploration,
or public education through the budget process. There is no
reason why the same process could not be used to decide how much
to spend on health care.

I would be happy to answer any questions.

223

SCENARIO 1

WORKER IN SMALL MANUFACTURING COMPANY
Demographics:

1 Ag«:

2 Gindtr:

Mat*

3 Family:

Wlfa ahd t«vo chlldran

4 Health Statua:

No praaxlating condltlona

No long farm haalth cara naada

5 Ineoma:

Wagaa - $50,000 In 1999, no othar Ineoma

6 Haalth Hablta:

Non smokar, non drinker

Current Health Insurance Coveraae:

1 Banadtt: Comprahanaiva benefits; no deductibles;

Rx drugs with copay; no dental; no
long term cara

2 Covaraga: Family

3 Employer Payment- Employer pays 100% of premium

COST TO THE WORKER

Out of Pocket Premiuin Taxes Total

Cunent System 200"' 5435™ q 5535

American HeaTth Care O™ 0 BaSO**' 5250

Security Act^

blliiMm tmmnal ftkM tm ■"*>■ m «r» tm—* «■ fniif w ol 9m NMES dw Wh«»< l» t»<hct 1S*a t
1 100 1

»cc««<m W «» IiM'r" S«n*a« ammli kMHuM'a irfiMliBuin b««d on »m 1M2 ■ippliiiiMH of •■• Cwiwl
r^p»dmtianStr<mrmn6^997ftm1ianatH^l%rti£J^pmn^tunS*0V9y,mKlfioy9ttm^M^tJL^^m^A^tw^al^>ltml»ma^OJ^^pmnmm
til tf|iua in inamfacturing iraM wMi lawl tfwn 10 iiiyhiiMl. Btmim IimMi tumtc* prmnkmm ar« ■nnmil le
terwii fuMr «wn p«T>«a. ■ mnr CQtnwv«a»i «mmii»aw» b Am «ii >«u»n»|i w* nM clm|>.

JoW CewiUm on TMjacw »in(im » ptr/nM Urn &I S.4 p«rc«n« id Iwcomw m «t 2.1 pwont would raba Om nqutod

COST TO THE EMPLOYER

Payments for Health
Insurance
Current System 5435"

American Health Care 4200™

Security Act

OiMWM •> ■■■■ai porrai kt ISM m tso.ooo.

Atio<*>9 le dM bnployi BoiMlil acmtcfc hvtkuu'e coleidodoiM boMd on dx 1*92 imihinwil ol dM
l>VU>don Swvor and 1 987 Nolkaiol M.<icol Cjq>ndhura Survvr. onvtoiw hooltfi o.l.mitum io(»<«^^
o4 poyral ki manwfoclMtna %ifw wMi Imvoi dMn 10 oiwp>u)ooi.

JoM Comndnoo on Toudon »iutoi.u • pmrnM uo ol a.4 pweoM.

224

SCENARIO 2

WORKER IN MEDIUM SIZED TRANSPORTATION FIRM
Demoaraohlcs:

Age:

Gender:

Female

Family:

Divorced, two children

H«allh Status:

No preexisting conditions

No long term health care needs

Income:

$20,000 In 1999, no other Income

Health Habits:

Non smoker, non drinker

Current Health Insurance Coveraqe:

1 Benefits: $1000 family deductible; no Rx;

no dental; no vision

2 Coverage: Family

3 Employer Payment: Employer pays 80% of premium

COST TO THE WORKER

Out of Pocket Premium Taxes Total

Current System 3330'" 2130'" q 5460

American Health Care C" 0 800'*' eOO

Security Act

EitknMa (or out e( podiM upandHum an b«i«d on conpuur nm ol Dm NMES dota kilUtod <o f«<l>ct 1*99 oaML

Asoumoi 100 porcom tattnf «rWl 0 poroom coparmoxts.

Aceac«<g to Dm Envloyoe Bcnotil ItoMorch ksAuu'i cakUations baaad on Ote 1992 ai^piamant ol Iha CaaioM
PopubtionSory«TO~<^9a7Ma<ionrfM«<»cal6jip«ndH<«S<«v»T.'oX*'Y«'''aalttia«pcndh»«Miapr«»ont«<10.6Sp>«i«n<
o< payral In a ttanipowation fim ol batweon 2S and 93 aoiployeai. Sacauso health knwanca maiiifcam ara aipactad la
hcnaa* lastar than paynl. a vonr consaivathn astifnata li that this pareontaga wB not cfianga.

For ainploien of Ian than 75 (ul tkna aqiivalant c»n(ilo>«ei aamtng an awraga wage o< lasa than •24.000. the Joint
Convnittea on Taaatkn has projectad a ta< rau of 4.0 percant wo>M lalsa tha ra^irad I

COST TO THE EMPLOYER

pr Health
losutancs

Current System 2130'"

American Heahh Care 800'"

Security Act

Assun>e< Iha nvaga payna In 1*99 Is «20.000.

Accoxfeg lo Ih. Cinplorn BansOl Rasaareh kitUluIs'i calciaaUons l>asad on Iha 1992 naipismawl of Oia Ciaranl
Popi4auon Swv.y and 19(7 National Medical tj^»odilu>. Suvey. .nH>lo,a. health e >pen<*«uras ie|>raaanled I0.«&pe.cenl
ol payiol h • uanwonaOon (an ol belween 2S end 99 emploYeei

ro« enH>lov««s ol le.l then li hA Ikne e«|u~elenl emploveee eeneng en .ve<e«e xege ol tesi Otan (24.0O0. the Jea<l
Conwnntee on leuoon hei (xo^ecled a lai fele el 4 0 |>a<cenl oeUd leiu Ihe ie«*ed emounl ol revenue

225

SCENARIO 3

WORKER IN LARGE

Demoaraohlcs:

Age:

Gender:

Family:

Health SUtua:

Income:

Health Hablta:

CONSUMER PRODUCTS FIRM

Male

Married with no dependenia

No preeiltting condltlona

No long term health care needa

SfiO.OOO In 1999, no other lr>come

Non smoker, non drinker

Current Health Insurance Coveraoe:

Benefits:

2 Coverage:

3 Employer Payment

Comprehensive; $200 deductible;

drugs; dental; vision

Family

Employer pays 100% of premium

COST TO THE WORKER

Qv\ 9f Pocket Premium Taxes Total
Current System 1218'" 6876™ q 3094

American Health Care
Security Act

0 6300'*' 6300

Estinwus tar eu( o< poctM upMtdltms arm b«Md on compuur nra si Oo NMES tf«a bi<Utt4 to raltoct 1999 c
I 100 uiciMl CJOwwua wWi 0 c

AccaAig w KM EmvtarM Benefit (teMarch bmttuu's ealcUaliona bncd en ttie 1992 ■<>><■ mini e( Oie Curem
IVipULetionS«»v«T end 1987Metlon«l»«e<«<alE«t)«n«tt»eSi»veT.«inti4ot««h««ti>ieiip«»«iluie«»«p>e«€me«l11.«« percent
el perrai In • ceraumo pcoAicts (inn eni«>)<>t4ng 500-999 mplareei. Seceuie heeMi btMnnee proiyiem an ejqiected
to Incnese le«« Bi«i p>Yra(. e verf conucvalive estimete b Ktet M> pwcinliM era net ctienge.

JoM CammHtee an Te<ationpfoiKts«perroatue<S.4 percent en) hcomelu of 2.1 pwoeni weiM rdee Die rebuked

COST TO THE EMPLOYER

Current System

American Health Care
Security Act

Payments (or Health
Insurance

6876™

6300'^'

Aaaumes an avarega payraS hi 1999 el «60.000.

Accerdins la 0<a C<ti|>Iot<« BenaM RaMarcft Insliruta ■ cakUabona baaed on Iha 1992 .

Cepi^lion Sway and 1987 MauanalMa<fa:alEv«<dHi«S<jrv«T.afn|><or«<ll.ara«ipandHure<
e4 perral In a conaunw producia fc™ amployaig &0&999 amplmaai

Ja4n< Cenwnmaa on Taxaljon protacts a payral lai o) B 4 percent

a*4n^">*iil of the Cterant

226

Age:

Gander:

Family:

Health Status:

Income:

Health Hablta:

SCENARIO 4

WORKER IN OWNER OPERATED GROCERY STORE

Demographics:

Mala

Married with one child

Child with chronic leukemia

$60,000 In 1B9t, no other Income

Hon smoker, non drinker

Current Health Insurance Coverage:

1 Benefits: Medium Option: Basic coverage;

$500 deductible; no dental; Rx drugs
lncluded;$3000 out of pocket limit; 3 month
waiting period lor preexisting condition

2 Coverage: Family: Ma|or Risk Medical Insuranca

3 Employer Payment: Owner operator pays 100%

COST TO THE EMPLOYER

Out of Pocket Premium j9x.iS lBia[

Current System 6922"' 5394™ 0 12316

American Health Care 0'" 0 6300"' 6300

Security Act

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227

Chairman Stark [presiding]. Thank you very much.

Before I recognize Lisa Priest, I did want to ask unanimous con-
sent that the testimony of Drs. Hsiao and Dans, who, because of
the weather, were unaole to make it this morning, be included in
the record, and I commend the testimony to my colleagues for their
perusal.

[The prepared statements follow:]

228

Presentation Before the Subcommittee on Health
House Ways and Means Committee

February 9, 1994

William C, Hsiao

K.T. Li Professor of Economics
Harvard University School of Public Health

I am pleased to give an evaluation of a single-payer system.
Simply put, a single-payer system can cut total U.S. personal
health expenditures by at least 20% while improving quality and
without rationing services. The cost reduction can be achieved
without sacrificing access or quality because the U.S. now has a
bloated and inefficient system. This 20% savings comes from
three major sources. First, approximately 8% of the savings
comes from reducing administrative expenses. Another 7% of
savings can be produced by reducing unnecessary tests and
surgeries. Finally, a savings of 5% will result from removing
duplication and waste resulting from our excess hospital and
laboratory facilities.

The U.S. has such an inefficient and expensive health care
system for two reasons. First, we have freely chosen a wasteful
approach by relying on a free market, private insurance system
that naturally leads to multiple and complicated administrative
systems and duplication of facilities. Second, the multiple
insurer/payer system gives an "open checkbook" to physicians and
hospitals. An open checkbook offers no incentive for providers
to operate efficiently or balance costs with effectiveness in
medical decisions. The fundamental debate in the U.S. is how to
close the checkbook so that pressures will be put upon providers
to remove waste and inefficiency.

An effective single-payer system has two essential
components to control costs and assure quality. The first
essential component consists of a global budget established
prospectively for total health expenditures. A global budget
serves as an effective fiscal cap over the health system which ■
pressures providers to manage health care efficiently and adopt
cost-effective medical technology. Without a global budget,
everyone would want the latest glittering technology and newest
drugs regardless of whether they would do the patient much good
and regardless of cost. Second, under a single-payer plan,
everyone is covered by public or private insurance plans so all
payments to providers can be channeled through a single pipe.
The single pipe payment enables us to effectively monitor quality
and volume of services and control costs.

To operate our private insurance-based pluralistic free
market system, the administrative costs amount to at least one-
fifth of our health expenditures. My research found that the
U.S. can cut approximately 8% of health costs by simplifying the
administrative operations of a national health insurance program
through a single-payer system. This estimate of 8% is quite
consistent with those estimates prepared by GAO and CBO.

The second source of savings comes from reducing unnecessary
surgeries and tests. Scientific studies show that between 20%-
25% of the surgeries and high technology tests performed now are
unnecessary. The New York Times' editorial on January 31, 1994,
put it this way "Studies show that as much as one-third of
current health care expenditure is for wasteful or ill-
advised procedures."

A single-payer system would close the open checkbook by
establishing a cap through negotiations on total health
expenditures and uniform payment rates. More importantly, but
often missed by analysts, the experiences of Rochester (N.Y.),
Canada, Germany, and Japan show that a single-payer system would
assemble the total practice profile of every physician. This

229

cannot be done under a multiple payer system. These complete
practice profiles have been used effectively by other countries
to monitor the practices of the aberrant physicians which may
only comprise 10%-15% of the physician population. The other 85%
of physicians were free to practice good medicine according to
their best profession judgment, free from the intrusive daily
monitoring conducted by the multitude of managed care plans as
they operate in the U.S. now.

The monitoring of guality is usually delegated to the
medical profession rather than the government or insurance plans.
Other nations found that physicians were in the best position to
monitor each other, not only because they have the expert
knowledge, but also they can use professional persuasion,
economic sanctions (such as refusing to refer patients to an
aberrant physician) , and social pressure to correct the medical
practices of aberrant physicians. Unlike the market system where
every third party payer has to set up vast administrative
machinery, formal claims review processes, and cumbersome due-
process procedures to enforce quality standards, a single-payer
system sets the overall budget cap, establishes a uniform payment
system, then lets providers compete on quality of services,
monitored by the medical profession itself. Empirical evidence
shows that a single-payer system not only is able to assure
better quality of medical care, but at much less cost.

The third source of savings comes from reducing excess
capacity. The United States has an excess supply of hospital
beds and surgeons, and duplication of expensive laboratories.
Our hospital beds are only using two-thirds of their capacity.
We can reduce our health expenditures by at least 5% by removing
the waste produced by excess supply.

What kind of single-payer system would the United States
adopt? In my view, we should look toward Germany as a model.
Germany realized that they could not remove their entrenched
private non-profit insurance plans (i.e., sickness funds) from
the scene once they were established. So they built a successful
single-payer system where the federal government sets the broad
policy guidelines but leaves the state to implement them, taking
into account local conditions. German citizens continue to be
insured by their sickness funds, but all claims are paid through
a single pipe. Quality control and monitoring are exercised by
the state medical associations. A global budget is established
by negotiation where the payers — representatives of sickness
funds, employers, unions, and consumers -- sit on one side of the
table while the representatives of the money receivers sit on the
other side. The government stays out of the middle in setting
the global budget so the process is not politicized with lobbying
and political theater. Germany has been able to control its
costs effectively at an affordable level and provide universal
health insurance. There is no rationing in Germany and no
waiting line. Of course, we do not have to adopt the German
system wholesale — we can improve it by introducing better
quality assurance and modifying it to our own political and
economic structure.

In summary, I would like to assess the single-payer system,
using the six principles laid out by President Clinton in his
national health security plan. The six principles are:
security, savings, simplicity, quality, choice, and
responsibility. On security, a single-payer plan is at least as
comprehensive as the President's proposal. On simplicity,
savings, choice, and quality, a single-payer system clearly is
superior to the President's plan.

Anyone doubting that this can be done in the U.S. only needs
to examine the experience of Rochester, N.Y. Its medical
technology is first class and services are rendered without
waiting periods. Meanwhile its medical costs are 34% lower than
the U.S. average. Another success story is Maryland's single-
payer hospital payment system.

Empirically, there is no doubt that a single-payer plan has
proven to be a superior strategy. The question is whether we
have the wisdom and political will to adopt it.

230

References

H.R. chassin, J. Kosecoff, R.E. Park, et al: Does appropriate
vise explain geographic variations in the use of health care
services? Journal of the American Medical Association
1987;258(18) :2533-2537.

A.M. Greenspan, H. Kay, B. Berger, et al: Incidences of
unwarranted implementation of permanent cardiac pacemakers in a
largo medical population. New England Journal of Medicine
1988;318(3) :158-163.

W.C. Hsiao: Public vs. private administration of health
insurance: A study in relative economic efficiency. Inquiry
Winter 1978 ; 15 (4) : 379-387.

J.F. Shiels, G.J. Young, and R.J. Rubin: O Canada: Do we expect.
too much from its health system? Health Affairs Spring
]992;ll(l) :7-20.

K.E. Thorpe: Inside the black box of administrative costs.
Health Affairs Summer 1992 ; 11 (2) :41-55.

US General Accounting Office: Private Health Insurance;
Problems Caused by a Segmented Market . G AO/ HRD- 9 1-114.
Washington, DC: US GAO, 1991.

S. Woolhander and D.U. Himmelstein: The deteriorating
administrative efficiency of the US health care system. The New
England Journal of Medicine 1991;324(18) : 1253-1258.

231

Testimony of Dr. Peier E. Dans before ihe Subcommittee on Health Of the
Ways and Means Committee of the House of Representaiives-2/9/94

Mister Chairman. Distinguished Members and Honored Guests

Thank you for the privilege of being invited to testify on an issue
about which I have felt passionately for over 20 years. I am not testifying
today in my official capacity as a Deputy Editor of the Annals of Internal
Medicine nor as a member of its parent organization, the American College of
Physicians but as a private citizen who has had the opportunity to
participate in and observe the medical care system from many different
perspectives. Growing up in a cold water flat and then a housing project in
New York city, I used free dispensaries and dental school clinics. In the late
40's when my mother was employed as a court interpreter, we were
enrolled in the Health Insurance Plan (HIP), an early HMO. As a high school
student in 1951. 1 debated the national debate topic: Resolved Should we
adopt national health insurance?- an issue with roots at least as far back as
the convening of the first national Committee on the Costs of Medical Care"
in 1 927. That debate.shrill with accusations of "socialized medicine, was
muted by the massive building of acute care hospitals through the Hillfiurton
aa as well as the use of tai incentives for employers to make medical
insurance more affordable.

Still, when I graduated from medical school in 196 1, people,
especially the poor and the elderly, were being turned away from hospitals.
Medicare and Medicaid corrected that but also institutionalized a usual and
customary fee payment system that favored high-tech and acute hospital
care over dfioe-based care, long-term care and prevention. The lives of
many were markedly improved by these reforms as I learned from caring
tor people in places as diverse as Massachusetts, Col<M-ado, and Maryland.
However, the incentives from these and other well-meaning reforms such as
the expansion of medical school enrollment became perverse with the
explosion in non-curative technology and the replacement of acute diseases
by chronic ones as the population.aged. By the mid-70,s , when I was a
health policy fellow in the US. Senate, it was clear that Medicare and
Medicaid had fueled a health care cost crisis. However, most people were
satisfied with their care and other issues like energy and defense took
precedence.

In 1978, 1 returned to Johns Hopkins Hospital to establish one of the
first medical practice evaluation units aimed at increasing the quality and
decreasing the costs of care - now called outcomes research and continuous
quality improvement. I watched the «>st crisis worsen as AIDS, drug and
alcohol abuse, violence, tuberculosis, and homelessness overwhelmed an
eroding public health system. Unfortunately, the medical care system's

232

after-the-fact response was tremendously expensive and only marginally
effective. For example, drug-addicted patients coming to the Emergency'
room to kick the habit would be given a number to call for programs whose
waiting lists were months long. However, if they had infected their heart
valve with a dirty needle, we could admit them for a valve replacement at
great expense.

So why is there so much controversy about whether there is a crisis"?
I beheve it is because of imprecisely diagnosing it as a "health care crisis".
Health care, or what is more appropriately called medical care, is not in
crisis. While it needs improvement in its distribution, organization, and (in
some areas) its qualitv. our medical care is generally acknowledged to be
very often the best in the world. We do, however, have a crisis in what
medical care we pay for, how much we pay for it. and how that payment is
administered. As a result, we have a coverage crisis whereby too manv
Americans do not have basic medical care benefits.

! am here today because 1 believe Congressmen McDermott, Stark.and
their cosponsors have made the right diagnoses and have tailored their
treatments accordingly. They don t rely on untried concepts not found in
nature like health insurance purchasing cooperatives which threaten to
interpose large impersonal bureaucratic organizations between patients and
their doaors. Instead, they propose to take a payment system that has
worked in Germany .Canada, and other developed countries and tailor it to fit
America, Even in America, in my home state of Maryland, an all-payor
system for hospital care has worked extremely well in holding down costs
while not adversely affecting care.

By mandating a basic medical benefits package and developing a
uniform system for paying for it. the bill will take much of the confusion out
of the current system. It also will reduce the huge administrative costs
which do not translate into improved care but instead enormously increase
the hassle factor for patients, their families and for physicians. I have seen
this from both sides. My parents died in 1991. six months apart. I had to
cope not only with my grief, but with masses of fragmented and almost
unintelligible medical bills. I had to communicate with 3 separate insurers,
of whom only Medicare seemed readily willing to fulfill its contractual
obligation. Having a medical degree was of little help. As a physician, I have
also seen the harassment by multiple third party payors with a myriad of
confliaing rules. Rather than improve quality, these rules have fostered the
creation of a paperwork bureaucracy and at times have even restricted care.

Another reason I favor this bill is that it doesn't incorporate the other
untried concept we so often hear about, "managed competition '. We don t
need more competition in the medical care system. Competition is largely to
blame for the combination of maldistribution and duplication of services.
We need more collaboration for the same reason we don t have competing

233

lire deparimenis in a given lunsdiaion. During war. we doni coniraa oui
medical care ser\'ices lo competing groups; we iniegraie them beginning with
triage at the front all the way back to the stateside hospitals. Indeed, under
the threat ol legislation, we are already seeing unprecedented mergers
among institutions in Boston and Philadelphia that once competed for the
same pool of insured patients. We have seen collaboration work effeaively
to improve care and hold down costs in Rochester. New York. By removing
many perverse payment incentives, this bill wlU level the playing field in
medical service areas. Global budgeting will encourage states and regions to
convene all local interested parties to define the needs of their inhabitants
and then to make sure that the quality, mix and distribution of services
meet those needs.

To help the local entities concerned with quality of care to accomplish
these goals, the bill mandates the development of a national electronic
database for patient records. Such systems are becoming more widely used
in such countries as The Netherlands. This will improve care by making key
clinical inl'ormation portable in our highly mobile society. It will also permit
the analysis of patient outcomes and comprehensive profiling of institutions
and physicians rather than insurance plans. From almost two decades of
experience, I can attest to the general inadequacy of most claims data for
accomplishing these tasks. I see physician profiling not as a report card"
with grades from A to F, but primarily as an educational tool. The vast
majority of doaors want to know how they are doing and how to do better.
It can also serve to identify the small percentage of "bad apples".

The bill also encourages the recognition d centers of excellence within
medical service areas. As someone who helped establish a migrant health
center in Fort Lupton. Colorado-now a thriving one-class community health
center, I am pleased that the bill takes into account the special needs of the
medically-underserved. Competition hasn t worked very well in rural areas
and inner dties-not just for medical services but also for other necessary
services.

The bill is silent on two important issues. The first is malpractice
reform. However, I agree with the sponsors that this issue should be uckled
separately. I believe that tort reform should be across the board. A society
where someone who is drunk and falls off a subway platform can win
millions of dollars in awards is completely out o{ whack. A system which
seeks "deep pockets ' to blame rather than trying to rectify any errors, most
of which are unintentional is ripe for reform. Compensating those who
should be , many of whom are not compensated under the current system, in
a non-punilive way would take the onus off the majority of physicians and
lead to improved care. Rather than continue the disabling specter of
litigaiion for the good doctors. I would prefer that that we isolate the truly
negligent physicians and deal with them punitively.

234

I also urge that Medicine be exempted from ihe provisions of the
Anii-irusl aci, as ii was before a 1970's ruling. Medicine is a profession not
a trade and doctors ought to be ezpeaed to aa accordingly. If baseball can
be exempt, it's not clear why Medicine should not be. My concerns stem
from my term on Maryland's Board of Physician Quality Assurance
from 1988 to 1992. Although almost a quarter of the complaints involved
allegations of excessive fees, virtually all were dismissed, even though one <rf
our standards prohibited "gross and wilful overcharging' . Presumably,
because doaors couldn t know one another s fees.we could not prove that
even the most outlandish fees were gross, let alone wilful. The medical
society also refused to get involved as a mediator, as it had in previous years
allegedly because it had been sued once for restraint of trade. For the same
reason, doaors who were aware of the bad aaors cited the famous Patrick
case which hinged on concerns about restraint of trade as a reason for
their reluaance to come forward. The potential for individual harm simply
out weighed the benefit. In a new era stressing prolessionalism and
cooperation for the public good, treating Medicine as a trade is out of step.

I would also favor reinstating the ban on advertising. Advertising
drains resources from the patient and invites overstatement and
downplaying problems. It makes us spin doctors not medical doaors.
Even at Johns Hopkins, iustifiably recognized as one of the premier hospitals,
the premise of our office of medical praaice evaluation was that as good as
we were, we could be even better. Again, no surprise here,because medical
care is a complex social enterprise involving imperfea people working in an
imperfea system. The idea should be to strive for perfeaion by identifying
errors and correaing them, not hiding them.

Finally. I am very much concerned that the terms of this debate were
established by a secretly -convened task force whose plan was being sold
even before it was made public. Some of the press coverage suggests an
'enough already attitude with the issue being reduced to a two horse race
with the handicappers urging you to get your bets down. This issue is simply
too important to come to premature closure. I have also been dismayed at
the polarization created by the tendency to cast villains as well as to
substitute slogans, jargon and catchy phrases for clear and reasoned analysis.
In the process, the Cooper " bill becomes "Clinton Lite". The single-payor
proposal is dismissed as not politically viable and too hberal when as a
matter of faa, it is probably the most fiscally conservative and least
intrusive into the patient-doaor relationship.

It gets to the root of the most pressing problems and preserves the
best of the current system. It does so in 200 pages as compared vilh
anywhere from 600 pages tol364 in the competing bills. There's an
enormous risk for mischief in those extra 1000 or so pages. As a health
policy fellow. I saw too many well meaning ideas start simply and then run

235

amok as micro management mania and a lack o( irusl led lo the orchestration
of every last deuil. As a result, the law-abiding people got tied up in the
red tape of voluminous regulations while the operators figured out how to
get around them. Whatever you do I urge that you keep it as simple and as
surgically precise as possible. This isn t about getting it done but getting it
right. What you do will have profound effects on the the profession of
medicine as well as how Americans choose lo live and die. Thank you for
vour attention.

236

Mr. McDermott. Mr. Chairman, may I say that the last page of
Dr. Hsiao's testimony, beginning with "in summary," I think is
probably the best, most concise compilation of what he has to say,
and he essentially, unfortunately, was snowed in in Boston. I would
love to have him here saying it.

Chairman Stark. So he could not snow the rest of us this morn-
ing [laughing]; is that right?

Mr. McDermott. No. He would tell us the truth actually.

Chairman Stark. Having said that, I would like to recognize Ms,
Lisa Priest, a journalist from the Toronto Star.

Please proceed, Ms. Priest.

STATEMENT OF LISA PRIEST, HEALTH POLICY REPORTER,
TORONTO STAR, TORONTO, CANADA

Ms. Priest. Dear Mr. Chairman and members of the committee,
I am a health policy reporter for Canada's largest newspaper, the
Toronto Star, and my only agenda as a journalist is to relate as
dispassionately and as objectively as I know how some of the
strengths and weaknesses of Canada's $67 billion health care sys-
tem.

In a country divided by language, various cultures, and frequent
constitutional squabbles, health care has been the one thing that
united and defines Canadians. Indeed, many would feel un-Cana-
dian without its health care system and its principles of universal-
ity, comprehensiveness, accessibility, portability, and public admin-
istration.

Canadians are overall very satisfied with their health care sys-
tem. Recent surveys show 84 percent of Canadians rate the quality
of their medical services as excellent, very good, or good; 81 percent
think government should pay for health care of all Canadians, re-
gardless of their income.

Saying that, we are having some problems with financing, and
the Federal and Provincial governments are trying to determine
what we can no longer afford.

Sixty percent of Canadians approve the charging of user fees,
and 82 percent believe that the government will introduce them
sometime in the future.

One of the problems that you have with capped resources inevi-
tably is that you are going to get waiting lists, and much of my re-
porting has concentrated on waiting lists. And since this is a public
system, you tend to find out about them quite a lot. And I would
like to give a few examples.

One of them is that Sunnybrook Hospital, you have to wait up
to 9 months for a hernia repair, 8 months for gallbladder surgery.
If you are a routine patient wanting a crack at the magnetic reso-
nance imager, it is 9 months. At Toronto Hospital, it is 4 to 9
months for an autologous bone marrow transplants, which is
deemed as urgent care. Essentially anyone who needs emergency
care gets emergency care.

And these problems, for the most part, are reflective more of poor
management than resources. In the past, we have always chucked
money into the system, and our budgets were growing at 10 per-
cent a year, and then we found that essentially we were not man-

237

aging the resources well, and a lot of these things can be fixed with
central registries.

Cancer, we have had a real problem with cancer care. I remem-
ber interviewing a woman who had to be driven by her paraplegic
son up to northern Ontario for radiation treatment. But overall,
Canadians do get access to their health care.

And I have also covered good stories where I have seen two
brothers with cystic fibrosis get double lung transplants, and that
was a total cost of $300,000, and they did not even know how much
it cost.

The Canadian health care system, though, is not in crisis, which
a lot of people tend to think, but there are just certain things that
need to be fixed.

And what is happening right now is that they are delisting cer-
tain procedures. A lot of these procedures, Canadians think, are
cosmetic anyway. They are things like tatoo removal and acne re-
moval and sterilization reversal. Those things are being delisted,
20 million dollars' worth in Ontario right now.

As well, doctors are not part of a socialist medicine state. In fact,
90 percent of the country's 60,000 physicians are self-employed, fee-
for-service practitioners who bill the Provincial health plans for
each medical procedure they perform. In fact, they are also able to
bill on top of that for third-party billings such as doctor's notes and
aviation medicals and things of that nature.

Since there is little utilization management on prior approvals,
physicians enjoy really a free way of practicing medicine. They do
not have insurance companies calling them us saying: Here, how
about that patient and hospital; when can you get them out? They
really practice on the Lone Ranger model for the most part, and
they negotiate their payments with government, so government
gets a very good bargain for the doctors.

Right now in Ontario, doctors are at a cap, and they are paid —
the 22,000 physicians are paid $3.9 billion a year. If they bill any-
thing over that with this hard cap, they have to pay back the
money to government, and, in fact, that is what they are doing
right now. They anticipate that they will run out of this $3,841 bil-
lion by mid-March, and the Ontario Medical Association has, in
fact, told its doctors: Could you please take a week off in March
sometime and not see any more patients, so we keep our utilization
down? And they are going to end up holding up on $148.9 million.
And the government gets that money by a clawback; essentially
they dock their pay.

Hospitals are also downsizing. Over the past 5 years, they have
taken out 5,000 beds in Ontario alone, and still they are seeing a
lot more patients than before because of the move to day surgery.

And I would like to end this by — I did notice that someone had
mentioned that a lot of Canadians go down south. We do have a
big fraud problem. Of our $17.5 billion budget in Ontario, up to
$700 million is fraud, some of it from Americans coming to Canada
to get care. And they are trying to control that, and they are hav-
ing a devil of a time.

And as a journalist, I would just like to finish by saying that I
am always trying to look out for the health care system.

238

Chairman Stark. That is because they are so mad that we make
all those Fords and Chevrolets up in Canada. Just trying to get
even. [Laughter.]

Ms. Priest. I would just like to end by saying that I have tried
to look at health care systems in other countries to see what should
Canada be doing, what should we emulate, and for the most part
I think Canada is a very good system, and it is just that you hear
about the bad things because of the public accountability aspect,
but over all it is quite a good system going through changes.

[The prepared statement follows:]

239

STATEMENT OF LISA PRIEST.
HEALTH POLICY REPORTER, TORONTO STAR

Dear Mr. Chairman and members of the committee:

My name is Lisa Priest. I am a health policy reporter for Canada's largest newspaper The
Toronto Star, an invited witness of the subcommittee on health and a patient in my country's
health care system.

As a journalist, I will endeavour to relay - as dispassionately and objectively as I know how -
some of the strengths and weaknesses of Canada's $67 billion health care system.

In a country divided by language, various cultures and frequent constitutional squabbles,
health care has been the one thing that unites and defines Canadians. Indeed, many would
feel un-Canadian without its health care system and its principles of universality, comprehen-
siveness, accessibility, portability and public administration.

While Canadians are very satisfied with their health care system, they are concerned about
the profound changes taking place as federal and provincial governments determine what we
can no longer afford.

I would like to put a human face on our health care system as seen through the eyes of
patients, doctors, government officials, hospital administrators and many others who have
been involved in the emotional debates during this transition period.

Here are just a few recent snapshots:
•Two brothers with cystic fibrosis each received double-lung transplants. When they left
Toronto Hospital a few months ago with their new, pink lungs they didn't have to worry about
the tens of thousands of dollars it cost. In another health care system, they could have
perished.

•A woman in her 60s, stricken with breast cancer, had to rely on her paraplegic son to drive her
hundreds of miles to Northern Ontario for radiation treatment, following her surgery. A backlog
in radiation spots meant she couldn't obtain treatment at a hospital near her home in
Metropolitan Toronto. But she didn't mind travelling to Sudbury at her own expense.
•In Toronto, a dialysis patient said she was literally waiting for someone to die or get a kidney
transplant so she could take over someone else's spot. Dialysis is in great demand as the
number of patients increases disproportionately to resources. (Dialysis patients are increasing
annually by 10 per cent in Toronto.)

•When I was 13 and a pedestrian. I was hit by a car. Near death, I was rushed to hospital with
broken txsnes and other injuries. As I lay in emergency and later in the intensive care ward, all
my parents had to worry about was whether I would recover. They never had to fret atx)ut how
much it would cost and it's a good thing - because they could not have afforded my hospital
stay and subsequent rehabilitation. Uke most Canadians, I have no idea of how much my
medical care cost but I am thankful to the doctors who saved my life and a system that has no
financial barriers.

Inevitably, a system with capped resources will have the rather undesirable consequence
of waiting lists. While there are no waiting lists for emergency care, there are many for so-called
"elective" procedures, including those for hip replacements, cataract surgery, knee replace-
ments, appointments with some specialists, to name just a few. However, the word elective is
a misnomer as these are not optional medical procedures - patients do need them.

Currently, routine patients wanting a crack at the medical world's hottest new diagnostic
tool, the Magnetic Resonance Imager, have to wait up to nine months in some areas, whereas
urgent patients wait less than a month. In the province of Alberta, a private MRI clinic has
opened up and patients wanting the diagnostic procedure quickly can get it - for a price.

Many health care critics believe that Canada's waiting lists reflect poor resource manage-
ment and planning in addition to a lack of funding. For example, in the late 1980s, there was a
cardiovascular surgery scare. Countless stories detailed how patients needing heart surgery
were dying waiting for treatment. Indeed, some Canadian patients flew to the United States for
surgery. Some critics screamed there weren't enough doctors. Others complained there were
too few operating rooms. A small amount of money and the creation of a central registry that
priorizes patients according to need solved this problem quickly and quietly.

Short waiting lists, as some health policy analysts point out, are desirable as it means the
most efficient use of resources. As one physician told me, "there's nothing more dangerous
than an idle surgeon." In fact, an open-ended system \M[h unlimited resources would likely
result in more surgery and treatment than is medically desirable. And it has been pointed out
that there are no scientific studies to prove waiting lists hurt patient outcomes.

240

However, I have interviewed many people on waiting lists and observed their anxiety and
intense psychological pain waiting for treatment. Some of them wonder whether they will get
help in time. Since those in need of emergency and urgent care don't have to wait, other
patients frequently get their dates of operations changed. It is not unusual for a patient'to get
psychologically prepared for open heart surgery or another serious procedure only to be told
he or she will have to wait another month. Others are in so much pain they can't work, costing
the system more in lost wages and taxable income. While waiting lists may make good
economic sense, they are often at odds with a patient's quality of life.

For example, a man named Alan Boothe is on an 11 -month waiting list for a right partial
knee replacement. At times, the pain of bone rubbing against bone is so severe it wakes him
at night. The way he talked about his upcoming operation this fall reminded me of a child
counting down the days until Christmas.

At Canada's largest acute-care hospital. The Toronto Hospital, it takes four to nine months
to get an autologous bone marrow transplant. At that same hospital, it currently takes about
one month to get surgery for head and neck cancer - which as you probably know - produces
a tumor that doubles in size within 60 days. This hospital isn't much different from the
hundreds of others across Canada. One Canadian radiation oncologist said if he was
diagnosed with head and neck cancer today, he'd "panic like hell and go to Buffalo."

Americans hearing these stories would find this kind of waiting intolerable in the same way
many Canadians find the U.S. system - which leaves 37 million people without health insurance
- impossible to fathom.

But there is no perfect system, Canadians are justifiably proud of their health care system
yet recognize there are areas that need to be fixed.

One constant source of worry is the decreased funding from the federal government.
Having lured the provinces into Medicare three decades ago, the federal government started
becoming alarmed at rising costs and has been steadily decreasing its funding to the
provinces. The 50/50 federal and provincial government split in health care spending three
decades ago has now decreased to 30/70. f^rovincial governments are also concerned about
increased costs and have been in the process of de-insuring or de-listing some medical
procedures.

For example. In Ontario, the provincial government and its doctors are in the midst of
slashing $20 million worth of medical procedures which are presently covered under the
Ontario Health Insurance Plan. Some of these proposed cuts include tattoo removal, in-vitro
fertilization, sterilization reversal, routine circumcision, and annual health exams.

/\n Environics Research Poll done on behalf of my employer. The Toronto Star, revealed an
overwhelming majority of people believe that cosmetic procedures such as acne and tattoo
removal should not be covered under the health plan. Interestingly, a majority of those polled
last month also support middle- and upper-income seniors pay part of the cost of their drugs,
which are currently covered by government.

Doctors, too, are waged in battles with their provincial governments, fvlore than 90 per cent
of the country's 60,000 physicians are self-employed, fee-for-service practitioners who bill the
provincial health plans for each medical procedure they perform. Doctors are also able to bill
separately on a fee schedule for non-essential procedures, which are largely cosmetic. Since
there is relatively little utilization management or prior approvals, physicians enjoy a rather free
way of practicing medicine. They do, however, negotiate their payments with government and
many physicians - who prefer to practice on the Lone Ranger model - don't like any affiliation
with government.

The Ontario government likes to label its negotiations with the province's physicians as
lively. Recently, the Ontario tvledical Association, which represents 22,000 physicians, agreed
to a hard cap which means they have to pay the government anything they bill over a $3.9
billion annual ceiling. This year, they have gone over their cap and are in the midst of paying
the government a projected $145 million. They do it grudgingly as many doctors believe they
shouldn't have to pay back what they have earned while caring for their patients.

This payback is done through a clawback, which means each physician's pay is essentially
docked. Two weeks ago, the Ontario Medical Association sent a notice to its physicians,
asking them to take one week off in March in an attempt to keep health care costs down.
Despite some physician complaints, Canada has a good track record for keeping its doctors.
In Ontario, for example, at)out 100 physicians move to the United States each year, which
amounts to less than half a per cent. Within five years, half of those physicians have returned.

Canadian hospitals are also going through a period of restructuring and downsizing. In
Vancouver, a hospital was recently closed. Ontario's 222 hospitals are in the midst of slashing
$260 million from their budgets under the Social Contract Act, which was imposed by a
provincial government that needed to cut $2 billion from its deficit. This is in addition to the
millions of cuts they have already made and the 5,200 beds that have closed over the past five
years in Ontario. In Toronto, a nine-member committee is being formed by the Metropolitan
District Health Council, a government advisory body that plans health services in Metro
Toronto, to realign 44 hospitals. It could mean the closing of some hospitals and the program
mergers of others. Already, hospital presidents are busily meeting and trying to merge
programs in an effort to make changes before the committee does it for them.

241

Perhaps the most pronounced part of Canada's health care system is how politicized it
has become. Patients routinely call journalists to tell them their health care woes. Writing or
broadcasting a story, patients think, will get them better access to treatment. Often, they're
right. A news item that exposes a serious flaw in the system means It will be picked up by
other media and opposition political parlies will raise it with government in the legislature. In
fact, I've seen health policy made in this fashion.

Months ago, news broke on how two big Toronto teaching hospitals had hired a marketing
manager to help them sell medical services to the U.S. Americans could order a la carte from
menu at a cost less than the U.S. but more expensive than what is charged in Canada. When
this news broke, it hit a nerve. Canadians were outraged and they let their elected officials
know they did not want their health care sold to anyone. Critics said it would create a
two-tiered health care system - the bottom tier for Canadians and a second one for rich
Americans. Even more said Canada should get its own house in order before it starts selling
health care elsewhere. Within days, the plan was dead. Ontario Health (vlinister Ruth Grier
declared that the province's $17.5 billion annual health care system was not for sale.

The crisis in cancer treatment is another example. Patients have been receiving mutilating
surgery because they couldn't get timely access to radiation therapy. Voiceboxes were being
surgically removed and women were getting mutilating mastectomies because the waiting lists
for radiation treatment had doubled in the past decade. Other patients became incurable
waiting for treatment. Dying patients - who needed radiation for comfort during their last
months at life - were being drugged instead because their chances of getting on the waiting list
were worst of all. At a recent task force hearing, radiation oncologists and hospital presidents
stated at least 13 per cent of patients who could benefit from radiation weren't receiving if.

Each day, opposition Liberal and Conservative leaders lambested Ontario's provincial New
Democrat government for weeks in the legislature, complete with horror stories from their
constituents. This problem - predicted two decades ago - was finally getting the profile it
deserved only because of public pressure. '

Shortly after, the Ontario govemment approved a $1 million annual plan to hire 20 more
much-needed radiation therapists. As well, it approved the hiring of more radiation oncologists
and officials vowed to form a long-term plan for cancer treatment. Soonafter, the Liberal party
formed a task force on cancer care, travelling the province to hear stories from hospital staff
and patients at)out the quality of treatment. I point to this example because it so clearly
illustrates that political pressure and will are often the sure way to get a problem in our health
care system fixed. While this is a terrific method of accountability, it seems an odd way to make
public policy. Without question period, the opposition political parties and the media, some
horrors in health care could go undetected and uncorrected.

Health care is moving in new directions in Canada. Hospitals are downsizing but aren't
nearly as far as the United States. If Canada could achieve the same efficient use of hospital
beds as the U.S., 30 to 40 per cent of our beds could be closed. Those resources could go to
day surgery, outpatient and community care. '

However, other gains are being made. Physicians are stressing preventive care and policy
makers are preaching the determinants of health. Governments are becoming more involved
with public policy such as tough tobacco and seat-belt legislation. Patients are finding out that
health care isn't "free." In fact, government ads are informing them that they don't need to go
to the doctor for a cold, which has cost the health care systems hundreds of millions of dollars.
Centres such as the Institute for Clinical and Evaluative Sciences in Ontario and Manitoba's
Centre for Health Policy are measuring the cost-effectiveness of certain procedures. One study
found that $4.26 million in health care could be saved each year in Ontario if vasectomies were
done in doctors' offices instead of hospitals.

Canada's health care system is facing many challenges. Hospital administrators, govern-
ment officials and health care providers are trying to meet that challenge by doing more day
surgery, stressing preventive care, community care and adopting other mettiods of containing
costs while treating the country's 27 million residents.

As a journalist who likes to compare health care systems in other countries, I have often
looked abroad to see if there's a place Canada should model itself after. But every time I look
elsewhere, I always come back to my country. It's true, we do have to wait for some of our
health care and we don't always like to. But we figure a little waiting for all of us is better than
letting others go without care.

242

Chairman Stark. Thank you, Ms. Priest.

If I could, there is a rather bizarre notion that you could have
a huge single publicly-financed plan without some politics getting
involved in it.

Could you kind of just summarize? Your Parliament, I mean, are
they really second-guessing the doctors and the system, or do they
only come in in an oversight capacity and on occasion to try and
fix the system? I mean, how involved is your Parliament in the
day-to-day running of the system and managing it?

Ms. Priest. Actually the Ontario Government and the Ontario
Medical Association just formed what they called a Joint Manage-
ment Committee. It was formed IV2 years ago. And what they also
did is, they set up an Institute for Clinical Evaluative Sciences,
which does a lot of — measures the cost-efficiencies of certain proce-
dures, variations across the Province.

Chairman Stark. Who participates in these boards or organiza-
tions?

Ms. Priest. The Health Minister and Deputy Health Minister
would be on the Joint Management Committee, and members, sen-
ior members, of the Ontario Medical Association, which is sort of —
they do not like to call it this, but it is sort of a union of doctors,
and they decide jointly on future health care practices.

Chairman Stark. OK. Dr. Anderson, you gave us some examples
of how the world would fare under the McDermott bill. Have you
made similar calculations about other proposals, such as the Stark
bill or the Clinton bill or the Thomas bill?

Mr. Anderson. I did, while I was listening to Mr. McDermott,
some calculations on the President's bill, and effectively what I
showed was for families of four in 1999 earning $20,000, $50,000,
and $100,000, they would pay less under the McDermott bill than
they would under the President's bill.

Chairman Stark. How about under Mr. Thomas' bill?

Mr. Anderson. I have not had an opportunity.

Chairman Stark. I wonder, it would be interesting — I was re-
viewing your figures — if you would care to, as we go along and a
couple of alternatives become more clearly identified — I am not
sure now that there are an awful lot of bills out there with names
on them that are not quite as clearly identified as Mr.
McDermott's, but I would appreciate it — I am sure my colleagues
would find it interesting if you would, at some point, maybe in the
next couple of weeks, extend your research and see how it com-
pares with other programs, the Cooper bill, for example.

Mr. Anderson. I would be glad to do that. What I insisted with
Mr. McDermott, however, is that the CBO go first, effectively, be-
cause I do not want to go out there and be essentially making my
estimates and then having somebody else do another estimate. So
I would be very happy to do it after CBO has done their work.

Chairman Stark. OK. Thank you very much.

Mr. Thomas.

Mr. Thomas. Thank you, Mr. Chairman.

I just hope CBO moves forward after their brief respite that they
were so desperate for. Give them the weekend. I wonder if they
showed up today on a slow day.

243

I echo the chairman's desire for some kind of an ongoing analy-
sis. We are inevitably required to compare apples and oranges, and
to the degree we can compare apples and apples and look at the
upsides and the downsides, it makes our job not easier, but at least
slightly better at doing something that works. And I think that is
the fundamental motivation of most of us.

Ms. Priest, you are a reporter, and you responded to the chair-
man's question in regard to the Provincial and National Legisla-
tures in the political cattle of what we can afford, and they nave
set up a structure to assist them in making that decision.

You said something else that I am wondering if you had any sto-
ries about or anecdotal information about, and that was that for
particular elective surgery, there appears to be inordinate or per-
haps unacceptable waiting periods to get that, but for emergency
care, it seems that you can jump the queue and go right to the
front.

Do you have any instances of folks gaming the system or doctors
attempting to define something as an emergency care rather than
elective to try to jump the queue to get patients some kind of serv-
ice prior to what they would ordinarily if they played the ballgame
the way it is supposed to be played.

Ms. Priest. There is always — I have heard some people and sen-
ior administrators in hospitals say: You know, it is only human na-
ture that if you are sort of well-known or if you have connections,
you will jump the queue. I have not seen one particular person that
has done that, but I have heard anecdotal stories that if you know
people and that doctors generally like tend to like to take care of
people who are more like them and educated and more well off. So
there have been instances.

Mr. Thomas. So to a certain extent, you are saying that, as it
is kind of in politics, it is not what you know; it is who you know
in a system that is controlled from the top down.

Ms. Priest. In a way. I mean, that is not representative of the
system. It is probably a very small amount of the cases.

The problem we have with waiting lists is that we do not have
waiting lists. There is no list in an office that says: Hey, here is
your name, and this is where I call.

Mr. Thomas. Take a number and wait, yes.

Ms. Priest. It is a laundry list in someone's head. And that is
the real problem, and that is when you can get the queue-jumping.

Mr. Thomas. Dr. Anderson, you wanted to say something?

Mr. Anderson. Yes. I have a grant from the Federal Government
looking at queuing right now in Canada in the Province of Mani-
toba specifically related to cataract surgery. And what we see is,
if somebody has a serious problem because they cannot drive or
something like that, each doctor has their own waiting list, but
every once in a while somebody cannot have surgery for a particu-
lar reason, and that person becomes the person who gets put into
the queue and gets care very quickly. So doctors have their own in-
ternal ability to prioritize. And that is pretty much what they are
doing in Manitoba.

Mr. Thomas. Prioritize between doctors of the same specialty or
within a doctor who has his own list and can bump his own list?

Mr. Anderson. His own list.

244

Mr. Thomas. His own list.

Mr. Anderson. Correct.

Mr. Thomas. OK. Thank you, Mr. Chairman.

Chairman Stark. Mr. McDermott.

Mr. McDermott. Thank you, Mr. Chairman.

I want to talk a minute about this situation and ask Ms. Priest
a couple of questions.

The illustration used in the Northwest about why the Canadian
system is so much of a problem is that the British Columbia Gov-
ernment said there was this long waiting list for heart surgery. So
they wrote a contract with the State of Washington and the Uni-
versity Hospital for 200 cases.

And I have examined every anecdotal thing anybody says about
Canada, and I go and try to find out if it is true or not. So I went
to them to figure out what had happened.

First of all, it took more than a year for them to find 200 cases
to send down to the United States. So there was no great waiting
list. We have unused capacity at the University of Washington
Hospital that I tried to stop, but they could not find any Canadians
to send down there.

Then it turned out that what really was the problem in Van-
couver is that there are two very famous heart surgeons. Every-
body wants to be done by those two people. The other 8 or 10 very
competent surgeons did not have any waiting list, but two people
had long waiting lists.

And my experience really jibes with what Dr. Anderson found in
cataracts in Manitoba.

I want to ask a question of Ms. Priest, though. There is now a
rumor around in the Congress that Canadians are shutting down
hospitals. And when the people were down from Ontario, the
woman who is the president of the Canadian Hospital Association
and the head of the Ottawa General Hospital were in my office,
they said: The next thing you are going to hear from Canada is
that we closed hospitals. And she said: The fact is that in the old
days when there were no paved roads and no snowplows, we put
a nospital about every 20 miles, and we have got these hospitals
all over the place, and they are so inefficient, we are now closing
them.

Is that a fair representation of what the hospital-closing rumor
out of Canada is all about?

Ms. Priest. That is exactly right. On University Avenue in
downtown Toronto, we have six or seven hospitals within about two
blocks of each other. And we just built too many hospitals, and now
we are in the process — no one has really had the guts to actually
close them down, so they are taking the beds out of the system.
But there is a District Health Council in Toronto that is spending
the next 18 months looking at reconfiguring the hospitals and pos-
sibly closing some.

But also four hospitals on University Avenue have formed a — are
in the midst of forming a consortium, so that all the duplication
with human resources and microbiology labs, that will be gone, and
they will save, they figure, tens of millions of dollars by doing that.

So whenever people scream that hospitals are closing, they really
need to. There are just too many, and we do not need that money.

245

Mr. McDermott. Have you done any research about the actual
number of Canadians whose health care is in the United States?

The numbers that I got from the Ontario Government in the past
were that about 4 percent of their budget was spent in the United
States. Half of it was by snowbirds, older people who had come
down to the United States, got sick here and had their health care
in Florida or Arizona or California, and the other 2 percent was for
a variety of reasons and people.

Does that square with the kind of figures that you have seen?

Ms. Priest. I am not really familiar with the figures. But I do
know from what I understand that it is a very small amount, that
most people get their health care in Canada. And you are abso-
lutely right; it is when you are out of town that you are getting it,
if you are old and you are away in Florida. Then, you know, you
are going to get your health care there.

And I think for a brief period, there was a time where our head
injury people were going down to Texas.

But those are the only instances I have heard of where people
have gone south. Most people are, you know, afraid to come down
south from Canada. Their two big fears are getting shot or getting
sick.

Mr. McDermott. Thank you very much. Thank you, Mr. Chair-
man.

Chairman Stark. Mr. McCrery.

Mr. McCrery. Ms. Priest, is it your impression from your work
in journalism that the health care system in Canada is improving,
or do you see any patterns of decline in the health care system?

Ms. Priest. One big area of decline is the Federal funding that
is funneled down to the Provinces before health care spending
would be split 50-50 between the Provincial governments and the
Federal Government.

Over the past few years, actually the past 10 years, they have
been — it has split now to 30 percent Federal funding, and they
have passed it on to the Provinces, which in turn cannot afford
quite a few things, so they are, in turn, delisting.

So that is one big area where, you know, we are getting less
money.

Mr. McCrery. So as a result, you are seeing, I suppose, dif-
ferences in the quality of health care among the Provinces?

Ms. Priest. We do not have a homogeneous care package across
the country. I think that is one problem, is that like four Provinces
fund psychoanalysis; other ones do not. Some do in vitro fertiliza-
tions; other ones do not. But the Federal Health Minister is trying
to get it so that we have a homogenous package instead of the 10
little health care systems across the country.

But that has been what is happening. Since it has been shoved
onto the Provinces, they have been delisting and cutting without
any kind of comprehensive line across the country.

Mr. McCrery. How do you pay for your health care system in
Canada? Is there a separate tax for that?

Ms. Priest. You know, I have no idea how much I pay for my
health care system. It is just taken off my taxes. The Ontario Gov-
ernment, for instance, a third of their budget is health care. That

246

is $17.5 billion a year. But I do not know the precise figures per
person. It is just taken off our taxes.

Mr. McCrery. So you do not know if there is a separate health
care tax in Canada, or if it just comes out of general revenues?

Ms. Priest. Oh, I am sorry. It does come out of general revenues.
That is right.

Mr. McCrery. So there is no separate health care tax?

Ms. Priest. No, no.

Mr. McCrery. What problem do you hear most frequently voiced
from people that you encounter while you are studying the Cana-
dian health care system?

Ms. Priest. I think the worst one was the radiation backlog,
which they are trying to fix right now. There are people literally
getting their throats ripped out, their breasts chopped off. They
were getting mutilating surgery because they could not get radi-
ation treatment. With larynx, head and neck cancer, for instance,
the radiation would have been able to shrink the tumor, but in-
stead, since they had to wait in the queue so long, it had grown
big; it had maybe become incurable, or it had to be surgically re-
moved.

So we had people losing their voices when they did not need to
lose their voices. We had women losing their breasts when they
could have had a lumpectomy and radiation.

At one point, the radiation backlog was 14 weeks, and this is
treatment that you are supposed to get ideally within 1 month. I
mean, that is a clinical standard. That is one big area.

We also have problems with any kind of orthopedic surgery, hip
and knee replacements and bone marrow transplants, which actu-
ally is urgent care. But we have waiting lists for that.

Mr. McCrery. Well, has the Federal Government in Canada ad-
dressed these problems?

Ms. Priest. It is usually the Province that will do it, and what
happens is that somebody screams about it and brings it up in a
legislature, and then the opposition will go after the government,
and they usually try to do something about it.

Right now, they have poured $1 million into hiring more radi-
ation therapists, and they are trying to come in with a long-term
plan as well. The problem with oncology is really a worldwide one.
There is a shortage of radiation oncologists, and I know that they
are trying to recruit some from around the world right now. So
they are addressing it, and the queues are getting smaller, but they
are still there.

Mr. McCrery. So has your experience been that the government,
whether it is the Provincial government or the Federal Govern-
ment, then responding in a timely way to the problems that have
cropped up in the health care system, or does it take a long time
for the political system to react, or what is your experience?

Ms. Priest. It has to be political, because these problems, espe-
cially for radiation, were predicted, and I think the first time was
1973 or 1975. I mentioned these were old, old problems, and people
are looking at how we are treating more people with radiation and
how we are having an aging population. So there were reports after
reports after reports done, and nobody did anything until someone

247

started screaming about it. And that is usually what it takes. It
does not always fix itself on its own.

Mr. McCrery. So essentially what you are telling us is that
when there is an identified problem in the health care system con-
cerning a lack of facilities, a lack of services available to treat peo-
ple in a Province, it is the political system that has to respond, and
your experience has been that the political system takes a long
time in some cases to respond?

Ms. Priest. In that particular case, it did. I mean, once it was
brought out into the public eye, it was solved quite quickly. But in
some instances — and there are other cases where doctors some-
times are able to solve it, but mostly you need a big, massive re-
structuring to form central registries or funding. Those are usually
the answers.

Mr. McCrery. Thank you.

Chairman Stark. Mr. McDermott.

Mr. McDermott. Yes. Mr. Chairman, let me just say something
about Dr. Hsiao and Dr. Dans' testimony. Dr. Hsiao if he were
here, would testify that the single-payer system would cut 20 per-
cent from national health care expenditures without affecting cost
or quality. That is his testimony.

Dr. Dans would testify that the single payer is the least disrup-
tive of all of the proposals and the most conservative in terms of
experimental changes. And this is a doctor talking from the Annals
of Internal Medicine. He is an internist from the American College
of Physicians. So as doctors look at it, it is the least disruptive.

And I want to ask a question of you, Dr. Anderson. There is some
conventional wisdom here on Capitol Hill that price controls will
not work. Could you expand on your testimony regarding why you
think they will work?

Mr. Anderson. Well, I think we have to look at the fact that
they have worked in places like Maryland and other places as well.
They have been able to control the rate of increase in health care
spending. They have been able to do that without any dem-
onstrated adverse effect on quality. The studies have shown that
access to care, especially to the uninsured, have been improved.

The hospitals themselves have been able to acquire capital, to ac-
quire new technology, and they have been able to do this in essen-
tially a globally budgeted system.

In Maryland, we have been working for the last 18 years under
a global budget set by the Medicare program. And as Mr. Cardin
and others have suggested, the health care system in terms of
quality of care in Maryland is equal, if not better, than any place
in the country.

Mr. McDermott. I think Congressman Cardin created that sys-
tem.

Mr. Anderson. Correct. He did.

Mr. McDermott. He just said it works very well.

Mr. Anderson. And we are investigating in Maryland whether
or not we should expand it to the physician sector as well. So they
physician is taking a look at that issue along with the politicians.

Mr. McDermott. Thank you.

Mr. Cardin [presiding!. If I might just follow up on that one
point, one of the concerns I have about the Maryland all-payer rate

248

system is that it works well; it has been — there is a lot of credibil-
ity among the providers that we are treating each of the providers
fairly in the way that the rates are set; there is no discrimination
against a facility that wishes to have a larger proportion of Medi-
care patients, because everybody pays the same rates. We, of
course, still have a problem with uncompensated care that we are
trying to deal with, and if we get universal coverage, then we will
not have to worry about the uncompensated care.

But what worries me is that if the pressures become so great to
reduce cost, will a Maryland all-payer rate system be able to sur-
vive, if the Medicare is arbitrarily reduced and more cost-shifting
occurs nationwide between the government progn"ams and the pri-
vate sector?

Will we be able to maintain a system by trying — what is going
to happen if we get our rates so low in our State, what is going
to happen to the availability of health care providers or hospitals?
Will it be able to do that?

Mr. Anderson. I obviously cannot predict the future. But if I
look at the past, the rate of increase that Maryland has had to
work under has been the Medicare rate of increase, which has been
less than the private sector rate of increase and less than the over-
all rate of increase.

And so Maryland has been able to do this over an 18-year period,
working under a constraint which is less than the rate of increase
in the overall health care sector and the rate of increase in the hos-
pital sector.

So I think if you look at the past, Maryland has been able to do
it. Will they be able to do it in the future, I cannot predict. The
hospital administrators are still enthusiastically endorsing this sys-
tem, and they look at their crystal ball, and they still are strongly
supportive of the system that you created.

Mr. Cardin. Well, let me thank both of our witnesses for being
here and braving the weather to appear before our committee. We
thank you very much.

Mr. Garden. The next panel will consist of Hon. Arthur
Flemming, chair and former Secretary of Health, Education, and
Welfare, representing the Save Our Security Coalition; Sara S.
Nichols, staff attorney for the Public Citizen's Congressional Con-
gress Watch; Lawrence T. Smedley, executive director of the Na-
tional Council of Senior Citizens; Dr. Michael A. Walker, executive
director of the Fraser Institute from Vancouver, Canada; and Dr.
William MacKillop, director of Radiation Oncology, Kingston Re-
gional Cancer Center, Ontario Cancer and Research Foundation,
Queens University, Kingston, Ontario.

Welcome.

Mr. Flemming, it is always a pleasure to have you before the
committee.

STATEMENT OF HON. ARTHUR S. FLEMMING, CHAIR, SAVE
OUR SECURITY COALITION, AND FORMER SECRETARY OF
HEALTH, EDUCATION, AND WELFARE

Mr. Flemming. I am delighted to be here, and I appreciate the
opportunity of presenting some of my views at this point relative
to a great national debate.

249

Sixty years ago, our national community, in the midst of the
greatest depression we have ever experienced, heard Franklin Roo-
sevelt's challenge to pool our resources in both the public sector
and private sector in order to help our people deal with the hazards
and vicissitudes of life.

I was a reporter than on the staff of what is now the U.S. News
& World Report. I saw the national community respond to Presi-
dent Roosevelt's challenge by launching our Social Security pro-
gram.

I later joined the Roosevelt Administration as a member of the
U.S. Civil Service Commission and had the opportunity of helping
on the implementation of that program.

Now I am hearing President Clinton challenge our national com-
munity as we move out of a serious recession to pool our resources
in both the private sector and public sector in order to help our
people deal with the hazards and vicissitudes of health care.

We are truly thankful that the national community, as it existed
60 years ago, turned Franklin Roosevelt's vision for universal cov-
erage into reality. The national community, as it exists today, I be-
lieve will turn President Clinton's vision for universal coverage of
health care into reality. If it does, our children, grandchildren, and
great-grandchildren will have reason to be truly thankful.

I want to do everything I can to see this happen, to see us reach
the objective of universal coverage for all our people.

I feel that it is unnecessary to spell out again the hazards and
vicissitudes in the field of health care that confront our Nation, and
I will not do it.

I represent a group who are delighted that President Clinton has
stated unequivocally that the health care plan must contain a pro-
vision that guarantees that all of our people have coverage of the
health care benefits that are spelled out in the law. He has in-
cluded in his plan the provisions that are needed if this guarantee
of health care coverage for all is to be achieved. His plan is a genu-
ine pooling of resources from the public and private sectors. All of
us will have the satisfaction of contributing some of our resources
to the pool, no matter how small. Then all of us will be permitted
to draw from the pool when and if we are confronted with the haz-
ards and vicissitudes of health care.

Also the group I represent rejoices in the fact that older persons,
survivors, and the disabled not only will retain their present Medi-
care benefits, but will have added to these benefits prescription
drugs.

For over 60 years, I have heard people debate various plans. But
we have no plan. The time has come to stop our debate and act.
At this point, I recommend the Clinton plan, because the Clinton
plan guarantees coverage to everyone for the health care benefits
set forth in the law.

It will undoubtedly be changed in some ways as a result of Con-
gressional hearings. But that fundamental principle will remain.
And once again, that fundamental principle will be come embedded
in our way of life.

I recognize that the executive branch, headed by the President,
has decided that it is politically feasible to recommend to the coun-
try the kind of a plan that he has submitted to the Congress. I rep-

250

resent and recognize that under our system of checks-and-balances,
you are now in the process of checking that judgment.

His plan is made up of various parts, all with the idea of achiev-
ing the objective of universal coverage. Undoubtedly some parts
that are in his plan will be exchanged for other parts by the Con-
gress. But I hope that the Congress and the President will continue
to communicate with one another until they agree on a plan that
will reach this objective. That is the one thing that I am interested
in.

But let us get to the place where we learn by doing. We have had
no experience with some of the recommendations in the Clinton
plan. Some will work; some will not work. When recommendations
do not work, let us change them. But let us begin by doing.

That is my theme. I feel after 60 years of watching this that this
country desperately needs a plan which will provide a universal
right of coverage for minimum benefits, and I hope that the nego-
tiations that are now taking place between the Congress and the
Executive will lead to the adoption of such a plan.

Thank you.

[The prepared statement follows:!

251

TESTIMONY OF ARTHUR S. FLEMMING
SAVE OUR SECURITY COALITION

Introduction

A. Sixty years ago our national community, In the midst of the greatest
depression we have ever experienced, heard Franklin Roosevelt's
challenges to pool our resources. In both the public sector and
private sector. In order to help our people deal with the hazards and
vicissitudes of life.

1. I was reporter then on the staff of what is now the United
States News and World Report.

2. I saw the national community respond to President Roosevelt's
challenge by launching our Social Security program.

3. I later joined the Roosevelt Administration as a member of the
U. S. Civil Service Commission and had the opportunity of
helping on the implementation of that program.

B. Now I am hearing President Clinton challenge our national community,
as we move out of a serious recession, to pool our resources, in both
the private sector and public sector in order to help our people deal
with the hazards and vicissitudes of health care.

C. We are truly thankful that the national community, as it existed sixty
years ago turned Franklin Roosevelt's vision into reality.

D. The national community, as it exists today, I believe will turn
President Clinton's vision Into reality.

E. If it does our children, grandchildren, and great grandchildren will
have reason to be truly thankful.

F. I want to do everything I can to make this happen.

ftl -fififi n - Q4 - Q

252

II. Body

A. I feel that It Is unnecessary to spell out again the hazards and
vicissitudes in the field of health care that confront our nation.

1. All I want to say Is that I am convinced that because of
these hazards and vicissitudes untold numbers of our
people face premature death and millions of our people face
unnecessary suffering.

2. I am likewise convinced that unless we act and act now runaway
prices for health care will make it impossible for us to
straighten out our economy and promote the best Interests of
our people.

B. I represent a group who are delighted that President Clinton has stated
unequivocally that the health care plan must contain a provision which
guarantees that all our people have coverage of the health care benefits
that are spelled out in the law.

1. He has Included in his well-rounded plan the provisions that are
needed if his guarantee of health care coverage for all is to

be achieved.

2. His plan is a genuine pooling of resources from the public and
private sectors — all of us will have the satisfaction of
contributing some of our resources to the pool, no matter how
small.

3. Then all of us will be permitted to draw from the pool when
and if we are confronted with the hazards and vicissitudes
of health care.

253

C. Also the group I represent rejoice In the fact that older persons,
survivors, and the disabled not only will retain their present
Medicare benefits but will have added to those benefits prescription
drugs and coverage in Federal-state programs of long term care.
III. Conclusion

A. Over 60 years I have heard people debate various plans — but we have
no plan.

B. The time has come to stop our debate and act.

C. I recommend the Clinton plan

1, The Clinton plan guarantees coverage to everyone for the
health care benefits set forth in the law.

2. It undoubtedly will be changed in some ways as a result of
Congressional hearings but that fundamental principle will
remain — and once we adopt that fundamental principle it will
become embedded in our way of life.

D. Let's learn by doing.

1. We have had no experience with some of the recommendations
in the Clinton plan.

2. Some of the recommendations will work; some will not work.

3. When recommendations do not work let's change them; let us
learn by doing.

E. I urge that the national community respond to the vision and challenge
of President Clinton to pool our resources, in the private and public
sectors, and by so doing enable all of our people to deal with the
hazards and vicissitudes of health care.

254

Mr. Cardin. Thank you very much.
Ms. Nichols.

STATEMENT OF SARA S. NICHOLS, STAFF ATTORNEY, PUBLIC
CITIZEN'S CONGRESS WATCH

Ms. Nichols. Thank you. Good afternoon. I am pleased to be
here to talk about the American Health Security Act, H.R. 1200.
I am working with over 1,000 groups around the country who sup-
port this legislation and want to see it passed.

It is now clear to me with the scoring of the Congressional Budg-
et Office yesterday of the Clinton plan that single payer is the onlv
plan before the Congress which is deficit-neutral and saves enough
money to cover everyone fully for the same amount we are spend-
ing now, including long-term care coverage. It is the onlv reform
before the Congress which fulfills the President's goals of simpHc-
ity, savings, security, choice, and quality.

It is very important to understand, because it is stated and mis-
stated so often, that a single-payer plan is a government-financed,
not a government-run, system. It replaces the inefficient private in-
surers with one insurer, the Federal Government, and it leaves the
entrepreneurial private delivery system in place. Doctors work for
themselves, and hospitals are not owned by the government.

Some people have quipped that a single-payer system would have
the inefficiency of the Post Office. I hasten to point out that if the
insurance industry were running the Post Office, 37 million people
would not receive mail.

H.R. 1200 bases itself on the Canadian health care system, and
it has very much, and the authors of the bill, have very much
learned from both the successes of that system and the mistakes
of that system.

And in my written testimony, I have at some length expounded
on that point and shown the extent to which H.R. 1200 improves
on the Canadian system, and it does that partly because we spend
30 percent more per person on health care in this country than
they do in Canada, so we can afford to provide better benefits; we
can afford to have more comprehensive services; we can afford to
have even more research and development of technology than they
do in that system and than we do now with the savings that we
can achieve. So it is truly the American Health Security Act.

I would hke to spend a little time comparing single payer to the
President's plan with looking at the particular goals that the Presi-
dent has set forth. I am not spending time comparing it to other
plans before Congress, in particular the Cooper-Grandy plan that
has been so much in the news, because I do not see that those are
really serious attempts to provide universal coverage. I am focusing
on the one other plan which actually makes an attempt to provide
universal coverage.

First, as to simplicity, clearly single payer is much more simple
than the President's plan. It could not be more simple. Everyone
is in the same plan; everyone has the same benefits; everyone pays
in, and everyone gets out. It removes a layer of bureaucracy, which
is the insurance industry.

In contrast, the President's plan is so complex as to be virtually
unexplainable. Instead of removing a level of bureaucracy, it adds

255

two new layers of bureaucracy, the health alliances and the man-
aged care bureaucracy, if you are not currently in such a plan.

It has, you know, as we know, many different contingencies. Peo-
ple in Medicare stay in there. Employers over a certain amount can
opt out. Others are in; they choose through their alliance. The
plans have various different costs. They pay copayments and
deductibles. While everyone may pay in the same amount to an al-
liance, the alliance will pay out different amounts to the different
plans, depending on whether the people in those plans are sicker
or poorer, and the subsidies are very complicated to figure out and
have to be adjusted retroactively if they have not been done cor-
rectly.

As to savings, it has already been amply demonstrated here this
morning that single payer saves more than any other plan and is
the only plan that saves enough to cover — simultaneously extend
universal coverage now and not in the future.

I cannot emphasize enough the importance of providing that sav-
ings now and not in the future.

The State of Massachusetts passed a plan in 1988 that was sup-
posed to provide universal coverage. Six years later, the savings
still are not there. They have given up all hope of universal cov-
erage, and costs are higher than anywhere else.

The Clinton plan does not save enough money to pay for itself;
$74 billion it adds to the budget deficit.

And security, of course, the single-payer plan, because it saves
money and because it is simple and because it is not employer-
based and goes with you rather than your employer, your spouse,
or where you live is ultimate security from cradle to grave, whereas
the Clinton plan, because it is not fully funded and employer-based,
may provide insecurity.

And the single-payer plan, of course, is the ultimate in choice,
free choice of physician everywhere.

In closing, I would like to dispel the single biggest fallacy about
the single-payer system and in relation to the President's plan in
particular.

People often act as if and talk about these plans as if the Presi-
dent's plan is more market-based than the single-payer plan. In
fact, both plans rely on a mixture of the public and private sectors
to achieve their goals. Single payer combines the best of the public
sector, fair financing, with the best of the private sector, entre-
preneurial free-market medicine, whereas the President's plan com-
bines intrusive — combines private sector inefficient financing with
government intrusion into the delivery of the health care system
and to the very choices that are made about medical care.

Single payer, the American Health Security Act, is by far the
least intrusive and best option for reform before our country.

[The prepared statement follows:]

256

TESTIMONY OF SARA S. NICHOLS
PUBLIC CITIZEN'S CONGRESS WATCH

My name is Sara Nichols, I am a staff attorney and health lobbyist with Public
Citizen's Congress Watch. Thank you Chairman Stark and to the other members of
this committee for allowing me to testify on the American Health Security Act.

According to numerous studies by the Congressional Budget Office (CBO),
single payer is the only health reform option before the Congress that has been
shown to save money and deliver health coverage to every resident simultaneously.
As such, a single payer plan is the only plan that can deliver on the President's
nonnegotiable demand for universal coverage.

The American Health Security Act, H.R. 1200, introduced by Representatives
Jim McDermott (D-WA) and John Conyers (D-MI) along with 90 other cosponsors, is
the piece of legislation before the House of Representatives which best represents the
single payer system.

Not only is H.R. 1200 the only reform before the Congress which actually
provides umversal coverage, if s the only legislation which fulfills the other laudable
principles set forth by the President but not deUvered by the President's plan:
security, simplicity, savings, quality and choice.

Single payer is simple: everyone's in the same plan. It provides security
because it is not employer-based. It saves more money than any other plan
according to the General Accounting Office (GAO) and the CBO and provides full
choice of provider. The President's plan is complex, saves little money, and therefore
provides no security and little choice.

Unfortunately, neither H.R. 1200 nor the President's plan significantly
improves the quality of medical care.

The most important thing to understand about the single payer system is that
despite constant misstatements to the contrary, single payer is not government-run
health care, it is govemment-/i>iflnced health care v^dth full and free choice of doctor.

While the Canadian system provides an excellent model for an American
health system, it is possible to improve on the Canadian system. H.R. 1200 has done
just that. Its sponsors learned from Canada's successes, and its mistakes, and they
have adapted the bill to the American health care crisis and system. Although it
could adopt still more from the Canadian experience, H.R. 1200, as we will
demonstrate, is truly the American Health Security Act.
n. THE SINGLE PAYER SYSTEM

The basic notion of single payer is very simple. The "single payer" refers orUy
to the financing of health care. The inefficient wasteful multiplicative financing of the
nearly 1500 private health insurers is replaced by a single government insurance
fund. All of the private expenditures currently in the health care system are
converted to public financing collected through the tax system.

The primary model for the single payer system which we rely on in this
country is the Canadian system. There are other nations in the world that have
workable umversal national health care programs. While features of these other
systems could no doubt play a role in any good health care system here, we think the
single payer Canadian-style system is the most adaptable to the American palate
because it is govemment-/jnflnced, not government-run. The distinction is important.

In a government-run system doctors work for and hospitals are owmed and
operated by the government. The often-derided British health care system is an
example of this model. In contrast, in a single payer system like Canada's, the claims
are processed by the government, but the doctors work for themselves and hospitals
are privately owned and operated.

While Americans can be easily convinced of the merits of a public insurance
fund over 1500 private insurance funds, they would be much more skeptical about
the idea of providers, climes and hospitals being government-ovvT\ed and operated.

It is incorrect to thii\k of the Clinton health plan as more market-based than
the single payer plan. In fact, both plans depend on a mixture of the public and
private sectors to achieve health system reform. In our estimate a single payer
system combines the best of the public;sector~fair financing-with the best of the
private sector-entrepreneurial private practice medicine. The Clinton health plan.

257

on the other hand, combines inefficient private sector financing with intrusive
government restructuring of the health dehvery system. The single payer plan is the
better and less intrusive option for the American medical and political system.

A. Universal Coverage. Single payer has as its most basic feature universal
coverage because single payer starts with the prenruse that health care is a right;
neither a benefit, nor a privilege, but a right. If health care is a right, our
government has a duty to provide basic health services to all its residents, not just
the rich ones or the poor ones, nor the employed ones nor the unemployed ones, nor
only the legal residents. Under single payer, all the residents of the United States could be
covered fully for the same amount we are spending now.

B. Cost Controls. Single payer is the oiJy health reform before the Congress
which controls costs enough to cover every person in this country fully for the same
amount we are spending now. In 1993, health care bureaucracy consumed 24.7 cents
of every health care dollar, $232.3 billion." By switching to a single-payer system, we
could have saved in 1993 at least $117.7 billion; $456 for every American, or $3,325
per uninsured person. These savings include $49.1 billion (60.1 percent) on
hospital administration,^ $23.8 billion (28.3 percent) on overhead in doctors' offices,
$1.6 billion (13.3 percent) on nursing home administration, and 34.2 billion (79.6
percent) on insurance overhead.' This is enough to fvmd vmiversal access for the
uninsured and improve benefits for the tens of millions of Americans who currently
have only partial coverage without any increase in overall health spending.

Single payer would achieve savings in insurance overhead by replacing the
nearly 1500 private payers of health insurance claims with one "payer," the federal
government. The hospital administrative savings come from global operating
budgets and reduced billing costs associated with direct reimbursement by the
government.

And finally, the single payer system, like every universal coverage health care
system in the developed world, controls costs by negotiating providers' fees, and
pharmaceutical costs.

C. Comprehensive Benefits. Single payer is the only health reform system
before the Congress that can afford to provide comprehensive benefits. Because
single payer controls costs better than any other system, it allows us to stretch dollars
further getting as much value as possible from our phenomenal health spending.

In 1993, Canada spent 38 percent less per person than the U.S. did and was
able to guarantee every Canadian comprehensive major medical coverage including
full primary care treatment. Because we spend so much more, we can afford to
provide better benefits than in many provinces in Canada, benefits like mental health
coverage, full long term care and dental coverage. Since we can afford it if we use
our money more efficiently, we should provide what everyone really needs, not just
the bare minimum. We need full coverage for all the people in this country, not just
the few who can afford it.

D. Accessibility. Single payer is fully accessible. There are no financial
barriers to care or treatment. There are no copayments or deductibles in a true single
payer system. Because there are no such "cost-sharing" provisions, people can go to
the doctor whenever they need to, not just when they can afford to.

The Clinton plan, in contrast, relies heavily on shifting costs to health
consumers, requiring families to pay as much as $3,000 a year out of pocket on top of

'Hellander, Ida M.D., Himmelstein, David M.D., Woolhandler, Steffie, M.D.,
M.P.H. and Wolfe, Sidney, M.D., "Health Care Paper Chase, 1993: the Cost to the
Nation, the States and the District of Columbia," from Physicians for a National
Health Program, Chicago, IL; The Center for a National Health Program Studies,
Harvard Medical School/The Cambridge Hospital, Cambridge, MA; and The Public
Citizen Health Research Group, Washington, D.C.-August 1993.

^Woolhandler, Himmelstein, New England Journal of Medicine, August, 1993.

^Ibid., "Health Care Paper Chase."

258

20% copayments. These cost shifts create an illusion of lower premivims and health
costs while simply forcing consumers to pay three additional ways, through their
taxes, through lost wages and through out-of-pocket expei\ses.

Some argue that we can't afford to break down these barriers, that we need
cost-sharing in order to bring in more revenue and deter people from seeking
unnecessary care. The reality is that by paying into a tax-based system, we all are
sharing costs. We all will need to access the health care system at some point in our
lives. So-called "cost-sharing" deters as much needed care as it does urmecessary care
and in so doing drives up the cost of health care because by the time people come to
the doctor, they are generally sicker and more exj. ensive to treat.*

E. Freedom of Choice. Single payer allows people full choice of provider,
even improving over the current choices people have in this country. In a single
payer system, you're provided with a health security card. That card guarantees you
full coverage at the provider of your choice. You take that card to the provider of
your choice anywhere in the country and you're covered. The provider sends the bill
to the government instead of billing you and your insurance company.

In contrast, the Clinton Health Security Card does not guarantee coverage. It
guarantees only universal access. The difference between access and coverage is
important. In theory, everyone has access to the finest hotel in town, but only if you
have the money to pay. In our current health care system, the ii\sur2mce companies
restrict both access and coverage. The Clinton health plan cures only the access
question, without providing coverage.

F. Portability. A single payer system is fully portable. Instead of coverage
being dependent on where you work, who you're married to, or where you live, your
coverage goes v^th you and stays with you, no matter where or whether you work.

G. Public Accountability. A single payer system is publicly accountable.
Instead of decisions about your health needs being made by insurance bureaucrats,
decisions are made by accountable, fairly-comprised health boards which are
answerable to the public through the political system.

m. CANADA'S VERSION OF SINGLE PAYER

The Canadian version of single payer is most illustrative of what we want to
provide here because it works, if s dose to home, and Americans have heard about it.
The Canadian system is able to deliver universal health care to all its residents with
no barriers to receiving care, and it does so at 38% less per person than the cost of
the American system.

A. Federal Minimums. In Canada, the single payer system evolved from
province to province, and the administration of the systems varies by province. But
there are certain features that never vary:

1. Copayments, deductibles and other "cost-sharing" devices are barred
by law;

2. Provinces have local health boards which negotiate fees with
physicians and drug companies;

3. Provinces have mandated separate capital and operating budgets;
and

4. Hospitals rim on global operating budgets which are determined on
a capitated basis (based on the number of patients served).

B. Provincial Jurisdiction. While the Canadian federal government provides
these basic standards, it allows other features to be controlled and determined at the
provincial level. Some examples of provincial discretion include:

1. The extent of the benefits provided;

2. Whether the physician is reimbursed on a strictly fee-for-service basis
or a salaried basis; and

3. How much money is allocated to capital development such as the
building of new high tech equipment, etc., vs. allocation to operating expenses.

In all, the single payer system, modelled on Canada, is not just the best plan
for consumers, but the only plan that provides what consumers need.

*Rassell, Edith, Ph.D.-Economic Policy Institute.

259

IV. H.R. 1200, AMERICAN HEALTH SECURITY ACT

H.R. 1200 takes the basics of the Canadian health care system and adapts it to
the United States. Most of the faniiliar featvires of the Canadian system make the
journey intact H.R. 1200 provides comprehensive benefits for all Americans for the
same amount v^^e are spending now to cover only a portion of the population. It
does so not only by replacing the inefficient private insurance financing with public
financing, but by employing global operating budgets for hospitals, and insuring
negotiated fee schedules for providers and drug compaiues. In all, H.R. 1200 is the
best representation of a single payer system currently before the Congress, containing
the oi\ly structure capable of guaranteeing health care to the nation.

In this section, because I have edready extolled the virtues of a single payer
system, I v^U concentrate on the ways in which HR. 1200 improves on the Canadian
system and point out a few places where it falls short. While the foundations of this
house are sound, we aim to take a closer look at its curtains and furnishings as well.

A. Decentralization. H.R. 1200 adapts itself to the American political and
economic system by decentralizing the running of the business of health care. Under
H.R. 1200, while the federal government would collect the premiums and set
minimum standards for benefits and allocation of resources, it is up to the state and
local govenunents to dedde how to use those resources, beyond a standard benefit
package.

There are aspects of this decentralization which are excellent. In general, it is
preferable for states and local corrununities to make decisions with regard to the fair
allocation of resources rather than the federal government. In theory, as long as
those decisions are publicly accountable, the resources stand a good chance of being
fairly distributed, especially when compared to the current health care system.

Nonetheless, there are some basic aspects to a single payer system which must
not be left up to the states, they must be set by the federal government. The most
important central principle which is left out of H.R. 1200 is the principle of mandated
separate capital and operating budgets for hospitals and other health providing
institutions.

H.R. 1200 fails to mandate such separate budgets. Instead, it specifies simply
that states must have budgets for capital and operating expenses and leaves it up to
the states to dedde whether to merge or split these budgets.

Granting latitude in this area subverts a fundamental precept of a successful
single payer system: namely, that vnthout this mandate of separate budgeting of
capital and operating expenses, there is no guarantee of halting the out-of-control
"medical arms race" which has eaten up our health care resources and dramatically
increased the cost of medical care.

Ur\less capital and operating expenses are paid for and budgeted for
separately, nothing is to prevent the local health boards set up by H.R. 1200 from
siphoning off money badly needed to operate existing facilities and devoting it
instead to building yet another lavish duplicative facility aimed at attracting wealthy
patients. We must erisure that basic me<ical fadlities and equipment are kept well-
staffed and running smoothly before we turn toward expanding machinery and
fadlities in a given metropolitan area and worseiung the wasteful current situation in
which there are 300,000 empty hospital beds in the U.S.. H.R. 1200 must be amended to
match its companion bill in the Senate, 5.491, which mandates separate capital and operating
expenses.

B. More comprehensive coverage. While most provinces in Canada have
made the dedsion to guarantee at the federal level only n>ajor medical expenses, we
can afford more coverage than that here because we spend nearly one-third as much
per person per armum as they do in Canada.

H.R. 1200 has gone a long way towards providing those comprehensive
benefits. It federally guarantees full major medical coverage, prescription drug
coverage, a basic package of mental health benefits, dental care for children up to 18,
and long term care and home and commuiuty-based coverage for those who meet the
requirements. States are free to provide benefits beyond the federal package, but
they carmot choose to cover less than the federal nunimum.

260

Although we applaud the high level of medical benefits guaranteed by the U.S.
government in relation to Canada, we think we can and should do better. We have
enough money in the system to eliminate the arbitrarily low cap on mental health
benefits, to provide dental care for all Americans, and to provide long term care
(especially home-based care) for people who need assistance with only one Activity
of Daily Living (ADL), instead of 2, as the bill provides.

C. Increasing the niunber of primary care practitioners. H.R. 1200 recognizes
that giving everyone a health security card to present to the provider of his or her
choice is meaningless if no such provider is available and accessible.

In fact, we have a critical shortage in this country of primary care practitioners
that Canada does not have. 2/3 of the physicians in this covmtry are specialists to
1/3 primary care practitioners. In most other developed nations including Canada,
the ratios are reversed, 2/3 primary care practitioners to 1/3 specialists. Reversing
these ratios here would not only increase the availability of the providers whom
patients need most and most often, but it would further bring down the cost of
health care by encouraging earlier and less expensive care over costly specialized
medicine.

H.R. 1200 has sought to address this problem by setting strong goals for the
national health board to work towards and establishing funding for those goals.
Some of those methods include:

1. Within 5 years of enactment, 50% of the residents in medical
residency education programs will be primary care residents;

2. The national board will reduce payments to state health security
programs that fail to meet this goal;

3. The bill also seeks to increase the number and use of clinical primary
care practitioners, certified nurse midwives, physician assistcmts and other non-
physidan practitioners; and

4. The bill revives and uses the National Health Services Corps and
Public Health Block Grants to accomplish these goals.

D. Increasing the number of primary care facilities. Another problem with
our current health care system is a critical lack of facilities and medical persormel in
poorer areas in our inner cities and in many sparsely populated and poor rural areas.
H.R. 1200 seeks to inaease the number of good primary facilities in previously
underserved communities in the following ways:

1. Establishing block grants to develop primary care centers which will
serve medically imderserved populations. Such centers would include migrant health
centers, community health centers or other qualified health centers.

2. The bill also encourages and aeates Community Health Service
Organizations (CHSOs) to serve previously imderserved communities and areas.
These CHSOs are basically qualified HMC5s which are designed to fill the vacuiun
created by a lack of health facilities.

Although we applaud any effort to create facilities and service for previously
underserved commimities, we fear the CHSOs will not work because the bill allows
them to be for-profit entities. Any featiire which encourages for-profit HMOs to start
and flourish in the future is anti-consumer in effect. In order to maximize profits,
for-profit HMOs tend to divert money earmarked for care to profit, engage in
excessive marketing, and pay high executive salaries, all at the expense of care. In
general, HMOs and other managed care facilities attempt to save money by reducing
the amount of care provided. There is no evidence that such efforts consistently
control costs. Global operating budgets and negotiated fee schedules control costs.

Unfortimately, the legislation distinctly fails to forbid profiteering at the
expense of care. In the companion legislation in the Senate, S. 491, there is a
provision that specifically forbids the creation of new for-profit HMOs and ensures
that existing for-profit facilities cannot divert excess dollars to profit over a
reasonable rate of return on their capital investments. This arrangement has already
proved successful with not-for-profit hospitals in the U.S.. To fulfill its goals, H.R.
1200 must be amended to include such provisions.

E. Universal Coverage. H.R. 1200 saves enough money to provide universal

261

coverage immediately upon enactment, rather thar\ "when the savings are achieved," as
the Clinton plan provides. Any plan v^rhich defers universal coverage to a time in the
future— even a specified time-is insufficient to address our current health care crisis.
The Clinton plan, because it does not save enough money nov^r, projects universal
coverage into the next millennium. This is unacceptable and doomed to failure.

The experience of Massachusetts is illustrative. In 1988, the Massachusetts
legislature passed a health reform plan based on the so-called "pay or play" model.
The idea was that universal coverage would kick in once sufficient savings were
realized. Because the plan had woefully insufficient cost controls, the savings were
never realized. 6 years later Massachusetts suffers from nearly the highest health
costs in the country, one of the highest p)enetrations of HMOs, and has given up on
achieving universal coverage vwth that system. H.R. 1200 fulfills the essential goal of
saving enough money to provide universal coverage immediately.

Although H.R. 1200 saves enough money to cover everyone, it actually leaves
at least 3.2 nullion people out. One area where H.R. 1200 does not improve on the
Canadian system is in its defiiution of uiuversal coverage. The bill has confined its
coverage to legal residents of this country, rather than all residents. This is ultimately
a self-defeating and unworkable distinction.

To take seriously the idea that health care is a right, rather than a privilege or
a benefit, means providing health coverage to all people who reside in this country
regardless of immigration status. It is immoral, unethical and unjust to exclude the
3.2 million undocumented workers of this country and their families from our health
services. We cannot say "one plan for all," and then define the "all" as we like.

Since the system will eventually pay for sick undocimiented residents one way
or another, it would be far cheaper on the system to provide full coverage including
preventive medicine. Allowing any group of patients to be excluded from "universal"
coverage creates the same expensive cost-shifting as the status quo.

We are already paying for the care of undocumented immigrants. In 1993, it
cost the United States government $300 million to provide emergency care to
undocumented workers in Texas, California, New York and Illinois alone. Study
after study shows that undocumented residents, like all of the uninsured, use our
health care system whether covered or not. They show up at emergency rooms
about to give birth to an unhealthy baby or they arrive in the advance stages of a
debilitating disease and our hospitals treat them, because they must. If those
hospitals and medical personnel are not reimbursed for treating undocumented
people, it strains our resources and puts an added burden on state and local
governments to pick up the tab.

Undocumented workers contribute to our economy. They buy goods and
services, they pay rent and often they even pay taxes. According to the Center for
Constitutional Rights in New York, the amount they contribute to our economy
outweighs or counterbalances the cost of providing health services to them. Yet
because of xenophobia and lack of leadership, we seek to deny them care.

Ironically, if for no other reason, we should cover undocumented imnugrants
out of fear. Diseases know no boundaries of legality. A sick undocumented diild
resident can infect your child as easily as a documented child. To protect all the
legal residents of this covmtry we must provide health coverage to the
undocimiented.

F. Public Accountability. H.R. 1200 dictates the composition of local health
boards ensuring a balance of consumer, physician and medical industry
representation on the boards. There is also an attempt to achieve nonpartisan balance
on the federal boards. These efforts are to be applauded because they represent a
dramatic increase over our current health care system in the amount of accountability
to the public.

The public accountability portions of the bill would be strengthened greatly by
facilitating the creation of an independent consumer-funded watchdog organization
modelled on the successful consumer utility board (CUB). Such a watchdog, funded
by voluntary contributions, would monitor local health boards, insuring that they
were accountable to the public.

262

G. Financing. Because a new financing section to H.R. 1200 was introduced
just last Thursday, we have not had a chance to review it thoroughly. Our initial
impression, however, is favorable. Again adapting to the American political realities,
the bill relies primarily on a payroll tax which is capped at a percentage of payroll
depending on the size of the business. The new package has elimiiwted the
inaeases in the top income tax brackets which the old fimding package had included.
It has added a $2 cigarette tax and a 50 percent exdse tax on handguns and
ammuiution.

In general, an income tax is preferable to a payroll tax as a funding mechanism
because it is progressive rather than taxing at a flat rate. However, when compared
to an employer mandate such as the Clinton bill contains, a graduated payroll tax
like this is much less regressive.

The $2-per-pack cigarette tax increase is very necessary and long-overdue.
Such an inaease would reduce the number of smokers over time, particularly by
discouraging people from ever starting smoking. We applaud its inclusion, and that
of the gim tax, in the bill.

H. Quality. H.R. 1200 is the only health reform bill currently before the
Congress that does nothing to lessen the quality of medical care by restricting
consumers' legal rights.
V. COMPARING H.R. 1200 TO THE CLINTON BILL

In setting forth his proposal for health care reform. President Clinton
established several laudable goals for what such reform should achieve, namely:
simplicity, security, savings, choice and quality. Unfortimately, the Clinton Health
Security Act is structurally incapable of achieving those goals. The only health
reform proposal before the Congress which achieves these goals is H.R. 1200/S.491,
the American Health Security Act.

A. Simplicity. H.R. 1200, the single payer plan, is simple; everyone is in the
same plan, with the same benefits, no matter where they live, work or what their
income level. In contrast, the Clinton health plan is so complicated as to be virtually
unexplainable, to say nothing of the expenses of funding these "complications."
Rather than removing bureaucracies, the plan inserts two new layers--the hecdth
alliances and the HMOs-between you and your doctor.

The Clinton plan is confusing and unfair because it establishes and
institutionalizes different tiers of care depending on one's income, age and place of
employment. Seniors continue to receive Medicare; Medicaid recipients go into the
new system v^dth reduced benefits; people buy care through newly created "health
alliances;" the level of care depends on ability to pay for more expensive "fee-for-
service" care and if you can't, you have to join an HMO. Large employers can opt
out of the plan altogether.

If people and businesses cannot afford to pay their health premiums, they are
subsidized (as soon as the savings are achieved and then for as long as they last) by
the federal government. The Health Alliances have to figxire out how much to
subsidize each person based on their income level, the size of their business, etc. If
the subsidy was wrong it will have to be adjusted retroactively. The amount of
complexity these contingencies generate is difficult to overestimate. The Clinton plan
could not be less simple.

B. Savings. H.R. 1200 would save upwards of $117 billion in administrative
waste and more by going to a single payer system and by setting global budgets and
fees. According to figures released by Rep. McDermott last week, 75% of consumers
would pay less out of pocket for health care than they do now. Single payer saves
money.

Soon we will know from the Congressional Budget Office exactly how much
savings the Clinton plan can produce. Preliminary estimates show the plan achieving
marginal savings by "streamlining" the insurance paperwork--$6 to $8 billion a year.
At the same time, the Clinton plan adds a cost of $21 billion a year to pay for the
new layer of bureaucracy-the health alliances.^

^Himmelstein, David and Woolhandler, Steffie, 1993.

263

Competition amongst health plans provides illusory savings at best. Managed
competition will hasten the existing trend in this direction. Already 45% of all HMOs
are owned by the 5 largest insurance companies-QGNA, Aetna, Prudential, The
Travellers, and MetLife.' Because it is likely that the plans vnU eventually be owned
by only a few giant corporations, an oligopoly will result. Oligopolies have no
incentive to compete; they instead act in concert to enlarge the size of the pie so that
they can all have a bigger piece of it.

Furthermore, the plan contains no global operating budgets, cmd no negotiated
fee schedules for physicians or pharmaceuticals (outside of the government-controlled
Medicare which is squeezed to find new money to fund the iminsured). The plan is
virtually incapable of saving enough money to cover the new people it hopes to bring
in.

On an individual level, there is little in the way of savings either. Individual
consumers will have to pay high out-of-pocket expenses in the form of co-payments
and deductibles. Although estimates on the individual savings vary, it is clear that
the number of people who will pay less under the Clinton plan for health care does
not begin to approach the 75 percent of us who will pay less under H.R. 1200. The
Clinton plan does not produce sufficient savings to pay for universal coverage.

In contrast, the CBO and General Accounting Ctffice (GAO) have consistently
found not only that single payer is the only health reform before the Congress which
saves money, but it is the only plan which saves money while providing universal
coverage simultaneously.

C. Security. H.R. 1200 provides complete security because coverage goes with
the person not her job, her spouse or her place of residence. All are covered under
H.R. 1200 from cradle to grave and no one can take it away.

Because it is employer-based and under-funded, the Clinton health care plan
cannot provide Americans with badly-needed health security. As long as the type,
extent and quality of health care coverage received is dependent on employment
status, we're all at risk because we may lose or change our jobs. The Clinton health
care plan depends entirely on employers to cover the workers of this country. The
rest of us are financed by money (nearly $285 billion) which is siphoned from the
Medicare system by "slowing its growth rate." Such financing is so flinisy that it
reinforces rather than alleviates the current insecurity of Americar\s about their health
care.

D. Choice. Perhaps the biggest fallacy about a single payer system is that it
would restrict choice. H.R. 1200 provides a real choice of provider because
consimiers can take their Health Security Card to the doctor of their choice. They can
also go to an HMO or managed care facility if they prefer. Plans and doctors
compete on the basis of quality, rather than cost. Managed care and fee-for-service
medicine will only survive if consumers choose to go to them.

By design, the Clinton health care system restricts choice of provider. The main
cost controls in the plan come from encouraging people to leave traditional fee-for-
service plans and enter managed care plans. By making the fee-for-service option
more expensive than HMOs, the Clinton plan would herd people into HMOs and
away from free choice of doctor, unless they are wealthy enough to afford the other
option. The President himself emphasizes choice of plan over d\oice of provider,
acknowledging that the choice of provider is limited in his plan. What consumers
really cherish is choice of provider not plan. Single payer provides that choice.

E. Quality. While the Clinton bill restricts consumers' legal rights to
restitution from negligent providers, H.R. 1200 preserves consumers' rights and for
that we applaud its sponsors.

Unfortvmately, the applause ends there. Like all current Congressional health
care proposals, both plans have ignored the vital concern of affirmatively protecting
consumers from negligent providers. Although many plaits pursue "quality
assurance" through anonymous data collection, practice guidelines, and protocols,
there are no provisions for meaningful regulation of the medical profession.

*Knov^rn as "the Alliance for Managed Competition."

264

Congress should pursue an affirmative agenda of consumer protection highlighted by
medical malpractice prevention and consumer empowerment.
Specific suggestions include:

1. Reducing the number of unnecessary deaths and injuries caused by
negligent medical treatment by creating a comprehensive medical malpractice
prevention program;

2. Developing independent, publicly-accountable state medical boards;

3. Establishing more stringent physician licensing and discipline
procedures;

4. Empowering health consumers by mandating reporting of
information regarding incompetent health care providers; and

5. Authorizing consumer access to information regarding health care
providers through the taxpayer-funded National Practitioner Data Bank.

VI. CONCLUSION

H.R. 1200, the American Health Security Act, is, despite some flaws, the best
representation of a single payer system before the House of Representatives. More
importantly, it is the only plan before the Congress capable of fulfilling the
President's nonnegotiable demand of universal coverage.

In crafting this bill, the sponsors of H.R. 1200 have ingeniously adopted the
strengths of the Canadian-system, while eliminating its few weaknesses.

As a govemment-/inflncai system with full choice of doctor rather than a
govemment-rwn system vwthout, single payer is uniquely adaptable to the American
system. In it, we could have competition which truly benefits consumers, between
doctors on the basis of quality rather than between HMOs on the basis of cost.

265

Mr. Cardin. Thank you very much for your testimony.
Mr. Smedley.

STATEMENT OF LAWRENCE T. SMEDLEY, EXECUTIVE
DIRECTOR, NATIONAL COUNCIL OF SENIOR CITIZENS

Mr. Smedley. Good morning. It is a pleasure to be here today.

My name is Larry Smedley. I am the executive director of the
National Council of Senior Citizens.

After years of careful consideration of different approaches to
health care reform, the National Council adopted a set of health re-
form principles which determine which specific legislation merits
our support.

Mr. Chairman, the health system that best incorporates our prin-
ciples is the single payer approach embodied in the legislation in-
troduced by Jim McDermott and Senator Wellstone, H.R. 1200 and
Senate bill 491.

Single payer provides a sensible approach to most of our health
care problems. It will reach every resident of this country and
guarantee that their health care needs will be met. It will be paid
for fairly through a progressive income and business tax system
with those who can afford paying a fair share.

Single payer finally allows us to get a solid handle on costs that
are spinning out of control. Single payer will expand benefits for
all Americans, provide an array of preventive health care services,
prescription drugs, long-term services keyed to community and
home-based supports.

Finally, single payer keeps the private health delivery system in-
tact and builds on the strength of that system.

Passage of a single-payer system is the ultimate goal of the Na-
tional Council. However, our arrival at that goal may not be as di-
rect as we might wish.

As you know, the President of the United States has introduced
a comprehensive plan to cover all Americans. We have examined
the President's bill in the context of our own health care principles.
We have found many reasons for senior citizens to support his
health proposal.

Universal coverage is guaranteed by 1998, and that is the key
reason that the National Council believes that the President's plan
advances the health reform debate. No other health care proposal,
other than single payer, comes close to meeting this goal.

The bill has strong cost containment. If we, as a Nation, cannot
hold down the spiraling growth in private health care expenditures,
we will never be able to achieve any meaningful, long-term deficit
reduction or needed domestic improvements.

Under the President's bill, Medicare is strengthened with the ad-
dition of a prescription drug benefit with capped out-of-pocket cost,
and balanced billing is finally eliminated under Medicare.

Pre-Medicare or early retirees are also covered. While some in
Congress may see this as a boon to those corporations who now
provide retiree health benefits, it is actually a necessary component
of reaching universal coverage.

And though the bill has some good features, which I have out-
lined, this does not mean that the National Council believes the

266

Clinton bill to be without flaw. There are key improvements we
would like to see

Mr. Cardin. Mr. Smedley, let me interrupt you just for 1 minute,
and I apologize for doing that.

There are 3 minutes left on a vote. I was hoping that Mr. Stark
would be back.

I am going to have to declare a short recess, and we will recon-
vene within 5 minutes. I would ask the witnesses to please stay at
the table. We should be able to reconvene within 5 minutes, and
I very much apologize for the interruption.

[Recess.]

Chairman Stark [presiding]. Mr. Smedley, I am sorry. If it were
not for the weather, this system would work much more smoothly,
and we would not have interrupted your testimony.

Mr. Smedley. Oh, that is understandable, Mr. Chairman.

Chairman STAJtK. Please, if you would like to pick up wherever
in your testimony you care to. Thank you.

Mr. Smedley. I will pick up where I left off.

Although the bill has all these good features — I am referring now
to the President's bill — this does not mean that the National Coun-
cil believes the Clinton bill to be without flaw. There are key im-
provements we would like to have made in the bill as drafted. Un-
fortunately, some of them are highly technical, and time does not
permit me to go into them today.

Chairman Stark. Give us a hint.

Mr. Smedley. Well, you can ask some questions, if you so desire,
Mr. Chairman.

Chairman Stark. I want to know what those overly technical is-
sues are.

Mr. Smedley. Mr. Chairman and members of the subcommittee
and Members of Congress, you will be hearing from us on these
and other issues as health care legislation goes through Congress.

Mr. Chairman, in conclusion, the National Council believes that
national health reform debate now centers on the President's bill,
H.R. 3600.

Nevertheless, we now that a single-payer system will be adopted
by this Nation one day, and we are going to do all we can to fur-
ther that day along. This is one reason where we are going to be
fighting very hard for Congress to pass the single State option the
President included in his bill.

We support the President's bill because we see that the bill is
laying the foundation of a national and efficient system of health
care. We will be working with the Congress and this subcommittee
to bring the Clinton plan in line with as many single-payer prin-
ciples as we possibly can, and with your help, our members' nard
work, and God's blessing, we will enact the most fundamental re-
structuring of the health care system in our Nation's history.

Thank you.

[The prepared statement follows:]

267

Testimony of Lawrence T. Smedley

Executive Director

National Council of Senior Citizens
Introduction

Good morning, Mr. Chairman, members of the Subcommittee. It is a pleasure to
be here today. My name is Lawrence T. Smedley. I am the Executive Director of the
National Council of Senior Citizens (NCSC). NCSC represents over five million older
and retired Americans nationwide through our 5,000 affiliated clubs and Councils. The
National Council was founded in 1961 to lead the fight for Medicare. After its
enactment — an event we considered to be the first step in the creation of a universal
national health care system — the Council continued its work on health reform. At the
same time, we expanded our commitment to programs for older workers, transportation,
housing, civil rights and Social Security and pension protections. Our work is not just for
today's retirees, but also for current workers who will one day enjoy the fruits of their
labor and for younger persons not yet in the workforce.

Health Principles

Over the decades, the National Council has debated which way this nation should
provide health care to all its citizens. After careful consideration of many different
approaches, our membership and General Policy Board adopted a set of health reform
principles. The principles are used by our officers and legislative staff to determine if
specific legislation merits the support of the National Council. The health reform goals
of this organization and America's seniors are incorporated in these principles. They are:

Universal coverage, with everyone in the same system.

Comprehensive benefits so that all medically necessary services will be provided
to all without multiple tiers of benefits based on income, age or other extraneous
factors.

Costs must be controlled throughout the system.

Financing must be fair and progressive.

Cost sharing must not create barriers to receiving care and must not be relied upon
to finance the system.

Quality must be strengthened with consumer protections.

Health planning must be undertaken to allow all our citizens equal access to high-
tech medicine.

Patients' rights must be spelled out to guarantee the timely delivery of services.

The Federal government and states must oversee the program to ensure a strong
role for consumers in the administration of the program.

Finally, whatever system is adopted must point the way towards a single-payer
system.

Single-Paver

Mr. Chairman, the health system that best incorporates these principles is the
single-payer approach embodied in the legislation introduced by Congressman Jim
McDermott (D-Wash.) and Senator Paul Wellstone (D-Minn.>— H.R. 1200/S. 491.

268

Single-payer provides a sensible approach to most of our health care problems. It
will reach every resident of this country and guarantee that their health care needs will be
met. It will be paid for fairly through a progressive income and business tax system with
those who can afford paying a fair share, while lower-income people will not see their tax
burden increased. Under the Wellstone/McDermott bills, up to 90 percent of all
Americans will see their overall health care spending decrease.

Single-payer allows us to finally get a solid handle on costs that are spinning out
of control. (NCSC believes that the current trend showing slower growth in overall health
spending is a cynical manipulation of the system by the insurers and providers of health
care to lull us into believing there is no financial crisis.) Only through system-wide cost
controls will we be able to put an end to providers being able to pit one group against
another (e.g., raising private pay rates to make up for falling Medicare and Medicaid
rates).

Single-payer will expand benefits for all Americans. It will allow us to provide an
extended array of preventive care services to keep people healthy, prescription drugs to
maintain that health, and long-term care services keyed to community and home-based
supports rather than to institutional services.

Finally, single-payer keeps the private health delivery system intact and it builds
on the strengths of that system.

Passage of a single-payer system is the ultimate goal of the National Council.
However, our arrival at that goal may not be as direct as we might wish.

President Clinton's Legislation

As you know, the President of the United States has introduced a comprehensive
plan to cover all Americans. We examined the Clinton bill in the context of our own
health care principles. We have found many reasons for seniors to support the Clinton
health proposal.

Universal coverage guaranteed by 1998 is a key reason the National Council
believes that H.R. 3600 advances the health reform debate. No other health care proposal,
other than single-payer, comes close to meeting this important goal.

Strong cost containment: If we as a nation cannot hold down the spiraling growth
in private health care expenditures, we will never be able to control Medicare and
Medicaid costs — leaving us unable to achieve any meaningful, long-term deficit reduction
or needed domestic investments.

Under H.R. 3600, Medicare is strengthened with the addition of a prescription drug
benefit with capped out-of-pocket costs. Balance billing is finally eliminated under
Medicare. NCSC fought for many years, both here in Congress and in State Houses
across the nation, to have this onerous and regressive cost-sharing provision removed from
the Medicare program.

Pre-Medicare or "early" retirees are covered. While some in Congress may see this
as a boon to those corporations which now provide retiree health benefits, it is actually
a necessary component for reaching universal coverage. Of the ten million pre-Medicare
retirees, only about forty percent have any business-provided health insurance. Only four
percent of all U.S. companies provide any retiree health benefits. This means six million
older Americans are either buying individual insurance policies themselves, are utilizing
government assistance or are going without such protection. The pre-Medicare retiree
benefit is fundamentally not a business benefit, but a help to retired workers and their

269

families. Many of these people were "down-sized" out of the workplace. They would
have continued working had their employer not told them they would get either a pension
check or an unemployment check.

This President has taken leadership to acknowledge that meeting chronic care needs
are as important as acute services. The creation of a non-means-tested long-term home
and community-based care program for citizens of all ages takes the crucial first step of
meeting chronic care needs that increase with age across the nation.

This same commitment to seniors' health needs of America cannot be found in the
Cooper/Breaux bill which will eliminate all. Federal support for long-term care forcing the
states to pick up the difference. It cannot be found in the Michel/Lott bill which simply
cuts reimbursement rates for Medicare making it harder for beneficiaries to find a
provider. These pieces of legislation, and similar efforts, only take fi-om Medicare and
offer nothing in exchange.

The National Council strongly believes that the useful debate should not be between
the so-called "Clinton-lite" plans and Clinton, but rather between H.R. 3600 and H.R.
1200. As the polls show, it is not a matter of how far the American people want to go,
it is a question of how far Congress is willing to hold us back from truly effective
solutions.

This does not mean the National Council believes the Clinton bill to be without
flaw. There are key improvements we would like to have made to the bill as drafted.

In order to create a single-tiered health care system and to eliminate the perception
that older citizens could be treated as second-class medical citizens under H.R. 3600, we
believe Medicare beneficiaries should be given the option to join a health alliance plan
or return to Medicare during the open enrollment season. If a senior opts into the health
alliance system, then Medicare should be required to pay the 80 percent average-weighted
premium like Medicaid, rather than Medicare paying to the alliance what it would have
paid had the beneficiary stayed in Medicare. The health alliance premium for an older
citizen must, like their younger counterpart, be community-rated if we are to piu"ge a
major evil of the current insurance system of risk adjustments of premium by age.

We are also concerned about the ability of Medicare to absorb another $124 billion
in cuts. In order to mitigate these changes and stop the current trend of physicians turning
away Medicare beneficiaries, we believe private-pay rates and Medicare rates should be
linked together. By legislating that Medicare rates could not' be lower than seven percent
of the average reimbursement for a geographic location, Congress would ensure providers
would not lack an economic incentive to see Medicare patients. Also, if the private-sector
cost containment were more successful than anticipated. Medicare growth would fall more
quickly. We also believe that the Congress should consider a hard-nosed anti-
discrimination clause in H.R. 3600 assuring that Medicare beneficiaries will not lose
access because of lower payments to providers.

In fairness, since the Clinton program provides financial protections to those at 150
percent of poverty or below, the Qualified Medicare Beneficiary (QMB) eligibility
thresholds should be raised to this level. We would also like to see a Federal minimum
benefit level specifying services established for the long-term home and community-based
care program in order to establish a uniform set of support services throughout the states.
The eligibility requirement should also be reduced from three activities of daily living to
two based on a care manager's assessment of need.

270

Single-Paver Option

Mr. Chairman, the National Council believes that national health reform debate now
centers on H.R. 3600. As I said earlier, we want that debate to continue and to
incorporate the benchmarks established by the single-payer proposals. We know that a
single-payer system will be adopted by this nation one day, and we are going to do all we
can to further that day along. That is one reason why we are going to be fighting very
hard for Congress to pass the single-payer state option the President included in his bill.

Several states are already interested in adopting a single-payer system and the
Federal government should not prevent their doing so. The Congress of California
Seniors, as you know, Mr. Chairman, is very much involved in the California Health
Access campaign to pass a single-payer initiative in your home state. Canada did not
adopt its successful single-payer structure overnight, rather it was enacted one province
at a time. If that is what it will take to demonstrate the political commitment for this
approach to our Federal legislators, then we are prepared to work for single-payer, state-
by-state. What we will not support is a retreat from basic assumptions of the President's
proposal. That would betray the principles demanded by our members.

Goals of the National Council of Senior Citizens

This organization has not backed away from our single-payer support. We support
the Clinton bill because we see the Clinton bill as laying the foundation of a national and
efficient system of health care. We will be working with the Congress and this
subcommittee to bring the Clinton plan in line with as many single-payer principles as we
possibly can. We will then use every resource we have available to ensure the passage
of a progressive health reform package. We will oppose any and all legislation that does
not meet our principles and sets back the cause of senior health care and the health needs
of all citizens.

With your help, our members' hard work, and God's blessing, we will enact the
most fundamental restructuring of the health care system in our nation's history. Thank
you.

271

Chairman Stark. Thank you.
Dr. Walker.

STATEMENTT OF MICHAEL A. WALKER, PH.D., EXECUTIVE
DIRECTOR, THE ERASER INSTITUTE, VANCOUVER, CANADA

Mr. Walker. Thank you very much, Mr. Chairman. I must say
I appreciate the opportunity to appear before your committee to
bring you the results of the Fraser Institute's latest survey of hos-
pital waiting lists in Canada.

First by way of introduction, the Fraser Institute is a federally-
chartered, nonprofit research organization which conducts studies
of public policy issues in Canada, and the Institute has published
three book-length studies that examine Canada's health care sys-
tem from different points of view. The latest study entitled "Caring
for Profit" was conducted by professor Malcolm Brown, a self-pro-
fessed advocate of Canada's approach to single-payer health care,
just to give you the idea that we do not have a monolithic view on
this topic.

The Institute also conducts an annual survey of physicians to de-
termine the extent to which access to health care is rationed as a
result of the fact that the demand for health care is steadily in-
creasing, but the supply is limited by a series of budgetary caps.

The survey produces two measures of rationing, the waiting time
for appointments to see a specialist and the waiting time for treat-
ment once the specialist has been seen. Since all patients proceed-
ing to either of these steps must first have seen a general practi-
tioner for a referral, it can be reasonably assumed that those wait-
ing represent a legitimate demand for care.

While a survey of specialists may be the only practical way to de-
termine specialist waiting times, it is not the preferred way to
measure hospital waiting lists. The Institute adopted this survey
approach only after ascertaining that hospitals do not have the in-
formation required to build a comprehensive waiting list in Can-
ada.

The publication of our surveys for the last several years has
stimulated considerable interest in the area, and I am hopeful that
within several years Provincial governments will publish com-
prehensive hospital-based waiting lists of a kind which are typical
in the United Kingdom, for example.

I have provided you with copies of this year's survey from the
Fraser Institute. There are many interesting aspects of the study,
but two seem to be of particular relevance to your deliberations.

The first is that it is a misnomer to refer to "the Canadian health
care system" as though it were one uniform system providing simi-
lar service for all Canadians. In fact, access to the health care sys-
tem varies dramatically depending on where in the country one en-
counters it.

As chart I shows — and for those of you who have copies of it, I
would ask you to look at chart I — and as that chart shows, average
total waiting time from referral by the general practitioner to treat-
ment ranges from 11 weeks in Ontario to 21 weeks in Prince Ed-
ward Island.

272

Wait times also vary within Provinces among specialties. In On-
tario, for example, wait times varied from 3.7 weeks for urology to
12.6 weeks for ophthalmology.

The fact that Ontario has generally the shortest waiting lists
may be of particular interest to the committee, owing to the fact
that Ontario was the only province studied when the U.S. Greneral
Accounting Office did a ministudy of waiting lists a few years ago.
Ontario is not typical, as our survey clearly shows. So any implica-
tions or any inferences that the GAO or your committee or anybody
else might draw from looking at Ontario is clearly not giving you
a good impression of what is happening in the country overall.

The second interesting aspect of the survey relating to the first
is the apparent correlation between the waiting time for treatment
and the amount which the various Provinces spend on health care.
This is evident from Chart II.

As can be seen there, there are two groupings of waiting times,
and these are roughly aligned with the amount that each of the
Provinces spends per capita on health care. Provinces that spend
more per capita on health care have shorter waiting times on aver-
age than those that spend less. Ontario, which spent the most, has
the shortest waiting time, while Prince Edward Island, which spent
the least, has the longest waiting times.

Evidently this point is of some significance when Americans look
to Canada for guidance in revising their health care arrangements.
What the Canadian experience seems to suggest is that centralized
control of health care spending can indeed limit the total amount
that is spent. However, with rising levels of demand, the inevitable
consequence is the rationing of care, and the tighter the spending
control, the more rationing will result and the longer will people
have to wait for care.

Recent fiscal developments in Canada suggest that waiting times
are likely to increase in the future. All Provinces and the Federal
Government are experiencing very large deficits. One of the con-
sequences is that the funding of health care is being reduced at a
time when demographic pressures are increasing the demand for
health care. The inevitable consequence will be increases in the ex-
tent of rationing.

In other words, as Americans look north to Canada, they have
to decide whether they want a health care system like that in On-
tario with its 11-week waits or that in Prince Edward Island with
its 21-week waits. If they do not like the idea of 11-week waits,
then they should avoid budget capping as an approach to health
care. And since budget capping is the silver bullet or the cost con-
trol that is built into all of the major proposals which currently
have been made for the revision of your health care system and
certainly are an integral part of a single-payer system, I heartily
recommend that you look carefully at this Canadian experience be-
fore you proceed.

Thank you very much for the opportunity to make this presen-
tation to you.

[The prepared statement and attachments follow:]

273

THE FRASER INSTITUTE

I appreciate the opportunity to appear before your Committee to bring you the results of
The Eraser Institute's latest survey of hospital waiting lists. The Fraser Institute is a federally
chartered non-profit research organization which conducts studies of public policy issues.
The Institute has published three book-length studies that examine Canada's health care
system from different points of view. The latest study, Caring for Profit, was conducted by
Professor Malcolm Brown, a scif-profcsscd advocate of Canada's approach to single payer
health care.

Tlic Institute also conducts an annual survey of physicians to determine the extent to which
access to health care is rationed as the result of the fact that the demand for health care is
steadily increasing but the supply is limited by a scries of budgetary caps. The survey
produces two measures of rationing — the waiting time for appointments to see a specialist
and the waiting time for treatment once the specialist has been seen. Since all patients
proceeding to either of these steps must first have seen a general practitioner for a referral,
it can be reasonably assumed that those waiting represent a legitimate demand for care.

While a survey of specialists may be the only practical way to determine specialist waiting
times, it is not the preferred way to measure hospital waiting lists. The Institute adopted this
survey approach only after ascertaining that hospitals do not have the information required
to build a comprehensive waiting list. The publication of our surveys for the last several
years has stimulated considerable interest in the area and I am hopeful that within several
years, provincial governments will publish comprehensive hospital-based waiting lists of a
kind which are typical in the United Kingdom, for example.

I have provided you with copies of this year's survey. There are many interesting aspects of
the study but two seem to be of particular relevance to your deliberations. The first is that
it is a misnomer to refer to the Canadian health care system as though it were one uniform
system providing similar service for all Canadians. In fact, access to the health care system
varies dramatically depending where in the country one encounters it.
As Chart 1 shows, average total waiting time from referral by the general practitioner to
treatment ranges from eleven weeks in Ontario to 21 weeks in Prince Edward Island. Wait
times also vary within provinces amongst specialties.

In Ontario, for example, wait times varied from 3.7 weeks for urology to 12.6 weeks for
ophthalmology. The fact that Ontario has, generally, the shortest waiting lists may be of
particular interest to the Committee owing to the fact that Ontario was the only province
studied when your General Accounting Office did a mini-study of waiting lists a few years
ago. Ontario is not typical as our survey clearly shows.

The second interesting aspect of the survey, related to the first, is the apparent correlation
between the waiting time for treatment and the amount which the various provinces spend
on health care. This is evident from Chart 2.

As can be seen, there are two groupings of waiting times and these are roughly aligned with
the amount that each of the provinces spends per capita on health care. Provinces that spend
more per capita on health care have shorter waiting times, on average, than those that spend
less. Ontario, which spent the most, has the shortest waiting time, while Prince Edward
Island, which spent the least, has the longest.

274

Evidently, this point is of some significance when Americans look to Canada for guidance
in revising their health care arrangements. What the Canadian experience seems to suggest
is that centralized control of health care spending can indeed limit the total amount that is
spent. However, with rising levels of demand, the inevitable consequence is the rationing of
care. The tighter the spending control, the more rationing will result and the longer will
people have to wait for care.

Recent fiscal developments in Canada suggest that waiting times are likely to increase in the
future. All provinces and the federal government are experiencing very large deficits. One
of consequences is that the funding of health care is being reduced at a time when
demographic pressures arc increasing the demand for health care. The inevitable
consequence will be increases in the extent of rationing.

In other words, as Americans look north to Canada they have to decide whether they want
a health care system like that in Ontario, with its 1 1 week waits, or that in Prince Edward
Island, with its 21 week waiu. If they don't like the idea of 11 week waits, then they should
avoid budget capping as an approach to health care.

275

Chart 1:
Total Waiting by Province

(Time from G.P. Referral to Treatment)

W//////////////M
W//////////A

™ Time waited for appointment with specialists
^ Time waited for treatment

Source: Fraser Institute survey of specialists' waiting lists.

Chart 2: Provincial Government Spending
on Health Care Per Capita Versus Hospital Waiting Lists

(Time between booking of treatment and treatment)

BC MAN ONT NB NS

AB SASK QUE NFLD PEI

H Average Waits for Treatment ^ Per Capita Expenditure on Health

Source: Per capita health care expenditure from "Public Finance Historical
Data. 1965/66 - 1991/92." Statistics Canada (cat. 68-512).

276

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Chairman Stark. Thank you very much.
Dr. MacKillop.

STATEMENT OF WILLIAM J. MACKILLOP, M.D., HEAD OF RADI-
ATION ONCOLOGY, KINGSTON REGIONAL CANCER CENTER,
ONTARIO CANCER TREATMENT AND RESEARCH FOUNDA-
TION, AND DIRECTOR OF THE RADIATION ONCOLOGY RE-
SEARCH UNIT, QUEEN'S UNIVERSITY, KINGSTON, ONTARIO,
CANADA

Dr. MacKillop. Mr. Chairman, thank you for the opportunity to
tell you about how we provide care for cancer patients in Canada.

I am a radiation oncologist; that is a cancer specialist who uses
radiation to treat cancer, and I practice in the city of Kingston in
the Canadian Province of Ontario.

Radiotherapy is an important form of cancer treatment. It cures
some patients and provides valuable pain relief for others who can-
not be cured.

To do its job of killing cancer cells, radiation has to be focused
precisely on the cancer, which is often deep in the patient's body.
It takes a great deal of skill and care to make sure that we hit the
cancer without damaging the normal tissues around it.

Safe, effective radiotherapy relies heavily on complex, expensive
equipment and requires a team of highly-trained physicians, physi-
cists, and technologists.

Fifty years ago, the Ciovernment of Ontario recognized the enor-
mous value of radiotherapy and created a cancer foundation to
make radiation treatment available to all Ontarians.

The decision was made to focus the expensive equipment and ex-
pert staff in a few strategically located cancer clinics, which would
provide high-quality care for everyone in the surrounding region.
Over the years, these clinics expanded their role by adding pro-
grams of surgery and chemotherapy, and each of the centers devel-
oped its own research program.

This created a publicly-funded, Provincewide network of com-
prehensive cancer clinics which now provide care to all the resi-
dents of Ontario.

All of the staff, including the doctors, are effectively salaried, and
all the operating funds for the regional centers come from the On-
tario Cancer Foundation, which in return receives its money di-
rectly from the Provincial Health Ministry. All serxnces to patients
are provided without direct charge. Most of the Canadian Provinces
now have similar cancer foundations.

Let me tell you about the strengths of the system. There are no
financial barriers to access, and the cost to the patient is not,
therefore, a consideration in the choice of treatment.

The system is highly efficient. We do not have duplication of ex-
pensive facilities, and all components work at close to full capacity.
People like me do not do any paperwork that is not directly related
to patient care. Doctors are allowed to get on with the business of
looking after patients.

We provide high-quality patient care, and the equitable distribu-
tion of resources by the Cancer Foundation means that similar
services are available right across the Province. Our large centers
concentrate a tremendous amount of specialized skill and experi-

288

ence in one place. Radiation oncologists work in group practices,
and this gives us the opportunity to develop special expertise in
specific types of cancer. We work in teams with medical oncologists
and surgeons, and we usually manage not to be competitive with
each other.

This system of ours in which all doctors have hard ceilings on
their incomes and in which they work closely with one another is
probably responsible for the relatively conservative Canadian ap-
proach to cancer treatment.

We have found, for example, that Canadian doctors who treat
larynx cancer, including the surgeons, are far more likely to rec-
ommend radiotherapy to conserve the voice box than their Amer-
ican colleagues.

We have also found that Canadian doctors are less likelv than
Americans to recommend radiotherapy or chemotherapy for pa-
tients with advanced and incurable lung cancer and are much more
likely to recommend supportive care instead of active treatment.

Despite its many advantages, our system is far from perfect.
Many patients have to travel long distances for radiotherapy. To
some extent, this is inevitable in this vast country of ours, but in
planning the distribution of cancer centers, concerns about quality
of care and efficiency have taken priority over concerns about con-
venience.

There are now long waiting lists for radiation treatment at many
cancer centers in Canada. This was unheard of a decade ago, but
the incidence of cancer has doubled in the last 20 years, and unfor-
tunately the cancer system has not expanded fast enough to keep
up with the increase in demand for radiation treatment. This is a
matter of great concern to us.

The message for you, I think, is that managed systems must be
well-managed, or they may become a liability.

Mr. Chairman, I have described some of the strengths and weak-
nesses of the Ontario cancer system, which operates on the single-
payer model. In general, Canadians seem well satisfied with the
service we have provided over the years. The cancer center in
which I work provides care for more than 2,000 new patients each
year, but it has not been faced with one malpractice suit against
any member of its medical staff since it was established in 1947.

Our system has much to recommend it in spite of its recent dif-
ficulties.

Thank you, Mr. Chairman.

[The prepared statement and attachment follow:]

289

STATEMENT OF DR. WILLIAM J. MACKILLOP, HEAD OF RADIATION
ONCOLOGY, KINGSTON REGIONAL CANCER CENTRE, ONTARIO CANCER
TREATMENT AND RESEARCH FOUNDATION, AND DIRECTOR OF THE
RADIATION ONCOLOGY RESEARCH UNIT, QUEEN'S UNIVERSITY, KINGSTON,
ONTARIO, CANADA.

Mr. Chairman and members. Thank you for the opportunity to tell you about how
we provide care for cancer patients in Canada.

I am Dr. William Mackillop. I am a Radiation Oncologist, that's a medical
specialist who uses radiation to treat cancer, and I work for the Ontario Cancer Foundation
in the city of Kingston in the Canadian province of Ontario. Let me begin by giving you
a few words of background about radiation treatment, and then I will outline for you what
I see as the strengths and weaknesses of our system.

RADIATION ONCOLOGY IN CANADA

Radiotherapy is an important form of treatment for cancer. It can cure some
diseases like cancer of the cervix even when patients are beyond hope of cure by surgery.
In other diseases it is a useful alternative to a surgical procedure which would leave the
patient with a permanent disability: cancer of the larynx, for example, can be cured by
surgery or radiation, but the surgical option may mean that the patient will lose his ability
to speak. Radiation is also very effective in relieving pain in patients with advanced and
incurable cancer. While radiation is certainly not useful in every case, it plays an
important role in the care of about 50% of all patients.

To do its job of killing cancer cells, radiation has to be focussed precisely on the
cancer which is often deep in the patient's body. It takes a great deal of careful planning
with sophisticated equipment to make sure that we hit the cancer without damaging the
normal tissues around it. The radiation treatment itself is usually given by skilled radiation
therapists using large modern x-ray machines. The whole process relies heavily on
complex, expensive equipment and requires the support of a team of highly trained
physicians, physicists and technologists.

Fifty years ago, Ontario recognized the enormous value of radiation treatment, and
created a Cancer Foundation to make radiation treatment available to everyone in the
province. The decision was made to focus the expensive equipment and expert staff in a
few strategically located cancer clinics which would provide high quality radiation therapy
for everyone in the surrounding region. Over the years these clinics expanded their role
by adding programs of surgery and chemotherapy, and each of the centres developed its
own research interest. This created a publicly funded, province wide network of
comprehensive cancer centres which now provide care to all the residents of Ontario who
require cancer treatment. In Ontario, which is twice the size of Texas, we have just nine
cancer centres. All the staff, including the doctors, are effectively salaried, and almost all
the operating funds for the regional centres come from the Ontario Cancer Foundation,
which in turn receives its money directly from the provincial health ministry. All services
to patients are provided without direct charge.

Most other Canadian provinces now have similar cancer foundations.

THE STRENGTHS OF THE SYSTEM _^___ ___^

I would like to tell you about the strengths of the system.

1) There are no fmancial barriers to access, and cost to the patient is not a
consideration in the choice of treatment.

2) The system is highly efficient. We do not have duplication of expensive

290

facilities and all components of this system work at close to full capacity.

3) We provide high quality patient care, and the equitable distribution of
resources by the Cancer Foundation means that similar services are available right across
the province. Our large centres concentrate a tremendous amount of specialized skill and
experience in one place. Radiation oncologists work in large group practices, and this gives
us the opportunity to develop special expertise in specific types of cancer. We work in
teams with medical oncologists, and surgeons, and we usually manage not to be competitive
with each other.

4) This system of ours, in which all doctors have hard ceilings imposed on their
incomes, and in which they work closely with one another, is probably responsible for the
relatively conservative Canadian approach to cancer treatment. We have found, for
example, that Canadian doctors who treat larynx cancer, including surgeons, are far more
likely to recommend radiotherapy to conserve the voice box than their American colleagues
(Figure 1). We have also found that Canadian doctors are less likely than Americans to
recommend radiotherapy or chemotherapy for patients with advanced lung cancer, and
more likely to recommend supportive care instead of active treatment (Figure 2).

THE WEAKNESSES OF THE SYSTEM

Despite its many advantages, our system is far from perfect.

1) Many patients have to travel long distances for radiotherapy. To some extent,
this is inevitable in our vast country, but in planning the distribution of cancer centres,
concerns about quality of care and efficiency have taken priority over concerns about
convenience.

2) There are now waiting lists for radiation treatment at many cancer centres
in Canada. This was unheard of a decade ago. Our population is aging, and cancer is a

disease of the older person: As a result, the incidence of cancer in Canada doubled in the
last twenty years and, unfortunately, the cancer system did not expand fast enough to keep
up with the demand for radiation treatment. This is a matter of great concern.

We radiation oncologists are responding by looking closely at the way that we treat
patients. Just as in other areas of medicine, there are variations in the way doctors use
radiotherapy and we are seeking to find the most effective and efficient ways of using the
resources available to us today. Governments across Canada are also responding by
expanding facilities and training more staff, but it will take some time before the supply of
radiation treatment will catch up with demand. In retrospect, it is clear that we did not
monitor the situation as closely as we should have, and that we did not respond rapidly
enough to early signs of strain in the system. The message for you is that managed systems
must be well managed.

CONCLUSION

Mr. Chairman, I have described some of the strengths and weaknesses of the
Ontario cancer system, which operates on the single payer model. In general, Canadians
seem well satisfied with the service we have provided over the years. The cancer centre in
which I work provides care for more than 2,000 new patients per year but it has not been
faced with one malpractice suit against any member of its medical staff since it was
established in 1947. In spite of its recent difficulties, our system has much to recommend
it. I would be pleased to answer any questions that you may have about it.

291

Proportion of Doctors Who Recommended Radiation

for Moderately Advanced Cancer of The Larynx

(T3,No,Mo, Glottic)

El Otolaryngologists ■ Radiation Oncologists

100

Ontario Massachusetts New York

Figure 1

From O'Sullivan, Mackillop, et al, Radiotherapy and Oncology, 1994.

Treatn^ient Recommended for Patients with Advanced
Lung Cancer (Stage lllb, Squamous Carcinoma)

100

m Canada ■ USA

Radiotlierapy Chemotherapy Surgery

Figure 2

Supportive
Care Only

From Palmer and Mackillop, Radiotherapy and Oncology, 1990.

292

Chairman Stark. Thank you.

Mr. Smedley, perhaps you could define for me, on page 4 you
suggested only 40 percent of the 10 million pre-Medicare retirees
have any — and I am quoting — "business-provided health insur-
ance." How do you define "business-provided health insurance"?

Mr. Smedley. It was written by staff, Mr. Chairman. I would as-
sume that would be a private business.

Chairman Stark. Well, I would hope that you could review that.
Our figures show — and I am sure the ones that CBO is using — that
only 25 percent are uninsured, which would mean that 75 percent
have some health insurance as early retirees.

Mr. Smedley. I will check that, Mr. Chairman.

Chairman Stark. Please do.

Mr. Smedle:y. I think vour figure sounds very, very

Chairman Stark. Well, whatever the figures may be, if I take
yours, you are suggesting that those 40 percent or 4 million people
should have, in effect. Uncle Sam pick up their costs.

Now that is an interesting idea, but it costs $8 billion a year, and
the major corporations are committed to paying that.

What rationale do you have to suggest that for those 40 percent
who have business-provided health insurance, what earthly reason
is there to let General Motors and Greneral Electric off the hook
and ask the rest of the taxpayers to kick in $8 billion a year?

Mr. Smedley. I will be happy to answer the question, Mr. Chair-
man.

First on the question of the differential in figures, it may be that
the 75 percent comes — that many of those people buy tneir own
health insurance.

Chairman Stark. That may well be. But I am just taking your
figures.

Mr. Smedley. It is not — this is business-provided.

Chairman Stark. Let us take your figures.

Mr. Smedley. That is where the 40 percent comes from.

Chairman Stark. Let us take your figures. Of the 40 percent
with business-provided health insurance, why should we pick up
what is now arguably an obligation of the companies, $8 billion?

Mr. Smedley. Well, let us — in any universal system, which I
think you strongly advocate as well as we do, that you want to
cover everybody

Chairman Stark. I do.

Mr. Smedley. Now we have had the precedent when the Medi-
care law, which you are so interested in expanding, if I remember
correctly, we passed that law, and because some of the employers
were covering retirees with health insurance, you did not make
them continue to cover costs that Medicare covered. That is a
precedent, a very good past precedent, which could be carried for-
ward.

If some employers cover their employees with retiree insurance —
they have been more socially conscious or perhaps through a collec-
tive bargaining agreement — but other employers simply dump their
employees on the national health care system

Chairman Stark. I agree.

Mr. Smedley. Why should we have the differential treatment?
Why should we treat

293

Chairman Stark. Well, I agree with you, but

Mr. Smedley. Why should General Motors not be a better em-
ployer?

Chairman Stark. Why should they not got into the universal
plan? Why do we single out these people to get a special plan that
other people would not get.

I am with you. Fine, put them into whatever the national plan
is. I am with that. But I would think one would require a mainte-
nance of companies, but if we do not, I see no reason to take this
little group and give them a special deal.

I agree with you that everybody should have coverage. If they
lose their job, they lose their job; they get coverage.

You may not have figured out, but I would ask you to have your
staff reread the President's bill. Any one of these early retirees who
happens to have a spouse who is working anyplace else where they
offer health insurance would not qualify for Medicare. As a prac-
tical matter, there are some of us who might live to be 100 before
our spouses would be old enough for us to get Medicare — absolute
lunacy in terms of destroying Medicaie.

Further, if you like Medicare and if you research the President's
system, you will see that in the President's plan is a formula to de-
stroy Medicare, to deplete the resources of its trust fund far more
rapidly than they are now and, in fact, to offer financial incentives
to people not to join, particularly young people coming onto Medi-
care.

If you wanted to privatize Medicare tomorrow, with these two
combinations, you could not figure out a better way to disband the
system. And I would urge those of you who, I think, blindly accept
the President's plan, to read it a second time. There are those of
us who do share your goals, but who question this plan that was
conceived in secret over the past year, without the input of either
the UAW or any decent union and without the input of Congress
or without the input of all but one or two Jackson Hole — trained
health experts. It is somewhat disconcerting to see people who
ought to be on the right side of social issues buying into a pig in
a poke.

And I commend you to return to your staff and ask them to
please reconsider.

Mr. Thomas.

Mr. Smedley. I will do that, Mr. Chairman. We will look at the
President's bill, read it very carefully a second or third time, and
I would say that as long as we have the same goals, knowing that
you are a reasonable man, I am sure that we can come to some rea-
sonable solution to the problem to deal with the early retirees, of
which we have a large number in our membership, to deal with
them fairly.

Chairman Stark. I understand that. Thank you.

Mr. Thomas. Thank you, Mr. Chairman. I commend the chair-
man's statement. Folks who preach ought to walk a mile in some-
body else's shoes.

Chairman Stark. Just give me your proxy.

Mr. Thomas. No, I do not give you my proxy. I just praise you,
that is all. Praise is cheap; proxies are expensive.

294

I apologize to the panel. We were over voting. There was a mixup
with the voting panel, and one of my secondary responsibilities is
running the shop a little bit, and so we were trying to work on the
computer glitch that would not allow the members to see their
vote. They recorded their vote, but they were not allowed to see it.

I want to talk to the Canadian doctors only, because I am not
familiar with the Canadian system as I would like to be, and I as-
sume you are probably far more familiar with our system, so that
if I asked you some comparative questions, you would be better
able to make the comparison than would I, based on my knowledge,
and try to quiz it.

And, of course, one of the concerns we have is the cost controls,
and we are toying with various mechanisms to determine how we
can control costs. One one of the things that I was concerned about
with the single-payer model is that you either have the benefit
package drive the costs, or you limit the costs, and that determines
the benefit package.

And I guess, Dr. Walker, we can get into this by saying: From
your history and perspective on Canada, when you cap budgets,
how does it most often manifest itself in the Canadian structure?

Mr. Walker. Well, first of all, the budget caps are, themselves,
manifested in four different ways. There are caps on the hospital
care system and the physician care system. The hospital care sys-
tem is capped in three different ways.

Hospitals typically get an operating budget. They get a separate
budget for special surgeries, and they get a separate and third
budget for the acquisition of capital. So from a hospital's point of
view, the capping of their expenditures can be therefore manifest
in three different consequences. Either they have to curtail their
general operations; they have to curtail specific operations; or they
have to curtail acquisition of technology when the budgets are in-
sufficient to cover all of their costs.

The fourth budget cap, of course, is on physicians' fees.

Mr. Thomas. Historically has it not been a prioritization or a
hierarchical ranking of those most often? It would seem to me that
instead of cutting into ongoing structured arrangements, the tech-
nology would be an easy one to forego.

Mr. Walker. Well, I guess one thing that is evident from the
data — and I think you would find this from talking to profes-
sionals— is that there does not seem to be any sort of coherent ap-
proach. Choices are made in the content of the political system.
And if there is more political pressure, as you heard from somebody
in the first panel, if there is a shortage of bypass surgeries and
there are stories in the newspapers about that, then the politicians
respond by getting the bureaucrats to allocate more money in that
area and so on.

Mr. Thomas. OK.

Mr. Walker. So it really is

Mr. Thomas. It depends.

Mr. Walker. It depends.

Mr. Thomas. Like the way we do liver transplants here. If you
can get in the newspaper or on the media, you have a chance of
getting one. And if you do not, you do not.

295

Mr. Walker. There is, however, a very, I think, special effect
here on technology acquisition, because in the process of making
their cost allocations. Governments in Canada do say things like:
Well, is the technology proven? You know, are we sure that this is
a cost-effective procedure? Are we sure that it is medically effective
and so on?

And so there is a kind of wait-and-see attitude built into the Ca-
nadian system, and typically, of course, as you may imagine, what
we are waiting to see is how it works out in the United States. In
other words, we do not acquire technologies very often until they
have been proven to be clinically and cost effective in the United
States first.

Mr. Thomas. Well, we are finding out that that is part of the
problem in pharmaceuticals. We are the only ones who are on the
cutting edge. And I guess if you are in a race and there is some-
body in front of you, you can pace yourself to try to get in front
of them.

But for so many areas, we are running against the clock, and the
question is whether or not you are going to continue the commit-
ment to excellence, regardless of any kind of a comparative ar-
rangement.

Ajid if we fall under the same system, maybe each other is
watching each other to see who goes first, it is Alphonse/Gaston,
and nobody goes through the door, and I think then that clearly in-
dicates that you get a quality reduction that would otherwise be
present, and as you indicated oftentimes with the choices that are
made by administrators or politicians, one of them, I assume,
would be inevitably waiting to get some kind of an elective proce-
dure, as we heard. Waiting is rationing in whatever form you want
to look at it.

Just briefly to Dr. MacKillop, if I might, Mr. Chairman, obviously
there is more and more emphasis on this whole question of cancer
and cancer treatment. I noticed the headline on the USA Today
newspaper was 'The Boomers Cancer Risk Tops Grandparents." It
is moving in on heart disease. The question of how you treat can-
cer, early detection, radiation, chemotherapy, surgery.

In your analysis of the United States versus Canada, clearly
there may be preferences for particular choices, but in your experi-
ence, are there any choices that seem to be dictated by the struc-
ture rather than either by the physician's first choice or what
might be best for the patient, which I think is probably the most
damaging thing that anybody can say about a structure?

Are you familiar with any structural definitions of what you do,
rather than

Dr. MacKillop. I can only speak from personal experience and
from two surveys that we have carried out that have compared
practice in Canada and the United States.

The first is in a disease which is cured by radiotherapy or sur-
gery, carcinoma of the larynx. And we have asked practitioners in
the United States and Canada and across the English-speaking
world about what choices they make and what recommendations
they make for their patients. And we have observed that practition-
ers in the United States much more frequently elect an operative

296

procedure that involves sacrifice of the larynx and natural speech
than practitioners in Canada.

It is not, I think, a matter of certainty why that arises, but I
think in Canada decisions are made by teams of practitioners who
have no financial interest whatsoever in the medical decision that
is made.

My sense is that a system in which doctors' incomes do not de-
pend on the level of their technical activity allows them to exercise
their clinical judgment without some of the restraints that are in-
herent in your system, and it produces different practice.

In patients with incurable cancers, I think Canadians are also
more conservative in their recommendations for patients than
Americans. And to some extent, I think that that has been condi-
tioned by your public rather than by your medical profession.

It seems to us that Americans are willing to accept any risk for
the most meager of benefits for treatment of a cancer. We know
that in your society third, fourth, and fifth line chemotherapy for
patients with breast cancer is essentially standard treatment and
has become part of the sad ritual of dying from this disease in the
unfortunate women who cannot be cured of it.

There is no evidence from any outcome study or from any ran-
domized clinical trial that third, fourth, or fifth line chemotherapy
offers any benefit either in terms of survival or in terms of quality
of life above a policy of supportive care.

I understand that to some extent fear of legal action for doing
anything less than the maximum drives some of our colleagues in
the United States to do more than they really judge to be appro-
priate.

Mr. Thomas. Well, I guess the easiest way to determine where
you would go, given your knowledge and expertise, is to say that
if you are where you are now, and you had a colleague diagnose
you in terms of some kind of cancerous situation, say the larynx
or in the throat or in the neck, would you stay in Canada to be op-
erated on, or would you go someplace else?

Dr. MacKillop. If I could have prompt care in Canada, I would
be very comfortable with the services offered by our system.

I happen to work in a community in eastern Ontario where we
are not greatly constrained in our choices by a shortage of supply
of either operating room time or radiotherapy time.

In metropolitan Toronto, in our biggest city, the delays which are
imposed on some patients before they can start radiation treatment
would make me think twice, I think, about whether I would be
willing to wait for several weeks before starting radiotherapy treat-
ment. And clearly as someone in the profession and with a signifi-
cant income, I could buy myself around that problem by seeking
care in the United States if that situation arose.

I should emphasize that this is a relatively recent problem in mv
own particular discipline of radiation oncology, and I do not think
it arises through capped budgets, but through very poor forward
planning.

Mr. Thomas. My concern is the growing need, not just for elec-
tive procedures, but need in terms of the cancer area.

Finally you indicated with some sense of pride — and in this coun-
try, it would be miracle, not just pride — that you have never been

297

sued for malpractice. I have got to believe that there is some kind
of a different structure that we are dealing with Canada in terms
of malpractice; one, in terms of the attitude of people toward others
in terms of suing, and second, what you can get out of suing and
your chances of winning in the system.

I would think that perhaps some of the practices that you out-
lined that were not practiced in Canada would, in part, be because
of the fact that there was very little fear of having a malpractice
suit brought against you and the relatively poor chance of success
beyond just basic economic damages that would be received, which
mean, I guess, if you are nodding your head, that means yes, that
you would think that one of the ftindamental things that we should
do is examine our malpractice structure and make some changes
there.

Is that a fair statement?

Dr. MacKillop. Well, I think you should perhaps examine your
relationship with your patients and find out why they so often seek
recourse to this very adversarial form of resolution of dispute. I
think it reflects

Mr. Thomas. Not just doctors with patients. Anybody with any
professional relationship with anybody else in the United States
would have to ask themselves that question, because we sue every-
body for anything and for nothing.

Ms. Nichols. Mr. Thomas, could I add one point to this?

Mr. Thomas. Sure.

Ms. Nichols. Which is just that it is important to note that one
of the main reasons that victims of medical negligence in this coun-
try turn to the courts for restitution, rather than in Canada, al-
though we do have different legal systems, is because they need
coverage of their medical bills.

So under a single-payer system, a universal system, many people
might not go to the courts who otherwise do. It is one way of taking
care of that problem.

Mrs. Johnson. Would the gentleman yield?

Mr. Thomas. Well, there is a whole downside to that. But I will
let my colleague jump in, because I think she wants to take off on
that. Go ahead.

Mrs. Johnson. I think this is a very important point. And you
are right. There is no reason to sue in Canada to get reimburse-
ment for medical costs.

On the other hand, it is also true in Canada that you cannot get
reimbursement for pain and suffering and that cases do not go to
juries and that you cannot sue on the basis of paying the lawyer
later, as you can here.

So our whole system encourages suits, particularly if there is a
possibility of an emotionally-based award, and that is a cost driver.
I do not think anyone adequately or can honestly estimate the
amount of cost associated. But if you talk to people in the business,
it certainly has altered the way we practice and how we think
about diagnosis and treatment.

But both of the

Mr. Thomas. Would the gentlelady yield briefly?

Mrs. Johnson. Yes.

298

Mr. Thomas. So that I could make a unanimous request of the
chairman that this, the Fraser Institute's Forum, which is a bul-
letin published, I believe, 12 times a year — the 1993 third edition
had a Critical Issues Bulletin on "Waiting Your Turn, Hospital
Waiting Lists in Canada," and ask unanimous consent to put it in
the record, Mr. Chairman.

Chairman Stark. Without objection.

[The preface to the bulletin follows. The entire publication is
being retained in the committee files:]

299

SER FORUM

1993

CRITICAL ISSUES BULLETIN

Waiting Your Turn:
Hospital Waiting Usts in Canada

3rd edition

by Joanna Miyake
and Michael Walker

300

Special Issue Fraser Forum, 1993

Preface

Michael Walker

W HE FRASER INSTITUTE HAS
1 long had an interest in the
1 health care system and in pro-
viding information about it to those
concerned about establishing an
appropriate public policy frame-
work for the delivery of this vital
service.

The Fraser Institute has published
three books dealing with Canada's
health care system.' While each au-
thor approaches the subject from a
different perspective and from a
different analytical orientation, all
are concerned with the impact of
economic arrangements regarding
health care on the quality and quan-
tity of health care services delivered
to Canadians. Our interest was par-
ticularly piqued several years ago
by my discovery that in the United
Kingdom, local governments actu-
ally produced publications listing
hospital waiting lists for a selection
of operations as a guide for health
care consumers. The intent in pub-

lishing the lists was to improve the
efficiency of the National Health
Service by ensuring that health care
consumers were aware of the hos-
pitals which had the shortest wait-
ing times. Since the lists were much
longer than could be justified by the
desire to avoid unused capacity or
to permit patients to have enough
time to arrange their affairs prior to
admittance to hospital, the un-
avoidable conclusion was that
waiting was being used as a
method for rationing health care in
the U.K.

About the same time, anecdotal ev-
idence began to emerge suggesting
that hospital waiting lists were
starting to become significant in
Canada. However, there were no
systematic measurements of the ex-
tent of waiting. Those partial wait-
ing list measurements which were
made by hospitals eind by govern-
ment departments were regarded
as politically sensitive and they

Ake Blomqvist. Tlie Health Care Business, 1979; Ronald Hamoivy, Canadian
i Medicine, A Study in Restricted Entry, 2984; and Malcolm C. Browr., Caring for
1 Profit, 1987.

301

Critical Issues Bulletin

were not made generally available.
Some preliminary measurements
made by The Fraser Institute indi-
cated that waiting was much more
prevalent in the 1990s than it had
been in the late 1960s. At the same
time, there was increased concern
about the cost to the government of
continuing to supply the level of
health care services that had been
the norm. The health policy issue
associated with these two develop-
ments is the possibility that waiting
lists or queues are being used as an
alternative to rising prices; they re-
strain health care expenses in a sys-
tem where prices have been
systematically eliminated and nei-
ther physicians nor patients have
the slightest economic incentive to
consider the costs of their decisions.

The current Critical Issues Bulletin is
the Institute's third attempt to doc-
ument the extent to which queues
are being used as a means of adapt-
ing to the conflict between limited
budgetary allocations and unlim-
ited demand for free health care.

The study, conducted by Joanna
Miyake and myself with the assis-
tance of Steven Globerman, has
been enthusiastically supported bv
The Fraser Institute, but the work
we have undertaken has been inde-
pendently conducted. The views
expressed in this study, therefore,
may or may not conform with the
views of the members and Trustees
of The Fraser Institute.

The Institute is pleased to offer the
results of the research to the public
for consideration and debate in the
hope that more attention will be
focused on the issue of hospital
waiting lists and on improving our
measurements of and knowledge
about this aspect of health care pro-
vision in Canada. The fact that the
provincial governments across the j
country are mounting projects to j
produce "official" hospital waiting
lists is a concrete indication that our |
work has been useful in stimulating j
appropriate concern about this 1
public policy issue.

302

Mrs. Johnson. Thank you.

Dr. MacKillop and Dr. Walker, both of you have brought some
very interesting material before us and have a great deal of re-
search experience to offer as well.

Dr. MacKillop, do you have any specific information about com-
parative waiting times for radiation treatments in Canada and the
United States?

There are a number of questions, so if we could be brief that
would be helpful.

Dr. MacKillop. I do have such information. We have recently
carried out a survey of waiting times, absolute waiting times, in
Ontario using the electronic database of the Cancer Foundation,
which demonstrated that — and I will take on example of carcinoma
of the larynx — that the waiting time for treatment between diag-
nosis and initiation of treatment with radiotherapy doubled from
about 2 weeks in the early 1980s to just over 4 weeks in the begin-
ning of the 1990s.

I have not accessed similar information in the United States, but
I have surveyed heads of departments at the 26 radiotherapy cen-
ters in Canada and at 75 comparable comprehensive cancer centers
in the United States listed by the International Union Against
Cancer, the UICC, and our observations confirm what I think we
realized on an anecdotal basis, that patients in Canada in general
wait longer for radiotherapy than they do in the United States.

Mrs. Johnson. Significantly longer?

Dr. MacKillop. Significantly longer, such that the waiting times
that you have currently in the United States are similar to those
that obtained in Ontario at the beginning of the 1980s, such that
you start patients on treatment about 10 days — that is the median,
the average, the central value — about 10 days after a patient is re-
ferred to a Radiation Oncology Department, and in Canada that is
30 days.

And in other diseases such as carcinoma of the prostate, the dif-
ference is wider, the median value in the American departments
being 2 weeks, and the median value in Canadian departments
being 6 weeks.

However, one must recognize that the median is the central
value, and that means that in 50 percent of those departments,
people wait a shorter time, but in 50 percent they wait a longer
time.

All of the differences in five disease sites that we explored are
significant and of a similar order of magnitude, a doubling or a
three times as long wait in Canada as compared to the United
States.

Mrs. Johnson. Thank you. I think particularly in radiation ther-
apy, that is a very significant issue that does raise quality issues.

How does the standard of care available to cancer patients in
Canada compare today with the situation 5 years ago or 10 years
ago? In other words, when you look at the pace or the evolution of
care in terms of cancer in Canada — and I think you are probably
generally familiar with those issues as well in America — can you
make any comment about pace of evolution, base of change in diag-
nosis and diagnostic and treatment capability?

303

Dr. MacKillop. I cannot comment on the American situation,
because I do not have any special expertise.

But the Canadian system has been beleaguered by the lack of re-
sources to provide prompt care. The quality of care, I believe, with-
in our very tightly organized cancer system where all of us work
essentially in academic environments, in teaching hospitals associ-
ated with universities, I think the quality of care is good. The au-
dits that I have carried out would confirm that, and there is the
opportunity for continuous peer review in that environment, and I
have great confidence in the quality of care.

Access, I believe, has deteriorated over the last 5 years. Our gov-
ernments, our Provincial governments, have been investing now in
further capital equipment and new facilities. We have also started
to train more radiation oncologists, medical physicists, and radi-
ation therapists.

But there is a long lag time associated with training people.
Eventually one has to train people to train people. And I think that
it will probably be the end of the decade before we catch up and
are able to offer an adequate supply of quality service to match the
increasing demand.

I do not think a similar situation obtains in the United States.

Mrs. Johnson. In other words, one of the unintended con-
sequences of budget caps is that it retards the ability of a system
to reorient itself toward new treatment modalities, to new illness
patterns, because it makes it harder to mobilize the resources to
move in a new direction at the same time you are providing serv-
ices in the old direction.

Dr. MacKillop. I think that is true. But I think that the re-
straints on resource allocation that have afflicted our discipline
happened in an era of great prosperity in Canada in the 1970s and
the 1980s, and I think it is not correct to dignify that as if it were,
in fact, a policy decision.

Mrs. Johnson. Well, that is very interesting.

Dr. MacKillop. I believe that it was a failure of forward plan-
ning, and I do not know whether that represents a lesser problem
or a greater problem. But the lack of trained staff and capital
equipment in the system now reflects policy decisions made 10 and
15 years ago in an era in which Canada was spending money like
a drunk man.

Mrs. Johnson. So it was not a lack of resources; it was a lack
of an ability to forward plan. But when you combine that with a
lack of resources, you could get a very much more significant lag.

Dr. Walker, would you like to comment? And, also, you have
some excellent charts in your testimony that you did not really go
through. Would you mind quickly walking us through your charts?

Mr. Walker. I would be happy to, Mrs. Johnson. But I do want
make the point, just for correcting the record, as I was listening to
Dr. MacKillop when he summarized his comments at the last point,
he misspoke, I am sure, when he said that waiting times in the
United States are three times longer than in Canada. He meant
just the opposite.

Chairman Stark. The record will show that Dr. Walker's charts
will be included in the record.

304

Mr. Walker. There are some interesting charts in here. And for
the most part, you can — I will leave them as read, but I think that
from the point of the deliberations of this committee, the second
chart in the separate page of charts called "Probability of Waiting
by Income Group" is a particularly interesting one that you are free
to focus on. It is beyond the presentation in the back. The charts
are in order. "Total Waiting by Specialty for Canada." The next one
is "Probability of Waiting by Income Group."

Do you find that chart?

Chairman Stark. Have you ever tried that in the United States,
Doctor? You do not have a piece of paper big enough to show how
long the people under $10,000 in this country would wait. That bar
would go all the way up to the ceiling of this room, because they
never get treatment.

How do you deal with that in Canada? •

Mr. Walker. Well, no. What this is, is the probability that peo-
ple of different incomes will wait.

Chairman Stark. I am telling you that the probability of some-
body who is poor in this country is 100, that they will not get any
care.

Now what do you in Canada do about that?

Mr. Walker. Well, Mr. Stark, this is very interesting, and it is
frequently said to me now. However, at the institute are scientists
and we like to try and document things.

Chairman Stark. Aha.

Mr. Walker. So when people say to me that there are waiting
lists of this kind, I say to them that when we try to do comparable
waiting list surveys in the United States, we could not get people
to understand what we were talking about in terms of measuring
these waiting times.

When we told them we wanted to know their waiting times for
different surgeries as we measure them in Canada, they basically
said that there were not any waiting times. And when people
say-

Chairman Stark. I do not know

Mr. Walker. Excuse me.

Chairman STARK [continuing]. Whether you are smoking, but you
are inhaling.

Mr. Walker. Excuse me. Excuse me, Mr. Chairman. When peo-
ple talk about waiting times, very often it is anecdotal evidence
that they are referring to.

Chairman Stark. Oh, I bet it is.

Mr. Walker. And what we have here is as close as you can get
to actual measurements of this phenomenon. So I do not have any
comparable

Chairman Stark. Let me — let me

Mr. Walker. I do not have any comparable measurements
that

Chairman Stark. Thank you. Doctor.

Let me ask Dr. MacKillop for a moment. Doctor, do you know
of — you are a medical doctor, Dr. MacKillop?

Dr. MacKillop. Yes, I am, sir.

305

Chairman STARK. How often do you hear about women in Can-
ada giving birth to children without being able to see a physician
or some kind of trained paraprofessional?

Dr. MacKillop. I do not, Mr. Stark.

Chairman Stark. Come to Oakland. I will give you a long list of
women who are just unable to receive that treatment because they
are poor.

And also can you think of many cases of people who accept, I
suppose — who are getting a lot of snowy weather like we nave
here — but in waiting times, you schedule appointments, or your pa-
tients have to schedule appointments to see you in your practice,
I presume?

Dr. MacKillop. Yes, sir.

Chairman Stark. And many of your patients work?

Dr. MacKillop. Yes.

Chairman Stark. And so as between the time they can find a
day to get off from work and get to see you — I suppose we all have
some waiting built into our world. I mean, do you have to make
appointments? Dr. Walker would not, but do you have to make ap-
pointments to see your barber?

Dr. MacKillop. In Canada?

Mr. Walker. [Laughing.]

Chairman Stark. That is all right. Doctor. We only have so
many hormones, and those guys who want to waste them growing
hair, let them go ahead. But I am just suggesting that

Mr. Walker. We follicularly challenged people who are use to
such barbs.

Chairman Stark. OK But I just guess I am saying that there
are waiting times built into our normal schedules — what I think I
heard earlier is that it would be a fair summary to suggest that
in Canada the decisions as to waiting and/or rationing, if that is
what you want to call it, are clinical decisions, for the large part
made by the medical community.

Is that a fair statement?

Dr. MacKillop. Can I respond to that, Mr. Stark?

Chairman Stark. Yes, please.

Dr. MacKillop. We distinguish, as you do, between waiting
while something is done and waiting for something to happen, and
we acknowledge in our discussions with patients that it is often
very important to wait while we complete our investigations, to
wait while we have the opportunity to discuss with them the costs
and benefits of treatment, before make a decision and implement-
ing it.

But there is a real problem in the management of cancer, which
is a time-dependent disease. I think this is a distinct issue from
waiting for a hip replacement, where you can make the case, as the
British do, that time for a sober second thought before undergoing
this potentially life-threatening procedure is not a bad thing. I do
not think one needs 13 months for that second thought, but you
can make such a case.

That type of case cannot be made in a time-dependent disease
like cancer, which is characterized by growth and by spread to
other parts of the body, because in every cancer, which is localized
and curable, comes a moment when it undergoes the transition to

306

become an incurable tumor which will inevitably kill the patient,
and even when that moment comes you cannot tell. It is something
that is discovered later.

Now, in Canada, we have been very challenged bv this problem
of waiting lists for radiation therapy, and the issues nave been very
real to us. Major institutions in Canada, the Princess Margaret
Hospital, our premier cancer institute, which by anybody's reckon-
ing, is one of the top six cancer treatment centers in the world,
closed its door to all new referrals, except for emergencies for 6
weeks in 1989, because its waiting list had grown so long.

Chairman Stark. That is a resource problem, is it not, doctor?
In other words, were the good burghers of this community willing
to pony up a few dollars in taxes and you could buy additional
equipment, perhaps even attract other professionals, then the peo-
ple in that community would have the access to this treatment. Is
that a

Dr. MacKillop. I think you are again absolutely right.

Chairman Stark. You see, in my neighborhood, we have got so
much extra equipment lying around, but we will not let the people
in who cannot pay. So we have this interesting situation where we
have got an embarrassment of the same equipment and resources
you wish you had, and we have people standing out in the streets
and we say I am sorry, we will not treat you if you do not have
the money.

Dr. MacKillop. If I may respond, I do not think that our system
is beyond repair, Mr. Chairman, but there are issues here. It was
not through a desire on the public's part not to spend the money,
nor indeed a conscious decision of the bureaucracy not to allocate
the money. There was a problem of planning. We made planning
errors that left the management of the system-

Chairman Stark. In the management of the system-

Dr. MacKillop [continuing]. Bad management, and I believe
also a failure of governance. You refer to the people in your com-
munity, and I think that is one of the important issues that you
are discussing today, is to give the people ownership of their new
medical system, whatever that may be, and that is a problem for
us in Canada. Our Cancer Foundation has a board of political ap-
pointees located in the city of Toronto. That is not a board that has
been extremely responsive to the grass roots concerns of the com-
munity.

So while you are correct that if the community had been able to
tell the bureaucracy that it wanted the money spent, the bureauc-
racy would have spent it, but we had no mechanism for this. Our
community did not have the lines of communication that would
have permitted it to have expressed that wish.

Chairman Stark. Let me ask one more question, if the gentle
lady will let me conclude.

Mrs. Johnson. Yes.

Chairman Stark. The earlier witness suggested that a good bit
of the cost I believe in Canada is generated by Americans coming
into Canada to receive treatment. I think, if I recall, that was Ms.
Priest who suggested that.

Just as a practical matter, I suspect that if I came to Canada —
I guess I can drive across a number of bridges without even being

307

stopped — then I am, for all practical purposes, an undocumented
alien, I gather. I do not know whether Canada would let me go to
work or not. Frankly, I do not know what I would do there, but let
us assume that I could wait tables or find suitable employment for
a person of my intellect and ability. And I came to your practice
or your surgery, I presume I would receive treatment. Would I
have to identify myself to you in any particular way, if I were in
pain, let us say?

Dr. MacKillop. You would receive emergency services without
checking documentation. Before you got near me, I think you would
probably have some check to make sure that you were an insured
Canadian.

Chairman Stark. But if I were not, how would the system dis-
pense with me?

Dr. MacKillop. We would bill you after the fact. You might pay,
Mr. Stark, or you might not, but we would send you a bill.

Chairman Stark. You would send a bill and you have the secret
police or somebody who would come down here after me and I
would still get invited to the Canadian Embassy to meet with your
folks?

Dr. MacKillo[». We do not follow up on any defaulting pay-
ments.

Chairman Stark. Is that a matter of great political concern in
Canada, that you are being cheated by us Americans who are
sneaking in there to get medical care?

Dr. MacKillop. We have started to hear about it occasionally. I
do not believe it is a significant political issue.

Chairman Stark. Ms. Nichols raised that issue for us in her tes-
timony, and — are you a lawyer, Ms. Nichols?

Ms. Nichols. Yes.

Chairman Stark. You are suggesting, I gather, that the Presi-
dent's plan in dealing with undocumented aliens is shortsighted.
Are you familiar with Article 8 of the Constitution?

Ms. Nichols. Yes, sir.

Chairman Stark. What constitutes being a prisoner?

Ms. NiCHOi^. Excuse me?

Chairman Stark. What constitutes punishment or being a pris-
oner? Do you have to be actually in the jail to come under the pro-
tections of Article 8, which guarantee medical care only to the likes
of Haldeman, Ehrlichman and Ollie North, because not giving them
medical care would be cruel and inhumane punishment? If an ille-
gal alien is detained, is that sufficient to put them under the

Ms. Nichols. I am not certain.

Chairman Stark. You ought to look that up. We may have a so-
lution, and then we could ignore the President's shortsightedness.

Ms. Nichols. Or if you failed to buy individual coverage under
the Chafee bill, maybe you would be jailed and then covered.

Chairman Stark. I have always suggested to people who are un-
insured that they just drive through Los Angeles, and when they
are stopped, hit a policeman, they will need more medical care
than they ever dreamed possible, out they will get it courtesy of
the County of Los Angeles. It is the only small elite group in this
country where there is guaranteed medical care under our Con-
stitution.

308

Did you want to inquire further?

Mr. Walker. Mr. Stark, you did raise several questions in your
comments that are answered in fact from Canadian data. You
raised, for example, the issue of a woman who is in a low-income
group not getting access to appropriate prenatal care, and so on,
and as a result may be having high infant mortality rates and that
kind of thing.

It is very interesting to look at the Canadian data in this respect.
A study which was done by an employee of the government of Brit-
ish Columbia in infant mortality amongst different income groups
in Canada. We find that the infant mortality rate amongst the
group experiencing the highest incidence of poverty in Canada is
double the infant mortality of the income group having the least
amount of poverty. This is the way they do the income quintiles in
the census.

I think that kind of information ought to lead you to challenge
whether or not you are in fact going to solve some of these kinds
of problems. We also have identified in Canada the fact that the
people who need health care do not seek it, and this has nothing
to do with the fact of whether the care is available or not. In the
case of these infant mortality statistics, it is not that the care is
not available to low-income people in Canada. The fact is they do
not seek it.

Chairman Stark. Doctor, comparing the Indian population of
Canada and its location with the Indian population of the United
States — and I presume by that you mean Native Americans

Mr. Walker. I am not comparing

Chairman Stark [continuing]. Drawing conclusions about the im-
poverished rate of infant mortality

Mr. Walker. No, no, no.

Chairman Stark [continuing]. Is akin to putting wings on pigs
and watching the sea boil.

Mr. Walker. That is a political task, Mr. Chairman. Economists
do not do that.

Chairman Stark. I thank you for your questionable contribution
to the art of research. I appreciate it.

Mrs. Johnson.

Mr. Walker. Mr. Chairman, you have completely distorted my
evidence, with all respect. What this data shows is not Indian ver-
sus non-Indian. It shows infant mortality in the city of Vancouver
and Victoria, two of Canada's most well-developed urban areas,
with the highest quality access to Canadian health care.

The point is that you, as a concerned observer ought to wonder
why it is that we have this same great disparity in infant mortality
rates between low- and high-income Canadians, in spite of the fact
that we have a single-payer system, with all of its supposed bene-
fits.

The Indian population is another issue which is also included in
this data, but does not in any way detract from the data for Van-
couver and Victoria, which are urban, you know, quite comparable
situations. It would be appropriate, for example, to compare this
with say Seattle not just the Indian population.

Chairman Stark. Mrs. Johnson.

Mrs. Johnson. Thank you, Mr. Chairman.

309

Dr. Walker, your chart entitled "Infant Mortality Rate in Van-
couver and Victoria," does describe exactly what you have just told
us very vividly, that in fact the infant mortality rate amongst your
poorest population is double that amongst your more affluent popu-
lations, and in fact your national health care plan has not been
able to address what we consider to be one of the serious problems
we face. And it is even a more serious problem for us, because our
out-of-wedlock birth rate is so much higher than yours.

I would also like to mention your infant mortality chart compar-
ing infant mortality among non-Indian and Indian populations in
Canada and the United States, and I just want to ask if I am read-
ing it correctly. The impression it gives is that the infant mortality
among Indian and non-Indian populations in the United States is
roughly the same, relatively close, and

Mr. Walker. With the Indian infant mortality rate being below
the average for the overall population.

Mrs. Johnson. That is a good point. The infant mortality rate is
actually lower among the Indian population in America than it is
among the non-Indian population. Whereas, in Canada it is more
than twice as much among the Indian population and the non-
Indian.

Mr. Walker. That is right.

Mrs. Johnson. So I think it does really raise a number of issues.
I would ask you to go back to your probability of waiting by income
group chart, because while the issue of waiting is not quite the
same in America as it is in Canada, our ability to document it is.
And it is certainly true that a poor person who goes to an emer-
gency room gets exactly what they want immediately.

So we do not have good research on the extent to which our poor
people are not getting care because they are not going, but we do
have some very good demonstration projects, one in my own home
town about the necessity of actually having people go out and bring
people in for prenatal checks, because even though there is no
transportation barrier, no day care barrier, and so on and so forth,
still the prenatal checks are not something that some women are
concerned about.

So I think there are a lot of different issues here, but I want to
understand your chart better. If you would please go over it, I
would appreciate it.

Mr. Walker. By the way, the data upon which this is based is
collected by our central statistical agency in Canada called Statis-
tics Canada, and this is drawn from a sample of 12,000 Canadians
interviewed by Statistics Canada, and the question is asked of
them, have you waited for any health care treatment any time dur-
ing the year, and they also collect statistics from them on the fam-
ily income.

So what we have been able to do then is to take this individual
survey data, it is not some sort of average, we have been able to
take this sample of 12,000 people and simply rate them according
to their income.

Now, the interesting thing that the chart shows is that there is
very little to distinguish the waiting times experienced by people
between no income and $60,000 a year. There is some variation,

310

there is some up, some down, but basically the probability is about
8 percent that they would be denied or have to wait for health care.

When we look, however, at the two upper-income groups from
$60,000 to $80,000 and $80,000 and above— and these categories,
by the way, are chosen by Statistics Canada, not by us — what we
find is that there is a dramatic difference in the amount of time
that these people wait. They wait, roughly speaking, half as long
as the other income groups wait.

This ties in with research that we have been doing in connection
with our waiting list survey and with the research that has been
done at other institutions, and that is that there is in fact not
equal treatment of people in the Canadian health care system.

The first reason there is not equal treatment is if you have the
income like, for example, the Premier of the Province of Quebec,
who recently found himself with a malignant melanoma, and you
cannot get interleukin-2 in Canada, the protocol for this particular
disease is not defined so that you can get interleukin-2 in Canada,
he was able to go to Bethesda, Md., and get his treatment, because
he can afford to do that. So that those who have income in Canada
who face these waiting list problems can opt out.

We find from a study that was done at the University of British
Columbia on the phenomenon of waiting times that there also is
queue jumping, and that the queue jumping tends to be related to
status; if you are a minister of government or if you are well con-
nected to the medical fraternity in some way you will be able in
fact to jump the queue.

What they found was that 80 percent of the queue jumping that
they could identify was for nonmedical reasons. That is to say only
20 percent of people are moved up in the queue, so that they do
not have to wait for medical reasons, 80 percent are moved up in
the queue for some other reason. And we think that those other
reasons are correlated with income, you now, the probability that
you are going to be well-connected and have high income are fairly
closely related.

What we are observing in this chart is the fact that high-income
Canadians are in fact able to avoid, in one way or another, the
problems that are experienced by the average in the population.

Mrs. Johnson. Thank you. That is a very interesting expla-
nation. I appreciate your testimony.

Chairman Stark. Mr. Thomas.

Mr. Thomas. Thank you. I apologize once again. I had to go off
to a leadership meeting dealing with health and the Republican
Party.

Ms. Nichols, while I was gone, you made some comment, and I
would prefer to hear it from you, about the Chafee bill vis-a-vis
what happens to people who do not have insurance, since I am the
principal sponsor of the bill on this side of the Capitol. Apparently
you said something about people would be arrested?

Ms. NiCHOi^. Mr. Thomas, I was being somewhat glib, but what
I was referring to

Mr. Thomas. I could not tell, the way in which it was delivered.
I was just talking about the content.

Ms. NlCHOi^. What I was referring to was that, as I understand
it, the principal claim that your bill has to being universal coverage

311

is an individual mandate, which means that everybody must buy
coverage for themselves in order for us all to have coverage.

It has always been a question on my part, I consider tnat not to
be universal coverage and not to be in the interest of the consum-
ers, and I wonder how is that enforced. If you do not buy universal
coverage, do you then go to jail where you can get free health cov-
erage? I was making a joke, but there is an underlying very strong
concern that I have about your proposal.

Mr. Thomas. Well, the answer is in the bill, and if you read the
bill, you will find out. We do not set up a punitive system, we set
up an incentive system. What we do is we provide vouchers for the
tax system beginning at 90 percent of poverty through the year
2005, to 240 percent of poverty phasing out.

We make all the changes that most other people believe are es-
sential in bringing about a rational system, not the least of which
is the malpractice reform, which we clearly see as the difference be-
tween Canada and the United States, on bringing frivolous suits
with enormous amounts of money being passed around the system
that have no relationship to economic damages or even non-
economic damages, but have more to do with the litigiousness of
society and the trial lawyers.

We make all of the antitrust changes, we make the administra-
tive reforms, we make the insurance reforms so that small group
folk can come together, and we have voluntary purchase coopera-
tives. After having done all of that through the year 2005, we re-
quire a premium to be paid if someone chooses not to buy insur-
ance, not because of poverty, because we have a buy-down proce-
dure for that, but because they simply choose not to do it, and not
because it is not innovative, because we have the medisave plan,
as well, if you just want to go catastrophic and take care of your
preventive care.

We say when that when you go in for the services without any
form of insurance, you are required to pay 120 percent of the actual
costs, because society is going to get out of you the protective as-
pect of insurance either by paying when you get that service di-
rectly, or by getting insurance. And the first couple of times you
go in and pay 120 percent of actual cost, you probably are going
to shop around for low-cost insurance.

It is as universal coverage as the President's plan or as Con-
gressman McDermott's plan, in terms of truly reaching universal
coverage. So no, we do not throw anybody in jail if you do not have
insurance. We simply require you to pay the societal cost of not
having the insurance, and it is subject to adjustment from 120 per-
cent to some other appropriate percentage, so that you will under-
stand that it makes sense to buy insurance. But before we require
someone to buy insurance, we make all the changes in the system
that not only makes it attractive and reasonable, but easy to do
that, as well. And that is in the bill.

In terms of this jumping the queue, any study on doctors vis-a-
vis doctors? You indicated that only about 20 percent of the reason
for jumping the queue was medically related, and the other 80 per-
cent are nonmedically related. The fact that you are a doctor that
needs some medical service, is that a medial or a nonmedical rea-
son to jump the queue?

312

Mr. Walker. Well, I think the implication is that that is a
nonmedical reason, of course, but you being a physician in the sys-
tem, you have better contacts than somebody else would have, for
example. It is also true that people who live in urban areas that
are near major centers are more likely to get treated than those
people who are in rural areas where they nave less good access,
and so on.

While I have the microphone, may I have the opportunity to just
make a mention about the people who are waiting. There is an im-
plication, and the chairman raised it, that people who are waiting
are not really needful of care. You know, it is sort of an optional
kind of thing.

A recent study — which is also included in your charts here — a
study completed by the Institute for Clinical Evaluative Studies,
which is funded by the Ontario Government, found that of those
people who are waiting for hip surgery, it is not untypical for them
to wait from 7 to 13 months in severe pain for this procedure. It
is not unusual for people to have had severe disability in terms of
mobility and be waiting for 7 to 13 months.

So I think we do need — perhaps Dr. MacKillop's comments about
waiting for intervention for cancer therapy has made the point bet-
ter than I can, and that is that we have to dispel the notion that
somehow this waiting does not involve any real costs to the people
involved, that this is just somehow ethereal stuff that really does
not matter.

These people for the most part are in pain, they are at the very
least in psychological pain, often in physical pain, and this is a real
cost to the people involved and it is something that really needs to
be focused on, if you are considering adopting this kind of system.

Mr. Thomas. Beyond that, doctor, I think tnere are a number of
elective procedures which, if put off, can in fact result in someone
doing more damage to themselves than would otherwise be the
case. Off the top of my head, I could think of cataract surgery,
which not only would provide a better quality of life for that year
or more that you are waiting, but that in fact if you are somewhat
elderly and still feel that you can get around — if you have a broken
hip you are down, it is painful, but you are down — ^but if you have
cataracts and you move around, you could wind up with that bro-
ken hip, by virtue of not having the timeliness benefit.

So there are a number of down-side exposures that occur any
time when you are waiting, and waiting is rationing and it is al-
ways in the eye of the beholder, primarily. But when you begin to
have statistical numbers show up, as you have, in terms of eco-
nomic relationship, you have some concern.

Let me ask one last question. It has a bit to do with your system,
again, which I am not as apprised of as I would like to be, and I
am trying to. For example, in the President's offering — which is ob-
viously not now reality, but it has to do in part with this business
of choice or limiting freedom of choice — under the President's plan,
you cannot go out and pick up insurance outside of the alliance
structure, that basically your choice will be within that framework.
As Senator Gramm said, based upon a Wall Street Journal article,
that this really does limit the freedom of choice that Americans
would have under the President's system.

313

Is there anything comparable to that in Canada, in terms of a
closed buying system or choices denied by virtue of the structure
that is there?

Mr. Walker. Well, it is a very important aspect of the Canadian
system that the purchase of insurance for those things which are
covered under the comprehensive program is outlawed in Canada.
In other words, a Canadian may not buy insurance for those proce-
dures, and this I think turns out to be a crucial features of the Ca-
nadian system. I must say until Mr. Gramm raised it in the Wall
Street Journal, I had missed it in the U.S. plan, but it is a crucial
point. Because what it means is, it means that the only health care
that is going to be available to anybody is the health care that is
made available to everybody.

Obviously if you cannot provide insurance for procedures, then
any provider of those procedures who is trying to provide more
than is available under the comprehensive program is not going to
be economically successful. What we have found in Canada is that
there are in fact no options to the government provided plan. In
other words, while ostensibly you have choice, the fact that you are
unable to insure yourself, to implement that choice means that
there is in fact no choice.

By the way, there is a distinction to be made here between the
Canadian and the U.K. system or the English system in this re-
gard. That is that in the U.K. system they are permitted to pur-
chase insurance under the British United Provident Association
and a number of other plans. They are able to purchase insurance
for services that are covered by the national health service, and
about 11 percent of the population of the United Kingdom in fact
get surgeries and things done in British United Provident Associa-
tion hospitals, and that option is not, as I say, available to us in
Canada.

The onlv option we have — and this option has just recently be-
come available — is to purchase insurance for treatment in the Unit-
ed States. There is a new insurance plan, operated by the Canada-
American Health Insurance Corporation out of Winnipeg, which
provides Canadians with the opportunity to buy insurance for cov-
erage in the United States. Evidently, under the plan which is
being proposed down here, that opportunity would be denied Amer-
icans.

Mr. Thomas. Under the President's plan.

Another reason, Ms. Nichols, that we made the changes in our
bill in terms of voluntary purchasing cooperatives. As opposed to
my friend Dr. McDermott, I do believe that, under the proper struc-
ture, the insurance industry can be verv creative in packaging var-
ious alternatives, and it seems to me that we do not know enough
about what should or should not be done in closed systems to not
allow for some kind of a private sector marketplace check on what
could be offered.

If in fact purchasing cooperatives and closed purchasing coopera-
tives are the way of the future, I think they ought to earn it in a
real world setting, rather than having them anointed by govern-
ment imposing them on the structure, and I frankly believe a little
competition, fair, equal competition with insurance changes that
are absolutely necessary would prove the merit of the purchasing

314

cooperatives far more than a government imposed one, as the
President does under his alhances, or even as Cooper-Grandy does
under their current structure. I believe you ought to earn the
changes, rather than having them awarded to you.

I vield back my time, Mr. Chairman.

Chairman Stark. Mr. McCrery.

Mr. McCrery. Thank you, Mr. Chairman.

I want to ask Dr. Walker and Dr. MacKillop a couple of ques-
tions. Before I do, I just want to make a couple of comments mDOut
some of the things I have heard.

I think it is important for this subcommittee and our full com-
mittee and the Congress to consider the question of why people in
this country do not get medical care in some instances, and I think
it is too easily answered by some in this House that the problem
is only that they cannot afford it or they do not have access.

To give you an example, in my home State of Louisiana, which
bv most measures is not as rich as the chairman's home State of
California, the burghers must find a way, contrary I suppose to the
chairman's State, to provide service for people who cannot afford it.

In my State, if a woman wants to get her child immunized, she
need only go to any public health center, a charity hospital, and the
charge is $5. If she says she cannot afford the $5, the $5 fee is
waived, and yet the immunization rate for children in my home
parish or county was, before a recent effort, less than 50 percent.
So there is obviously some reason other than access and afford-
ability that those folks are not getting the proper care, and we
ought not ignore that.

Thanks to a recent effort to advertise that and to get people to
take their children, we are now up over 50 percent. Hallelujah.
More efforts like that need to be done.

Also, we have heard a lot of testimony, be it anecdotal, about
why people from Canada go to the United States to get medical
care. In most instances, it is because they are on a waiting list or
they just cannot get that particular procedure or that particular
drug or medicine in Canada, and so they come to the United
States. That implies, at least to me, that the quality of health care
in the United States generally is higher than that in Canada, at
least with respect to some procedures and medications and treat-
ment.

Now, we have had some testimony here today that we have this
stream of Americans flowing into Canada to get health care. We
have not heard any reasons why they are going, but I suspect that
many of them, not most, if not all, are going because it is free, be-
cause they can get the health care free, they do not have to pay
for it. I would submit that is a totally different situation and we
ought not necessarily emulate Canada's system to stop that prob-
lem.

Dr. Walker, one of the issues that has been raised in the debate
is the effect that changes in the health care system as proposed by
the President or by Mr. McDermott, the single-payer system, will
have on research and development in the field of health care. Do
you have any insights, based on your experience in Canada?

Mr. Walkkr. Mr. McCrery, this is a very difficult area, because
we find that the data, for example, measuring amount of research

315

effort and so on is not very satisfacto^. We do know that certainly
there is not as much research activity done in Canada as there is
in the United States, even on a proportionate basis, but there may
be many reasons for that.

One of the things, however, that does come out in comparing the
Canadian and United States systems which I think bears on this
issue is the technology which is available in the two systems. I
draw your attention to the chart. I have provided a technology com-
parison in the charts that I have given you, and it shows the avail-
ability of different kinds of technology in Canada per million people
and in the United States per million people.

What you are really struck by is the fact that there is an enor-
mous gap between the amount of technology that is available to the
average Canadian and the amount that is available to the average
American. Now, by inference, as an economist, I said to myself,
well, if this is the way the market for technology is in the two
countries, and since ultimately it is the market for technology that
drives research and it is the market for new medical technologies
which drives the soft research, if there is not the market for the
technology, why do the research. It does not seem to me to make
much sense and does not seem to stand up to reason that people
will continue to invest large amounts of money in the development
of new technologies which they know will not be adopted.

I think what you have to address in your own deliberations on
this question is to ask yourself the question, if you adopt a Cana-
dian style system, whether it is the kind that Mr. Clinton wants
or it is the kind that Mr. McDermott wants, what is going to hap-
pen to the demand for high-tech modalities and high-tech equip-
ment and what will be the implication of that on the research that
you are doing in your country.

I think, frankly, that if the United States does adopt our system,
that you will in fact find yourselves getting very much the same
kind of technology that we have now eventually, and that this is
going to have a devastating impact on the amount of research that
is done. Because we in Canada typically do not adopt technology
until it has been proven out in the United States. We look to the
United States and say, well, is it cost effective, is it clinically effec-
tive. And having seen that evidence from your activities, we then
adopt it, and that is why we have this lag in adoption of these new
and advanced technologies.

Mr. McCrery. Thank you, doctor.

Just one question for Dr. MacKillop. We have heard references
to the budget limitations in Canada in the health care system. Can
you just tell us how those budget limitations that have been re-
ferred to affect the way that you practice medicine?

Dr. MacKillop. I can only tell you about the way I practice med-
icine and people in my discipline of cancer medicine practice medi-
cine. I cannot make general statements.

As I mentioned, I do not think that the status of my discipline
of radiation oncology in Canada relates to the current fiscal crisis
in Canada, but we have a limitation on resources imposed by a
more limited investment than was appropriate in radiation oncol-
ogy in the 1970s and in the 1980s. As a result of that, we do not
have as many facilities with as much equipment or as many

316

trained staff as we believe are necessary, and that I believe has
had an influence on the way that radiotherapy is practiced in Can-
ada.

I have audited the management of the commonest form of the
commonest disease, nonsmall cell lung cancer, and I have audited
the management of all patients in the Ontario Cancer Foundation
over a period of 10 years, between 1982 and 1991. We found that
across the whole system — although there was variation amon^ the
different cancer centers — across the whole system we were giving
about 30 percent less radiotherapy to that group of patients in
1991 than we were in 1982 counted as the number of treatments
per patient. There were big changes in some centers dropping to
half of the former level of radiotherapy utilization and in some
other centers the rate remained constant.

I have to tell you, Mr. McCrery, that we looked at the effect that
this might have had on the outcome of the disease, and we looked
at that in terms of survival as a fundamental measurement, and
also in terms of probability that that patient would require further
treatment to the same part of the body at a later date, as an indi-
rect measure of quality of life, re treatment being an indicator of
progression of the disease or occurrence of the disease.

And we found no difference whatsoever in the survival from this
disease associated with the large decrease in resource utilization.
We are talking about 15,000 patients, and the power to detect dif-
ferences would have been very high. We found that the median sur-
vival over the two 5-year periods that we studied remained con-
stant to within a week, and there was an eerie similarity in the
percentage surviving 1, 2, and 3 years.

So I think that the resource constraints did alter practice, and
I think that it looks as if my profession chose to cut down radio-
therapy utilization in a circumstance in which we already had
great doubts about the utility of intense radiotherapy utilization,
and we have been able to achieve as a result quite massive savings
at no expense in terms of quantity of life and no change in quality
of life that we can detect in this type of audit.

I should indicate that we do not have good measures of quality
of life based on a retrospective analysis of an electronic database.
But if you look at the way that we practice lung cancer medicine
now and compare that with the United States, we use far fewer re-
sources and we produce the same results I believe in terms of
quantity of life, and there is nothing to say that we do not produce
equally good quality of life on our side of the border.

Mr. McCrery. I appreciate that. Dr. MacKillop, but what you
are telling me is that the methodology was driven by a lack of re-
sources that was driven by the budget, and after the fact you stud-
ied the results and found that there was no significant difference
in outcome. But would you say that you got lucky on that one?

Dr. MacKillop. I think there was insight and intuition, but I
would say you are exactly right, we were lucky on that one, but,
my goodness, you are not so lucky, because in the United States
you continue to practice the same over-expense over-treatment of
patients in this disease that we used to 10 years ago.

Mr. McCrery. That is something we could possibly learn from
you, and I am hopeful that we will start to study outcomes more

317

and develop practice guidelines and things that we can use to use
our resources more efficiently. But I am not sure that I would pre-
fer your system, which imposes methodologies on our practitioners
through budgetary considerations, and we have to hope that we get
lucky in each and every circumstance in the health care field.

Mr. Walker. May I just add a footnote to this commentary? The
issue of whether it is budget caps or whether it is management
seems to me is just the same problem looked at from a different
perspective. Dr. MacKillop was looking at it from the point of view
of his one area, and very important area, of expertise, and he sees
it simply as the bureaucracy not responding quickly enough to get
the resources to them to keep up with the demand for cancer treat-
ment.

But you see, viewed in a broader context, those bureaucrats and
those people who are acting too slowly are operating within a po-
litically determined allocation of overall budget, and one of the rea-
sons why they are moving slowly is because their budget room is
being taken away from them by some other competing political pur-
pose.

I think that the lesson that Americans need to learn from the
Canadian system is that when you move away from the current
system that you have — where there is some politics involved in the
allocation of resources, but it is basically driven by economic and
market considerations — that when you move to a single-payer sys-
tem, all of the resource allocation decisions will effectively become
determined at a global level by politics.

What you need to ask yourselves is, is there anything about the
way in which your political system currently makes decisions and
allocates resources that leads you to believe that this is going to
be a superior way of allocating resources, and, in particular, adapt-
ing to changing medical needs.

Because as Dr. MacKillop has pointed out, everything was fine
in Ontario 10 or 15 years ago, it is the increased incidence of can-
cer causing a need for a change in the allocation of politically deter-
mined resources that has caused the problem. You know, you are
all much more expert in political matters than I am and perhaps
you could enlighten us on that issue.

Mr. McCrery. I appreciate your responses, and thank you all for
coming today.

Thank you, Mr. Chairman.

Chairman STARK. If there are no further questions, I want to
thank the panel very much, and the meeting is adjourned.

[Whereupon, at 1:45 p.m., the hearing was adjourned.]

[Submissions for the record follow.]

318

STATEMENT OF JACK SHEINKMAN
AMALGAMATED CLOTHING & TEXTILE WORKERS UNION

The Amalgamated Clothing and Textile Workers Union is acutely aware
of the health care crisis in America. When we organize a non-union plant, we
usually find workers and their families with no insurance, inadequate insurance
or unaffordable insurance. We have members in inner cities in die North and
rural areas in die South who have trouble finding a doctor despite the fact that
they have a health plan. Escalating health care costs threaten the
competitiveness of our companies, strain the collective bargaining system and
dominate government budgets at all levels. The current regressive system of
health care financing puts our firms and their domestic plants at a serious
disadvantage in the global economy, threatening our members' very livelihood.
Effective health care reform must come to grips with all these dimensions of the
health care crisis.

Therefore, ACTWU is guided by three fundamental principles as we
evaluate proposals for reform:

1. The need to provide comprehensive, quality health care for everyone.
Employed and unemployed. Young and old. Rich and poor.

2. The need to eliminate waste in the health care system and effectively
contain costs. The plan must reduce administrative waste and put a lid on rising
medical costs.

3. The need to share the financial burden of health care equitably. That
means progressive public financing, where coiporations and wealthy individuals
pay more than small employers and wage earners.

The American Health Security Act, HR 1200, is the only bill that fuUv
satisfies these needs. It moves away from the employer-based insurance system
toward a national social insurance system. It takes all the administrative waste
from thousands of separate insurance plans and puts that money into a
comprehensive benefit package that includes long-term care. It provides
meaningful cost containment through an intemationally proven method of
bargaining with providers. It addresses isssues of quality control without
micromanaging health care professionals and without compromising patients'
freedom to choose their doctors and hospitals. It provides funding and
incentives to get more doctors into inner cities and rural areas. It assures public
accountability of the health care system.

ACTWU is delighted to support this legislation for all these reasons. But
we are particularly concemed about competitive issues and equitable financing
in health care reform. HR 1200 fully addresses these issues as well.

Equitablv Financed Universal Coverage Is Needed

ACTWU members, like millions of working Americans who now have
insurance, are suffering the consequences of a health care system in which some
employers get away with providing little or no insurance for their employees
and dependents. Tliis system puts socially responsible companies at an imfair
and serious competitive disadvantage. And that means lost wages and lost jobs
for insured workers. ACTWU firms with insurance are also paying more than
companies in other countries with less expensive universal health care systems.

319

As low wage workers in the textile and apparel industry who are
representative of low wage workers in general, ACTWU members are also
concerned that universal health care be progressively financed, like their own
union plan, using a percentage of payroll formula. The overall current health
care financing structure is highly regressive for companies and workers. Health
care reform needs to reverse that pattern so that universal coverage does not
create new competitive problems for companies or severe hardship for workers.

HR 1200 would create a universal health care system with equitable
financing. This would eliminate the unfair competitive advantage held by those
firms who deny health insurance to their workers. Such a system would also
bolster U.S. comp)etitiveness with those countries that have affordable universal
coverage.

Current System Distorts Competitiveness

Through our experience in collective bargaining and organizing, the
Amalgamated Clothing and Textile Workers Union is confronted daily with the
competitive distortions that result from some companies providing health
insurance for their workers while others do not. Non-imion firms often provide
partial or no coverage or require co-payments on coverage for dependents that is
prohibitively expensive. For example, before they unionized, single mothers
making curtains for K-Mart at the S. Lichtenberg Company in Georgia were
taking home $150 a week. The company charged them $68 a month if they
wanted to cover their children under an insurance policy with a $500 deductible.
After paying for food and shelter, almost none of the 530 workers were able to
buy family coverage. In their first union contract, the company and workers
joined the national ACTWU health plan with an affordable "community" rate,
no premium payments by workers and a $200 deductible. Hundreds of children
became protected by health insurance for the first time. Now the company has
to find other ways to compete with curtain firms that have the non-insuring
edge.

There are many ways that insuring firms are hurt by those who don't
insure their workers. First, the non-insuring firms have lower operating costs
and can underbid firms with insurance. Second, the insuring firms end up
covering the spouses and dependents who work for non-insuring firms. This
includes wives who work in retail stores and husbands or college students who
work for small businesses. (About 65% of retail employees and 31% of firms
with 10 or fewer woricers had no company insurance in 1992.') Third, cost
shifting by health care providers means that insuring firms actually pay the bills
of employees of non-insuring firms. (About 30% of private insurance hospital
bill payments cover nonreimbursed expenses of other patients.^) Finally, to the
extent that the government pays the bills of the uninsured, all taxpayers,
including insuring companies, pick up the tab for non-insuring firms.

HR 12(X) would remove the competitive edge currently enjoyed by those
firms that foist their workers' health care bills onto other companies and

' Employee Benefit Research Insiitutc, EBRI Issue Brief (EBRI tabulations of 1993 Current Population
Survey), January 1994.

' Economic Policy Institute, "The Impact of the Clinton Health Care Plan on Jobs, Investment, Wages,
Productivity, and Exports", 1993.

320

taxpayers. Given the countervailing profit incentives, nothing short of a
mandatory universal system can guarantee that all employers make a fair
contribution to coverage and that all workers and their dependents are insured.
This will take care of 85% of the currently uninsured who are the employees
(and their dependents) of non-insuring firms. It also follows in the footsteps of
mandatory Social Security contributions by virtually all employers.

We negotiate health plans with hundreds of small businesses. So we feel
obUgated to counter the hysteria that is being whipped up against mandatory
employer contributions by some small business organizations. These are the
same groups that said increasing the minimum wage would close businesses and
kill jobs. But the actual minimum wage increases in 1990 caused no job loss.^
Now they're saying that mandatory premiums, no matter how small, will close
businesses and kill jobs. They're wrong this time, too. Small business can
afford insurance if it's equitably financed.

Equitable Financing is Kev to Equitable Emplover Mandate

While we feel very strongly that all firms should provide insurance for all
their employees, we know that charging the same flat premium to every
company could create new competitive problems. It could threaten the viability
of some labor-intensive, low-profit-margin firms from apparel companies to
retail stores. It would also continue to put U.S. firms at a competitive
disadvantage internationally.

ACTWU negotiates contracts in both U.S. and Canada. We can cite
many of examples of a single payer system providing the same or better
coverage for less. In 1992 Levi Strauss paid premiums equal to 19% of its
Florence, Kentucky plant payroU but paid an amount equal to only 4% of its
Stoney Creek, Ontario (Canada) payroll for similarly comprehensive health
insurance. For textile company Courtalds PLC the difference was 22%
(Alabama) vs. 6% (Ontario); for two Hathaway shirt plants of the Wamaco
Company the difference was 12% (Maine) vs. 4% (Ontario). A similar cost gap
exists between the largest U.S. men's suit manufacturer, Hartmarx, and its
Canadian competitor. Peerless, which is exporting almost 300,000 suits to the
U.S. annually. Canada's pre-eminence as the largest exporter of men's wool
suits to the U.S. is helped in part by Canada's less expensive national health
insurance.

Charging the same high flat premium to all workers threatens the already
tenuous living standards of low-wage workers. Currently, workers can't afford
to buy insurance once they've paid for food and shelter. How will they feed
and house tiieir families if the premiums become mandatory and their incomes
remain the same? The high price and unfair distribution of health care costs in
the current system is the engine that drives firms and individuals to drop
coverage. HR 12(X)'s payroll premium would solve this problem.

'Ibid.

321

Current Health Care Financing Is Regressive

The current financing of health care is extremely regressive. A
recent study found that low-income families pay over twice the share of income
for all health care expenses as high-income families.'' As a share of income,
low-income families spend four times as much as high income families for
premiums, even though many poor families are uninsured and don't pay any
premiums. Out-of-pocket spending is even more regressive, with low-income
families spending nine times what high-income families spend even though poor
people can't afford to spend much at all on uncovered bills and deductibles.

The only portion of health care financing that is equitable is the portion
covering programs that are paid for through personal and corporate income taxes
at the Federal and state level. But other taxes, such as sales taxes, hit low-
income families harder.

The Fairest Financing Method Is Also the Simplest

The majority of health care is funded through premiums and out-of-pocket
spending~the two most regressive forms of financing. Fortunately, the most
equitable method for financing health care, a payroll premium by firms and
workers, is also the simplest to administer.

Traditional insurance premiums are flat doUar amounts that by their nature
are a greater burden for low-income people. This burden is made even heavier
by having different rates based on family size~the more mouths you have to
feed, the higher your insurance premium. Under the current system, contingent
workers-part-timers, temporaries and independent contractors-pay higher
individual premiums than employees in group plans even though they often have
lower incomes. Finally, smaller firms pay higher rates than larger ones.

HR 1200 provides the most equitable and simplest solution to financing
health care: transforming per capita premiums into a progressive payroll
premium structured like Social Security. The combination of a 8.4% payroll
premium for companies (4% for smallAow wage firms) plus a 2.1% payroll
premium for workers would cover the costs now covered by regressive flat
premiums and out-of-pocket payments.

These 8.4% and 4% payroll premiums are fair to a wide range of
companies and workers. It represents significant savings for most companies
that now insure their workers and a reasonable cost for those that do not. It is
in line with amounts paid by our competitors in the developed nations. It
automatically covers most contingent workers.

The Clinton plan creates a hybrid premium in the form of a flat rate with
a payroll payment maximum of 7.9% for companies and 3.9% for individuals.
These caps, along with the subsidies for small businesses and the very poor,
make premium financing less regressive than the current system. But it creates
a system that is much more cumbersome than a progressive payroll premium.
This hybrid premium would require several billion dollars each year in

* Edith Rasell, Jared Bemsiein, and Kainan Tang, "The Impact of Health Care Financing on Family
Budgets," Economic Policy Institute, 1993.

322

unnecessary administrative costs to determine employment status, family
structure, employment status of dependents, and which firms and individuals are
eligible for how much of a subsidy. While simplicity is supposed to be one
principle of the Clinton plan, its financing is much more complex than it needs
to be.

Cost Sharing Is Not Justified

The other highly regressive component of health care financing is out-of-
pocket expenses, including deductibles, co-payments for premiums, uninsured
portion of bills, and uncovered services (often drugs and mental health care).
People with low incomes can't afford to buy the health care they need. Yet
they pay almost a nine-times larger portion of their income out-of-pocket than
high-income famiUes for the health care they get. Furthermore, a single
catastrophic illness can propel even middle-income families into bankruptcy due
to uncovered bills.

Increasing out-of-pocket burdens have been advanced as a cost
containment measure and a means to reduce imnecessary use of medical
services. But, it is not clear that America overuses health care compared to our
international competitors. Americans go to the doctor less and stay in hospitals
a shorter period of time than consumers in every other major industrialized
country. These nations get more services for less money despite universal
coverage and little oi ..o cost-sharing.

What is clear is that co-payments and deductibles discourage 24% of
people with insurance from seeking the care they feel they need.' What is also
clear is that low-income people in America have worse health when they are
subjected to cost-sharing. Americans who can't afford to go to a doctor put it
off till they land in a hospital emergency room where more expensive heroic
measures have a much lower chance of actually providing a cure.

Many union and non-union workers do not currently pay a portion of
premium costs. Our imion has seen too many families in unorganized plants
"choose" not to have coverage simply because they couldn't afford it. As a
result, we have insisted that our largest national tailored clothing and cotton
shirt and jeans contracts have fuUy-employer-paid insurance.

HR 1200 uses payroll premiums to fully fund health care without any
deductibles or co-payments for insurance or for medical services. This is
similar to systems among our international competitors. Cost contairunent and
the problem of inappropriate care are addressed without creating financial
barriers to necessary services. We feel this bill incorporates the best way to
finance health care and the most effective cost containment mechanism.

HR 1200 provides a free choice of provider and does not force woricers
into managed care and HMOs. Under the Clinton plan, we are concerned about
how large a gap there will be between HMO, PPO and fee-for-service
premiums. We fear the creation of a Medicaid-type second tier system of
HMOs with low quality care and no middle-class constituency.

' Mark D. Smith, Drew E. Alunan, Robert Leiiman, Thomas W. Moloney, and Humphrey Taylor, "Taking
the Public's Pulse on Health System Reform", Health Affairs. Summer 1992, p. 130.

323

Any New Taxes Should Be Fair

Payroll premiums fall only on wages and salaries and do not impact non-
labor income such as dividends, interest and rents. Equitable financing of health
care therefore should include some payments based on total income or non-labor
income. Excise taxes, such as the proposed cigarette tax, are the most
regressive taxes of all. A cigarette tax would take a 72 times greater share of
family income from the lowest 20% of families compared to the top 1 % of
famihes. While a cigarette tax has some justification as a health measure, it
must be counter-balanced with less regressive financing provisions.

Conclusion

We heartily endorse HR 1200 not only because it would provide equitable
financing for health care, but also because it would eliminate waste, control
costs and use resources wisely to provide comprehensive, quality health care for
everyone.

324

TESTrMONY OF THE AMERICAN HEALTH CARE ASSOCIATION

The American Health Care Association (AHCA) , which represents
over 11,000 nursing facilities, residential care centers, and
assisted care facilities, applauds you for holding a series of
hearings which explore the full range of health care reform
proposals. We also commend Congressman McDermott for his
leadership in the health care reform debate and his willingness
to put forward a solution to the problems which plague our
current system. However, the AHCA does not believe that the
American Health Security Act (H.R. 1200) is the proper reform to
our system and must oppose the legislation based on philosophical
grounds .

Background

The American Health Security Act provides universal health
insurance coverage for Americans effective January 1, 1995.
Coverage is provided under a mechanism of global budgets. The
states administer the program in conformity :with federal
standards for: budget; minimum benefit packages; guarantee free
choice of provider; and quality assurance.

The minimum benefits package covers all inpatient and outpatient
medical services without limits on duration or intensity except
as delineated by outcomes research and practice guidelines based
on quality standards.

States deliver health care services within a federally set global
budget. The system is financed 85 percent by the Federal
government and 15 percent by the states. Federal monies are
apportioned among the states according to population, demography,
and anticipated health status differences. For example, states
with large elderly populations can be expected to require larger
volume of high intensity services and will receive a higher
proportion of revenues. States determine how that money is
allocated among types of providers and will negotiate with
providers on rates of reimbursement.

The bill covers services provided in a nursing facility,
including "post-hospital" and long-term care services. The bill
does not contain any limitations or caps on nursing facility
services except that they must be determined to be provided in
the "least restrictive and most appropriate setting."

Home care and community-based services are covered for
individuals unable to perform at least two ADLs . Long-term care
is financed through a $65 monthly premium on individuals 65 years
of age or older and above 120 percent of the poverty level.

The national insurance program would be financed by multiple
increases in federal tax programs. They include a 7.9 percent
payroll tax on employers; increasing the existing 1.45 percent
Medicare payroll tax by 6.45 percent; an increase in corporate
income tax from 34 percent to 38 percent for businesses with more
than $75,000 in profits; increases in the personal income tax
rates from 15%-28%-31% to 15%-30%-34%, with a top rate of 38% for
families with income over $200,000 and a health premium equal to
.5% of income; reforms to close loopholes in the tax code; in
addition to the long-term care premium, a $25 monthly increase
for Medicare Part B and an increase in the amount of Social
Security benefits excluded as taxable income from 50 percent to
85 percent.

325

AHCA Position

AHCA has serious concerns about the quality of long term care in
a health care delivery system created by H.R. 1200. The
legislation states that nursing facilities and other providers
would "negotiate" with the single payer, in this case the state
as the insurer, who in reality would have sole discretion of
setting reimbursement rates as it chooses.

Experience with state Medicaid administration leads us to believe
that reimbursement rates will fall short of the level necessary
to provide quality care to our residents. In 1991, Medicaid was
the primary payer for 70% of nursing facility residents, yet only
provided 48% of those facilities' reimbursement. Massive cost
shifting to the private sector is the reason residents can
receive quality care.

Philosophically, the bill is contrary to AHCA' s Quality Care for
Life proposal. Quality Care for Life is based on the premise
that families are fundamentally responsible for planning and
providing their own future long-term care needs and that
government should limit its role to providing assistance to
individuals who have low income. The bill does neither. It
would negate any private long-term care insurance market by
establishing a single government run insurer. Furthermore, the
government's role would extend to providing coverage for all
Americans .

There are some positive aspects to H.R. 1200. The AHCA is
pleased that coverage for long-term care services is more
generous than any health care reform proposal currently before
Congress. All Americans in need of services would be eligible
for home, community or institutional long-term care. We are also
pleased that there appears to be no cap or arbitrary
qualification for institutional care.

We commend the authors of this legislation for their recognition
that long-term care services must be included in any
comprehensive health care reform effort. However we must
maintain our position that health care reform must be a
private/public endeavor allowing for limited government
participation.

Mr. Chairman, thank you for the opportunity to provide this
statement .

326

TESTIMONY OF GENE BRACEWELL
SHRINERS HOSPITALS FOR CRIPPLED CHILDREN

Shriners Hospitals for Crippled Children has seventeen orthopaedic hospitals and three bums
institutes in the United States. If offers medical and surgical care to children, wholly free of charge. In
addition to patient care, each Shriners Hospital is affiliated with major medical centers and teaching
institutions to train physicians and nurses and other alUed health care professionals. Over two hundred
resident physicians receive training in pediatric-orthopaedics and bum care annually at Shriners Hospitals.

All care at Shriners Hospitals for Crippled Children is financed from its endowment and by
voluntary contributions from the general pubUc and the nearly 700,000 Shriners. Over $2.25 billion has
been expended to date in the provision of health care to children. In 1993, 96% of Shriners Hospitals'
operating budget was expended on patient care and research. Shriners Hospitals neither seeks nor accepts
federal or state financial assistance for any of its U.S. hospitals.

The mission of Shriners Hospitals has always been to provide optimum and compassionate care for
special categories of childhood illnesses free of charge. Recognition of the need for specialized hospitals
for the treatment of children with polio and other crippling diseases prompted the founding of Shriners
Hospitals in 1922. In the early 1960's there was only one bums institute in the United States, and it was
military; so Shriners established three bums institutes for children. Presently under construction is a
fourth, which will share a new facihty with one of Shriners' orthopaedic hospitals.

We believe Shriners Hospitals makes the largest single contribution to the care of disabled children
in the United States on a continuing basis. The annual operating budget of Shriners Hospitals
($304 million for 1994) has exceeded the entire federal contribution to the Children with Special Health
Care Needs (CHSCN) Title V state programs in each of the last five years.

Unlike other non-profit hospitals which, according to the United States General Accounting Office,
provide anywhere from 2.7% to 7.9% uncompensated care, Shriners Hospitals provide 100%
uncompensated care. Shriners Hospitals have always encouraged the treatment of those children whose
parents or guardians are not finpjicially abie to meet the costs of treatment without substantial hardship.

To avoid any unintended adverse effects to our charitable institution and its free programs to
children, Shriners Hospitals for Crippled Children suggests that the following provisions be included in any
health care reform legislation adopted by the United States Congress:

1 . A definition of "charitable provider" in terms such as "a provider which fumishes
medical and/or surgical care wholly free of charge to its patients, and which neither seeks nor
accepts direct or indirect governmental aid".

2. A provision [in addition to §50 1(c)(3) of the Intemal Revenue Code] which
specifically excludes "charitable providers" from the imposition of any provider taxes or other
taxes levied to support health care reform.

3. Provisions which specifically exclude "charitable providers" from any proposed
regulatory, financial or audit provisions (other than those which are directly related to patient
safety) which are enacted as a part of health care reform, as well as from any provisions which
would condition charitable tax exemptions on the participation of "community representatives" in
institutional strategic planning.

4. Provisions to the effect that the collaboration with public hospitals, agencies or
other providers in the deUvery of patient care; affiliation with public institutions to provide health
care education; or the pursuit of research in cooperation with public institutions or agencies
shall not be considered as the receipt of direct or indirect govemmental aid or support.

5. Provisions which preserve fiee hospital systems, Uke Shriners Hospitals, so they
may continue to contribute to children's health care in the future.

Shriners Hospitals for Crippled Children appreciates the opportunity to submit written comments
before the Sub-committee on its current and future role in the delivery of charitable health care services to
the nation's children.

ALTERNATIVE HEALTH REFORM PROPOSALS,
INCLUDING H.R. 3080, H.R. 3704, H.R. 3652,
H.R. 3222, AND H.R. 3698

THURSDAY, FEBRUARY 10, 1994

House of Representatives,
Committee on Ways and Means,

Subcommittee on Health,

Washington, B.C.
The subcommittee met, pursuant to notice, at 10:15 a.m., in room
1100 Longworth House Office Building, Hon. Fortney Pete Stark
(chairman of the subcommittee) presiding.

[The press release announcing the hearing follows:]

(327)

328

FOR IMMEDIATE RELEASE PRESS RELEASE #27

TUESDAY, FEBRUARY 1, 1994 SUBCOMMITTEE ON HEALTH

COMMITTEE ON WAYS AND MEANS
U.S. HOUSE OF REPRESENTATIVES
1102 LONGWORTH HOUSE OFFICE BLOG.
WASHINGTON, D.C. 20S15
TELEPHONE: (202) 225-7785

THE HONORABLE PETE STARK (D., CALIF.), CHAIRMAN,

SUBCOMMITTEE ON HEALTH,

COMMITTEE ON WAYS AND MEANS, U.S. HOUSE OF REPRESENTATIVES,

ANNOUNCES THE FINAL HEARING OF THE SERIES OF HEARINGS

HEALTH CARE REFORM:

ALTERNATIVE HEALTH REFORM PROPOSALS, INCLUDING H.R. 3080, H.R. 3704,

H.R. 3652, H.R. 3222 AND H.R. 3698

The Honorable Pete Star)c (D. , Calif.), Chairman, Subcommittee on
Health, Committee on Ways and Means, U.S. House of Representatives,
announced today that the Subcommittee will hold its final hearing in a
series of hearings on health care reform on Thursday, February 10,
1994, beginning at 10:00 a.m., in the main Committee hearing room,
1100 liongvorth House Office Building. This hearing will focus on the
following health care reform proposals:

(1) H.R. 3080, the Affordable Health Care Act Now of 1993

(2) H.R. 3704, the Health Equity and Access Reform Today Act of
1993

(3) H.R. 3652, the Health Plan Purchasing Cooperative Act of 1993

(4) H.R. 3222, the Managed Competition Act of 1993

(5) H.R. 3698, the Consumer Choice Health Security Act of 1993

These bills are summarized below in the background section of the press
release.

In announcing the hearing Chairman Stark said, "In addition to
H.R. 3600, the Administration's Health Security Act, a number of health
reform legislative proposals have been introduced throughout the
103rd Congress. On February 9, the Subcommittee on Health will hold a
hearing on single-payer options, including H.R. 1200 and H.R. 2610.
The hearing on February 10 will take a careful look at several other
health reform proposals. The Subcommittee wi'll examine the extent to
which these proposals are designed to achieve the goals articulated by
the President - namely, universal coverage and verifiable cost
containment".

Oral testimony will be heard from invited witneases only.
However, any individual or organization may submit a written statement
for consideration by the Subcommittee and for inclusion in the printed
record of the hearing.

BACKGROUND;

H.R. 3080 (introduced by Messrs. Michel, Archer, Crane, Thomas,
Shaw, Mrs. Johnson, Messrs. Bunning, Grandy, Herger, Hancock, Santorum,
Camp, Sundguist, Houghton, et al) would improve access to health
insurance through small-group market reforms and by requiring all
employers to offer, but not pay for, at least a standard benefit plan
to employees. It would require insurance companies to make available
to small employers standard, catastrophic and medisave plans and would
encourage small employers to form purchasing groups. Individuals who
purchase health insurance could deduct up to 100 percent of the cost.
States would be given the option of allowing Medicaid beneficiaries to
enroll in private insurance plans, and in such instances, the State
could expand Medicaid coverage to higher-income individuals within
current funding levels. H.R. 3080 would expand Community and Migrant
Health Centers, and other rural health programs, and includes
administrative and paperwork simplification, malpractice reforms, and
antitrust reform.

329

H.R. 3704 (introduced by Mr. Thomas, Mrs. Johnson, et al) would
require all citizens and lawful residents to obtain health insurance
coverage by the year 2005, through an individual mandate enforced
through the tax system. This bill includes insurance market reforms
and voluntary, competing purchasing groups within health care coverage
areas established by States. Employers would be required to offer, but
not pay for, health insurance coverage, including a standard and/or
catastrophic health plan. H.R. 3704 would provide vouchers to low-
income individuals and families to purchase private health insurance,
with the phase-in of the vouchers (up to 240 percent of poverty by
2005) contingent upon realization of Medicare and Medicaid savings.
Individual and employer tax deductions, and individual exclusions,
would be limited to the average premium of the lowest one-half of
standard packages in the area. H.R. 3704 would provide funding for
medically underserved areas, and includes administrative, anti-trust,
fraud, and malpractice reforms, and a medical savings account option.

H.R. 3652 (introduced by Mrs. Johnson, Mr. Thomas, et al) would
require States to establish voluntary purchasing cooperatives.
H.R. 3652 includes health insurance reforms, including guaranteed issue
and reissue, guaranteed renewal, and rating restrictions which allow
for adjustments for age, gender, number of family members, and the
area. Under this bill, insurers participating in voluntary
cooperatives would be required to offer at least one plan combining a
MediSave cash-value annuity or flexible-spending account with an
integrated catastrophic benefit coverage plan, one managed-care plan,
and one fee-for-service plan to a participating purchasing cooperative.
Employers would offer, but not be required to pay for, their employees'
plans.

H.R. 3222 (introduced by Messrs. Cooper, Andrews, Grandy,
Mrs. Johnson, Messrs. Payne, Houghton, Camp, et al) includes health
insurance market reforms and exclusive, mandatory, health plan
purchasing cooperatives (HPPCs) for individuals and small employers
with 100 or fewer employees. Under this bill, employers would be
required to offer, but not pay for, health insurance coverage of
employees. In addition, individuals would not be required to purchase
health insurance. H.R. 3222 would repeal the Medicaid program and
provide Federal subsidies for coverage of low-income families up to
100 percent of poverty enrolled in the least-cost plan through the
HPPCs, with additional subsidies provided on a sliding-scale basis
between 100 and 200 percent of poverty. States would assume full
responsibility for long-term care. H.R. 3222 would limit employer
deductions of health pr'emium costs to 100 percent of the lowest-cost
plan offering a uniform benefit package in an area. The bill would
provide assistance to safety-net providers in underserved areas, and
includes malpractice, reform, administrative simplification, and
antitrust reforms.

H.R. 3698 (introduced by Messrs. Stes^rns, Hancock, et al) would
require employers to withhold, but not C(^tribute to, premiums paid to
an employee's chosen insurer. Qualified insurance plans would have to
provide specific benefits and cost-shar;lng and could not exclude
coverage for pre-existing conditions, or cancel or fail to renew
coverage of enrollees. The bill would require most residents of a
State to purchase Federally qualified health insurance, or be covered
under a State program that provides equivalent coverage. Individuals
failing to purchase, at a minimum, catastrophic insurance by 1997 would
be subject to a tax penalty. Employers would be required to add the
value of the coverage they offered as of December 1996 to employee
wages beginning January 1997. The current tax exclusion for employer-
sponsored health plans would be replaced by individual tax credits for
premiums and unreimbursed health expenses and for contributions to
medical savings account. Federal Medicaid payments to the States would
be capped, and would be calculated on a capitated basis. However,
States would be given flexibility to provide acute medical care
coverage to Medicaid beneficiaries. H.R. 1742 would provide new grants
to States to provide coverage for low-income uninsured, and includes
malpractice reforms, paperwork simplification, and antitrust
provisions.

330

DETAILS FOR S0BMI88I0K OF WRITTEN COMMEKTS;

Persons submitting written statements for the printed record of
the Subcommittee's series of hearings on health care reform should
submit at least six (6) copies of their statements by the close of
business on Monday, February 28, 1994, to Janice Mays, Chief Counsel
and Staff Director, Committee on Hays and Means, U.S. House of
Representatives, 1102 Longwcrth House Office Building, Washington, D.C.
20515. An additional supply of statements may be furnished for
distribution to the press and public if supplied to the Subcommittee
office, room 1114 Longworth House Office Building, before the final
hearing begins on February 10.

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331

Chairman Stark. Good morning. This morning marks the com-
pletion of a series of hearings on health care reform, and we will
focus this morning on alternative proposals to the President's plan.

Yesterday, we focused on the single-payer option, and today, we
will examine 5 additional bills introduced during the 103d Con-
gress. They include: H.R. 3080, the Affordable Health Care Now
Act of 1993, introduced by our distinguished minority leader. Bob
Michel; H.R. 3704, the Health Equity and Access Reform Today Act
of 1993, introduced by our distinguished ranking member, Mr.
Thomas; H.R. 3652, the Health Plan Purchasing Cooperative Act of
1993, introduced by our distinguished member of the subcommit-
tee, Mrs. Johnson; H.R. 3222, the Managed Competition Act of
1993, introduced by Mr. Cooper, a member of the Energy and Com-
merce Committee, along with Mr. Andrews and Mr. Grandy, who
are distinguished members of the subcommittee; and H.R. 3698,
the Consumer Choice Health Security Act of 1993, introduced on
the House side by Hon. Clifford Steams, and he was joined in that
effort by Senator Don Nickles of Oklahoma.

We will examine the extent to which these proposals achieve the
principal goals articulated by the President: Universal coverage,
verifiable cost containment, and an equitable way to pay for them.

In the Chairs opinion, achieving universal coverage means that
every resident must have a nationally guarantees, portable health
insurance coverage, supported by adequate and fair financing. We
will hear a variety of approaches to this problem, and the mem-
bers, I am sure, will have their own comments on the various bills.

We did hear a few days ago from the Congressional Budget Of-
fice, and the bills have not had the luxury or the joy of being vetted
out by that process. I am sure they will. The Chair, of course,
would welcome any suggestions by tneir sponsors or advocates of
how they think they will fair. The Chair is making book on that
as a matter of fact and would be happy to let you place bets on how
your particular or favorite bill will be ranked by Mr. Reischauer.

There are examples of some of these bills. We have, for instance,
in Tennessee the TennCare bill which was put together by the au-
thor of the Cooper bill, and we have a chance to see how that is
working in Tennessee, and I hope we will have testimony to that
effect.

We will have discussions of an individual mandate, and I hope
that, as we hear about individual mandates which the Chair finds
intriguing, we have a way to provide the individual with the re-
sources to fulfill that mandate.

I would just close by suggesting that those of you who, unlike the
Chair, are lawyers and recognize Article 8, a simple way to provide
universal coverage is to mandate that every individual have it. If
they don't have it, put them in jail, and once in jail the Constitu-
tion requires they get medical care. We thereby have solved the
whole problem adding the cost to the States, and we will fund it
through the Senate crime bill which I am sure they are hoping we
pass in the House soon.

[The prepared statement follows:!

332

OPENING STATEMENT

THE HONORABLE PETE STARK

SUBCOMMITTEE ON HEALTH

February 10, 1994

Good morning. Today, the Subcommittee on Health completes
its series of hearings on health care reform, with a focus on
alternative health reform proposals.

Yesterday, the Subcommittee focused on the single-payer
option, H.R. 1200, introduced by our colleague, Mr. McDermott.
During the hearing today, we will examine five additional health
reform bills introduced during the 103rd Congress. They include:

(1) H.R. 3080, the Affordable Health Care Act Now of 1993,
introduced by Mr. Michel;

(2) H.R. 3704, the Health Equity and Access Reform Today
Act of 1993, introduced by Mr. Thomas;

(3) H.R. 3652, the Health Plan Purchasing Cooperative Act
of 1993, introduced by Mrs. Johnson;

(4) H.R. 3222, the Managed Competition Act of 1993,
introduced by Mr. Cooper, Mr. Andrews and Mr. Grandy;
and

(5) H.R. 3698, the Consumer Choice Health Security Act of
1993 introduced by Mr. Stearns.

We will examine the extent to which these proposals are
designed to achieve the principal goals articulated by the
President - universal coverage and verifiable cost containment.

To achieve universal coverage, every resident must have
nationally guaranteed, portable health insurance coverage,
supported by adequate and fair financing. None of the bills
before us today comes close to the goal of universal, affordable
health coverage.

One of the proposals that has received more attention than
it deserves is the Cooper/Grandy bill . It does not achieve
universal coverage -- leaving behind at least 25 million
uninsured Americans, according to the CBO. It does not control
the growth in health care spending. In fact, it would increase
the Federal deficit.

The Cooper/Grandy bill is far from benign, and does more
harm than good. It herds the American people into the cheapest
managed care plan in town. It taxes Americans for choosing their
own doctor. And, if that's not enough "reform" for one bill, it
goes on to eliminate the only Federal program that currently
finances nursing home care for seniors and the disabled.

333

One aspect of this bill that has received surprisingly
little attention is the stealth Cooper/Grandy tax. It's a tax on
businesses that choose to provide benefits in excess of the
cheapest health plan. These employers must pay a 34 percent
excise tax, unless they drop benefits, require higher
contributions from workers, or eliminate health insurance
coverage altogether.

The Joint Committee on Taxation and Congressional Budget
Office assume employers will cut health benefits to avoid the
proposed tax, and replace them with higher wages, which, of
course, will be subject to payroll and income taxes.

If you want to know what the Cooper plan means for health
care reform, just look to Tennessee, and see its kindred spirit,
TennCare, to see how popular and successful this managed
competition approach will be. It's an equal opportunity
program -- hated by doctors and patients alike.

Some say that the Thomas/Chaf ee bill should be considered as
the basis for compromise. I would agree that the individual
mandate proposed by the Thomas/Chaf ee bill, is needed to achieve
universal coverage. However, it is not sufficient to require all
individuals to purchase health insurance coverage -- unless it is
affordable to all who are mandated to have it.

An individual mandate, in the absence of either employer
contributions or general revenues, is likely to have a minimal
impact on the majority of the currently uninsured population,
who cannot afford to purchase health insurance for themselves or
their familieg. It is like trying to solve the homeless problem
by mandating that each individual buy a house.

334

Chairman Stark. I know that you will have a much more serious
and sensible suggestion from the distinguished minority leader,
and I am happy, as soon as we hear from our distinguished rank-
ing member, to recognize him.

Mr. Thomas.

Mr. Thomas. Thank you, Mr. Chairman.

I hope that, as we listen to these plans, we realize that what we
should be doing is addressing health care problems and needs in
1994, 1995 and beyond, and not from the late 1980s.

One of the things that has occurred out there, without the Fed-
oral Government moving, are significant changes in the private sec-
tor and in States, and what we have done is taken a look at what
we think needs to be done today and tomorrow, not yesterday.

We have heard some proposals that I think have fundamental
flaws in them. For example, the single-payer system has the gov-
ernment running the health care system. Enough said in terms of
that flaw. The President's plan, as we heard, increases the deficit
and, more importantly in chapter 5 of the CBO report, contains
new, untried, novel — but absolutely essential to the success of the
President's plan — structures which, if they do not work, create a
fatal flaw in the President's plan.

So, as we go forward, I think what we need to do is look at these
ideas, listen to them, and unlike the gentlemen who advocate the
single-payer, we are more than willing to compromise, accommo-
date, and work together to solve the health care needs of all Ameri-
cans. I look forward to these new and novel ideas.

Thank you.

Mr. McCrery. Mr. Chairman.

Chairman Stark. Mr. McCrery.

Mr. McCrery. Thank you. I look forward to hearing testimony
from all of our colleagues on the various alternatives.

I am in the process of drafting my own alternative. I am working
with the legislative counsel now. I have handed out to a number
of members this morning a short summary of my plan, and I hope
to have an opportunity to address the subcommittee later today to
take any questions that the folks have at this point.

Thank you.

Chairman Stark. We are honored to have a number of our
House and Senate colleagues with us this morning, and we will
begin with the distinguished Republican leader, Bob Michel, who
will testify in support of H.R. 3080, the Affordable Health Care
Now Act. He is accompanied by the principal sponsor from the Sen-
ate on the same bill, Hon. Senator Trent Lott.

Why don't you gentlemen lead off any wav you are comfortable.
Your prepared statements will appear in the record in their en-
tirety without objection, and we would be happy to have you sum-
marize or expand on your testimony any way you are comfortable.

STATEMENT OF HON. ROBERT H. MICHEL, REPUBLICAN
LEADER, U.S. HOUSE OF REPRESENTATIVES, AND A
REPRESENTATIVE IN CONGRESS FROM THE STATE OF
ILLINOIS

Mr. Michel. Thank you, Mr. Chairman arid members of the sub-
committee. It is a pleasure and opportunity for us to appear before

335

this subcommittee. You certainly have your work cut out for you,
hearing not only the testimony, but then sifting it all out and, in
the end, to attempt to come to some kind of consensus on one of
the biggest issues, of course, that has been confronting the Con-
gress in many years.

Since my colleague. Senator Trent Lott, and I are part of a panel
that will be presenting several other Republican-initiated health
care reform plans, I think it is important to outline for you the
overall framework within which Republicans propose to address the
health care reform issue.

The fact is. Republicans in both the House and Senate have been
studying and working on the health care issue for quite some time.
In the House, we established the leader's task force way back in
1991, long before the President came into office. The Senate Repub-
lican task force was established in a similar time frame.

As a matter of fact, the initial product of our task force, the ac-
tion Now Health Care Reform Act, introduced in June 1992, was
similar to the so-called Bentsen bill that was adopted twice by the
Senate that year, and I think, if my memory serves me correctly,
had the majority of members of this committee been willing to ac-
cept some of those reforms in conference, we would, in fact, have
that in place today with the American people already benefitting
from those reforms.

Be that as it may, our Republican proposals this year all reflect
the strong view of Republicans in the House and Senate that re-
form of our health system is essential and should be enacted as
soon as possible. They also reflect our view that there is a right
way and a wrong way to reform the system and that the direction
the President proposes to take us, into a massive, dictatorial, gov-
ernmental-run health care system, is the wrong way to go.

Rather, our Republican proposals follow the general set of prin-
ciples adopted by House and Senate Republicans last year, and
these principles start with a proposition that we believe the health
care delivery system needs powerful new incentives for change. In-
dividual responsibility and control are critical. No government-con-
trolled system can be as responsive, as high in quality, or as cost
effective as a system that is based on personal consumer choice and
satisfaction.

We believe that there ought to be increased access. All Ameri-
cans should have access to affordable health care for themselves
and their families. Americans should not fear losing their health
insurance when they change jobs, move, or suffer serious illness. So
we believe in portability, and, yes, improving the pathway toward
eventually achieving universal coverage. We begin by talking about
access before we can get to the ultimate goal of universal coverage.

We would like to maintain quality. The American medical care
and technology are the best in the world. People around the globe
come to America for the best care. The best research is done in our
country. Men and women from all around the world come to be
trained in American medical schools. Reform that jeopardizes these
resources, in our opinion, is unacceptable.

We have got to provide choice. Consumers, not the Federal Grov-
ernment, should choose how they get their care and from whom.

336

and as soon as Washington starts dictating health care, Americans'
freedom to choose will be jeopardized.

We want to preserve jobs. As we seek to provide all Americans
with access to health care, we don't want to put Americans out of
work through increased mandates and taxes on small and inde-
pendent businesses.

Then, of course, we ought to have a high degree of flexibility.
Health care reform should not infringe on innovative plans being
adopted by a number of our States and by large and small busi-
nesses. Health care reform must be flexible enough to fit the needs
of both urban and rural areas.

It ought to be fair. All Americans should be eligible for the same
health care deductions. All should be able to deduct their health in-
surance costs no matter where they work or how they get their in-
surance. Today, workers in large businesses get most or all of their
insurance tax-free, while the self-employed can deduct only 25 per-
cent of their health insurance costs. Indeed, individuals buying in-
surance outside their job can deduct nothing.

Then I think we want to encourage individual responsibility. Re-
form should increase options to enable individuals to take respon-
sibility for their health care.

It ought to be financially responsible. I will tell you, the huge
Federal deficit and the recently expanded tax burden on the Amer-
ican people mean that any Federal efforts to assist with the financ-
ing of insurance must be gradually phased in as other government
savings become available. Adding to the deficit or the tax burden
is not the way to finance health care reform.

Finally, I think we must give people information about their
plans and the cost of services and then let them choose. Moreover,
we ought to target the factors that drive up costs such as our mal-
practice system and defensive medicine, the excessive paperwork
and administrative burden, and the waste, fraud, and abuse in our
system.

These, then, are the principles that have guided our deliberations
and which unite our various ideas. Our proposals may differ in spe-
cifics, but they all adhere to the fundamental theme that the Amer-
ican people themselves, through their places of employment,
through their communities, and within their families should be in
charge of their health care.

Republicans are ready and willing to work with the Democrats
now to develop and pass health reform legislation that truly fixes
the problems with our health care system.

I think with what we have heard, particularly in the last week
or two, that the President's health care plan, as proposed, is un-
likely to be enacted.

The proposal Senator Lott and I have introduced can be the basis
from which a good bipartisan health care reform is crafted. Our act
is a common-sense approach to health care and focuses on fixing
the shortcomings, not overthrowing the entire system simply be-
cause some of the parts are not working. It proposes workable re-
forms that will make things better for people now and not risky,
untried concepts that will likely not be implemented until after the
turn of the century.

337

It builds upon and encourages the many reforms already under-
way at the State and local level and the private sector. H.R. 3080,
the House version, I might add, has 141 cosponsors, making it the
bill with the most sponsors of either body in the Congress, and
when you add in the Senate sponsors, we are up over 150, I be-
lieve.

So I would like to turn, then, if I might, Mr. Chairman, to my
distinguished colleague from the other body. Senator Trent Lott,
who has joined in support of the basic bill.

[The prepared statement follows:]

338

REPUBLICAN APPROACH TO HEALTH CARE REFORM
REMARKS BT HOUSE REPUBLICAN LEADER ROBERT H. MICHEL
WAYS AND MEANS SUBCOMMITTEE ON HEALTH
FEBRUARY 10. 1994

I appreciate having this opportunity to appear before the subcommittee
along wiUi our former colleague, the Senator from Mississippi (Trent Lott), in
support of the "Affordable Health Care Now Act."

Since we are part of a panel that will be presenting two other Republican-
initiated health care reform plans, I think it important to outline for you the
overall framework within which Republicans propose to address the health
reform issue.

The fact is. Republicans in both the House and Senate have been
studying and working on the health care issue for quite some time.

In the House, we established our Leader's Task Force on Health way
back In 1991, long before President Clinton came into ofHce. The Senate
Republican Task Force was established in a similar time frame.

As a matter of fact, the initial product of our Task Force, the Action Now
Heedth Care Reform Act, introduced in June of 1992, was quite similar to the
so-Ccdled Bentsen bill that was adopted twice by the Senate that year.

Had the majority members of this committee been willing to accept those
reforms in conference, we would in fact have health care reform in place tDday,
with the American people edready benefiting from those reforms.

The point is that when we have the opportunity to correct problems with
workable solutions, we ought to move ahead and not delay action in order to
await the development of grandiose schemes that may never prove doable or
acceptable.

Our failure to act In 1992 ought to provide fair wjunlng to us in 1994.

Our Republican proposals this year all reflect the strong view of
Republicans In the House and Senate that reform of our heedth care system is
essential and should be enacted as soon as possible.

They eiIso reflect our view that there is a right way and a wrong way to
reform the system, emd that the direction the President proposes to take us,
into a massive, dictatorial, government-run health care system, is absolutely
the wrong way to go.

Rather, our Republican proposals follow the general set of principles adopt*
by House and Senate Republicans last year.

These principles start with the proposition that:

"We believe the health care delivery system needs powerful new
incentives for change. Individual responsibility and control are critical. No
government-controlled system can be as responsive,

as high in quality, or as cost-effective as a system that is based on personal
consumer choice and satisfaction.

Reform should:

1. REDUCE COSTS. Reform must start with putting the brakes on
escalating health care costs. Such costs should be controlled by
rel)dng on knowledgeable consumers who actively participate in the
health care market— not global budgets and government-imposed
price controls that result in waiting lines, ration health care and
inhibit technological advances.

339

We must give people Information about their plems and the cost of
services and then let them choose. Moreover, we must target the
factors that drive up costs such as our malpractice system and
defensive medicine; the excessive paperwork and administrative
burden; and the waste, fraud and abuse in our system.

2. INCRE^E ACCESS. All Americans should have access to affordable
health care for themselves and their families. Americans ^ h&uld not
fcEir losing health insurance when they change jobs, move, or suffer a
serious illness.

3. MAINTAm QUALITY. American medical care and technology are the
best in the world. People around the globe come to America for the
best care. The best research is done in America. Men amd women
from around the world come to be trained in American medical
schools. Reform that jeopardizes these resources is unacceptable.

4. PROVTOE CHOICE. Consumers, not the federal government, should
choose how they get their care amd from whom. As soon as
Washington starts dictating health care, Americans' freedom to choose
will be jeopardized.

5. PRESERVE JOBS. As we seek to provide all Americans with access
to health care, we do not want to put Americans out of work through
increased mcindates and taxes on small business.

6. ENHANCE FLEXIBILITY. Health care reform should not infringe on
innovative plans being adopted by states and by large and smedl
businesses. Health care reform must be flexible enough to fit the
needs of both urban aiid rural areas.

7. BE FAIR. All Americans should be eligible for the same health care
tax deductions. All should be able to deduct their health insurance
costs no matter where they work or how they get their insuremce.
Today, workers in large businesses get most or all of their insurance
tax-free, while the self-employed can deduct only 25% of their health
Insurance costs. Indeed, individuals buying insurance outside their
job can deduct nothing.

8. ENCOURAGE INDIVIDUAL RESPONSIBILITY. Reforms should
increase options to enable individuals to take responsibility for their
heedth care.

9. BE FINANCIALLY RESPONSIBLE. The huge federal deficit and the
recently expanded tax burden on the American people meem that any
federal efforts to assist with the financing of insurance must be
gradually phased-ln as other government savings become available.
Adding to the deficit or the tax burden is not the way to finance health
care reform.

10. BE WORKABLE. Health care represents one-seventh of the U.S.

economy and is too important to the American people to subject It to
the major risks that would result if it were turned over to the federsd
government. Reforms adopted natlonsdly must be built on what
works."

These, then are the principles that have guided our deliberations and
which unite our various ideas. Our proposals may differ in specifics, but they
all adhere to the fundamental theme that the American people themselves,
through their places of employment, through their communities, and within
their fsmiilles, should be In cheirge of their health care.

At this point, Mr. Chairman, allow me to comment on the legislative
realities we all face around here.

You know and I know that the President's bill in its present form is not
going anywhere.

340

E^en if It did have a chance of passing in its present form, it would have
to be on your side of the aisle.

Republicans~emd what I like to think of as discerning Democrats— simply
are not going to accept such a bureaucratic monstrosity.

The administration says it is going to fight all the way to see the
President's bill pass In substantial form.

But you remember—as we all remember— that the administration told you
last year that a BTU tax was absolutely vital and that the administration would
settle for nothing less.

But when many Democrats went unwillingly along with the BTU tax in
the House, it was unceremoniously dumped in the Senate— and many members
of your party were left in an uncomfortable— and in some cases untenable-
position.

I bring up this bit of recent history as a friendly reminder of what could
and in all probability wiU happen to any member of the majority who is
beguiled by the administration's current rhetoric about the absolute necessity
of passing the President's bill.

The Administration said the same thing about the BTU tax a year ago
and your members were left hung out to dry. It can happen again.

If it is the plan of the leadership in Congress to try and ram through the
President's government-run health proposal without a serious effort at
bipartisanship, there almost certainly will be major errors and miscalculations
that will rebound negatively on those who were a part of that effort.

For bipeutlsanship to work, It must be undertaken at the beginning of the
legislative process, not at the end when time to craft a workable proposal has
run out.

Republicans are ready and willing to work with Democrats now to
develop and pass health reform legislation that truly fixes the problems with
our health care system.

The proposal Senator Lott and 1 have Introduced can and ought to be the
basis from which a good bipartisan health care reform bill is crafted.

The Affordable Health Ceire Now Act is a commonsense approach to
health care reform.

It focuses on fixing the shortcomings of our health care system, not
overthrowing the entire system simply because some of the pjirts are not
working right.

It proposes workable reforms that will make things better for people now,
not risky, untried concepts that will likely not be Implemented until after the
turn of the century.

It builds upon and encourages the many reforms already underway at
the state and local level and in the private sector, not negate these reforms
through the imposition of a government-run health system imposed from the
top down.

H.R. 3080, the House version, has 141 cosponsors, making it the bill
with the most sponsors in either body of the Congress. When you add in the
Senate sponsors, we are up over 150.

Let me turn now to Senator Lott, who Introduced the bill in the Senate.
He will discuss the specifics of our proposal.

341

Chairman Stark. Without objection, we are pleased to see you
back, Trent. Welcome. Proceed in any manner you are comfortable.

STATEMENT OF HON. TRENT LOTT, A U.S. SENATOR FROM THE
STATE OF MlSSISSffPI

Senator LOTT. Thank you. Republican leader and Mr. Chairman
and ranking Republican, Congressman Thomas, members of the
Health Subcommittee of Ways and Means. It is a pleasure to be
back in my old haunts. As most of you know, I was here for 16
years. I think I served with all of you but two, but I had forgotten
what elegant surroundings you have over here on this side. I mean,
we live in austere poverty over on the Senate side compared to
this. This is the most beautiful room.

Chairman Stark. And they are building a new railroad to get
there.

Senator LoTT. I don't remember it looking quite this good when
I was over here. I might not have tried to move across the Capitol
if it had.

I am delighted to be here, once again, riding shotgun with my
good friend, the distinguished Republican leader, Bob Michel. It
was a great pleasure for me to serve as his whip for 8 years, and
I really learned to admire him as an individual and admire his
leadership and his courage. I would like to commend him.

Particularly, I would like to commend Congressman Denny
Hastert from Illinois, who was chairman, I believe, a leader of the
task force that worked on this legislation. He is not able to be here
today because of an illness in his family, but he did yeoman's work.
I have talked to him several times, and I want to commend my col-
leagues in the House for the work that they have done.

We do have now 13 Senators sponsoring this legislation in the
Senate. I had looked at all the different plans, and I am satisfied
that this is the one that is the most commonsensical, most reason-
able, most responsible, and most affordable now.

I agree with the leader. The Clinton plan as it was originally in-
troduced is basically dead. I think that you are going to see more
and more concerns being raised about the Cooper plan, and we are
going to have to then move to trying to develop a consensus that
a bipartisan majority can agree on that will address the real prob-
lems we have and that we can afford, and I think that is what this
bill does.

I am a cosponsor of the Nickles-Stearns plan. I think they have
got a lot of good ideas. I think there are a lot of other good ideas
floating around here, and you see a proliferation of other bills and
good ideas. I think that is good, first of all, but I think it has also
been driven by the fact that clearly what is on the table from the
administration is not what the American people want or need.

The big government mandates, lack of choice, costly proposal is
not what is going to happen. So we must begin to try to develop
a basic plan, and I think this is it, and I am delighted to be a co-
sponsor of this legislation.

Now, when I go back to my State, the people talk about fun-
damental concerns and problems. We obviously all agree we have
problems in the insurance area. We must deal with portability. We
must deal with access. We must deal with cherrypicking. We must

342

deal with the laws of insurance because you have a preexisting ill-
ness. There are certain insurance areas we all agree we ought to
do something about that. So we ought to begin from that stand-
point.

Most of us agree that there should be medical malpractice re-
form, responsible reform that would help deal with a serious prob-
lem in this area that leads to the practice of medicine, that is a
defensive practice, that leads to a lot of procedures that we don't
need that drive up the cost. We ought to do that.

In my State of Mississippi, it is not access to insurance. Our
problem is access to any kind of medical provider. In rural areas,
even if you had insurance, you can't get to a hospital, you can't get
to a doctor, you can't get to a nurse practitioner. You probably can't
even get to a midwife. So we must address this problem not just
from the standpoint of the inner cities which we must do and try
to have reforms there. We have got to make sure that the rural
areas are considered in this process, and this bill does that. It has
some significant proposals in the rural health care area.

So those are iust a couple of the areas that I am going to be
watching. I do tnink we need incentives, incentives for individuals
to do the responsible thing, incentives for more doctors to go into
the general practice, incentives to get health care providers into
rural or underserved or unserved areas, and I think that there are
a lot of good ideas that would accomplish that.

Are we working on House rules or Senate rules? Do I have 5
minutes or 50 minutes? Don't answer that.

This bill is paid for. I think that in these times of being con-
cerned about unfunded mandates and just dumping the cost off on
the States, you must have a financing provision in your package.
This does. It phases out Medicare subsidy for seniors with incomes
over $100,000 individually or $125,000 per couple.

It would prefund government retirement health insurance cost. It
would increase the Federal retirement age fi-om 55 to 62 which
comes to just over $17 billion, and as best as we can estimate, be-
cause the Joint Committee hasn't responded to our request to cost
it out, we think it would be about $17 billion. So our package is
paid for.

Now, turning to the package, I would just like to quickly run
through what tnis does. It does require employers without existing
health benefit plans to offer to eligible employees at least one plan,
meeting an actuarially defined standards of coverage. It does limit
preexisting condition restrictions under all employer health benefit
plans. It does require coverage of essential and medically necessary
medical, surgical, hospital, and preventive services. It encourages
the formulation of multiple employer health plans by removing IKS
regulatory barriers involving geographic limitations and business
commonality tests which now prevents such groups from using the
tax-exempt trusts to lower costs.

I mentioned that it does provide a number of areas of assistance
in rural health care, including rural emergency medical services
with $15 million to help get that started.

On air transport for rural victims, in Hattiesburg, Miss., we do
have a helicopter service that serves probably about 7 or 8 coun-
ties. This would really be helpful in some of these rural areas just

343

to be able to get to a hospital in 20 minutes instead of 50 or 60
minutes. It would save a lot of lives. This legislation provides help
in that area.

It does provide for increased access to community health services.
In my State of Mississippi, community health services now do a
great job, but we need more help in that area, and there is a provi-
sion for community coordination demonstration grants.

It does provide for Medicaid program flexibility. The States are
doing a better job than we are. That is true in innovative ideas and
new ideas. The Chairman mentioned the Tennessee plan. I mean,
right now it is in a state of chaos, but they have launched on out
there into these untried, troubled waters. They are doing some-
thing, and they can do a lot more if we would give them the flexi-
bility in Medicaid to come up with new ideas and actually provide
better help, more help to the poor that depend on this program.

It allows States to enroll in Medicaid beneficiaries and HMOs
and PPOs without having to submit to all of the cumbersome waiv-
er requirements and applications that they now have to have.

I mentioned it does have medical malpractice liability reform.
There are various proposals in this area. Senator Gramm of Texas
has a very strong medical malpractice liability program, but as a
lawyer and one that used to be on the defense side of the equation,
this one is reasonable. It is practical. It is not extreme. We can do
it, and it would help with the problem, and I don't think it would
run all the lawyers in the world off with its proposals.

It does have the medical savings account, medisave. I think it is
a good proposal, but I think that we can work with others. We need
to strengthen it, provide more encouragement there, but I would
encourage this subcommittee to look at this medisave proposal. I
think it is an excellent one. It has the antifraud provisions and
Medicare plan changes. It has got it all.

This has been described as the minimalist plan or the incremen-
tal plan. The people that do that haven't looked at it. This is a
well-thought-out plan. It is one we can do now. We ought to quit
fighting over what we disagree on and find out what it is we can
agree on, do it this spring, and then look to the future. Let's do
what we can do, and as we go along, as we make savings, as we
come up with better ideas, we can adopt those. We don't need to
reinvent health care in America. It is in pretty good shape. We just
need to deal with some of the problems. We need to try to improve
it. At the very least, let's begin by doing no harm.

Thank you, Mr. Chairman.

[The prepared statement follows:]

344

HEALTH CARE REFORM-A PRACTICAL APPROACH
THE AFFORDABLE HEALTH CARE NOW ACT OF 1993
A STATEMENT BY SENATOR TRENT LOTT
FEBRUARY 10, 1994

Mr. Chairman, I come before you and this Subcommittee on Health of
the House Ways & Means Committee today, to offer support for the
legislation H.R. 3080, "The Affordable Health Care Now Act of
1993." This bill will improve access to health insurance, help
contain health care costs, and address the areas of health care
which really warrant reform. This legislation, furthermore, is
widely supported with 141 cosponsors currently in the House of
Representatives, and 13 cosponsors currently in the Senate. This
speaks well of those who crafted the bill. It also reflects how
well the American public has transmitted its message to Members of
Congress, because our health system does work. However, we want it
to work better.

I have spoken to countless Mississippians and others across the
country about health care reform. I want to tell you this morning,
there is a great deal of apprehension, or perhaps I should say
fear, about what we here in Congress could possibly do to the
quality of health care delivery, and the existing availability of
medical treatment.

Health care reform is a subject which has now captured the
national spotlight, and tapped the conscience of all Americans. It
is one of the most difficult problems facing our country today. We
all need and deserve health care that is affordable and accessible.

345

Rapidly increasing costs, however, have made these goals hard to
reach. I looked closely at the details of a number of proposals
presented in Congress, and chose to sponsor the legislative
proposal of Congressman Michel in the Senate. It is S. 1533
bearing the same title, "The Affordable Health Care Now Act of
1993."

It too, is a practical approach. It will expand access to
affordable group health coverage for employers, employees and their
families. Also, it will help eliminate job-lock and the exclusion
of such individuals from coverage due to preexisting condition
restrictions .

In addressing health care reform, we must make sure that we do not
sacrifice quality as we reform the present system. In addition, I
believe that any plan ultimately approved by Congress, must ensure
that we retain the positive things about our country's health care
system, like the individual freedom to choose your own doctor and
hospital.

The health care problems we face are very complex and a solution is
not going to happen overnight. Obviously, we need to do something,
but any reform must be carefully weighed. He need to have a full
and thorough debate on all the options facing us. The issue of
health care is too important simply to rush to judgement.

I urge you and this Committee to exeunine the merits of this

legislation, this practical approach to health care reform, and

favorably report it. Thank you Mr. Chairman, and I ask that my
remarks be inserted in the record.

346

Chairman Stark. Thank you.

I must say there is very httle in this bill with which I suppose
anyone could disagree. That is the good news. Unfortunately, the
CBO in their last scoring indicated that it would have virtually no
impact on the number of uninsured in the country, and I don't
think there have been any major changes in the bill since that last
CBO analysis.

Now, if there have, the only question that I think I would ask
you is this. Your Medicaid buy-in really is up to the States. The
States could shift some money that they get to buy into Medicaid.
There is the possibility that we could raise more Federal money for
the uninsured, one way or another, to help the States allow a Duy-
in, and I want your comments on that. I mean, that would get
more of the uninsured in the plan. Arguably, we would have to talk
about taxes or raising some money to do it.

Let's assume we could find it. Let's assume there is a health
fairy who is going to put some money under our pillow. Would you
like to see the Medicaid plan expanded or an alternative which is
attractive to the Chair is would you be willing to allow at no cost
to the Federal Government individuals or companies to buy into
Medicare if we priced it such that it paid the full actuarial cost?

Mr. Michel. First of all, one of the problems with our current
system is I think you have got some Medicare/Medicaid recipients
getting a better level of care than low-income working

Chairman Stark. Medicare.

Mr. Michel. Yes. I think we accept that, and what we are at-
tempting to do here by way of offering the States more flexibility
is to allow them to assist those up to 200 percent of poverty and
open up the doors to those currently without insurance. Put your
thinking caps on, and if there is an opportunity out there in the
insurance world to utilize that resource, give the States that option
to do that.

Now, in saying so, I think we have to be candid to the insurance
industry and say, "Look, folks, this gives you an opportunity, but
you have an obligation, too, to try and help us see if there is a way
in which we can hold costs down by spreading that risk and over
a bigger pool."

I don't want to be shifting a burden, more of our mandate or a
burden from the Federal level on the States. We heard from our
Governors, and they have had it about up to here on that. As a
matter of fact, they have their reservation about a section of the
Cooper plan that puts them in a bind with respect to one of those
provisions. So at least we offer it as a starting point, and then it
is one of these negotiable things we would have to work out.

Senator Lott. I might just say that I think that seniors would
have some concerns about that proposal. I know that the chairman
has worked a lot in that area over the years, and that is why you
would like for us to really, maybe, move, but I get concerned about
crossing these two.

Chairman Stark. There would have to be a firewall in the trust
fund.

Senator Lott. Yes.

Chairman Stark. It would have to be a separate section. I just
used it as a structure.

347

Senator LoTT. Right.

In answer to your question, I do think that this proposal would
provide more coverage for people without mandates. As long as we
are saying that we are going to do it for you, employers are not
going to do it. I think that if we encourage and move the employers
toward covering more employees, working with them on it, that, in
fact, they will do that.

Plus, I do think by these changes we have proposed in Medicaid
that allow the nonmedical-eligible individuals to buy into the sys-
tem it would help a lot of people.

Chairman Stark. Thank you very much.

Mr. Thomas.

Mr. Thomas. Thank you, Mr. Chairman.

I can think of worse criticisms than you are not ambitious
enough. I think it is pretty obvious that the President's plan was
a bit too ambitious.

It is interesting that in today's Washington Post, one Clinton ad-
viser is quoted as saying, "We are going to have to compromise,
and we might as well as do it sooner as later."

We have heard statements from other people supporting other
plans that they had no interest in compromising because their plan
was perfect and they didn't want it contaminated with anybody
else's ideas, in essence.

My only question in terms of a general one is: If you are being
criticized as not being ambitious enough, are you willing to sit
down and talk about options that may be available that will allow
us to move forward or are you adamant in terms of not wanting
to talk about compromise at all? Where are you in terms of a will-
ingness to look at other options?

Mr. Michel. We all have to start from somewhere, and I am re-
minded of all of the discussions we had in our Republican task
force where we were very conscious of not wanting to impose an-
other new tax. We decided if that is what some provisions were
going to require, we better trim our sales to the degree that we can
do the kind of things that don't call for additional taxes and the
kind of unachievable increased revenue that would bring a whole
plan down.

I am looking at our experience in the catastrophic health care
field several years ago where I thought I was supporting a very
noble venture, and it was going to be financed with $4 a month
premium income from Medicare. Of course, we had to get benevo-
lent by adding things to the degree that we had to have a tax on
a tax, and within 1 year, we were all embarrassed by having to re-
peal it. I don't want to repeat that.

I was here during the Medicaid/Medicare deliberations when we
were talking about cost projections, and they are nowhere near
today what we perceived them to be in those times. So we decided
in our task force that we should be honest, forthright, and candid
with the American people and say, "Folks, there is a limited
amount that we can really promise you at this juncture, and we
don't want to raise your expectations beyond our power and ability
to deliver what we are talking about." I think, frankly, that has
been part of the criticism of what the President initially proposed,
raising everybody's hopes that this was going to be something for

348

nothing. When it comes right down to it, it has all got to be paid
for in some form or manner.

Senator Lott. If I might respond to that, I think I would describe
myself as having been just about the biggest flirt in town over the
past year, as I have flirted with every plan. I have looked at them.

I started off by saying I am not going to cosponsor any of them.
I am going to wait for the one I can support. I wound up being a
cosponsor. Well, Senator Chafee is here. I attended some of his
task force meetings. I have been interested in the ideas in his plan.
I am a cosponsor of the Nickles plan. I am a cosponsor of the
Gramm plan. I even talked several times with Sonator Breaux
about the Cooper-Breaux plan, seeing if there was a way I could
go on as a cosponsor, and I finally concluded that I just could not
for a variety of reasons.

In the end, I finally settled on this one as being the best one, the
most reasonable one, the one we can afford and one we can do now.
This will be the base of the principal alternative to the Clinton
plan.

Can we make some changes? Absolutely. I think we are going to
make some changes in certain areas, and I am willing to work on
it, but you have got to begin somewhere, and I don't want to begin
up here at this reinvention of health care and then back down from
it. I think we ought to begin at what do we need to do now and
can we afford it, and then if we can make some adjustments on it
around the edges, I am perfectly willing to work with you.

Mr. Thomas. That is what I wanted to hear; that we are willing
to sit down and try to accommodate and compromise to reach a
conclusion.

Senator Lott. If I might just say in the end, I think there is
going to be a Michel-Dole-Moynihan plan.

Mr. Thomas. Let me say the chairman said that he doesn't be-
lieve that under the CBOs analysis that we would do anything in
terms of the uninsured. I think he needs to know that when the
CBO analyzes this session's version, he will find that, as you cor-
rectly said. Senator, it is fully funded, and in that fully funded pro-
gram is money that covers 100 percent of the deductibility for in-
surance for the self-employed and 100-percent deductibility for
those people who are not insured and whose employer does not pay
for their insurance; that if they acquire insurance, they have 100-
percent deductibility, and it is paid for under your plan. That, I
think, is a significant response to the question of the uninsured.

I thank the gentlemen for their testimony.

Mr. Levin [presiding]. Thank you.

I guess I am next, so welcome, as always.

To the minority leader, let me just ask you a few questions. You
are a person of goodwill. So it isn't always easy to zero in on what
may be flaws in your proposals, but let me just probe, maybe not
too gently, but fairly.

In your testimony, you talk about government-imposed price con-
trols. In your plan, as I understand it, you have a limit on the an-
nual premium increase for small employers, a 15-percent limit.
Now, how is that consistent with your inveighing against govern-
ment-imposed price controls?

349

Mr. Michel. I think, again, what we want to do is pave the way
for business and industry to do its share and its responsibiHty. I
think we are trying to touch the conscience of all individuals who
eventually become employers. Insurance is prevalent in large in-
dustries and a lot of our small businesses, but there are many out
there that simply say they can't afford it.

Now, what we want to do, while we don't mandate that they pay
for it, that you as responsible employers, encourage them to pro-
vide some kind of health insurance program. Then, again, turning
to the insurance industry, 'Tou folks in the industry have an obli-
gation to provide in every community of this country an oppor-
tunity for pooling of resources to make that a reality."

Now, it may be Utopian to think that that can come in a vol-
untary way, but I think we have already seen some of our business
and industries moving in this direction, whether or not it has been
caused by the very debate that we are holding today and have for
6 months or more now. If so, then I think we are on the right
track.

Mr. Levin. But still you impose a limit on what insurance car-
riers can charge small business.

Mr. Michel. Yes, we do, and what we would perceive in a basic
policy of some form is that the 50 commissioners of insurance could
get together and make a determination among the 50 States what
is a viable basic policy that ought to help us get through this.
Then, of course, we would move beyond that and say then the op-
tion above that is a catastrophic plan or a medisave plan, but there
ought to be an agreement beforehand among the 50 State insur-
ance commissioners what we consider to be a basic policy, and
then, hopefully, what we have prescribed there would fit that mold.
Now, if it doesn't, well, we will have to make adjustments.

We are not the only ones moving in these unchartered waters
and area, and the very fact that, for example, we can't even get our
plan costed out specifically by CBO to give you real hard-and-fast
figures, we have done the best we can in the absence of that, but
as we have also heard this past week, there have been some pretty
prominent people who thought the costs were going to be such and
such and find that figure pretty well debunked by others who are
in positions of authority.

Senator Lott. Let me answer that. Maybe in the pure sense of
your question, the answer is yes, if you are trying to get us to
admit that we are not 100-percent pure as the driven so. Maybe so,
but the goal there was to try to have some reasonableness, some
responsible limits on excessive increases.

Mr. Levin. How about for larger business?

Senator LoTT. It is not a dollar amount; it is a percentage.

Mr. Levin. What?

Senator LoTT. It is not a dollar amount; it is a percentage. So
the percentage would be applicable to large and small, but, obvi-
ously, you are talking about a higher amount would be involved for
the larger ones.

Mr. Levin. Under your proposal, there is a 15-percent limit on
premiums for small business, but none for large.

Mr. Michel. I think, here again, you are going to have a transi-
tion period over a period of time. I understand the administration's

350

plan allows those employers with 5,000 employees or more to go
ahead and do your thing. Now, I look at my hometown industry of
Caterpillar, for example, and it has a health care plan that ranks
in the 96th percentile. It costs the company about $6,000 per em-
ployee.

Now, I will tell you, there are not very many businesses around
the country that can pay that. So you have got to accept that, that
there are going to be these wide variations, but I am not altogether
sure the best interests of the country are served by saying, "You
way up here and you way down here, all have to come to some uni-
form premium." I would like to see it flexible enough that we can
accommodate what we have to deal with currently and what we are
thinking about down the road apiece, whether it is 5 or 10 years
or whatever.

Senator LOTT. I understand, also, here that it may be because
that is where the gyrations occur in that area. You don't have as
much a fnovement up and down in the bigger business as you do
in that smaller area.

Mr. Levin. All right. My time is up.

Let's see. Mr. McDermott is next.

Mr. McDermott. Thank you, Mr. Chairman. I simply have one
question of the two witnesses. I appreciate your quoting the Hippo-
cratic Oath, the first line of which I used to think was "Primo non
escero * * *," which is, first of all, do no harm, and I think you
haven't done any harm. The question is how much good you have
done in the proposal you have made.

I want to ask a question that relates to something the President
has put on the table. I think we can talk about details here end-
lessly, but there really is a philosophical question that has to be
answered, and that is this. The President has said that any bill he
signs has to have universal coverage guaranteed, and I wonder how
you come down on that issue. Do you think it is a right of citizen-
ship in this country that you have health care or is it a function
of something related to your employment or something else? I
would like to hear your thinking on this issue.

Mr. Michel. My own personal feeling is I don't see anything in
the Constitution that guarantees me health care coverage as we
are talking about it today in specific terms. Now, there will be
those who will argue that point. I just have a philosophical feeling
that there are certain basic things guaranteed, life, liberty, and the
pursuit of happiness. Now, you can stretch that all out and say,
well, the pursuit of happiness means having the government take
care of all my doggone needs. Well, I can't get myself around to ac-
cepting that.

As for universal coverage, that may be our ultimate goal, but to
think that it is achievable within the immediate future, I cannot
conceive that we have got the capability to do that funding-wise.
In other words, what you are talking about, you are saying 15 to
20 percent of our population is the real target area, and I guess my
reluctance to saying let's do it immediately is that when we went
to that catastrophic health care bill, very limited in scope for the
terrible things that wipe out your home, property, farm, and every-
thing else, and when 80 percent of the people found out that, broth-
er, tney were going to have to pay a little bit more than what the

351

coverage was for themselves to provide for those who don't have it,
they rebel, and that was nominal.

What we are talking about here in the President's plan is not
nominal. These are drastic changes, and I think we better be very
well alert to the magnitude of the problem before we jump over the
cliff and cannot retrieve ourselves.

Senator LoTT. If I might respond briefly, I think it was unfortu-
nate that the President chose to whip out his pen and make that
kind of statement. We do that in Washington. Other presidents
have done it, Republican presidents. I have done it. You have done
it. We draw the line in the sand and say, "Dad gum it, if you cross
that line, the whole deal is blown up."

Look, I got one, too. If employer mandates are in there, I won't
vote for anything because I think it is just fundamentally the
wrong way to go, but, I mean, I don't think we ought to start off
by saying what we are not going to do.

That is why I like this proposal. Let's start off by saying what
can we come together and agree on, and let's work from tnere.

In direct answer to your question, I guess, again, it is a fun-
damental disagreement. It is probably why we are Republicans and
you are a Democrat. I do believe that every American has a right
to an equal opportunity to a job, food on the table, a house, medical
care, great football games, everything. Who pays for all this? What
about the right of my 26-year-old son to be able to keep some of
the rewards of the fruits of his labors? He works 60 hours a week.

Last year in the tax bill, we just raised the tax on the bonus he
gets which is basically what he really lives on, and now 45 percent
of his bonus is taken by the Federal Grovernment, and this is not
just rich people. These are people out there busting it because they
are given an incentive to work hard. Doesn't he have some rights?
How much is he as a young entrepreneur going to be asked to pay
so that everybody can have everything guaranteed to them by the
Federal Government? So I guess the answer is I agree to the right
to an equal opportunity, but I just don't think the government
should and can afford to just say, "We are going to give it to every-
body. Come on, don't worry about it."

Mr. McDkrmott. Let me just say I appreciate hyperbole, and I
didn't think I had promised everything to everybody. We are talk-
ing specifically about health care.

I think my real concern — and Mr. Michel you brought up the peo-
ple that I really worry about — those Caterpillar people. Those are
people who sat out there and negotiated benefits, and if there is
some kind of economic downturn, they are out on the streets of Pe-
oria and Aurora and a lot of other places without a job and no
health care, and they can be bankrupted.

I find it hard to think that if we focused on those who don't have
health insurance now, the debate becomes one kind of debate, but
if the debate is 80 percent or more in this country who are covered
by insurance, but could lose it tomorrow and be bankrupted the
next day by an illness or an injury, it seems to me that then it be-
comes a much different debate.

I think for you to say or for people who support you to say that
they don't care, they want just the opportunity for that Caterpillar
worker, "He lost his job. Well, that is too bad. I guess we don't care

352

what happens to him," I think that is not a political position that
is sustainable in a democracv. I think that Caterpillar worker
ought to have the guarantee tnat the President and the CBO said
is an entitlement.

I mean, I disagreed with them up to the point that CBO said it
is an entitlement. They changed the debate when they said that is
an entitlement. I think those Caterpillar workers ought to have
that. I am sure we will have a whole other debate on this.

Mr. Michel. The most urgent problem in our country today is
not the employees of the biggest companies in this country who vir-
tually have a guaranteed health plan and, in Caterpillar's case, a
guaranteed job for 6 years by name.

These are cases of negotiated contracts which are the envy of
many people on the outside.

I don't think that is the problem area for us nearly as much as
these poor devils out there who really are down and out and with-
out a job and the wherewithal to keep a family together.

Senator Lott. If I could also say, I appreciate y our hyperbole,
too, Mr. McDermott, but what I am worried about, I don't have
Caterpillar, but I have Engle Shipyard. My father was a pipefitter
and a shipyard union member, by the way, and I worried that the
Clinton plan or the single-payer plan is going to shift more costs
to the business and industry area and perhaps to the individuals
and people are going to lose their jobs, the low-end people.

The people out there working for my son, if his costs go up, he
is going to say, "Gee, guys, I am sorry about you. I would like to
help you, but this is just the final little straw that pushed you out
of a job." So I do worry about the jobs that could be lost as a result
of another mandate on business and industry.

Mr. McDermott. We will continue this session.

Thank you, Mr. Chairman.

Mr. Levin. Mr. Grandy.

Mr. Grandy. Thank you, Mr. Chairman.

Mr. Leader, as you know, I was on the Republican health care
task force that drafted H.R. 3080, and we completed our delibera-
tions and marked up and finished our work, I think, in September
of last year. Isn't that correct?

Mr. Michel. Yes.

Mr. Grandy. You pointed out that we now have 140 cosponsors
on this bill — 141. How many of them are Democrats?

Mr. Michel. I don't see a one.

Mr. Grandy. Are there any Senate Democrats on the bill, Sen-
ator Lott?

Senator Lott. No.

Mr. Grandy. I guess I would ask how do we get to where we
want to go if this is exclusively a Republican strategy. I mean, I
understand the criticisms that have been leveled against the Clin-
ton plan, and there have been several in front of this committee
and Energy and Commerce over the last couple of weeks, but I still
do not understand how we are going to move from an admittedly,
heavily regulated government-dense health care delivery system to
a series of market incentives that are embraced in H.R. 3080.

The reason I explore this line of questioning is because there is
apparently a new strategy that is now moving at least into some

353

of the Republican channels that has been advanced by, I think his
name is, William Krystal — he used to be with Senator and then-
Vice President Quayle — who is now advocating that we should de-
feat the coming Clinton-Cooper compromise.

Now, the other bill I am involved with is the Cooper bill or the
Cooper-Grandy bill, depending on what State you are running for
higher office in, and I was not aware of a Clinton-Cooper com-
promise. I don't think Congressman Cooper is, but, evidently, Mr.
Krystal has this to say about our side:

There are those Republicans prepared to argue that such a result involves no com-
promise of conviction. That means signing on with cither Cooper or Senator Chafee's
bill.

David Durenbergcr, for example, Cooper's only Republican cosponsor in the Sen-
ate and a cosponsor of the also very similar Chafee bill says that, "Republicans al-
ready have a winning strategy, and that strategy is managed competition, which he
calls a comprehensive vision consistent with Republican principles."

Senator Durenberger is wrong. Managed competition is not a Republican prin-
ciple. It is massive social regulation, precisely the kind of thing the Republican
Party should exist to oppose, and for Republicans to acquiesce or participate in its
enactment would bring us no credit and much shame.

Did I make a teirible mistake in lining up with Democrats to try
and build some kind of compromise between where the President
is and where we are, Mr. Leader? I mean, is Mrs. Johnson wrong
to be part of this group, and Mr. McMillan who is on the Energy
and Commerce Committee and the other 26 or 28 Republicans that
are trying to find some way to get from here to there? I mean, is
this a sell-out? Tell me. I mean, I am in a very serious Gk»vemor's
race back home. I need to know this for my political future. Leader.

I thought that finding some kind of solution here would bring
credit to this party, just the way helping the President solve the
NAFTA problem brought not only a dividend to the party, but to
the country, but I may be wrong here. If there is going to be a
strategy that moves through our conference that says trash every-
thing right of Cooper through Chafee and then the Nation will em-
brace H.R. 3080, I might have to turn in my pass.

Do these comments embrace your views. Leader?

Mr. Michel. Let me first take this opportunity to compliment
the gentleman on his contribution to our health task force. He was
there every day. The same was true for the gentlelady from Con-
necticut, Mrs. Johnson, as well as for Mr. McCrery and Mr. Thom-
as. You are all on the task force and did an outstanding job. The
task force met for an hour or so over a period of nearly 2 years,
and the contributions the gentleman from Iowa made specifically to
the deliberations of that task force were very noteworthy.

Initially, when we crafted what has turned out to be this basic
bill, we wanted to get as much support as we possibly could on our
side. I think there was an inhibition on the part of maybe some
Democrats who might have thought we have had some good things
to talk about because it was their President, a Democratic Presi-
dent carrying the initiative on this from the standpoint of the ad-
ministration, and that they would be rather reluctant to be pic-
tured in opposition to their President until they had more time to
sift it all out.

We are in a shake-out period right now. The gentleman has a
great deal of foresight, and I have no criticism of his having said,

354

"Look, I am not altogether sure that what we have crafted here
does everything I would like to see done. I would like to go a step
or two further. So I am certainly not going to condemn the gen-
tleman for having reached out as he had to those other tenets in
which he might feel comfortable, and that is how eventually around
here you get people moving toward a solution.

If we were back in the old days when the Speaker would say we
are going to debate this baby for 2 weeks on the floor, and we are
going to have an open rule, and we are going to give you all an
opportunity to amend the base bill, probably through alternatives
or substitutes with the opportunity for amendment to each, and
when an amendment is disposed of, you can come back with an-
other. Through that process, you work your way up to the top of
the pyramid and achieve a refined product that is basically a con-
sensus of all the House. Oh, I wish that day would return. That
would do credit for the institution probably more than anything
else. Then the gentleman, who does so well on his feet, would con-
vince members of his position in an effort to attract converts, and
eventually, we would get the best product.

Senator LOTT. Let m join in that, if I could, and respond to your
question.

Mr. Grandy. Gro ahead. Senator.

Senator Lott. When I had the pleasure of serving in the House
and serving as the Republican whip, we won a lot of victories in
the eighties, and we always had to do it with 40 or 50 or 60 Demo-
crats. I had a regular daily plan to work with Democrats and in-
clude Democrats in our strategy. That is how we won on important
budget votes and tax relief votes. So I certainly agree with that,
but you begin by getting your own troops together. You don't send
out scouts and start trying to put a package together until you get
your own act together, and I think that is what this bill does, H.R.
3080.

I will bet you, you can support everything that is in this H.R.
3080.

Mr. Grandy. I wrote a lot of what is in that. Senator. Of course,
I can.

Senator LoTT. So I think, at some point, we can use this as a
base, and we can see if there are other things that we can reach
out and do to improve it.

I don't know if you were here. Maybe you weren't, but I told you,
I flirted with everything in town including the Cooper package, but
I just could not bring myself to support it because there were some
fundamental things in there I didn't agree with.

Now, you are talking about cosponsors. I want to also point out
to you that the Cooper-Breaux package which you have signed
onto, in the Senate, it only has three cosponsors, only three, one
Republican and only two Democrats, other than John Breaux. So
that is not exactly much of a consensus in the Senate. I mean, all
we got to do is reach out and find one Democrat that will join up
with us, and I bet we can do that.

Mr. Grandy. I realize my time has expired. My question was not
philosophical. It is tactical. I don't understand how we are going to
get to our objective if we cut off our supply lines and begin trashing
the one bipartisan effort that now exists anywhere in the Congress.

355

I might point out it is also bicameral. Senator Chafee, who is sit-
ting behind you, knows that we have met regularly with his group
in an effective way to try and bridge some of the differences be-
tween our bill, which I think are slight, but nonetheless of concern.

I may be wrong, but I don't understand how we are going to win
the day by mustering our troops at the border and try to shoot
down everything that comes flying our way, but, again, I have not
been here as long as you gentlemen. So maybe there is something
that I don't know about grafting a compromise, but I don't think
it begins with scorched earth.

Thank you, Mr. Chairman.

Chairman Stark. Thank you.

Who is next? Mrs. Johnson. I am sorry.

Mrs. Johnson. Thank you, Mr. Chairman. Because there are
many other people to testify, I will keep my comments short. How-
ever, I did want to comment on the issue of rate constraints in our
proposal because I don't think it was quite clear to my colleague
from Michigan that the 15-percent constraints are reafjy between
groups, and that there are more serious constraints from year to
year, and that not only does our bill do that, Senator Bentsen's bill
also does that.

All of those who have thought seriously about insurance reform
and the industry have accepted that it is perfectly reasonable when
you are reforming insurance and eliminating the right to exclude
for preexisting conditions, guaranteeing that people can buy the
plan for the same prices as everyone else, guaranteeing that it will
be renewed, and that you also can guarantee that there will be
more modest rate fluctuations.

Certainly, we don't have to deal with this kind of issue with big
employers. They are big enough to bargain good deals for them-
selves, and their problems with rate increases have not been the
problems of the small market.

That brings me to the question that I want to pose to you gentle-
men. Both of you made the point that you are proposing very spe-
cific solutions to the problems that we see. We see the problem in
the small group market. We don't see a buying problem in the big
group market. The kind of work that you gentlemen have done rep-
resents very common sense solutions and very practical and very
forceful solutions to the real problems as we know them, but I
think as we go through the details, the overall view of how these
proposals will interact to control costs has been lost.

We really have two options before us. One group wants to say
government will control cost. Government will set prices. We will
have global budgets. We will take care of this, America. I think the
big generic difference here is that we think if government changes
the rules of the game and creates a different interaction of motiva-
tions and forces that cost will be controlled, and the pieces that vou
are proposing interact in such a way that costs will be controlled.

Now, it is true CBO has a hard time with this because, as we
know, they can't deal with changes in behavior, but I would like
you to talk a little bit about how your proposal does two things,
specifically controls costs and specifically increases access.

Mr. MiCHKL. On the access side of it, as I said, we are not man-
dating business and industry to pay for their plan, but you have

356

an obligation to offer a plan to your employees. There has got to
be something.

Mrs. Johnson. So you are going to have to do that educational
job that everyone needs done for them. Employers are going to
have to do that.

Mr. Michel. Right, and not all of them do, obviously, today. So
it has its leverage there by saying we expect you to consider this
a part of doing business today as offering some health care plan to
your employees.

Now, it has got to work in combination, however, with the insur-
ance industry out there that we don't condemn out of hand. I want
to keep the private sector still in the act. That is what it is all
about, private versus public, but they also have an obligation, too,
then to dovetail into what we are admonishing the employers to do,
and they have an obligation then to help those smaller employers
unable now to afford it, by putting together risk pools to stablize
the cost of insurance. I think that is the access one.

On the expenditure side, of course, we have talked here a little
bit about the doctors playing defensive medicine rather than offen-
sive medicine, and it comes by way of what has happened by the
kind of malpractice cases and all the rest, and we would like to
move in that area much more aggressively, so that we don't have
our doctors, dentists, and those professionals so burdened with the
kind of malpractice insurance premiums that they have got to pass
it onto the consumer.

Medical malpractice is one, but another one is in the antitrust
area. I have three hospitals in my home community and a teaching
school, the Peorie Med School. Our trust/antitrust laws today are
really standing in the way of a number of our hospitals moving to-
ward doing the kind of things they say could cut their cost, but
they are foreclosed because then they would be conniving with the
neighborhood hospitals. We will take this portion, you take that
portion, and we will take this one here and fill a void, and unless
we break that down to give them the opportunity to cooperate with
one another, it drives up costs, and that is one area where I think
we could be very helpful.

Mr. Levin Ipresidingl. Senator, if we are going to finish, so that
you can leave before the vote, why don't you answer briefiy, if that
is OK

Senator Lott. I will try to answer briefiy Nancy's question be-
cause I think the Leader covered it quite well.

Just one point. Even though my brother-in-law, who is a suing
lawyer, wouldn't like it, I do think that we could make significant
savings with real genuine medical malpractice reform.

Also in this package is improved access to community health
services. I talked particularly in my opening remarks about rural
access. We have got a lot of people who just can't get to it, and I
think the community health services, the migrant health centers
would help, as well as some of the rural emergency and transpor-
tation provisions.

Then, finally, I do think we improve substantially access by the
changes that allow employer-purchasing arrangements and chang-
ing IRS restrictions that now prohibit the ability to do what needs
to oe done, across State lines, for instance.

357

Mr. Levin. If it is all right, Mr. McCrery, why don't you inquire,
and if you take the 5 minutes, I think we can finish up the panel,
so, Mr. Leader, you can also go to vote. So Mr. McCrery will take
5 minutes, and then we will run together to vote.

Mr. McCrery. Thank you, Mr. Chairman, and thank you all for
appearing before a subcommittee this morning and giving excellent
testimony.

I did work with you, Mr. Leader, on the task force that came up
with this plan, and as you know, I have not yet cosponsored the
plan because I have been working on my own, and I kind of want
to get it introduced first, to put mv marker out there as to what
I thought was the best approach before I started cosponsoring other
approaches, but I can assure you, as soon as mine is introduced,
I will be cosponsoring your bill and probably a couple of others.

I just want to summarize for the subcommittee the good things,
the positive things that you do in your bill because I think there
are many, and they ought not be overlooked.

You have antitrust reform which can be a powerful incentive to
control cost in the provider community. You do have rural health
care incentives which will help get access for folks out in the rural
areas of our country.

You have medical malpractice reform. I do disagree with one part
of your medical malpractice reform, and that is caps on attorney's
fees. Philosophically, I am just opposed to telling people what they
can make, regardless of whether they are doctors or lawyers, but
it is a good medical malpractice reform section.

You do a lot of insurance reform which gets at some of the prac-
tical problems that people have in this country for getting coverage.
For example, you do away with preexisting conditions clauses. You
guarantee renewability. You limit premium increases for those peo-
ple who get sick, and you increase the portability of insurance in
this country.

You also provide greater access to the system by giving tax de-
ductibility to the self-employed and not only the self-employed, but
to individuals who don't have insurance provided by their employ-
ers. That is a huge incentive for folks to get into the system, get
into the health insurance system.

So you have a lot of good things in this bill, and I agree with
Senator Lott, this is a place where we ought to start. We ought to
agree that these are things that we all can agree on and do now
and get people in this country a little security in the health are
system.

So I congratulate you for this effort. It is a great building block,
and I am looking forward to working with you and the Senate side
in crafting something this year that will give some folks some relief
in this country.

Senator LOTT. Best question of the day, I thought.

Mr. Michel. Mr. McCrery, if I might just briefly respond.

Mr. McCrery. Sure, Mr. Leader.

Mr. Michel. Not to respond, but to take the opportunity to com-
pliment you, too, on what you did on that task force, I just noticed
the summation of what you are proposing now and will look with
interest upon that, but you have always been one of those more
thoughtful Members who said, "Hey, I want to check this all out.

358

I might have a few views of my own," and I think that is the spirit
in which we have got to address this entire problem. With the time
that you have devoted to the subject matter, I would surely want
to give second and third thoughts to what you are proposing be-
cause they usually come from a pretty doggone sound mind, and we
will be happy to take those into consideration.

Mr. McCrery. Thank vou, Mr. Leader.

Mr. Michel. I thank tne chairman, too, for the time you have ac-
corded both Senator Lott and myself.

Mr. Levin [presiding]. Thank you. It has been our privilege, Sen-
ator. Glad you were here. Welcome back.

Senator LoTT. Glad to be back.

Mr. Levin. Now, you can go back to the luxurious quarters on
the other side. Say hello to a friend of mine over there.

Senator Lott. I will.

Mr. Levin. Senator Chafee, why don't you take the witness chair.
I think Mr. Stark will be here in 1 second. We know that you have
some rigorous time limits. The minute he gets here, we will start.
Let me go and vote, but he should be here any second.

Look who is here. What timing.

Chairman Stark. John, we will just start, and as the others on
the panel return — and if you have to leave before we have com-
pleted inquiry, that is fine.

I will now recognize our good friend, the Senator from Rhode Is-
land, John Chafee, with whom this subcommittee has worked, at
least on the 9 years I have chaired it, on the other side of the Cap-
itol on a variety of Medicare and health issues. We have worked
closely and have a great relationship.

I welcome you. You will be joined at the completion of this vote
by our ranking member. Bill Thomas; Hon. Nancy Johnson from
Connecticut; another member of the subcommittee, Hon. Fred
Grandy; Mr. L.F. Payne, another member of the full Ways and
Means Committee; Congressman Cliff Stearns; and Senator Nick-
les, if he is able, because of a previous engagement, to join in the
group.

Senator, why don't you proceed. Your prepared statement will
appear in the record in its entirety, and if you would like to en-
lighten us or expand on your testimony, why don't you proceed in
any manner that you are comfortable.

I recognize that our first panel went longer than was anticipated,
and we appreciate your patience. I understand that you have a
pressing engagement that you have put on hold, and if you have
to leave before the full panel has completed their testimony, we
will certainly understand.

STATEMENT OF HON. JOHN H. CHAFEE, A U.S. SENATOR FROM
THE STATE OF RHODE ISLAND

Senator Chafee. Thank you very much, Mr. Chairman. Before I
start, I want to say how much I have enjoyed my relationship with
you over these many years as we have worked on Medicare. Those
sessions have gone late into the morning, the early hours of the
morning. I think we have been at it 2:30, 3, and 4 o'clock in the
morning, and it has always been a treat to work with you. I don't

359

think anybody has better credentials than you do in the field of
health care.

Chairman Stark. I hope my wife is listening. I am never sure
she has really believed that.

Senator Chafee. Well, I can guarantee to her where you were in
many of those late nights. We were together in the Capitol and var-
ious committee rooms around here.

Mr. Chairman, I won't go through the similarities that exist in
the plan that we have, the ones that you are familiar with, insur-
ance market reform, antitrust reform, reforming medical liability,
increasing funds for essential community providers, like the com-
munity health centers, cutting administrative cost, making health
insurance deductible.

What I would like to touch on are some of the fundamental dif-
ferences that exist between our plan and the Clinton plan. First,
let me say I want to credit the administration. President Clinton
and Mrs. Clinton, for bringing all of this up to the front burner.
But for what they have done, we wouldn't be where we are now in
discussing health care. So both the President and Mrs. Clinton de-
serve a lot of credit.

While there are many, many features that are similar, I'll touch
on those and first touch on some of the major differences.

Our proposal does allow for the establishment of private group
purchasing organizations, but we don't establish a single manda-
tory health alliance controlled by the Federal Government and the
States as called for in the administration's proposal.

For example, in my State, we don't have any businesses with
more than 5,000 employees except possibly Brown University and
the Rhode Island Hospital. Outside of that, nobody works for a
company that big. So every man, woman, and child in our State
would be required to purchase health insurance through an alli-
ance. We have great concerns about them, and we really don't
think that they can simultaneously enforce all of these new regula-
tions and at the same time be responsive to the needs of the
consumer.

Chairman Stark. If the Senator would yield, my guess is that
there aren't the votes in the House to create them. I have yet to
find anybody who wants them, and I would certainly join with you
in that. There have got to be simpler ways to do this, and there
has got to be a more flexible way. So I think you are quite right
on that point.

Senator Chafee. All right. So I am on a roll here, Mr. Chairman.

My second point is that our proposal does not contain the backup
insurance premium caps. We believe that the substantial insurance
reforms we provided for and changed incentives will stem the
growth of health care cost.

As you and I know, we have worked on this together so many
times. The Federal Government hasn't had a great deal of success
in trying to regulate prices. As you know from the reconciliation
conferences we have been on, the troubles that come with trying
to micro manage payments to health care providers, for every price
we set, we face a host of requests for exceptions. There are excep-
tions to the DRGs. There are exceptions to the RBRVS, physician
reimbursement scales that we have worked on. So I don't have

360

much faith that we can set premiums in such a way to ensure that
the goal of health care reform can be achieved.

The third thing is we do not create, and to use the Hngo of the
trade, we don't have an employer mandate. We have an individual
mandate, and we don't have the complicated system of discounts or
subsidies envisioned in the administration's proposal. My written
statement goes into a little detail on that.

Last, we do have compelling differences between our proposal re-
garding new Federal obligations. As you know, there are new enti-
tlements in this program, whether it is a entitlement for early re-
tirees or an entitlement for everybody getting covered very, very
quickly.

I want to state very clearly that our bill provides for universal
coverage. I agree with the President on that. I think it is an abso-
lute necessity. You are not going to get control of the cost of health
care in the United States in my judgment without universal cov-
erage.

[The prepared statement follows:!

361

Testimony by Senator John H. Chafee

Before the House Ways and Means Subcommittee on Health

February 10, 1994

Mr. Chairman and Members of the Committee, thank you for giving me
the opportunity to discuss the Health Equity and Access Reform Today
(HEART) Act. I believe that most of us in Congress share the President's
same basic goals with respect to health care reform. We want to slow the
rate of growth in health care costs, and ensure that all Americans have
high quality and affordable health care coverage.

There are many similarities between the legislation that
Representative Thomas and I have introduced, the many other proposals
under consideration, and the President's proposal. These similarities
include such things as reforming the private insurance system; changing
antitrust laws; reforming medical liability; increasing funding to
essential community providers - such as Community Health Centers;
providing subsidies to low-income individuals; cutting administrative
costs; making certain that health insurance is deductible, and focusing on
primary and preventive care.

These similarities serve as an important starting point for health
care reform. I do not believe, however, that they alone will solve our
health care problems. Without universal health insurance coverage, the
ability to control rising health care costs will continue to elude
individuals, providers, businesses and government - especially the
federal government.

There are some fundamental differences between our legislation and
the proposal put forward by President Clinton.

First, although our proposal does allow for the establishment of
private group purchasing organizations, we do not establish a single
mandatory health alliance controlled by the federal government and the
states, as called for in the Administration's proposal. Under that bill, for
example, in my home state of Rhode Island, where there is no business

362

with greater than 5,000 employees, every man, woman and child would be
required to purchase health insurance through an Alliance.

We have great concerns about the ability of such a powerful entity
both to enforce new regulation and simultaneously respond to the needs
of consumers. Thus, in our proposal, system reforms are accomplished
without the mandatory alliance structure.

Second, our proposal does not contain "back up" insurance premium
caps such as are established under the Administration's proposal. We
believe that substantial insurance reforms and changed incentives for
providers and consumers will stem the rate of growth in health care
costs.

We have not had much success in regulating prices in this country.
Those of you who have served, as I have, on budget reconciliation
conference committees, have witnessed firsthand the headaches
associated with micromanaging payments to health care providers. For
every price we set or regulation we impose, we face a host of requests for
exceptions.

When we established Medicare DRG's the intent was to move toward
a national rate for each procedure. Yet, each year we have moved farther
away from that goal by varying the updates based on types and locations
of hospitals.

Even the concept of the Resource Based Relative Value Scale, for
Medicare physician reimbursement, did not survive in its original
structure, and thus is still based in part on historical charges rather than
the value of the service and actual practice costs.

Based upon my experience, I have little faith that we can set
premiums in such a way as to ensure that the goal of health reform jcan be
achieved.

Third, we do not create an employer obligation to pay 80% of the
high insurance premium -- a provision that looks remarkably similar to a
new payroll tax. Nor do we create the complicated system of discounts or

363

subsidies envisioned in the Administration proposal. While at first glance
such a requirement seems politically popular, upon closer examination it
looks much less enticing.

Most economists agree that such an employer contribution is passed
on to employees through lower wages and fewer jobs, and perhaps in
higher prices for consumer goods. Indeed, organized labor is quick to say
that it has for many years negotiated health benefit expansions in lieu of
wage increases. If one agreed with that argument, why go through the
process of creating such a massive system of alliances and employment
based subsidies, when a simple and direct system of individual and family
subsidies can be created that will target federal assistance to those most
in need?

Last, and perhaps the most compelling difference between our
proposals is our approach to new federal obligations. The Administration
has chosen to propose massive new federal spending and to promise new
entitlements to a wide group of individuals - not only the uninsured --
with no guarantee that the savings will accrue to pay for them.

Our proposal, on the other hand, contains an annual assessment of
our progress and an automatic mechanism for adjustments. If we are
right about reform, spending and savings will go into effect smoothly, but
if we are wrong, our proposal forces us to make immediate adjustments or
the phase-in of vouchers will automatically be scaled back.

We have heard CBO's testimony. We believe that our approach is the
only one that can lead to a truly reformed system -- one in which
currently distorted relationships are repaired and the potential for the
creation of new distortions is minimal.

What the CBO has made very clear is that any estimate of
comprehensive reform is only as good as the assumptions made by those
doing the estimating. Today, those assumptions can only be based on
historical patterns -- the very patterns we intend to turn upside down!

364

Thus, the only way to ensure that we do not bankrupt our children, is
to impose a system of annual review with serious ramifications if action
is needed, but not taken.

In closing, let me emphasize that I believe it is possible for
Congress to enact comprehensive health care reform this year. In the
history of the health care reform debate, the various factions have never
been closer. With good faith and hard work we can achieve what so many
before us have tried and failed to bring about-- enactment and
implementation of responsible health reform.

I look forward to working with my colleagues in the House and
Senate, as well as with the Administration, to enact a health care reform
bill that will achieve the goals of slowing the rate of growth in health
care costs, and ensuring universal health insurance coverage. Thank you,
Mr. Chairman.

365

Chairman Stark. I will take a little advantage here until the
rest return. Let me state my concern with your universal coverage,
Senator. Dependent on the savings, early on in your statement, you
S£iid we haven't had much luck in getting the savings. So I am un-
willing to leave that to chance. That may be my fault that I haven't
been able to get the savings, and maybe it is important in some of
the savings plans that you have had, but I am unwilling to tell the
American people that they will have coverage which is what I want
to do, the President's bottom line, unless I can go down the line
and over 5 years find the money to pay for it.

Let me ask you just a question, quickly, on one of the things in
which we do agree, and that is in the area of insurance reiorm,
while the rest of your panel is getting their seats.

On the community rating, could you just briefly for me outline
what you would do. Would you let them rate by age band? Would
you let them rate by community? Would you phase in or how quick-
ly would you move? Could you just give me a quick summary of
how you see that.

Senator Chafee. We do allow for an age band. Outside of that
is total community rating.

Chairman Stark. Yes.

Senator Chafee. So that is there, and why do we have it? We
believe that it is important to have that difference between the
younger group and the older group.

Chairman Stark. Let me leave you with one problem, and you
could perhaps respond to me later. I, like you, want to see open en-
rollment, no medical underwriting, and community rating. Here is
the problem I see with the age rating. There will be some folks who
could; say, an employer with a group of 20-year-olds. They could
run for 10 years in a self-insured plan under your bill or buy it
from the insurance company and then suddenly abandon their
plan.

In a full community rating without age, the younger people
would pay more than the average and older people less, but the
younger people would in effect be paying into a reserve fund that
would keep their premium lower. Let's say 40 is the median age
for a rating. So, from 40 to 65, they would pay a little less, from
20 to 40, they would pay a little more, and I am afraid that a big
plan might quit when its average employers got older.

Say, a computer company that starts with 20-year-olds, they go
for 10 or 15 years. They quit and dump their responsibility either
onto another insurer or if there is a Federal backup plan, and I am
not quite sure how we could push these self-insured people to com-
pensate or they might get an advantage, and you can stew on that
a little. The insurance companies aren't quite sure, and if you get
an idea how we could deal with that, it could make this age band-
ing more fair. I will leave you with that.

Mr. McDermott. Would the gentleman yield just to have a clari-
fication while I think about your proposal?

What is the age at which you think there should be a break? Is
it at 40 or 45 or where does the age band start?

Senator Chaeee. The NAIC, we have asked them to recommend
an age band.

Mr. McDermott. Thank you.

366

Chairman Stark. Now that the rest of the panel is here, I apolo-
gize. We were just trying to accommodate Senator Chafee.

Senator Chafee. By the way, the variance would be 20 percent
to start with, maximum variance, and then come down to 10 per-
cent at the end of 5 years.

Mr. Chairman, you were kind enough to note that I had this firm
commitment, and I apologize.

Chairman Stark. Please, John.

Senator Chafee. I am glad that Mr. Thomas is here, and we
have got some good backup folks who can help out.

Chairman Stark. Bill doesn't know all of the tough questions
you have laid out before us that he is going to have to answer. So
we will let you sneak away.

Senator Chafee. Well, I wish you would rephrase it in a dif-
ferent way than that, Mr. Chairman.

Chairman Stark. Thanks very much for your patience. We ap-
preciate it. Senator.

We are just going to take our colleagues in order.

Mr. McDermott. Mr. Chairman? Senator Chafee, I have been on
panels with him. He doesn't sneak away. He will stand and fight.

Chairman Stark. We are now proud to recognize our ranking
member, Hon. Bill Thomas who we can follow on with Senator
Chafee's testimony on the Thomas-Chafee bill.

STATEMENT OF HON. BILL THOMAS, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF CALIFORNIA

Mr. Thomas. Thank you, Mr. Chairman. That is H.R. 3704 over
here, and I do want to note that now is a good time to begin look-
ing at specifics and alternatives because I keep reading literature
which indicates that the Chafee-Thomas bill or the Thomas-Chafee
bill and the Cooper-Grandy bill are so much alike.

I think you will find that in secondary areas, there are a lot of
bills that are alike in terms of areas that people think should be
dealt with at the Federal level in terms of malpractice, antitrust,
administrative reform, small group insurance reform, and a num-
ber of other areas in which I think most bills address those con-
cerns, unless they want to take it all the way fi-om the private sec-
tor and give it to the government.

For someone to say there are not significant differences between
my approach and that of the gentleman from Tennessee and Iowa
is to, one, either indicate your ignorance that you haven't read the
bills, or, two, for political purposes, they are very anxious to lump
them together.

There are two fundamental principles in the Chafee-Thomas leg-
islation which I think should not be ignored and, frankly, cannot
be ignored now after the CBO testimony. One is that I concluded
that this debate has reached a point in the American society that
there has to be universal coverage. I believe we provide universal
coverage. We provide it in a way that the President today thinks
probably is far more attractive than he did a week ago, prior to the
CBO announcement, for obvious reasons and for the reason being
it is reasonably funded in a way in which it will not have a nega-
tive deficit impact.

367

In addition to that, we do not impose by government edict a new,
novel, academically approved restructuring of the health care deliv-
ery system. We, of course, provide for purchasing cooperatives, be-
lieve that they are new and novel ideas, notice that they are attrac-
tive to a number of regents, but do not believe that by government
edict they ought to be awarded the status of winner.

We, as we have done in California, allow for purchasing coopera-
tives, but, with the other changes that have been made, create a
far more competitive marketplace and say that if, in fact, they are
destined to be the primary structure, they should achieve it
through the marketplace and not through government edict.

The other thing, I think, that we have to do after the CBO pro-
nouncement is to begin to understand that we have got to look at
solutions to problems for the mid-1990s, not to the late 1980s.

The Department of Labor has just recently released statistics
that show in 1990 the medical price inflation rate was 9.6 percent.
In 1991, it went to 7.9 percent. In 1992, it went to 6.6 percent. Just
this last fiscal year 1993, it was at 5.4 percent. You cannot deny
that trend. In fact, in December 1993, it was at 4.4 percent.

I think what you are finding is that, based upon the changes
made in the States and changes made in the private sector to the
increased cost for health insurance, under the rules that we have
allowed, you have seen some long-term structure changes.

Dr. Stu Altman and I had a discussion in front of this committee
about whether or not these changes were, in fact, structural. He
tended to agree with me that he believed that these changes were
structural and that we need to make additional changes to improve
the structural changes that are attempting to take place out in the
private sector and at the State level.

One of the things I think we should not do is to say that we need
to fundamentally change the structure when all that has occurred
out there over the last decade is that people have been playing
under the rules that we have laid down. I think it is fundamentally
unfair to complain that insurers, third-party payers, and those who
get to write off any and all cost of insurance should now give up
the opportunity to he creative under a new set of rules and let the
government run the program.

I had hoped and tried and lost by two votes on this panel in 1983
to cap ft-inge benefits. Had we done so at that time, I believe a dis-
cipline would have taken place which would not have created the
enormous increases in costs in the late 1980s. We still need to do
that, in my opinion. We have got to talk about making changes in
the insurance industry, so that the new rules will allow all to par-
ticipate.

Finally, let me say that when you come to financing, the Chafee-
Thomas proposal, I think, is probably the most prudent one
around. I think you will find that CBO will, in examining our bill
when they finally give us the report, clearly indicate that, as op-
posed to the President's bill, we will not have a negative impact on
the deficit. It is written in such a way that cannot have a negative
impact on the deficit.

If you will examine the tax cap as we have incorporated it in this
legislation, based upon the last Congress' bill that I introduced to
the Joint Teix Committee's analysis, the kind of tax cap that we

368

propose will not only bring about some cost control and discipline,
but it will provide sufficient revenue to provide 100-percent deduct-
ibility under the cap for the self-employed, something we have tried
to do repeatedly, but haven't been able to find the money for. In
addition, it will cover the costs of all people who now pay for their
insurance when the employer does not contribute up to the tax cap.

Beyond that, the Joint Tax Analysis indicated that there was
about more than $7 billion available to begin the process of issuing
vouchers to those individuals, beginning at 90 percent of the pov-
erty level and working up through the year 2005 to 240 percent of
the poverty level, partially funded by the reduction in Medicare
from a 12 percent a year increase to a 7 percent a year increase
over that 10-year period. This would create, in fact, universal cov-
erage through the individual mandate, fully financed, without a
negative impact on the deficit.

I think those proposals clearly structure a bill significantly dif-
ferent than Cooper-Grandy in its scope, in its content, and in its
financing, and that, Mr. Chairman, I think is a significant dif-
ference, and I thank the gentleman.

[The prepared statement follows:]

369

statement of the Honorable

BILL THOMAS

Member o£ Congress, 21st District of California

before the

Committee on Ways and Means

Subcommittee on Health

February 10, 1994

Mr. Chairman, thank you for this opportunity to address the
Subcommittee today along with my good friend Senator Chafee. The
President has challenged this Congress to pass a health care
reform bill that will provide universal coverage to every
American and slow the growth in health care costs. I am pleased
to present to the Subcommittee the bill introduced by myself in
the House, H.R. 3704, and introduced by Senator Chafee in the
Senate, S. 1770, which would accomplish both of these goals over
a reasonable period of time and in a rational manner.

The Chaf ee/Thomas bill requires that, beginning in the year
2005, every citizen of the United States must be covered, at
least at the minimum benefit level, by a health insurance plan.
In order to assist low- income individuals and families to meet
this requirement, the bill provides vouchers to those with an
income up to 240% of the poverty line, on a sliding scale based
on ability to pay, with those at the poverty level receiving a
100% subsidy for the basic benefit package.

In addition to the individual mandate and the federal buy
down for low-income individuals and families, the Chafee/Thomas
bill includes several other crucially needed, and widely
accepted, reforms to the health care system to ensure that every
person in the United States has access to quality health care.
The Chafee/Thomas bill would:

1 . Prohibit insurance companies from excluding people with
a preexisting condition from coverage and guarantee
renewability of coverage.

2. Require all employers to provide information to their
employees on basic benefit packages that are available
in their health care area and deduct any premiums from
their checks .

3. Encourage the development of voluntary purchasing
cooperatives, of which there can be more than one, in
the health care areas developed by the States.

4. Extend 100% deductibility of health insurance costs to
both the self-employed and the individual who must pay
all or part their own insurance premiums.

370

6. Give States flexibility to reform their Medicaid
programs, allowing them to cover more people with the
same or fewer dollars.

7. Develop and expand programs to increase the number of
primary care physicians and improve access to quality
health care services in underserved rural and urban
areas .

The Chaf ee/Thomas bill will result in universal coverage,
but the approach differs from the President's in two major
aspects .

First, the Chaf ee/Thomas bill would not create a new federal
bureaucracy to enforce another mandate on American business. Not
only is an employer mandate an onerous requirement on low-wage
companies, it is an inefficient way to provide assistance to
those who currently do not have insurance.

As proposed by the President, the employer mandate would
require a new structure be established in the Department of Labor
to enforce the requirement on business. In addition, as this
Subcommittee has heard from several economists, it is not the
employer but the employee who ends up paying for the mandate
through lower wages. This was echoed by the Congressional Budget
Office in their report on the President's plan. Proponents of
the Chaf ee/Thomas believe that it is more efficient, more cost-
effective and more honest to require the employee to have
insurance and then provide assistance directly to those who need
it, instead of funneling that assistance through a smoke screen
of employer regulations and subsidies to businesses.

Second, the Chaf ee/Thomas bill would attain universal
coverage in a manner which ensures that the program will not add
to the federal budget deficit. When the First Lady testified
before the Ways and Means Committee last year, I asked her
whether she would accept a provision which would require that the
budget cuts in the President's plan be realized before additional
benefits are provided. Her answer, in essence, was "NO." As we
heard on Tuesday during the testimony of Dr. Reischauer on the
Congressional Budget Office report on cost estimates of the
President's plan, during the six-year period beginning fiscal
year 1995, the plan will increase the deficit by $70 billion, and
that is assuming that Congress will have the political fortitude
to enforce the strict premium caps and implement the Draconian

371

cuts in Medicare and Medicaid. Health care reform must be
fiscally responsible or it has the potential of bankrupting
future generations.

The Chafee/Thomas proposal, on the other hand, is fiscally-
responsible. It would require that specified reductions in
Medicare and Medicaid spending -- the reductions are far less
than those proposed in the President's plan -- are realized
before the vouchers are phased- in. It also includes a cap on the
deductibility of health insurance costs, which is set at a level
which still provides consumer choice, to cover the cost of
providing a 100% deduction to self-employed workers and
individuals who must pay all or part of their health care
premiums .

Aside from reducing federal tax expenditures, the tax cap
also creates discipline within the health care system to reduce
costs. Currently, with an unlimited amount of health insurance
costs that can be deducted by the business and excluded from
income by the employee, there is no incentive to prioritize
health care needs and negotiate the best rt = possible. A tax
cap would force employees and employers to think more about what
they want in their health care package and what they are willing
to pay.

The Chafee/Thomas bill also includes several other
provisions designed to reduce the growth of health care spending
in the United States. Although the current downward trend in
medical-care price increases is a positive sign and demonstrates
that the strict cost control measures included in the President ' s
plan are unnecessary, it does not mean that further cuts in
wasteful spending are unnecessary.

First, the Chafee/Thomas bill would eliminate excessive
regulations and unnecessary paperwork, which greatly increase the
cost of providing health care in the current system. The bill
would standardize claim forms, preempt state laws which hinder
the electronic transmission of claims and other records and
provide consumers with information on the comparative value of
medical services.

Each of these provisions would streamline the provision of

372

care in the United States, thus saving providers and consumers
millions of dollars every year.

Second, the Chafee/Thomas bill would provide an exemption
from antitrust laws to providers who enter into a joint venture
to increase efficiencies, expand access, reduce costs and
eliminate excess capacity, or share high technology equipment or
medical services. Such an exemption, which is more expansive
than that included in the President's plan, would enable
providers to coordinate efforts to provide the highest quality of
care in the most cost-effective manner to all areas of the United
States.

Third, the Chafee/Thomas bill would discourage frivolous
malpractice claims, limit malpractice awards and eliminate the
need for defensive medicine, all of which add unnecessarily to
the cost of health care in the United States. This is achieved
by requiring the use of an alternative dispute resolution system,
capping noneconomic damages, limiting contingency fees, limiting
liability to participation in the harmful act and directing
punitive damages to the State for the purpose of reducing medical
malpractice. Once again, these reforms go beyond those proposed
by the President but they go to the heart of the problem and are
long overdue .

Fourth, fraud continues to be a growing problem in our
health care system. Billions of dollars each year are
fraudulently billed to insurance companies and taken from
consumers. Current law is not adequate to prevent fraudulent
activity.

The Chafee/Thomas bill would enhance the Federal Bureau of
Investigation and the Inspector General's office at the
Department of Health and Human Services to detect and investigate
fraud and the bill protects whistleblowers . The bill also
permits private insurers to deny reimbursement to providers who
commit fraud, just as the government does, and allows for the
forfeiture, after conviction, of property either involved in a
health care fraud scheme or obtained with the proceeds of such a
scheme. These reforms would greatly reduce health care fraud in
the United States, and they can be passed today.

373

Finally, the Chaf ee/Thomas bill provides consumers with the
option of opening a medical savings account, known as a MediSave
account. These accounts would allow consumers to make the health
care spending choices they and their doctor believe are most
cost-effective. They also reward consumers who use health care
dollars prudently by allowing them to rollover any leftover funds
in the account to the next year.

The most crucial element to controlling costs in the health
care system is to get the consumer more involved. In this
assertion we are in firm opposition to the single payer advocates
who want access to the tax base to provide care to all with
little or no discipline to use the health care system prudently.
The current threshold question of "Will my insurance cover the
procedure?" must be replaced by informed dialogue between the
patient and their doctor about the efficacy and cost of the
procedure. MediSave accounts, as well as the cap on the
deductibility and exdludibility of health insurance premiums,
will force consumers to be more informed and participatory in
their health care decisions, thus reducing health care costs.

The access and cost control provisions in the Chafee/Thomas
bill are designed to address the problems currently found in our
health care system, not the ones found in the health care system
of the late-1980s. These reforms can be accomplished now,
bringing much-needed relief to American consumers, and I urge the
Subcommittee to pass this legislation and send it to the
President for his signature.

374

Chairman Stark. I thank the gentleman.

We are pleased now to recognize one member of the subcommit-
tee, two members of the fiill committee, Hon. Lewis F. Payne from
Virginia, and Hon. Fred Grandy of Iowa, and I will let you all de-
cide among you as to which one would like to go first.

STATEMENT OF HON. FRED GRANDY, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF IOWA

Mr. Grandy. Mr. Chairman, I lost the toss. So I will go first.

Chairman Stark. All right.

Mr. Grandy. Mr. Chairman, let me begin by asking the Chair for
the opportunity to include a complete text of my remarks in the
record of this hearing.

Chairman Stark. Without objection, all witnesses today will
have their prepared remarks and any supplemental material ap-
pear in the record in its entirety.

Mr. Grandy. Thank you, Mr. Chairman. I am going to also in-
clude an editorial by Robert J. Samuel son in the February 2nd edi-
tion of The Washington Post, the title of which is the dishonest and
nasty health debate, and I just wanted to begin by reading a para-
graph of that, because I think to some degree, we have allowed the
debate to overwhelm perhaps some of the substance of our delib-
erations on health care, but let me just begin with this because I
think this is a problem that all of us who are in the health care
vineyards right now, whether we support the Cooper-Grandy bill or
the Chafee-Thomas bill or any of the alternatives, have to reckon
with.

Mr. Samuelson says the following. He says:

Both Clinton and his critics skirt the real problem. Most Americans express far
more from the medical system than it can deliver. In general, we think people
should have good care when they need it, cost should be no bar, insurance should
pay. The issue is a moral one, but naturally we don't want soaring insurance cost
to raise our taxes or depress our salaries. All of these are worthy goals, but, unfortu-
nately, contradictory ones.

And that is the point that I think we should begin with here, Mr.
Chairman, is the bottom line for lawmakers and politicians who
are trying to come to some kind of compromise on this, if indeed
we are.

Basically, we have to deal with an American electorate that is all
for health care reform as long as we don't change anything, and
clearly there is not a bill out there that is not involved in some
amount of behavioral modification, and I think that we have to own
up at the beginning that if we are going to undertake this kind of
social engineering, either in a large degree or a smaller degree,
there are some changes that people probably will find objectionable
even if they don't fully understand them.

I would point out that when Dr. McDermott was querying the
minority leader about his plan, we were again reengaging the de-
bate about whether health care is a right versus a responsibility.
I am not sure that debate serves this committee or Energy or Com-
merce or Education and Labor or any of the committees that will
have a large piece of the markup.

I think we all acknowledge if we are in this for the long run, that
is, a combination of both and finding the right mix of individual re-

375

sponsibility, and citizen right to at least access health care is
where the compromise will come down.

I would also just also say that no matter whether we are sup-
porters of single payer, a la McDermott-Wellstone, or whether we
move to the opposite end of the spectrum and believe that we can
solve our health care problems through the Tax Code, like Senator
Gramm believes, we are all trying to solve one equation, and that
basically is cost plus access to health care plus quality must equal
value. If the American doesn't want it, they will reject this com-
promise as quickly as they rejected the catastrophic bill of a few
years back.

So let me begin now with kind of excerpting my testimony, and
then I will yield to my colleague, Mr. Payne, who is one of the early
cosponsors of the Managed Competition Act.

We are here to provide an overview of the health care legislation,
I have cosponsored with a diverse coalition of 57 of my colleagues,
including Representative Jim Cooper, who is the author of the bill,
and 5 other members of this committee; principally, Mr. Payne,
Mrs. Johnson, Mr. Andrews, Mr. Houghton, and Mr. Camp.

The official title of the legislation is the Managed Competition
Act of 1993, and it remains the only comprehensive bipartisan
health care reform proposal before either body of the House.

As you know by now, Mr. Chairman, the Managed Competition
Act is a market-based approach to health care reform. It guaran-
tees universal access to high-quality, affordable health care, and
like the President's proposal, the Managed Competition Act builds
off of what works in the current system and reforms the chronic
problems that have plagued our system for too long. Most impor-
tantly, like the President's plan, the Managed Competition Act en-
sures that every American will have access to a private health care
sector plan.

I would like to begin, though, by addressing up front this criti-
cism that has been leveled against our bill about whether or not
we are for or provide universal coverage. Everybody who is out
here, I think is working toward the goal of universal coverage, and
I believe that the universal access mechanism that is embodied in
the Managed Competition Act is the best means of achieving that
end. In other words, it is the best way to kind of reconcile the
public's right to access to health care and an individual's respon-
sibility to purchase it.

So the whole discussion of access versus coverage, I think is a
question of semantics. It is more a discussion of timetables and
how we get to universal coverage, and the Managed Competition
Act uses a different mechanism than the administration to achieve
universal coverage, but I believe we share the same underlying
goal, and as I am sure you are aware, that goal is now embraced
by, among others, the Business Roundtable, National Grovernors
Association, and other groups that have come forward.

Let me talk about some of the specific components in the Man-
aged Competition Act. In many instances, these will correspond to
proposals you have already heard today.

One is insurance reforms that will encourage insurers and pro-
viders to combine and form accountable health plans. Accountable
health plans will not be allowed to exclude coverage of preexisting

376

conditions and will not be allowed to charge higher rates based on
an individual's medical history.

I don't think there is a health plan out there that doesn't do that,
but I think we should also be mindful that that alone would raise
cost.

Two is access provisions which will ensure individuals' and small
businesses' affordable coverage by joining health plan purchasing
cooperatives. These cooperatives will offer group rates with lower
administrative costs, and once a year, individuals will be able to
choose from a menu of AHPs in the area, much like the current
Federal Employee Health Benefits plan. As I am sure you are
aware by now, those purchasing cooperatives are mandatory for
employers with fewer than 100 individuals.

Three is provisions to change the incentives in the system for
"more money for more services," fee-for-service, in other words, in
which health plans are prepaid, so they will have incentives to pro-
mote preventive care, which eliminates unnecessary tests and inef-
fective treatments, and which reduces administrative costs. Be-
cause accountable health plans will be required to provide informa-
tion on health outcomes and beneficiary satisfaction, they will be
driven to improve quality.

The other thing I want to stress here is that for every procedure
that you would avail yourself under, under the Managed Competi-
tion Act, there would be some kind of copay, no matter whether
you are an upper-income individual or somebody just coming off
AFDC. The only exception we make here, Mr. Chairman, is for
what we consider preventive or wellness kinds of treatment,
colorectal screenings, mammograms, immunizations, those we try
to create an incentive for by not requiring a copayment. Again, one
of the common goals that I think is shared in all of the health care
reform proposals is to encourage wellness and preventive care.

Fourth, a Federal low-income assistance program will pay health
plan premiums for all people below 100 percent of the poverty
level. Individuals between 100 percent and 200 percent of the pov-
erty level will receive sliding-scale subsidies toward the purchase
of a health plan. This involves, of course, the federalizing of the
acute care portion of Medicaid, and that is one that is, perhaps,
more controversial, but I think one of the more attractive selling
points of this bill in that we do try and target resources to those
people among the uninsured who need it the most, the uninsured,
the people who are working for low income, in many cases, mini-
mum-wage employers who up to this point have not been able to
access a plan either because their employer does not provide it or
if they did they couldn't afford it.

These subsidies will defray those costs and, hopefully, open up a
new avenue of accessibility to the people who I think are currently
most disadvantaged along with the uninsurable population in soci-
ety today.

I might say, parenthetically, that is where I really diverged with
H.R. 3080. To allow the States the option to just kind of convert
Medicaid to this kind of a plan is a good intermediate step, but I
think we are beyond that, and I don't think anybody will get up
and argue for the viability of continuing Medicaid the way it is,
and that is why we attempt to federalize it and turn it into a low-

377

income subsidy program that, I might say, reaches more deeply
into lower-income populations than even the Clinton plan does. The
Clinton plan goes to 150 percent above poverty. We go to 200 per-
cent.

Finally, of course, are tax reforms which will allow employers to
deduct the cost of the most efficient health plans, but not the cost
of excessive benefits or wasteful spending. In addition, individuals
and the self-employed will for the first time enjoy 100-percent de-
ductibility of their health plan premiums. Again, this goes beyond
the tenets of H.R. 3080.

So, in other words, if I am working for an employer, a small em-
ployer, let's say, who provides only 50 percent of my benefit, I can
deduct 100 percent of that 50 percent in addition to getting a sub-
sidy if I am a low-income individual. This, I think, is part of the
empowerment in H.R. 3222 that provides a new avenue of access
to, again, low-income individuals and particularly working mothers
in the workplace.

We have, along with most of the other health care proposals, the
requisite amount of rural health care, antitrust reforms and mal-
practice reforms, administration simplification, electronic claims
processing. I don't think we need to get into that. There seems to
be common agreement on that, although, obviously, malpractice
will be slugged out in the Judiciary Committee and not here.

Let me just, again, go back to two points, Mr. Chairman, and
that is, first of all, what I mentioned with the Leader. I don't think
we are going to get anywhere in this debate unless Republicans
and Democrats work together. This is the only bill that at least has
a working consensus among House Members. It is the only bill that
has at least moved over to the Senate side to work with Senator
Chafee and others who support that proposal.

I will point out that when the Business Roundtable endorsed this
proposal last week, despite heavy pressure from the White House
to stay off, they called it a thoughtful first step, and that is clearly
what it is. We do not claim to have developed the final product of
this debate. Even cosponsors of this bill, who will testify later, have
misgivings about the tax cap, about a mandatory purchasing coop-
erative as opposed to a voluntary purchasing cooperative. That is
all well and good, but to get to the discussion of those issues, I
think we have to move beyond the hurdles that the Clinton plan
puts before us which are heavy-handed employer mandates, global
budgets, and large bureaucracies, none of which are contained in
the Cooper-Grandy legislation.

I believe the Managed Competition Act represents the best start-
ing point for the upcoming debate, and this sentiment, as I say, has
been echoed now by the Business Roundtable, the National Gov-
ernors Association, and a broad cross-section of the business com-
munity.

With that in mind, Mr. Chairman, I hope that we will be given
full consideration not just in the hearing process, but also as we
move to markup, and at that point, I would like to yield to my col-
league, a member of the committee, Mr. Payne.

[The prepared statement and attachment follows:]

378

THE HONORABLE FRED GRANDY

U.S. House of Representatives

418 Cannon HOB

Washington, D.C. 20515

(202) 225-5476

February 10, 1994

THE MA^'AGED COMPETITION ACT OF 1993 — H.R. 3222

Testimony Before

The H use Ways and Means Subcommittee on Health

Mr. Chairman and members of the Committee, I appreciate this
opportunity to ..estify on one of the most important policy
decisions confronting the United States Congress. Specifically,
ensuring affordable, high quality, health care coverage for all
Americans.

Today, I am he. : to provide an overview of health care
legislation I .j,n proud to have cosponsored with a diverse
coalition of f / of my colleagues including Representative Jim
Cooper and five other members of this committee: L.F. Payne,
Nancy Johnson, Mike Andrews, Amo Houghton and Dave Camp. The
official title of the legislation is the Managed Competition Act
of 1993. It remains the only comprehensive bi-partisan health
care reform proposal introduced in the House.

As you are by now aware, the Managed Competition Act (MCA) is a
market-based approach to health care reform. It guarantees
universal access to high-quality, affordable health care. Like
the President's proposal, the Managed Competition Act builds off
of what works : n the current system and reforms the chronic
problems that have plagued our system for too long. Most
importantly, l,.ve the President's plan, the Managed Competition
Act ensures every American access to a private sector health
plan.

I would like tf address upfront a criticism that has been leveled
against the MC. that we do not provide universal coverage under
our proposal. want to make it clear that we are not opposed to
universal cove? ge. In fact, universal coverage is a goal that
is shared by m- and all of the cosponsors. I believe that the
universal acces > mechanism in the Managed Competition Act is the
best means to lieving universal coverage. These are not
mutually exclusive goals. This whole discussion over access
versus coverage Is really, in my opinion, an issue of semantics.
It is more a discussion of time-tables and how do we get to
universal coverage. The MCA uses a different mechanism than the
Administration to achieve universal coverage, but I believe we
share the same underlying goal. I am here to offer my aid in
achieving our shared goal of ensuring that all Americans are
covered under a system of health care that provides the quality
of care Americans want and deserve.

Our bill uses a series of strong tax incentives that will
encourage provi-^ers and insurers to form accountable health
partnerships (A) ?s) which, for the first time, will be publicly
accountable. A countable not only for the cost of the care they
provide but als< for the quality of that care. This will enable
consumers to pu. ,hase health care coverage in a much more cost
conscious manne than they do today. It will also provide them
with the inform ^ion necessary to truly determine which of the
plans available ■.o them provides the highest quality of care.

379

To help facilitate individuals' and small businesses' access to
these new AHPs and ensure af fordability , regional purchasing
cooperatives \xll be developed to give individuals and small
businesses the 'oenefits of greater buying power currently enjoyed
by larger empl' 'ers. A national Health Care Standards Commission
will establish a basic benefits package which AHPs will be
required to of r in order to receive tax-favored status. In
addition, AHPs will be required to comply with a series of
insurance refo ms and disclose information on medical outcomes,
cost-ef f ectivefiess and consumer satisfaction.

Specific compo Tnts of the Managed Competition Act include:

1) Insure ce reforms that will encourage insurers and
providers to combine and form AHPs. AHPs will not be
allowed tr exclude coverage of pre-existing conditions
and will n .t be allowed to charge higher rates based on
an indivir\.al 's medical history;

2) Access provisions which will ensure individuals' and
small businesses' affordable coverage by joining Health
Plan Pure .nsing Cooperatives (HPPCs) . HPPCs will offer
group rata- with lower administrative costs. Once a
year indi iduals will be able to choose from a menu of
AHPs in t a area much like the current Federal
Employees Health Benefits Program;

3) Provit . ons to change the incentives in the system
from "mon money for more services" to a system: in
which hea. ch plans are pre-paid so they will have
incentive; to promote preventive care; which eliminates
unnecessa y tests and ineffective treatments; and
which red- ces administrative costs. Because AHPs will
be requir d to provide information on health outcomes
and benef ciary satisfaction, they will be driven to
improve q.ality;

4) A fede al low-income assistance program will pay
health plan premiums for all people below 100% of the
poverty level. Individuals between 100% and 200% of
the povert ' level will receive sliding-scale subsidies
toward thd purchase of a health plan;

5) Tax reorms which will allow employers to deduct the
cost of tl e most efficient health plans, but not the
cost of excessive benefits or wasteful spending. In
addition, individuals and the self-employed will for
the first time enjoy 100% deductibility of their health
plan premiums;

6) A serit 1 of provisions and additional resources to
assist un: Tserved areas in recruiting and retaining
providers, the development of provider networks,
integrati: i of public health clinics and coordination
with urbar i^edical centers; and

7) Savingr mechanisms such as enhanced competition
among hea > ch plans, anti-trust reforms, significant
malpractice reforms, administrative simplification and
electronic claims processing.

380

Mr. Chairman, this committee has heard various approaches to
expanding access and ensuring affordable health care
coverage for all Americans. These range from proposals that
would eliminate the current system and replace it with a
Canadian-style system, to proposals that would eliminate the
current tax deduction provided businesses for their health
care expenses and replace it with an individual tax credit.
Our proposal c2early comes in well to the right of the
single-payer approach and left of the medical IRA approach.
On a spectrum with these two approaches as the respective
left and right ends, our proposal comes in on the fifty yard
line, building upon the very best aspects of our current
system and providing the flexibility necessary to address
the deficiencies within that system.

As important as the specific policies included in any
legislative framework are the politics involved in building
a coalition to pass health care reform. In that regard I
submit that the Managed Competition Act provides the
foundation for bipartisan reform because it represents a
true bipartisan approach to reform. Unlike the single-payer
approach, the Administration's proposal, the House GOP
proposal, and the medical IRA approach, H.R.3222 remains the
only bipartisan approach.

We do not claim to have developed the final product of this
debate; only the legislative process itself can accomplish
that. We do hcwever have the only proposal that has shown a
good faith effort to put aside partisan positioning and work
together across the aisle and on both sides of the hill, and
as such, I believe the Managed Competition Act represents
the best starting point for the upcoming debate. This
sentiment has been echoed by the Governors and a broad cross
section of the business community.

Thank you once again for holding these hearings and
providing me w i.th this opportunity. I would be happy to
answer any quescions at this time.

381

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382

Chairman Stark. L.F., welcome. Congressman Payne.

STATEMENT OF HON. L.F. PAYNE, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF VIRGINIA

Mr. Payne. Thank you very much, Mr. Chairman, and thank you
for giving me this opportunity to testify, and I want to thank you
and the members of the committee for all the work that you are
doing on behalf of the full committee and on behalf of the Congress
in terms of dealing with a very complex and a very important sub-
ject, which is how to reform our Nation's health care system.

As the subcommittee considers the various health care proposals
before it, I would like to express the importance of seeking a bipar-
tisan solution because I think, in order for us to make health care
reform work back home and in order to successfully change the
way our countiy spends $1 out of every $7, we must have the sup-
port of the entire Nation; that is. Democrats and Republicans and
Independents alike. H.R. 3222 is the only health care reform bill
before Congress with truly bipartisan support in that 31 of the cur-
rent 57 cosponsors are Democrats.

Representative Jim Cooper made an important contribution to
the health care reform debate when he introduced the Managed
Competition Act in 1992, and President Clinton, then running for
the presidency, seized upon managed competition in his presi-
dential campaign as the new Democratic approach to health care
reform. So the sponsors of managed competition delayed introduc-
ing any bill in the 103rd Congress to allow the President to intro-
duce his health plan first. The supporters of the managed competi-
tion approach saw that the President's plan had moved away from
its managed competition origins and reintroduced the Managed
Competition Act. While I very much applaud President Clinton,
Mrs. Clinton, and the administration for their tremendous leader-
ship on this issue of health care reform, I cannot support his bill
as it is currently drafted.

Last week, the National Governors Association unanimously ap-
proved a resolution urging the Congress to pass a health care re-
form bill this year. This bipartisan resolution called for the estab-
lishment of an affordable standard package of health care benefits,
the creation of purchasing cooperatives, the provision of subsidies
to low-income individuals, limits on tax deductibility of health
plans, and insurance and malpractice reforms. All of these rec-
ommendations are contained in the Managed Competition Act.

The Business Roundtable, which is a group representing over
200 of the Nation's largest businesses, voted overwhelmingly to
support the Managed Competition Act as the starting point for the
health care reform debate, and this is not to say that the Managed
Competition Act is or should it be the final product of this commit-
tee or of this Congress, but, rather, it should be used as the main
building block upon which a bipartisan health care reform plan can
be constructed.

The Managed Competition Act will build upon existing reforms
that are already taking place in the private marketplace, namely
by utilizing current innovations in managed care, and managed
care plans have grown dramatically in recent years. Enrollment in
HMOs has more than quadrupled since the early 1980s. Over 50

383

million individuals are expected to be enrolled in HMOs by the end
of this year. Employers and consumers are choosing managed care
because it works, as it provides quality care while it also contains
cost.

When you look at the health care reform proposals before this
committee, the Managed Competition Act comes closest to the
President's plan. There are many similarities, but there are also
some key differences. We agree on most goals of health reform, but
we disagree on the role that the Grovernment should play in the
marketplace. We disagree on employer mandates. We disagree on
the bureaucratic price controls and large and bureaucratic health
alliances.

The Managed Competition Act promises less than the adminis-
tration's bill, but we are confident that we can deliver on these
promises. If this committee has learned anything from the CBOs
analysis of the administration's health care proposal, it is that Con-
gress should tread carefully before creating an enormous new enti-
tlement program.

Mr. Chairman, to conclude, the Managed Competition Act is clos-
er to the President's and closer to the Governors' recommendations
than any other bill before the Congress. H.R. 3222 is the only truly
bipartisan bill. It is not the final word in health care reform, but
it is the best starting point to achieve a national consensus on this
very complex issue. With managed competition, we have an oppor-
tunity not to copy another nation's health system, but, instead, to
create an innovative system that will be the envy of the world.

Thank you very much, Mr. Chairman.

[The prepared statement follows:]

384

Testimony of Representative L. F. Payne

Before the

Subconunittee on Health

Conunittee on Ways and Means

February 10, 1994

Thank you, Mr. Chairman, for giving me this opportunity to
testify before you and the Subcommittee today. I appreciate all the
hard work that you and the Subcommittee are doing on the extremely
complex and important task of reforming our nation's health care
system.

I would like to speak with you today about H.R. 3222, the
"Managed Competition Act of 1993". As this Subcommittee considers
the various health care reform proposals before it, I would stress
the importance of seeking a bipartisan solution. In order to make
health care reform work back home, in order to successfully change
the way our country spends one dollar out of seven, we must have the
support of the entire nation - Democrats, Republicans and
Independents alike. H.R. 3222 is the only health care reform bill
before Congress with truly bi-partisan support - 26 of the current 57
co-sponsors are Republicans.

Representative Jim Cooper made an important contribution to the
health care reform debate with his introduction of the Managed
Competition Act of 1992 . I am proud to have been an original
co-sponsor of that bill. Building upon the framework of a Jackson
Hole Group proposal, the Managed Competition Act introduced a new
lexicon to the health care reform debate - Managed Competition,
HPPC's, and Accountable Health Plans. President Clinton seized upon
Managed Competition in his Presidential campaign as the "New
Democrat" approach to health care reform.

The sponsors of the Managed Competition Act delayed introducing
the bill in the 103rd Congress in order to allow the President to
introduce his health plan first. Supporters of the managed
competition approach saw that the President's plan moved far from its
managed competition origins, and reintroduced the Managed Competition
Act. While I applaud President Clinton, Mrs. Clinton, and the
Administration for their tremendous leadership on the issue of health
care reform, I cannot support his bill as it is presently drafted.

Last week, the National Governors' Association unanimously
approved a resolution urging the Congress to pass a health care
reform bill this year. This bipartisan resolution called for the
establishment of an affordable standard package of health care
benefits, the creation of purchasing cooperatives, the provision of
subsidies to low-income individuals, limits on the tax deductibility
of health plans, and insurance and malpractice reforms. All of these
recommendations are contained in the Managed Competition Act.

385

The Business Roundtable, a group representing over 200 of the
nation's largest businesses, voted overwhelmingly to support the
Managed Competition Act as the starting point for the health care
reform debate. The U.S. Chamber of Commerce, representing America's
small businesses, testified before this Committee that because of
"high employer premium contributions, rich benefits, and
counterproductive regulation and new federal and health alliance
bureaucracy", the President's plan should not be used as a starting
point for Committee markup.

This is not to say that the Managed Competition Act is, or
should be, the final product of this Committee or this Congress.
Rather, it should be used as the main building block upon which a
bipartisan health care reform plan can be built.

The Managed Competition Act will build upon existing reforms
already taking place in the private market place, namely by utilizing
current innovations in managed care. Managed care plans have grown
dramatically in recent years - enrollment in HMOs has more than
quadrupled since the early eighties. Over 50 million individuals are
expected to be enrolled in HMOs by the end of the year. Employers
and consumers are choosing managed care because it works, providing
quality care while containing costs.

A recent study by Peat Marwick indicates that HMO premiums
increased 40% less than fee-for-service premiums over the five year
period from 1988 to 1993. HMOs also provide a richer benefits
package than fee-for-service plans, including preventive health care
services such as adult physicals and well-baby care. H.R. 3222 will
continue to encourage such cost-saving innovations in the private
market place.

When you look at the health care reform proposals before this
Committee, the Managed Competition Act comes the closest to the
President's plan. There are many similarities, but there are also
some key differences. We agree on most of the goals of health
reform, but we disagree on the role that government should play in
the market. We disagree on the employer mandates, bureaucratic price
controls, and large and regulatory health alliances.

The Managed Competition Act promises less than the
Administration's bill, but we are confident that we can deliver on
those promises. If this Committee learned anything from the CBO's
analysis of the administration's health proposal, it is that Congress
should tread carefully before creating an enormous new entitlement
program.

To conclude Mr. Chairman, the Managed Competition Act is closer
to the President's and closer to the governors' recommendations than
any other bill. H.R. 3222 is the only truly bipartisan bill. It is
not the final word in reform, but it is the best starting point to
achieve national consensus on this complex issue. With managed
competitition, we have an opportunity not to copy other nations'
health systems, but instead to create an innovative, new system that
will be the envy of the world.

386

Chairman Stark. Thank you, L.F.

Next on our list is Hon. Nancy Johnson. Welcome.

STATEMENT OF HON. NANCY L. JOHNSON, A REPRESENTA-
TIVE IN CONGRESS FROM THE STATE OF CONNECTICUT

Mrs. Johnson. Thank you, Mr. Chairman.

I will be fairly brief because there are two things I want to say.
I think in our sober moments, we all recognize that this health care
reform ought to be bipartisan. First of all, it is not fundamentally
a partisan issue, but, also, the people expect that we think far
more seriously about their problems and that we relate changes in
law more directly to their problems than is possible if ideology
takes precedence over practical reality.

Consequently, I am proposing in my bill that we are hearing be-
fore this committee a piece of the solution because I think that we
are going to have to build this solution and look at the individual
integrity of each piece and then the integrity of how all the pieces
interrelate. So my proposal would fit into the Republican proposal.
It would take their collective purchasing provisions and bring them
a step further by requiring that every State put in place a purchas-
ing cooperative.

It would fit within the Cooper-Grandy proposal, making their
mandatory purchasing cooperative voluntary; therefore, making it
more comfortably applicable, particularly in rural areas, giving us
the chance to build what we will need before we make any decision
as radical as demanding that a large percent of the population par-
ticipate through one kind of entity.

While the Cooper-Grandy bill does bring down the number of
people that have to buy through the entity from 1,000 to 100, an
employers with fewer than 100 are 98 percent of the employers in
Connecticut. So it is still a pretty good whack.

My bill is already included in the Chafee-Thomas bill, although
it appears in various ft'agments. I have pulled it out, worked
through it very thoroughly with experts, and I present it to you
today.

The legislation that I have introduced, H.R. 3652, would require
that each State create at least one purchasing cooperative, but it
allows multiple competing purchasing cooperatives because some of
those that have tried to get started have turned out not to be very
good. Like anything else, it depends on good management, creative
leadership, and a good purchasing cooperative. It is going to be dif-
ferent than a poor purchasing cooperative.

So my bill does allow multiple competing purchasing cooperatives
in which individuals and small employers can freely enroll and se-
lect from a wide array of competing health plans. Each of these
plans would be required to provide the standard benefit package
consistent with the insurance reform proposals that we are all in
pretty good accord about.

Additional provisions of my bill would require that the individ-
uals and small employers that purchase through the HPPC have
the choice of at least three different plans. So the purchasing coop-
erative would have to provide at least a managed care option, a fee-
for-service option, and a medisave option.

^ 387

I think this latter issue is particularly important. I think when
we are talking about real reform — and clearly, one of the things
that has driven rising costs has been overuse of the system — I
think it is important that we experiment with bringing individuals
into the decisions about purchasing health care for their own pur-
poses; in other words, their own wellness.

I think it is also legitimate and reasonable for a nation that
undersaves and that has enormous concerns, at least if you read
the numbers. You ought to have enormous concerns about whether
the baby boom generation is going to enjoy retirement security.

We ought to be allowing our people and encouraging them to use
vehicles like medisave, so that they not only think about health
care purchases, but can roll any money they save over into a retire-
ment vehicle, again, looking at long term costs, and personal secu-
rity in a larger setting.

Second, the bill requires that all health plans sell their products
for the same price within the HPPC and without the HPPC be-
tween the insurance reform provisions that reduce the right to risk
select. In this price comparability inside and outside of the HPPC,
we have reason to believe that there will be minimal risk selection,
although the bill does require insurance commissioners to watch
this issue and gives insurance commissioners really quite broad
powers to address it, should it develop.

The bill also provides an assurance that all plans would comply
with proposed insurance reforms, including guaranteed availability,
renewability, and continuity of coverage, limits on the use of pre-
existing condition exclusions, and modified community rating.

The Health Plan Purchasing Cooperative would enable members
of the cooperative to benefit from the cooperative's contracting ex-
pertise, the administrative savings that accrue from large pools,
the elimination of marketing expenses which are very high in the
small group market, and the consumer information that HPPCs
would compile in the plans offered through them. Like the man-
aged competition framework within which this proposal could eas-
ily operate, H.R. 3652 would encourage competition, increase ac-
cess, bring down costs, and improve quality.

Thank you for this opportunity to appear before the committee
today and to be part of a panel from which many of the ideas that
will De part of the solution will come.

Thank you, Mr. Chairman.

[The prepared statement follows:]

388

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TtumOMC: (203) 223-6412

TESTIMONY OF CONGRESSWOMAN

NANCY JOHNSON

BEFORE THE

SUBCOMMITTEE ON HEALTH

COMMITTEE ON WAYS AND MEANS

FEBRUARY 10, 1994

Mr. Chairman and members of the Committee, it is a pleasure
to be here today ta discuss alternative approaches to health care
reform. It is my sincere hope that on this important issue we will
be able to put aside partisan politics and work together to craft a
bipartisan reform package of which we can all be proud. In that
regard, I am happy to have the opportunity to describe a bill I
introduced in the last session of Congress which I believe is
applicable to any of the reform proposals that rely upon the managed
competition framework. In fact, my proposal is applicable to any
plan which uses purchasing pools as a mechanism to ensure access to
more affordable insurance for those in the individual and small
group markets.

The legislation I have introduced, H.R. 3652, the Health Plan
Purchasing Cooperative Act of 1993, provides a framework for the
creation of purchasing cooperatives. Under my proposal, states
would establish voluntary Health Plan Purchasing Cooperatives
(HPPCs) in which individuals without insurance and small employers
could freely enroll and select from a wide array of competing health
plans. Each of these plans would be required to provide a standard
benefit package consistent with the insurance reforms which have
wide bipartisan support on both sides of the Hill.

Additional provisions of the Health Plan Purchasing
Cooperative Act include:

* A specification that all individuals and small employers
purchasing insurance through the HPPC have access to at least
three standard plan choices — a managed care plan, a fee-
for-service plan, and a medisave plan.

* A requirement that all health care plans sell their
products for the same price both inside and outside the HPPC
so that neither the HPPC plans nor plans outside the HPPC
receive an inequitable share of risk.

* An assurance that all plans would comply with proposed
insurance reforms including guaranteed availability,
renewability and continuity of coverage, limits on the use of
pre-existing condition exclusions, and modified community
rating.

The Health Plan Purchasing Cooperative Act also would enable
the members of the cooperative to benefit from the cooperative's
contracting expertise, the administrative savings that accrue from
larger pools, and the consumer information they would compile on the
plans that offered insurance through the HPPC. Like the managed
competition framework within which this proposal is intended to
operate, H.R. 3652 would encourage competition, increase access,
bring do%m costs and improve quality.

Thank you for giving me this opportunity to appear before the
Committee today. I look forward to working with you to develop a
health care reform package we can enact before the end of this
••■■ion.

389

Chairman Stark. Thank you.

We are now pleased to start the testimony from nonmembers of
the Ways and Means Committee. So we are happy to recognize
Hon. Cliff Stearns.

Mr. Grandy. Mr. Chairman, we have a member of the committee
who is not testifying.

Chairman Stark. You wanted to wait until the end.

Mr. Stearns. Yes, sir. I will be brief.

Chairman Stark. At the request of Mr. McCrery, he had asked
to be the wrap-up. I was going to recognize Mr. Steams.

I believe. Rod Grams, you are testifying with Mr. Steams. Is that
correct?

Mr. Grams. That is correct, Mr. Chairman.

Chairman Stark. So I will let you two proceed in any manner
that you care to, whoever chooses to go first.

STATEMENT OF HON. CLIFF STEARNS, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF FLORIDA

Mr. Stearns. Thank you, Mr. Chairman. We are delighted to be
here.

Chairman Stark. Welcome to the committee.

Mr. Stearns. Senator Nickles wanted to also testify, and he
could not be here. He was here earlier. He asked that I make his
statement, as well as Congressman Jim Ramstad, as well as mine
part of the record.

Chairman Stark. Without objection, all of the statements will
appear in the record in their entirety.

Mr. Stearns. Mr. Chairman, when President Clinton highlighted
his State of the Union statement, he mentioned that he would veto
any health care reform legislation that did not contain universal
coverage.

On our side of the aisle, our bill, the Consumer Choice Health
Security Act of 1993, does include universal coverage. Mr. Chair-
man, this particular bill has been scored by an outside accounting
firm, Lewin-VHI. It has analyzed this for a long period of time. It
is deficit-neutral. There are no mandates, no new taxes. In the
sense that the Clinton plan provides more bureaucracy, this is no
new bureaucracy.

You and I have talked a little bit about the idea of mandates on
the employer and mandates on the individuals. This particular
plan does have individual requirements that everyone have health
care.

Now, we have patterned this plan off of something that is in ex-
istence. As many of my colleagues know, we had the Federal em-
ployee health benefits program. That has been in existence for 33
years. There are 10 million Grovernment employees involved with
this program, and, of course, the President, the Vice President, the
Senators, and all the Congressmen are all covered under this plan.

So, Mr. Chairman, I suggest we give this plan to the American
people. The American people would have the same options that I
did when I came to Congress. I could select 35 different plans and
make my decision, and I made the choice.

What we do under our Health Care Security Act is provide legis-
lation which provides a Federal tax credit that would for the first

390

time give individuals control over their health care dollars. The
credit would offset the cost of premiums, out-of-pocket medical ex-
penses, and exempt-from-taxes contributions to medical savings ac-
counts. Now, this is a very simple concept, and it moves in the di-
rection for America to give personal responsibility to individuals
and give them the choice.

Now, let me just quickly and briefly give you an example of how
this would work. Let's take, for example, that a person who is mak-
ing $35,000 a year and the employer pays for their health insur-
ance and it turns out to be roughly $3,500 a year. Let's say, also,
they have out-of-pocket expenses of $1,000. We will put that into
the mix, too. So the individual has $35,000 in salary, and they have
provided by the employer $3,500 in medical insurance. What our
bill would do is move that $3,500 to the individual with a raise in
salary to $38,500. They would be able to write off their $3,500 as
well as their $1,000 out-of-pocket expense and get tax relief for out-
of-pocket expenses.

The new tax credit established for this family would see their tax
liability decrease. They would have more disposable income. Across
the board, Lewin-VHI has studied this, and I can give you the in-
formation. Part of it is going to be part of our statement. We have
shown across the board this provides better tax relief for Ameri-
cans. Plus, it moves as we know the responsibility for individuals
and away from a third payer.

Mr. Chairman, we buy our automobile insurance this way. We
buy our life insurance. We buy our mortgages. Why not health
care? Why do we delegate the responsibilities for health care to the
Government, to the bureaucrats, and force it, mandate it on em-
ployers?

It should be pointed out that the idea of employer-provided bene-
fit did not evolve out of the Congress. Instead, health benefits were
offered as an incentive to attract employees during World War II
when wage controls were in place. Later, the Internal Revenue
Service decided that such benefits would be exempt from Federal
income and Social Security taxes. These events, among others,
have contributed to the current system we are confronted with
today.

Our bill opens up competition by providing opportunities for even
unions, colleges, farm organizations, and even churches to provide
alliances. So, instead of 10 million Americans going out to seek em-
ployment, insurance for themselves through the employee benefits
program, you would have all American competing in the same way.

As I mentioned earlier, this is the only plan on my side of the
aisle that had been scored by an outside accounting firm. We are
just getting the CBO estimates now, and, of course, there are no
new taxes, no rationing, and no price controls. Again, we have uni-
versal coverage.

In conclusion, Mr. Chairman, these are the fundamental con-
cepts. It is not hard to understand. After all, you don't hear many
of us here in Congress at this table or in this hearing complaining
about their health care coverage.

[The prepared statement of Representative Stearns and the
statements for the record of Senator Nickles and Representative
Ramstad follows:!

391

OPENING STATEMENT

by the

HONORABLE CLIFF STEARNS (R-FL)

Testimony before the House Subcommittee on Health
Committee on Ways & Means

February 10, 1994

Thank you Mr. Chairman for allowing me this opportunity to testify
before your subcommittee on H.R.3698 / S. 1743, the Consumer
Choice Health Security Act of 1993, legislation I jointly introduced
with Senator Don Nickles of Oklahoma. As the members of this
committee are aware, the issue of health care reform has remained at
the forefront of our citizens' concerns and rightfully so. In the
President's State of the Union address we all heard him say that he
would not sign into law a health care reform proposal that did not
guarantee universal coverage. H.R. 3698 does that and more. As
such, I believe that it merits full consideration by the Congress
before a final bill is brought to the House floor for a vote.

I would like to quote the President from his State of the Union
remarks.

392

"The American people provide those of us in government service
with terrific health care benefits at reasonable costs. We have health
care that's always there. I think we need to give every hard working,
taxpaying American the same health care security they have already
given us."

Mr. Chairman, members of this committee, over 40 of our colleagues
here in the House and Senate agree with that statement. That is why
we introduced the "Consumer Choice Health Security Act of 1993."
As the title indicates, this legislation seeks to provide quality
necessary medical care to all Americans through the oldest and
proven mechanism -- the free market. Furthermore, this legislation
is patterned after the Federal Employee Health Benefits Program
(FEHBP) that has been in existence for over thirty years and held
down costs while providing quality health plans.

As you know, all members of Congress, our staffs, the President, the
Vice President, the cabinet, the Supreme Court Justices, and some ten
million federal employees, retirees and dependents are enrolled in the
FEHBP. The program is unique in that it is explicitly based on the
free market principles of consumer choice and market competition.

393

Unlike our constituents, we have the luxury of being able to pick and
choose from over thirty different health plans -- be it a traditional
fee for service, HMO, PPO, or union sponsored plan like the postal
workers etc. Unlike the rest of America, we get to make a personal
choice and compare the prices, and level of benefits of each plan.
We then make a decision based on our budget, our needs, and our
bottom line, not some corporation's bottom line.

While the FEHBP model is not perfect, with the modifications that
have been added in this bill, an FEHBP type system can be expanded
to cover all Americans. Combined with an individual mandate that is
explicitly written into this bill, the President's goal of universal
coverage is met. The FEHBP is a sound program with good benefits.
And while the level of benefits has increased over the years, costs for
these plans have been effectively kept down. Not with price controls
mind you. But with competition. On September 14, 1993, Jim King,
the Director of Office of Personnel Management stated "Our
enrollees continue to gain from the competition and managed care
that form the backbone of the FEHBP program." This is evidenced
by the fact that the price of premiums federal employees have to pay
in 1994 are only 3% higher than the prices they paid in 1993.

394

In short, the market forces have worked for the FEHBP. There is no
reason why these same principles cannot work for the American
people. Most Americans are kept out of the picture when it comes to
purchasing health insurance because it is usually purchased by their
employer. Doctors and hospitals rarely discuss bills or fees prior to
delivery of care and rely on third party reimbursement. Consumers
are shielded from the true costs of health care and as such, there is
no incentive for all parties involved to control costs. The time old
saying of supply and demand -- the market forces that control costs
in every other sector of the American economy are not present in an
employer based health care system.

In sharp contrast to government based insurance or mandatory
employer based insurance, where government bureaucrats or
corporate officials are deciding what level of benefits Americans will
receive, H.R. 3698 will provide every American with the means to
purchase health insurance within the framework of the free market
and consumer choice.

Under the Consumer Choice Health Security Act of 1993, health
insurance benefits will be made available to all Americans along with

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the tax relief currently enjoyed by individuals with employer
provided insurance. However, this coverage will no longer be
dependent on employment status. Furthermore, consumer choice
would serve as a driving force in bringing down costs the same way
it does in the rest of the economy. This would be accomplished by
transferring the multi-billion dollar federal tax break for employers
providing health benefits, in the form of deductions and exclusions •
and giving that money to American workers in the form of a federal
tax credit. The federal tax exclusion alone was worth $66.6 billion
in 1991 dollars for 1992.

As the members of this committee are aware, this legislation imposes
a mandate on individuals to purchase at a minimum, a health care
package which must include catastrophic coverage to address the free
rider problem. Every individual who fulfills this legal requirement
will receive a federal tax credit to offset the costs. This new tax
relief would also be extended to individuals and families for payment
of out-of-pocket medical expenses. The tax credit will be provided
directly through the tax withholding system or through a voucher for
the working poor. The size of the tax credit will vary according to a
percentage of health care expenses in relation to an individual's

396
adjusted gross income.

By giving every individual the same tax advantages, irrespective of
place of employment or income, and empowering them with tax
credits to purchase insurance, a consumer choice system will enable
Americans to seek the best value for their health care dollar when
buying health insurance. If private employers wish to continue
providing health benefits to their employees, there is nothing, I
repeat, there is nothing, in this legislation that would prevent them
from doing so and they can still continue to deduct the cost of
providing that benefit. However, it should be noted that with equal
tax treatment for all Americans who purchase health insurance,
company plans will be competing with different types of health
insurance packages and keep prices down.

At the risk of sounding redundant, I would like to emphasize that the
core problem of our current health care system is the tax code, and if
we are to ever remedy the problems arising out of the current
inequity, the tax code needs to be changed. By changing the tax code
and empoweri|ng the individual directly, the health care market will
be changed from an employer based market to an individual based

397

market as it should be. By giving the American people what you and
I as Members of Congress enjoy, the power to choose our own health
insurance plan, and combining that power with widespread
competition, H.R. 3698 will offer our constituents the best chance at
controlling health care costs.

I would like to point out that this legislation has already been scored
by Lewin-VHI, the same health econometrics Arm used by the Clinton
Administration. It is budget neutral, deficit neutral, and does not
raise taxes on Americans. No price controls are employed, no global
budgeting, no new bureaucracies are created, and no monopolistic
alliances are set up under the purview of a National Health Board.

The major objection I have encountered to an individual mandate is
that our citizens aren't capable of choosing their own health plan. I
couldn't disagree any stronger. Even Alain Enthoven, one of the
architects of "Managed Competition", a proposal that has been
offered by our esteemed colleague from Tennessee, Mr. Cooper, has
stated the following, and I quote:

"Critics of the consumer choice position usually are not very explicit

398

about whom they consider to be better qualified than the average
American to choose his health plan for him."

- New England Journal of Medicine (1978)
I should point out that Americans make important decisions every day
without delegating those responsibilities to government bureaucrats
or politicians. They make decisions with respect to their mortgage
policies, car insurance policies, life insurance policies, homeowner's
insurance policies all without the creation of alliances, national
health boards, or bureaucrats. Why? Because these matters are not
employer based. When an individual loses his job, he does not lose
his car insurance or go to a new mortgage company. There is no
reason why health insurance should be treated any differently.

While the changes to the tax code are the heart of this proposal,
Senator Nickles and I have included several other key reforms which
must be addressed in this debate. Anti-fraud measures are included
to enhance federal criminal penalties established against health care
providers and insurers who knowingly defraud persons in connection
with a health care transaction. Anti-trust provisions have been
included to create "safe harbors" from federal anti-trust laws for
certain groups of providers; medical self-regulatory entities that do

399

not operate for financial gain, certain joint ventures for high
technology and costly equipment and services and hospital mergers.
This is especially crucial for rural area hospitals forced to compete
against each other for patients. In my district down in Florida, there
have been instances in which a hospital will decide to purchase an
MRI machine just so that it can advertise to the public that they have
state of the art technology when just a few miles away, another
hospital will have the same equipment already in place that could be
used by the patients of that first hospital.

Long term care is addressed as well in this bill. H.R. 3698 also
exempts from taxation certain exchanges of life insurance policies for
long-term care policies, and amounts paid or advanced from a life
insurance contract to a terminally or chronically ill individual who is
confined to a hospice or nursing home.

Malpractice reforms are also included. The bill caps noneconomic
damages at $250,000, reduces the amount of damages paid in a
medical malpractice case by the amount of other payments (such as
private disability insurance or employer wage continuation program
payments) made to the injured party for medical care, limits the

400

liability of manufacturers or sellers of health care products approved
by the FDA, except in cases where the manufacturer withheld or
misrepresented information to the FDA or bribed an official, and
provides for a schedule of limits on attorney fees in medical
malpractice actions:

1) 40% of the first $50,000, 2) 33.3 % of the next $50,000, 25% of
the next $500,000, and 15% of any additional award or settlement.
Mr. Chairman, this provision may sound familiar because it is
patterned after California medical malpractice law, also known as
(MICRA). This law has been in effect since the mid 1970's and
proven to bring down the number of frivolous claims while ensuring
the residents of California who are harmed by a negligent doctor to
be justly rewarded.

Administrative reforms are also included which are designed to
reduce the amount of paperwork and double-billing the insurance
industry and hospitals are famous for. Another important feature of
this legislation is the explicit pre-emption of state laws which are
deemed to be "anti-managed care" laws. For example, the bill would
preempt state laws which:
1) require health insurance policies to cover specific diseases.

401

services, or providers;

2) limit the ability of managed care plans to selectively contract with
health care providers;

3) limit the ability of managed care plans to impose higher cost
sharing provisions on treatment obtained from providers outside a
plan's network.

In conclusion, this legislation achieves universal coverage, provides
portability, security, simplicity, and cost containment without raising
taxes or the creation of powerful and potentially monopolistic
alliances. Instead, it will allow all Americans a wide array of
choices of benefits within many health plans, just like the system that
is currently available to Administration o^icials and Members of
Congress. The major cost constraint is a purely competitive health
care market, something that has been sorely missing for the past five
decades. Combined with personal responsibility and the security of
knowing that they can purchase health insurance from plans they
trust, such as their union, church, farm bureau, or employer, AND
enjoying tax relief, this is an alternative that Americans will want to
explore further.

402

As Members of Congress we have been presented with an historic
opportunity to rectify what is wrong with the health care system, and
to maintain what is right. There is no need to subject one-seventh of
the nation's economy to a new and untried scheme that has not been
proven to hold down costs while continuing to provide quality
medical care to our nation's citizens. We can resort to price
controls, decisions coming down from bureaucrats in Washington,
DC, and rationing. Or, we can open up the market and give every
American the same benefits of choice and competition that Members
of Congress enjoy.

Finally, if this Congress fails to give the American people the same
benefits and advantages of a free market system of health care, then
this Congress should be willing to deny themselves those same
advantages and withdraw themselves from a market driven federal
system - and enroll in whatever state run health program we force
upon the rest of America. Thank you, Mr. Chairman.

403

STATEMENT BY SENATOR DON NICKLES

HOUSE WAYS AND MEANS COMMITTEE

FEBRUARY 10, 1994

Mr. Chairman, and Members of the Committee, I am pleased
to appear before you today along with Rep. Stearns to discuss the
Consumer Choice Health Security Act.

In the debate over health care reform, a fundamental choice has
emerged: Who should drive health care reform? The government
and its bureaucrats? Or consumers, empowered with more control
over health care choices and costs?

The President's plan relies on more federal control and
regulation of a trillion-dollar industry that represents one-seventh of
our entire economy and provides the highest quality health care in
the world.

The Clinton plan outlaws virtually all current plans and
substitutes a one-size-fits-all program which forces consumers into
government controlled monopolies called "health alliances."

Overprornisef! and underfmanced, the Clinton plan contains

404

onerous employer mandates and will cost hundreds of thousands of
jobs.

But simply criticizing the Clinton plan is not the solution. Those
who believe as I do that the Clinton plan would be a disaster are
obligated to come up with a better one. That's why 25 of my
colleagues in the Senate have joined me in sponsoring the Consumer
Choice Health Security Act.

Our program comes down on the side of individuals. It
provides universal health care coverage for all Americans earlier
than the Clinton's plan, preserves the health choices Americans now
have and that the Clintons will take away and provide new
opportunities for health care that the Clintons deny; all without
increasing taxes or creating new bureaucracies.

The Consumer Choice plan offers all Americans choices much
like those found in the highly successful Federal Employees Health
Benefits Program (FEHBP) which for 33 years has served nearly 10
million federal employees and their families by offering dozens of

405

plans which provide a wide array of benefits at a variety of costs.

The FEHBP has worked well for all federal employees,
including Senators and Congressmen and our offlce staffs. We choose
our health insurance plan based on what's best for us and our
families just as we choose our auto insurance, home insurance and
life insurance.

This array of choices has kept premium increases in the
FEHBP, on average, one-third less than the national average increase
in private health insurance premiums.

Our proposal lets employees keep the health care coverage they
now have with their employers if they wish. But could shop for a
new plan if they choose.

Here's how it works:

The tax exclusion for company-sponsored health plans would be
replaced with individual tax credits. Companies would take the
money they spend to subsidize their employees' health insurance and
give it to employees in the form of wages. Then, a tax credit would

406

be given to individuals.

The combination of higher wages and a tax credit would give
individuals the resources to purchase the health insurance they want
and need. They could keep the company plan, or choose something
different. They could also invest some of their resources in tax-free
Medical Savings Accounts, using the funds they save to pay for
additional health benefits or to save for long-term health care needs.

The choice is theirs.

The tax credits, which would become available on Jan. 1, 1997,
would be structured to give all Americans a basic level of tax relief
based on all of their health care expenses. Using a sliding scale
system, greater tax relief would be targeted to individuals and
families who, because of illness or below average incomes, face
proportionately higher health expenses relative to their income.

The tax credit would also be refundable so unemployed and
poor individuals would be reimbursed for a substantial portion of the
cost of their insurance premium. Low-income people also would be

407

eligible for subsidies in addition to these tax credits.

Best of all, people would get the tax credit for all of their out-
of-pocket health care spending-not just for health insurance
premiums.

The Consumer Choice health care plan guarantees that all
health plans are fully portable. Because individuals own their own
policies, they could take them along when they change jobs. No
individual could be turned down because of a preexisting health
condition. No one could have coverage cancelled or premiums
increased because of illness. All Americans would be required to
carry a policy that limits their expenses for health care.

Any viable health care reform must address other causes of
spiraling costs. Our plan tackles runaway medical malpractice costs
by capping punitive damage awards and limiting attorney fees. We
also cut red tape and government waste by streamlining health
insurance claims and easing regulatory burdens on providers.

Perhaps the greatest savings in total outlays for health care will

408

result from a very simple but very important change which is
fundamental to our plan: Consumers will be spending their own
money, not their company's money or the government's money. As
a result, consumers will make a fundamental shift in their buying
habits which are now often costly because of the perception that "its
not our money we're spending".

But just as important as what the plan will do, is what it will
not do, especially when compared with the Clinton government-is-
the-answer plan. Because it contains no onerous mandates that force
employers to cough up additional dollars for health care plans they
cannot afford, it will not cost jobs.

Our plan will not add to the total cost of health care, nor to the
federal deficit. It does not include the President's global budgeting
which would inevitably result in price controls, ever-increasing
regulation, and rationing of health care by bureaucrats.

Health care reform is a complex issue. Its wrong to think that
the problems we face in health care can be solved by the kind of

409

invasive big-government surgery proposed by the Clinton
administration. The Consumer Choice plan seeks a straightforward
solution by protecting what is right about the current system —
quality and choice — and knocking down the barriers that deny any
American access to affordable health care.

410

S. 1743

CONSUMER CHOICE

HEALTH SECURITY ACT FACT SHEET

November 20, 1993

Sponsors (25): Nickles, Hatch, Mack, Bennett, Brown, Bums, Coats,
Cochran, Coverdell, Craig, Dole, Faircloth, Grassley, Gregg, Helms,
Hutchison, Kempthome. Lon. Lugar, Murkowski, Simpson, Smith, Stevens,
Thurmond, and Wallop.

WHAT IT DOES

The Consumer Choice Plan

• Provides the securitv of universal health care coverage for all Americans, guaranteeing
them access to insurance that is ponable, and available regardless of pre-existing
conditions. It would take effect on January 1, 1997.

• F^rovides individuals and families with a maximum choice of health insurance plans
with a wide variety of benefits and costs, including the ability to keep the employer-
sponsored benefits they have now. That's more choice than most Americans have now.

• Individuals and families are provided with the resources to purchase the health
insurance plan that best fits their needs with tax credits in place of the current
employee tax exclusion for health care expenses. People whose health expenses consume
a larger percentage of their incomes would get a bigger tax credit.

• Controls rising health care costs by empowering consumers with choice and individual
responsibility and infusing real competition between insurance companies for the
consumer's health care dollar.

• Further reduces rising health care exjjenses with real reform of medical malpractice
laws, including capping awards for noneconomic damages.

• Creates Medical Savings Accounts, or MSAs, which can be used to pay medical bills
or to pay for extra benefits.

411

Modeled after the 33-year-old Federal Employee Health Benefit Program (FEHBP),
giving consumers the same option of choice now enjovcd bv L". S. Senators and
Representatives. The FEHBP's annual cost increases have averaged a third less than
other private health insurance programs.

What it does NOT do

• The plan has no new, job-killing mandates on employers to provide and pay for health
insurance for their employees. Employers must only give their employees the option of
retaining their current benefits, or "cashing out" their benefits and joining another plan.

• The plan requires no new taxes.

• The Consumer Choice and Health Security Act does not wipe out existing health
insurance policies, unlike the Clinton plan, which would outlaw nearly everv health
insurance plan now in existence. Under the Consumer Choice Act, people who are
happy with their employer- sponsored coverage can keep it.

• The plan places no price controls or "premium caps" on insurance plans that could
reduce the quality of coverage and even result in the rationing of health care.

• The plan creates no new national health board or government bureaucracies.

• There is no government coercion to purchase benefits not wanted or needed, beyond

a minimum catastrophic insurance requirement.

HOW IT WORKS

Insurance Reforms to Guarantee Access

• The Consumer Choice and Health Security Act provides for guaranteed issue of health
insurance policies. Insurers could not exclude coverage of any preexisting medical
condition of any applicant who switches from one insurance plan to another or of any
currently uninsured person who buys insurance.

• Insurers cannot cancel or refuse to renew coverage of a health insurance policy except for
non-payment of premiums or fraud or misrepresentation. Insurers could not offer bonuses
to brokers for selling insurance to "healthy" people or avoiding the sale of policies to

412

Health insurance underwriting would be liniited, allowing insurers to vary premiums only
on the basis of age, sex and geography. However, because of the importance of
prevention and healthy lifestyles, the legislation would allow insurers to give incentive
discounts to promote healthy behavior, prevent or delay the onset of illness, or provide
for screening or early detection of illness.

Certain state laws pertaining to mandated benefits and services, anti-managed care laws,
and mandated cost-sharing would be preempted.

Tax Credits

• Individual tax credits would replace the current tax exclusion for company-sponsored
health plans.

• Tax credits, which would become available on Januar\' 1, 1997. would be structured to
give all Americans a basic level of tax relief on all of their health expenses, with greater
tax relief targeted to those individuals and families who, because of illness or below
average incomes, face proponionately higher health expense relative to their income. The
credits would be structured as follows:

Health Insurance Premiums and
Unreimbursed Medical Expenses
as a Percent of Gross Income Percent Reimbursed

Below 10 percent 25 percent

10 to 20 percent 50 percent

20 percent or more 75 percent

• At a minimum, for everj' $100 which is spent on health insurance premiums, or
contributed to a Medical Savings Account (MSA), or spent on ANY out-of-pocket
medical expenses, the individual or family would pay $25 less in taxes. The greater the
ratio of health costs to income, the greater the tax benefits. Low-wage persons with higher
percentage health costs would receive greater benefits. The tax credit would be as much
as $75 per $100 spent on health care, and would be refundable as explained below.

• The credits are refundable, meaning that if the value of the credit is more than an
individual's or family's tax liability, the government would pay the difference. Much like
the treatment of the Earned Income Tax Credit (EITC), employers would reduce their tax
liability and provide the tax credit as additional income in the employees' paycheck, so
they could purchase insurance.

413

Family Security Benefit Requirements

• Society should not have to pay the price for irresponsible individuals who refuse to
purchase insurance and then expect us to pick up the tab when they become seriously ill
or injured. Every individual and family would be required to have niinimum health
insurance coverage to cover medically necessary "acute medical care," including:

— Physician services

— Inpatient, outpatient, and emergency hospital services and
appropriate alternatives to hospitalization

— Inpatient and outpatient prescription drugs

— A maximum deductible amount of $1,000 for an individual and
$2,000 for a family and an out-of-pocket limit of $5,000. These
amounts would be indexed to inflation in future years.

• For Medical Savings Accounts, or MSAs, the Consumer Choice plan would provide the
same basic 259c tax credit for deposits. Each household would be permitted to have one
MSA and to make an annual deposit no greater than the sum of $3,000 plus $500 for
each dependent. The funds in an MSA could be used to pay medical bills not covered
by their insurance plans, and to pay health insurance premiums.

• Transitional Rules: In order to provide individuals and families with secure, portable
benefits, insurers and employers who currently provide health insurance coverage would
be required to offer policyholders the option of converting their existing coverage to an
individual or family plan. Employers would also be required to add the value of the
coverage they now offer to their workers' wages. Thus, workers could take their
coverage with them when they changed jobs or could use the money to buy a different
plan that better suited their needs.

Employer Provisions

• Individuals and families could still purchase health insurance through their employers.
This would not be their only option, since they would be able to receive the same tax
relief if they purchased coverage on their own or through other groups such as unions,
churches, farm bureaus, business coalitions, professional associations, or through some
other group — similar to the choices that more than 10 million Federal employees,
retirees and their families have today.

• To ensure that individuals and families are able to make regular premium payments on
their health insurance, employers would be responsible for withholding premiums from
their employees' paychecks and sending these premiums to the employees' chosen insurer.
Employers would also be responsible for adjusting their workers' tax withholding to

414

reflect the new tax credits. Thus, taxpayers would not need to wait until they filed their
tax returns to claim back the new tax credits.

Individuals who fail to enroll in private health insurance plans would be ineligible to
claim the personal exemption on their federal income taxes. Employers would adjust their
withholding to reflect this increased income tax liability.

Financing the Consumer Choice Plan

• Because the Consumer Choice tax credit is more generous than the tax deductions and
exclusions that it would replace, it will result in a net revenue loss to the federal
government of $133 billion between 1997 and 1999. To offset this revenue loss, the bill
calls for savings in the Medicare and Medicaid programs of $139 billion over five years.

• Federal Medicaid payments to states for acute care would be distributed on a per capita
basis beginning in fiscal year (FY) 1995. The capitated amounts would be set at 20
percent above the FY 93 level in FY 95. In subsequent years, the capitated payment
would rise by one percent above the consumer price index (CPI). Total federal Medicaid
acute care payments to a state for FY 95 could not exceed the payment for FY 93 plus
20 percent. In subsequent years, the total federal acute care payment to any state could
not exceed the previous year's payment plus CPI plus 2.5 percent. This will produce a
five-year savings of $72 billion. States would be given broad latitude in how they deliver
acute medical care services to their Medicaid population.

• Medicare savings will be achieved by eliminating payments to "disproponionate share"
hospitals, reducing payments to hospitals for indirect medical education costs, continuing
the transition to a prospective payment system (PPS) for outpatient services, and by
updating PPS payments on January 1 of each year, rather than on October 1 . Further
savings would be achieved by placing a 20- percent coinsurance requirement on
laboratory and home health services. These changes will save the Medicare program $67
billion over five years.

Comparison of Savings Achieved
The President's health plan and the Consumer Choice plan

Program Consumer Choice President

Medicare $67 Billion $152 Billion

Medicaid $72 Billion $225 Billion

415

Cutting Costs through Malpractice, Paperwork Reforms

• The Consumer Choice plan would place a $250,000 limit on noneconomic damages,

provide for periodic payment of malpractice awards that exceed $100,000, and limit the
liability of a defendant for noneconomic and punitive damages to their percentage of fault,
as determined by the trier of fact. It would also cap attorney fees, provide for offsets
from collateral sources, and set forth rules for any health care malpractice claims filed in
state or federal coun or resolved through arbitration.

• The Secretary of Health and Human Services would have the power to require all health
care providers to submit claims to health insurance companies in accordance with
standards developed by the Secretary, if providers are not voluntarily complying with the
standards. The Secretar>' is also directed to adopt standard? relating to data elements for
use in paper- and electronic-claims processing of health insurance claims, uniform claims
forms and uniform electronic transmission of data.

Helping the Disadvantaged

• The Medicaid Disproportionate Share program — now used to reimburse providers to

help defray the cost of uncompensated care — would be convened into grants to states
for health insurance coverage, health promotion and disease prevention. The program
would target assistance to individuals who are not eligible for Medicaid, who have
incomes less than 150 percent of poven\', and whose unreimbursed payments for health
insurance premiums and medical care, net of federal tax credits, exceed 5 percent of their
adjusted gross income.

Consumer Protections

• The Federal government will continue to police insurance programs to protect consumers

from being defrauded. Federal criminal penalties are established against health care
providers and insurers who knowingly defraud persons in connection with a health care
transacdon.

Anti-Trust Provisions

• The bill will create "safe harbors" from federal anti-trust laws for: certain groups of
providers; medical self-regulatory entities that do not operate for financial gain; cenain
joint ventures for high technology and costly equipment and services; and certain hospital
mergers. It directs the Attorney General to create additional "safe harbors" for health care
joint ventures that would increase access to health care, enhance health care quality,
establish cost efficiencies from which consumers would benefit, and otherwise make
health care services more effective, affordable and efficient.

416

The Attorney General also is required to establish a program thixsugh which certain
providers may obtain cenificates exempting from anti-trust laws activities relating to the
provision of health care services.

Long-Term Care

• Amounts withdrawn from individual retirement accounts (IRAs) and 401(k) plans for

long-term care insurance are excluded from income. The bill also provides that certain
exchanges of life insurance policies for long-term care insurance policies are not taxable,
li aliO exempts from taxation any amount paid or advanced from a life insurance conaaci
to a terminally or chronically ill individual who is confined to a hospice or nursing home.

417

322 Cannon HOB.
Washington. DC. 20515

News from (202) 225-2871

Congressman JIM RAMSTAD

STATEMENT OF CONGRESSMAN JIM RAMSTAD

BEFORE THE HOUSE WAYS AND MEANS SUBCOMMFTTEE ON HEALTH

THE CONSUMER CHOICE AND HEALTH SECURITY ACT

February 9, li>94

Mr. Chainnan, thank you for giving us the opportunity to discuss our bill, the Consumer
Choice and Health Security Act, this morning. I've enjoyed working with you on legislation
to eliminate the woik disincentives facing disabled Americans who receive SSI payments and
I hope we can work together on health care reform legislation as well.

Few dispute the need for health care reform. Our families are seeing their health costs rise
at nearly twice the rate of inflation. Every year millions of Americans go without coverage.

We have correctly diagnosed the disease. Now it is time for strong medicine.

Our package wUl give all Americans the same choice that the nation's public servants
currently have. This legislation would allow every family to choose from among dozens of
health plans competing on the basis of cost and quality.

Furthermore, the federal employees health benefits plan on which this proposal is modeled
has consistently ou^rfonnwl other private and public sector health insurance programs in
holding down its rate increases.

Mr. Chainnan, this is truly a reform package on which R^ublicans and Democrats can
agree. It provides universal coverage while preserving America's high quality health care
delivery system — the best in the world.

Like many Americans, I am dubious of President Clinton's health care plan.

The Clinton's "one-size fits none" benefits package turns administration of our entire health
care delivery system over to thousands of new state and federal government bureaucrats.

Instead of expanding the authority of government, we need health care reform that preserves
the high quality of care Americans have come to expect and eliminates the perverse
incentives that are driving the health price spiral.

Our plan would eliminate unfair insurance practices such as pre-existing exclusion clauses
and guarantee our woricers that when they change jobs, their health insurance wUl go with
them.

And most importantly, what we promise in this bill we can pay for. According to Lewin-
Vm, one of the nation's most respected economic forecasting firms, this pack^e is budget
neutral.

This pro-family, pro-individual package is truly the cure for our health care system ills.

Thanks again for this opportunity. I look forward to woildng with you on this important
issue.

418

Chairman Stark. At this point, I yield to my good friend, Rod
Grams. Who I suppose won't complain about his health care either.

STATEMENT OF HON. ROD GRAMS, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF MINNESOTA

Mr. Grams. No, I don't.

Chairman Stark. All right. Good to see you. I welcome you to
the committee.

Mr. Grams. Thank you very much. I thank the chairman and the
committee members for the invitation to appear before them this
morning, and I am pleased to join with Congressman Cliff Steams
and Senator Nickles in full support of H.R. 3698 which is the
Consumer Choice Health Security Act.

Now, after hours of listening to my constituents in Minnesota
and their suggestions on health care, I believe Congress must pass
some comprehensive reform legislation which will, first, make
health care affordable for all Americans, regardless of income, sec-
ond, ensure universal coverage and prohibit discrimination against
preexisting medical conditions, third, guarantee insurance port-
ability, fourth, enhance consumer choice, and fifth, treat Members
of Congress just like all other Americans.

These are many of the same principles that the President himself
enunciated in the State of the Union Address. Let me read to you
a few excerpts from the President's speech that night.

"Now, in the coming months, I hope very much to work with both
Democrats and Republicans," the President said, "to reform a
health care system by using the market to bring down costs and
to achieve a lasting health security." He went on to say, "The
American people provide those of us in Government service with
terrific health care benefits at reasonable costs. We have health
care that is always there. I think we need to give every hard-work-
ing, tax-paying American the same health security that they have
already given us." Finally, he said, "If you send me legislation that
does not guarantee every American private health insurance that
can never be taken away, you will force me to take this pen, veto
the legislation, and we will come right back here and start all over
again."

Well, when I sat there that night in the House chamber, I
thought to myself that the President was basically endorsing the
Nickles-Stearns plan. Of all health care proposals now in Congress,
only the Nickles-Stearns plan is using market forces to reduce
health care costs, guarantees universal affordable private health
insurance, increases the number of health insurance plans avail-
able to the average American, and ensures insurance portability
and nondiscrimination against preexisting conditions.

The Nickles-Stearns plan is also modeled after, again as Con-
gressman Stearns enunciated, the Federal employee health benefits
program which has provided health insurance to Members of Con-
gress and Federal employees for 33 years at an average cost of one-
third less than other private health insurance plans.

Unlike most plans, including the President's, the Consumer
Choice Health Security Act accomplishes all of this without undue
Government interference. As my hometown newspaper, the Min-
neapolis Star Tribune, reports, 'The Nickles-Stearns bill tells Gov-

419

ernment to give consumers the dollars and lots of choices and then
get out of the way."

Reforming health care with as little Government interference as
possible is a message that I hear every day from average Min-
nesota citizens, and who can blame them. How can the average
American put his or her trust in a Congress which can't run its
own bank or post office to administer a $900 billion industry like
health care? Decisions about health care should be left to individ-
ual consumers and their families, not to national health boards or
alliances, and that is what the Nickles-Steams bill does.

One of the key roles this bill transfers from Government to con-
sumers is deciding where to purchase their health insurance. The
current Tax Code penalizes those who cannot or choose not to re-
ceive their coverage through their employer. This list includes
farmers, self-employed individuals, the temporarily unemployed,
people changing jobs, and those suffering from illnesses or injuries
not covered by their employer's one-size-fits-all insurance plan.

By replacing the current exclusion for employer-based insurance
with individual tax credits, the Nickles-Steams plan gives consum-
ers an opportunity to shop around for a health plan that best suits
their needs. It does not eliminate employer-based insurance, but
the bill simply offers consumers more choices and introduces great-
er competition in the insurance market, thereby resulting in lower
costs.

Now moving the emphasis away from employer-based health in-
surance, we will also eliminate the problem of job lock. By loosen-
ing the tie between a job and health insurance, no longer will peo-
ple be forced to decide between taking a new job or losing their
medical coverage. The Nickles-Steams plan guarantees health care
that is always there, regardless of whether you work for employer
ABC, employer YZ, or no employer at all. All insurance reforms in
this bill will ensure that no one will be denied insurance because
of any preexisting medical condition.

Finally, since the individual tax credits are determined on a slid-
ing scale based on income and cost of health care expenditures, the
Nickles-Stearns bill will help low- and moderate-income Americans
the most. It is a progressive plan which ensures that those who
truly need the most assistance to purchase health insurance will
have access to it.

Health care costs, universal coverage, insurance portability, and
consumer choice, these are the problems that we as a Congress
must address in this year's health care debate, and we must do it
without creating a new government-run program which would re-
sult in a real health care crisis. The answer, my colleagues, is the
Consumer Choice Health Security Act, and I strongly urge you to
do what is right for the Nation and help pass this legislation.

Thank you.

Chairman Stark. Thank you.

Now we will hear from another distinguished member of our sub-
committee and full committee, Mr. McCrery.

420

STATEMENT OF HON. JIM MCCRERY, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF LOUISIANA

Mr. McCrery. Thank you, Mr. Chairman, and I appreciate your
allowing me the opportunity to testify today in spite of the fact I
do not have a bill yet introduced.

I am currently working with the legislative counsel to refine the
document, and I hope to soon have that introduced. The title of the
bill will be the Health Savings and Security Act of 1994, and it has
many similarities to the bills that you have heard described this
morning. It has an antitrust reform for providers, rural health care
incentives, medical malpractice reform, insurance reform such as
doing away with preexisting conditions, guaranteed renewability,
limitations on premium increases for people who get sick, narrow-
ing the bands of underwriting, and increased portability.

We also provide tax deductibility for the self-employed and for in-
dividuals whose employers do not provide them insurance. We also
provide refundable tax credits for low-income individuals who pur-
chase insurance and tax credits for individuals who purchase pre-
ventive health care.

As we go through the debate in Congress, the thing that I hope
we concentrate on most is the escalating health care cost in our
health care system. That, to me, creates many of the other prob-
lems that we talk about. I believe that of the options out there, cer-
tainly, Mr. McDermott's option and your option, a single-payer op-
tion is a legitimate way to address the problem of rising health
care cost. However, like some medicines, that solution has some
side effects, and I am not yet ready to sign on to those side effects.

When one begins to think about how to cure a problem, he ought
to try to investigate the causes, and while there are many, many
causes for escalating health care cost, it is my opinion, after much
reading and research, that the primary problem in our system is
the lack of incentives for individuals in our society to control cost.

The third-party payment system in the health care svstem in the
United States is pervasive. It controls the system, and it saps any
responsibility, any individual responsibility from our system.

My plan, I think more than any others presented this morning,
addresses that problem. We do that in addition to all the reforms
that I have already mentioned. We do that by encouraging through
the tax system the purchase of high -deductible policies of insur-
ance, coupled with medical savings accounts, allowing individuals
to spend cash for basic health care and preventive health care, and,
of course, you are familiar with the concept anything they don't
spend out of their medical savings account, they are allowed to
keep in that account, rolling it over, year to year, accumulating
what they can in their medical savings account, and at some age,
say 65, they can convert that to an IRA and use that for anything
they like if they pay taxes on it when they withdraw it.

They could also under my plan use their medical savings account
proceeds to purchase long-term care insurance, and that would be
tax-free, as would any other expenditures for health care.

421

I would also allow a tax deduction for the purchase of a managed
care option. I also encourage the creation of small employer-
purchasing pools for small employers as well as individuals.

That, Mr. Chairman, summarizes my plan. I appreciate very
much your allowing me to testify today, and I hope you will allow
me to include in the record a brief summary, a 1-page, front-and-
back summary, of my plan.

[The prepared statement follows:]

422

Health Savings and Security Act of 1994
by Representative Jim McCrery

Insurance Reforms

Guaranteed Issue and Renewal.

No denial of coverage for pre-existing condition.

Premium differentials only for age, geography and gender.

Creates voluntary insurance pooling reforms for small businesses and individuals to provide
lower premiums through group coverage.

Tax Changes

Provide Capped Employer Tax Deduction and Employee Tax Exclusion for Health
Insurance Policy (The deduction and exclusion are limited to policies valued no more than $2,500
per adult up to $5,000 total and $500 per dependent up to $1,500 total, with geographic cost of
living adjustment). Employer tax deduction allowed only for an employer provided Medical
Savings Account/ High Deductible Umbrella Insurance Plan (minimum $1,500 and maximum
$3,000 deductible) OR a managed care (HMO) plan.

Provide Individuals 31 Percent Tax Credit Tax credit is provided only for Medical Savings
Account/High Deductible Insurance Plan or managed care plan. Equalizes treatment for self-
employed and individuals without employer offered qualified health insurance.

Refundable Tax Credit for Low Income Persons for Purchase of a High Deductible
Umbrella Insurance Policy or Managed Care Plan.

65 percent credit for up to 1 10% of poverty.

60 percent credit for 1 10% to 120% of poverty.

55 percent credit for 120% to 130% of poverty.

50 percent credit for 130% to 140% of poverty.

40 percent credit for 140% to 150% of poverty.

40 to 3 1 percent phase out credit for 150% to 160% of poverty.

Tax Credits for Non-MSA Preventive Care. 3 1% tax credit for routine preventive care for those
without a Medical Savings Account or qualifying managed care plan.

Tax Incentives for Practice in Rural and Urban Underserved Areas. Physicians practicing in
rural, frontier, or underserved urban areas are allowed a tax credit equal to $1,000 a month. Nurse
practitioners and physician assistants would also be eligible for a similar credit up to $500 per
month. Includes mandatory service period with recapture if service is less than 5 years.

423

Health Savings and Security Act of 1994
by Representative Jim McCrery

Medicaid Reforms

Increase State Flexibility in Medicaid for Acute Care. At state option, the Medicaid program
will pennit AFDC and SSI recipients to receive medical assistance through enrollment in managed
care or MSA/high deductible umbrella offered in regional voluntary insurance pools.

Provide Federal Budget Savings by Limiting Acute Care Medicaid Payments. Eliminate
disproportionate share payments. 20 percent increase in 1996 over 1994.
1997=CPI+3%;1998=CPI+2%;1999=CP1+1%; 2000 and thereafter=CPI.

Tort Reform

Provides states with a set of uniform standards for resolving medical malpractice disputes.

Promotes pretrial alternative dispute resolution to encourage reasonable settlements.

Eliminates joint and several liability for non-economic damages.

Limits non-economic damages to $250,000.

Includes medical products and devices in health care liability actions.

Anti-Trust Changes

Facilitates the sharing of expensive, underutilized medical equipment by health care providers, and
creates a more flexible anti-trust policy environment for the evolving health care mariceL

Statutory Safe Harbors

The "Safe harbors" apply to: (1) small provider combinations; (2) activities of medical self-
regulatory entities; (3) participation in certain surveys of cost, price, reimbursement, and employee
wages & benefits; (4) joint ventures for high technology, other costly equipment & services; (5)
small hospital mergers; (6) joint purchasing arrangements; & (7) good faith negotiations.

Certificates of Review (Waivers) Awarded by the Attorney General

Providers may petition the Attorney General for certificates of review to obtain antitrust exemption.
If the AG does not reject the application within 90 days, the activity is deemed approved.

Joint Venture NotiHcations for Reduction of Antitrust Penalties

Upon notification and publication of members in a joint venture, health care providers can limit
potential antitrust penalties that may be imposed against the venture.

Underserved Areas

Several new programs are authorized to provide medical services in underserved rural and
urban areas.

424

Chairman Stark. Without objection.

Mr. McCrery. Thank you.

Chairman Stark. I have a couple of comments. I am reheved,
with the exception of Mr. Payne, to find that the minority party
has as much trouble getting an agreement among itself as the ma-
jority party. So welcome to the consternation and confusion club,
as we try and find a package that will answer the President's chal-
lenge of universal coverage and get 218 votes in the House.

I wanted to ask Rod this. You said something about the govern-
ment's inability, and I would stipulate as to our problems with the
bank, but I presume that you have no problem with the way Gov-
ernment runs Medicare and would not want to be by yourself in
voting to eliminate Medicare.

Mr. Grams. Medicare would stay as it is, but I think there could
be some reforms in their handling of Medicare, of course.

Chairman Stark. Some improvement, but we like to think on
this committee that it stands as a symbol of what bureaucracy can
do, and we are always a little touchy about that.

Mr. Grams. I understand.

Chairman Stark. We think we do a better job than the House
Bank, all right?

Mr. Grams. But when I talk to most constituents, none of them
really believe that the Government can better handle health care
than individuals of the private sector, and this is what I get back
so many times from individuals. In fact, at most town hall meet-
ings, they have one phrase for me, and that is "keep Grovernment
out of my health care."

Chairman Stark. But they don't say that about Medicare be-
cause, if we closed up Medicare, they wouldn't have any insurance.
It is interesting. My constituents say the same thing, "Oh, Medi-
care is different," and that is a conundrum we will have to deal
with.

I have a couple of questions on the Grandy-Cooper bill. Is that
right?

Mr. Grandy. Cooper-Grandy bill, Mr. Chairman.

Chairman Stark. Cooper-Grandy. All right.

Mr. Grandy. We are on the other side of the Mississippi.

Chairman Stark. You repeal Medicaid and, in so doing, do away
with the only source of public support for long-term nursing home
care. It eliminates the nursing home reform amendments that we
put in, in 1987, and Mr. Cooper did suggest that he had a long-
term care provision that he was going to add back and reintroduce.
Is that still in the works?

Mr. Grandy. That is in the works, Mr. Chairman. We federalized
the acute care portion of Medicaid. It is not a repeal of Title I. We
had this discussion with Chairman Waxman in front of the Energy
and Commerce Committee.

The long-term care provision is structured in such a way, so that
there is a 4-year phasein of subsidies to those States that would
be getting, obviously, State control of their long-term care dollars,
but might be losing money under the acute care federalization. So,
in other words, the States that would be in the short run disadvan-
taged would have a subsidy to provide them with the dollars they
would lose.

425

Chairman Stark. But the States don't have to maintain any ef-
fort or any payment for the Medicaid cost they now have or do you
require maintenance of effort by the States?

Mr. Payne. There is a requirement of maintenance of effort on
long-term care. States like my own, Virginia, which spends 57 per-
cent of its dollars on acute care and 43 percent on long-term care,
would actually have more dollars to spend on long-term care as a
result of this proposal.

Chairman Stark. I am going to take exception to your bureauc-
racy statement because I think you create one, and hear me out on
this. Health plans and the HPPCs would be forced to absorb a loss
from enrolling a disproportionate number of low-income individuals
with vouchers. To compensate those plans, you have created a rec-
onciliation process which would be coordinated by the National
Commission. It would attempt to equalize the payments within
HPPC plans across the country and across self-insured plans which
aren't in the HPPC.

So my postulate is that essentially require this National Com-
mission to tax all health plans, including self-insured plans, in
order to compensate those plans that enroll a disproportionate
share of low-income, vouchered individuals. Is that not correct?

Mr. Grandy. My understanding, Mr. Chairman, is that we have
a fall-back mechanism to provide full funding for low-income indi-
viduals if the Federal funding falls short.

Chairman Stark. Right. So you tax all the plans, and the Na-
tional Commission makes the adjustment to compensate. The plans
would get hit. It is sort of a risk adjustment, but it is an equali-
zation process. The President does somewhat the same thing.

Mr. Grandy. This would only happen, Mr. Chairman, if Congress
did not raise the sufficient funds. In other words, it is a fall-back
mechanism.

Chairman Stark. Yes. All right. That is what the President has,
the same thing, but it needs then to tax the plans or raise the
money from the plans to redistribute within the HPPCs and the
self-insured plans.

Mr. Grandy. That would be the consequence of Congress didn't
do its job, yes.

Chairman Stark. OK I have just suggested that would take
some bureaucracy.

Now, if a firm has over 100 employees and an employee in that
firm gets cancer, is there any limit on how much an insurance com-
pany insuring that firm could increase the employee's premium,
and is there anything that would prohibit the insurance companies
from cancelling that coverage?

Mr. Payne. If you would wait just 1 minute and let us consult.

Chairman Stark. I don't think there is. You can offer amend-
ments to correct this. I point this out, L.F., not in a manner of hos-
tility, but these are all the same problems that have been leveled
at many plans.

I only say it to suggest that, in my opinion, creating HPPCs,
even though they may rely on competition, can create the same
problems in the absence of this sort of absolute purity which none
of us can write in. There is no perfect competition.

426

I am not sure that we are going to be able to write, absent single
payers, as my distinguished colleague will suggest, a plan that
doesn't create some of these disconnects.

Mr. Grandy. Mr. Chairman, as I think you just implied, there
are assumptions in all of these plans, single payer included.

Chairman Stark. Right.

Mr. Grandy. The assumption that we make with the 100-
employee threshold is that above that number, an illness such as
cancer, a catastrophic payout would not necessarily drive up the
premium so disproportionately above that number that you would
see a precipitous increase.

Chairman Stark. But there are companies, like Golden Rule who
have a long history and 1,000 lawsuits against them, where they
do just that. We don't have any control. There is always the bad
apple that spoils the barrel, and I have felt for a long time that
we have to prohibit that by creating an open enrollment or not al-
lowing medical underwriting, which you do under 100 and obvi-
ously could correct this just by taking that 100 cap off.

My time has expired.

Mr. Thomas. Mr. Chairman, that is exactly why in examining
the options we believe that purchasing cooperatives have a lot of
potential, but they are imperfect currently. Therefore, they should
be allowed. We should structure it. We should change antitrust
provisions. We should reform the insurance market, but we should
let the market competition continue to define this rather than have
us sit down and try to devise a perfect world. There is on perfect
world, and we have purchasing cooperatives, but they are
nonmandatory.

Chairman Stark. Dr. McDermott.

Mr. McDp:rmott. Thank you, Mr. Chairman. I want to commend
you for having this hearing.

I think this is one of the better hearings we have had because,
actually, members are sitting, talking to members and getting an
opportunity to at least hear how the other person thinks about this
issue. I think in this debate, that is going to put us a lot further
down the road.

I would suggest that preconceptions people have about plans
really need to be held in abeyance a little bit. Over in the Edu-
cation and Labor Committee, the American College of Surgeons
just endorsed the single-payer plan. So I think the game is still on
the field, and I think this kind of discussion is very important.

I would like to hear some thinking. Unfortunately, I have got
questions for everybody because I found myself agreeing with some
of what each of you said, but I am going to focus on L.F. and Mr.
Grandy for a second because yours is the plan that probably goes
the furthest in terms of answering the question that everybody gets
hung up on, and that is the question of where do you get the
money for this.

The tax cap that is in your bill, as I understand it, operates in
that the company that provides health insurance for their employee
can deduct only that amount equal to the lowest-cost plan in the
area. They lose the deductibility for anything they purchase for
their employees beyond that, and if they do purchase for their

427

employees, they pay a 34-percent excise tax on the benefits they
provide.

To me, that is a tremendous financial lever; the employer then
has to say to his employees, "We are getting out of the benefit
package business. We will pay for your low-cost benefit, and you
can go out and buy whatever you want," and I understand tnat
may be what you wanted to create.

What is hard for me to understand is what you think the impact
will be across this country in terms of taking away the tax deduct-
ibility of health insurance that, as Mr. Stearns suggests, has been
built up since the second World War. Workers have foregone wages
in order to get a benefit package in negotiations all across this
country.

Boeing employees have stood in the rain three times in a row
over their benefit package on strikes. We are not talking about a
minor issue here.

I would like to hear your thinking about what the impact is
going to be on society if you take away the deductibility of
everybody's health care insurance except for the lowest-cost plan in
the area.

Mr. Grandy. Dr. McDermott, let me try a stab at this. This was
brought up at Energy and Commerce as well, and you were a little
kinder than your colleagues over there. You didn't actually accuse
us of raising taxes on the middle class, but somewhere lurking in
your statement is that inference.

Mr. Grandy. I put it in the press release.

Mr. McDkrmott. I didn't want to bring it here because I really
would like to understand your thinking.

Mr. Grandy. Let me say, first of all, one of the statements that
I think stuck in my mind when we began this debate and one of
the ones that I think drives the thinking behind the Cooper-Grandy
bill is something that Dr. Everett Koop said when he came up and
appeared with the First Lady when he said that there is a problem
in this country, not solely that there are too many Americans with
too little health insurance, but there are probably a significant
number of Americans who have too much.

Right now employer-provided benefits and that deductibility is
the third-largest health care entitlement the Federal Government
bestows, and that has created, I think, a surfeit of benefits and per-
haps a wedge in the labor-management relationship to basically
concentrate more on benefits which are not taxable than wages
which are.

The purpose behind our attempt to limit the deductibility, but
not the exclusivity to the individual, is to allow some of that redis-
tribution to go to those people that don't have any health care or
too little. If my colleague, Mr. Cooper, were here, he would describe
this as trying to take away the Cadillac right to everyone, so that
everybody could have a Chevy.

Basically, the threat there, as you point out, is that employers
perhaps will start to shorten up on their benefits. If that were to
happen, and I am not necessarily sure that is a consequence of this
action, but if it were, the individual, because exclusivity remains,
can go out, buy extra benefits if they so choose, and deduct that
because 100-percent exclusivity still remains in play. If they are

428

low-income individuals, there will be subsidies to that effect to pro-
vide them if they feel as though their benefits are too small.

What we are reducing, though, and we are admitting this and
are proud to admit this, is that we are trying to shorten up on
what we think has been an enormous corporate subsidy under the
guise of health care benefits over the last few years, a subsidy that
perhaps has run away. Contrary to the Clinton plan which contin-
ues that subsidy for 10 years, a kind of period, a grace period, for
which all Americans will play, including low-income individuals, we
are trying to stop that now.

So, if that is a tax increase to you, I would say that is a middle-
income tax cut to those of us that believe this because the individ-
ual, the person without the benefit, the person with too little insur-
ance, I think is going to wind up getting a benefit, a more generous
benefit, or perhaps one that they don't have at all in return for per-
haps large corporations, whether it is Boeing or Chrysler or Amer-
ican Airlines, perhaps, if you are right, downsizing their benefits.

I guess I would say, finally, I am not sure that they all will be-
cause I think that health care is a significant bargaining chip in
any labor negotiation, and I am not sure that you would nec-
essarily see all of the employers of America disinvesting in health
care right away.

Mr. Grandy. I agree with you, and I would predict great labor
unrest. Every major labor dispute in this country in the last 5
years, perhaps longer, has been related to the benefit package.

Mr. McDermott. But that is not necessarily good, I don't think
. I mean, what you have seen on the other side is that wages have
shortened up. Wages have remained stagnant in this country, and
benefits have exploded. One is taxable; the other isn't.

Mr. Grandy. My belief is that you increase the pressure, man-
agement is going to say, "If we give you this benefit package, we
are going to have to pay a 34-percent excise tax on what we pay
you above the very minimum package in our neighborhood," and
from my standpoint, the stockholders are going to be saying to the
management, "You've got to offload this cost onto the employees."
I mean, that is what we have been doing. We have been watching
since about 1980. The number of people insured in this country has
been dropping because employers have been trying. First, they got
rid of the children and then they got rid of the spouse, and so now
they are trying to get only the employee that they are covering be-
cause they have tried to offload parts of the health care cost.

This, to me, is a tremendous lever that the stockholders are
going to use on the management and say, "If you want your job,
get rid of some of these costs. Get rid of the health care cost. Put
it on the employees."

Let me make one more point, and then I will yield to Mrs. John-
son. I don't want to leave the impression with this committee, and
we did not leave it with Energy and Commerce, that this low-cost
health care plan, as it was described in Energy and Commerce, is
somehow some cut-rate de minimis plan that nobody can really
use. We may not be as comprehensive as the administration's plan,
but we are not talking about some kind of cheap subset of health
care benefits that a lot of people have now.

429

Will in vitro fertilization be in it? Probably not, but most of the
care that a lot of people, I think, would expect under a basic plan
will be, and if the consequence of all of this is that managers and
CEOs find themselves having to take what they used to pay in ben-
efits and transferring over to wages, I think labor is advantaged.

I will yield to Mrs. Johnson.

Mr. McDermott. May I just make one clarification before Mrs.
Johnson?

Mr. Grandy. Yes.

Mr. McDermott. I would feel much better about this proposal if
you had written your benefit package into the law, so I know what
it is, instead of giving it to a board who is going to define it after
we have passed the bill and left town.

I did one of those in the State of Washington, and they left men-
tal health benefits out of a bill I wrote. So I don't trust commis-
sions. That is why I am a little wary of your low-cost plan, what
that will amount to.

Mr. Grandy. Mr. Cooper has said in front of Energy and Com-
merce that in the interim while we are waiting for the standard
commission to be created and empowered, there might be an oppor-
tunity to create an interim set of benefits. Could we count on your
support if we were able to do that? I mean, could we sign you up
as a cosponsor at that point?

Mr. McDermott. Let me see the benefit package.

Mrs. Johnson. Mr. McDermott, two comments. First of all, I
think you can write generic descriptions of a basic benefit package
that would address the problem that you had with your Washing-
ton situation, but I am very nervous, and I think this committee
ought to be particularly conscious of the down side of a specific
benefit package because we have seen ourselves write tax law that
had a catastrophic impact on a certain set of businesses that we
simply never thought about.

Congress has literally put people out of business because it is un-
able to change the law in a timely fashion to save people who le-
gitimately should have been saved.

As a woman, I do not want a Federal law that says how often
I can have a mammogram because I know if it says it today and
the science decides tomorrow I should have it more often, it will be
very hard for us to change that law, just like it took us, what, 3
or 4 years to get any reimbursement at all for mammograms for
women. So what we heard in our hearing yesterday was that gov-
ernment doesn't have a fiexible-enough process to either respond,
to benefit changes driven by science, or to plan ahead.

Those long waits that we heard extensive discussion of yesterday
were directly the response of Canada not being able to see in the
1980s the disease patterns of the 1990s and, therefore, put in place
the resources. So I think there are some issues about benefit plan
specificity in Federal law that we really have to address.

To the earlier issue that you raised about tax deductibility, there
is an issue of equity that health care reform has to address, and
we really have only two choices. Do we address it through a con-
sistent policy of defining what government will subsidize and what
it won't or do we not address it at all? I would maintain that the

430

President's proposal, foF instance, for premiums that will automati-
cally step down won't address it.

Right now we have people who pay a large amount of money for
a very poor package, effectively subsidizing through their income
taxes those first-dollar coverage, Cadillac plans that you are refer-
ring to because they are all subsidized through tax expenditures.
It seems to me only fair and reasonable to pull back our subsidy
of those plans to the benefit plan that everybody has access to.
That is a matter of equity, and I think health care policy has got
to be equitable if we don't do that, and the President doesn't, and
since the President doesn't, we have this phenomena. We have
pressure on premiums so that they will go downward. That will
make less money available for service reimbursement, but those big
plans will still have every incentive to overuse and no block on the
drain on money to pay for that overuse, further depleting available
funds for those within the system who have a less generous plan
than the first-dollar coverage people.

So the equity issues that lie behind your question are very seri-
ous, and while I personally as a cosponsor of the Cooper-Grandy
bill am troubled by tying deductibility to the lowest-cost plan, I
think there is a point at which we can say this is what society is
willing to subsidize, and we are going to do it for seniors, we are
going to do it for middle-class working people, we are going to do
it for Medicaid people, and we are not going to do more than that,
but equity has got to be addressed as we move through health care
reform.

Mr. McDeiimott. I agree with you on the equity question, and
that is why, frankly, single payer makes more sense to me because
it is a big issue, and I understand now why you are thinking what
you are thinking, but is it your belief that the people who are get-
ting Medicare will be brought down to some low-cost plan or will
that always sit out there as a plan unaffected by the rest of what
is going on in this process?

Mrs. Johnson. Frankly, Medicare is not so great, and there are
a lot of things that aren't available to you under Medicare.

Furthermore, for some people, the copayments are very steep. So
I think, yes, we are trying to establish a health care plan in which
we are going to subsidize costs for low-income people, and that
should be consistent. Gradually, we should move toward a benefit
package that is consistent, and we are recognizing that in Con-
gress. We are just doing it through the backdoor, but when we
change the premium rates for upper-income seniors, we are doing
subtlely the same kind of things.

So I think we need to work toward absolutely consistent policy,
and age should not be a factor. Quality care, affordable care, taking
into account resources in society as well as individual resources,
are those things that ultimately should guide us. While we may not
get there entirely on the first round of health care policy reform
this session over the long haul, absolutely I am looking for equity,
and most of the seniors I represent would be perfectly happy to
know that they got exactly the same support and help according to
income and quality plans that everyone else is getting.

Mr. Thomas. Mr. Chairman.

431

Mr. McCrery. Mr. Chairman, I want to add to the discussion on
this for just a moment.

Mr. Thomas. As do I.

Chairman Stark. All right.

Mr. McCrery. I will defer to my senior collea^^ie on the commit-
tee.

Mr. Thomas. Although no questions have been directed to the
package, it obviously contains somewhat similar concept, and I
want to make sure that in the discussion of a tax cap on fringe
benefits, although the Cooper-Grandy plan has it at the lowest-cost
plan available in an area and in the Chafee-Thomas, it is the aver-
age of the lower half, I believe that flexibility does allow you to
make some judgments that are not available in the other structure,
but I want to talk to the larger question.

Over the last 20 years, compensation has gone up 12 percent.
Wages have gone down 6 percent. To reinforce the point that Mr.
Grandy has made, there has been under the rules that we cur-
rently have a drive toward fringe benefits. It is not a right. It is
not a responsibility. It is a rule under which we established a way
in which collective bargaining and other negotiations outside the
collective bargaining structure could be carried out between man-
agement and employees.

If you are telling me now that unions are going to come unglued,
what I think you need to do is realize that you can't have your ar-
gument both ways. They achieve the fringe benefits under the rules
through collective bargaining. None of these bills repeal collective
bargaining.

If the pressure on the employer is that we have got to bail out
of the fringe benefits because they are not a freebie anymore, we
have changed the rules, as we snould have a decade ago. Then
what you are going to get is pressure on the hand of tne labor
union to increase wages. If you are going to take away what we al-
ready negotiated because the rules nave changed, then put it back
on the wage side in those collective bargaining structures.

So I don't think the unions have anything to fear. I think those
folks who might be under a nonunion structure in which the em-
ployer has a greater right to deal with it would, in fact, be con-
cerned.

Now, what do you do with the mone}' from the cap on the fringe
benefit? Take a look at the Chafee-Thomas bill. We anticipated the
concern that you have not so much for the collective bargaining
people. They are going to be able to take care of themselves under
the current structure, but for those folk who may wind up having
to insure themselves now because the employer pulls away from it,
we take the money scored by the Joint Tax Committee with that
t£ix cap, and we use the low Blue Cross/Blue Shield as our model,
which is not a skinnied-down package, as Mr. Grandy indicated, it
is a relatively decent package.

The money that you save with that tax cap gives 100-percent de-
ductibility for the self-employed. Now, how about equity there? I
think you need the equity for the self-employed. We pay for it.
Then all of those who are currently not being paid for by the em-
ployer on their insurance, up to the tax cap, would be covered as
well by that money.

432

So, one, it creates a discipline that should have been there 10
years ago. Two, it provides a funding source that offsets those who
are now insuring themselves up to that nice package and 100-per-
cent deductibility for self-employed, and it provides over $7 billion
to initiate the voucher structure along with the Medicare savings
to make sure that those people, up to 90 percent of the poverty
level, initially, working up to 240 percent of the poverty level,
through the existing Treasury collection and dissemination struc-
ture, begin to get help in buying that insurance that they cannot
now afford.

I think if you look at it that way, you will see that an individual
mandate tied to the tax cap does have a synergism that works well
in making fundamental changes in the marketplace, if you change
the insurance incentives, if you change antitrust reform to allow for
small business, among others, to capitalize on the changes that you
are putting in the system.

Mr. McDermott. I would agree with you that the people most
at risk are the nonorganized or the unorganized; that the organized
people make up 19 percent of the work force. So they are really not
the main issue. It is really the unorganized where the employer
will have all of the leverage, and the employees will be totally un-
protected in that struggle, at least by my view.

Mr. Thomas. I understand that, but your point was that the
labor unions will come unglued. Now they are only 19 percent of
the marketplace.

Mr. McDermott. No, no, no.

Mr. Thomas. Once again, you can't have it both ways. Either
these people have got a good deal and they are going to collect it
in wages or they are not strong enough to drive the decisionmaking
unless you are a member of the Democratic party and they are in-
side your group making sure that a good change like this won't be
part of a compromise.

Mr. McDermott. I was just suggesting that they would go on
strike. They can do that, and if you want labor strikes and labor
unrest in this country, then you establish a social policy that pits
two people against each other, and you can make social policy.
Now, that was my question. I am not saying you intend that.

Mr. Thomas. First of all, before I got into this job, I negotiated
fringe benefits

Mr. McDermott. I know that.

Mr. Thomas [continuing]. Under the rules, and what we did was
sit around and dream up ways to go after that money beyond a de-
cent normal package.

You know what they came up with? We came up with an 8-per-
cent tax-sheltered annuity funded through fringe benefits. What I
did when I came up here was knock out any dollar benefit from
any kind of a fringe benefit package where you could collect money
at the end of the year because I thought that was wrong. At the
time, those were the rules. We partially changed the rules in that
regard.

What you are going to find out there is not this enormous action
to go on strike. What you are going to find is, hey, guys, the game
is up. We were able to play it for longer than we should have, and
now we are going to have to redefine the way in which we relate

433

with each other, and wouldn't it be wonderful if the solution be-
tween management and labor is that we are going to give you a
wage and you are going to decide for yourself how to pay for it in-
stead of pumping it into that tax-fi*ee fringe benefit area in which
third-party players have distorted the system for too long.

Mr. McCrery. Mr. Chairman, if I might just add a quick note
here.

Chairman Stark. Gro ahead.

Mr. McCrery. I think this is an appropriate discussion for this
tax-writing committee because what we are talking about, really,
is tax expenditures. When you talk about deduction, you are talk-
ing about tax expenditures. It is really like a spending program.

Mr. Thomas. Would the gentleman yield briefly?

Chairman Stark. If we could have one witness at a time.

Mr. Thomas. Could I have my 5 minutes, so the light would be
green?

Chairman Stark. You have had more than your 5 minutes.

Mr. McCrery.

Mr. McCrery. Thank you, Mr. Chairman.

I agree, I think, with you, Mr. McDermott, as you are an advo-
cate of a single-payer system, that we ought to use the tax system
in whatever manner to offer incentives for insurance or for health
care to the broadest possible array of citizens in this country, and
that is what a tax cap is all about. So it is a little surprising to
me that a criticism of that attempt by some of us, a few of us on
the Republican side, I might say, to broaden the base of people who
benefit from these tax expenditures would come from a single-
payer advocate, which takes that thought to the extreme of giving
everybody the same benefits for the tax expenditures that we
make. So I am surprised that you would make that negative com-
ment about an attempt by some of us to further liberalize the tax
expenditures.

Mr. McDermott. Let me just suggest one of the quibbles I have
and the reason I raise it is I guarantee universal coverage.

Mr. McCrery. And we are trying to guarantee it to more people.

Mr. McDermott. You can't guarantee it to more people than ev-
erybody.

Mr. McCrery. Sure, we can.

Mr. McDermott. I have got everybody.

Mr. McCrery. If we spread the tax deduction around to more
people, Mr. McDermott, we allow more people to get in.

Chairman Stark. Only in Cook County, and we don't talk about
that.

I have one comment, and I would take part in this. This is only
relevant to future witnesses, as we have heard some discussion,
and we will, about individuals choosing. It becomes very important
to empower the individual.

It has always been a feeling of mine that among us — we had 7
at the witness stand and a couple of here — without the help of our
staffs and with nothing written on your shirt cuffs, I am going to
speculate that we are arguably far more knowledgeable about
health insurance benefits than the average person in the country,
not a provider, but the average man on the street, we here on the

434

dais and the witness panel, I don't think you can get a much more
well-informed group.

I am further going to suggest that there isn't a one of us that
could score a 70 percent passing grade on my test to describe in
any detail what our health benefits are. Deductibles, out-of-pocket,
copay on the hospital, copay on the docks, preventive care, mental
health benefits, prescription drug benefit, dental benefit, home
health care, durable medical equipment, I am not sure I could tell
you. I could run back to my office and get my policy, but I am not
sure. I just say that to say that I am not sure it is reasonable to
expect the average person on the street who hasn't had our experi-
ence of having to grind through this, with as much knowledge as
they could have, and we have had more knowledge than many of
us may want to have.

I only say that when you think through this idea of completely
empowering an individual. It may speak to the need for purchasing
groups. It may speak to the need for bargain plans. If anybody
wants to challenge me on them, I will give you the test, but I don t
think we can do that because we don't anticipate being sick, unless
you have just had a member of your family who has needed to use
the insurance, you haven't looked at the policy, and maybe once a
year we read through the book when we select for the Federal Em-
ployees Benefit Plan. Even then, we may look at it just to renew
what we have.

I hope you will keep that in mind as we begin to just throw ev-
erything on our constituents. They will be able to use some help,
and I am not so sure that defining some benefit plans, some of
those things are a bad idea.

Mr. Stearns. Will the chairman

Chairman Stark. Do you want to take the test?

Mr. Stearns. I don't want to take the test, but I would also be
glad to take the test with my independent insurance agent by my
side, and I think almost every American has an independent insur-
ance agent when they buy their automobile insurance, they buy
their life insurance, and when they buy a multitude of things, like
even mortgages.

Chairman Stark. You have just established one cost parameter.
You want to pay an extra 15 percent to accomplish to provide the
answer to the question I just asked to the total health insurance
cost to this country. I think we can find a less-expensive way.

Mr. Stearns. I would just advocate that in the free market, that
15 percent would be made up in lower cost if the individual made
the decisions with the help rather than the Congress or a national
board set up or something, as Mr. McDermott says, after we ad-
journ Congress. So, I mean, my argument again is for individual
choice.

Chairman Stark. I would buy that. If it weren't the same insur-
ance salesman that sold my mother that Prudential real estate in-
vestment, I would probably go along with you.

Mr. Stearns. All Americans buy automobile insurance, and the
main are successful.

Chairman Stark. All right. Class, if you would like to resume
the seats vou had before, this session of our class started, we will
get on with it.

435

Mr. Stearns. Thank you, Mr. Chairman.

Mr. Payne. Mr. Chairman, may I say one thing as we conclude?

Chairman Stark. Please.

Mr. Payne. I am of a different persuasion than the rest of my
fellow witnesses here. The reason that I am here with Brad and
a part of this Cooper bill is that I do feel very strongly that, as we
conclude health care reform, we have to find the place that can
bring Republicans and Democrats and Independents and all of us
together.

I do think that the Cooper bill does have a real place in terms
of this whole debate because it seems to be a place where this de-
bate may well begin to emanate from and something we can build
on.

I was struck as I was waiting yesterday to make a 1-minute
statement on Japan at the number of Republicans who were saying
that the Cooper-Grandy bill was nothing more than the Clinton
bill, but just slightly different, and then I am struck by the people
in our own party who say that Cooper is really nothing else more
than the Michel bill, slightly changed.

Perhaps what that means is that we are just about in the center
of the universe of things that we are talking about in the Congress,
and I would hope that the committee would give it some credence
as they proceed.

Chairman Stark. The gentleman has in many instances added
a voice of moderation and wisdom to the committee's deliberation,
and I think you are attempting to play that role and doing a very
good job of it in this debate, and we will look forward to your con-
tinued participation. Thank you.

Mr. Payne. Thank you very much, Mr. Chairman.

Chairman Stark. Our next witness is Hon. Charlie Rose.

STATEMENT OF HON. CHARLIE ROSE, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF NORTH CAROLINA

Mr. Rose. Thank you very much, Mr. Chairman. I have learned
a great deal sitting here this morning listening to this extended de-
bate about probably the most important vote I will ever make in
the U.S. Congress.

The thing I would like to ask you to focus on as you go through
this procedure is something that came to my attention rather
starkly when I went through the recess that occurred just before
this session came in and realized the concern of my people back
home on how this plan will impact on each county in my district.

You and I worried a long time about where we are going to put
our district office, so that we can give adequate service to the peo-
ple. Well, think like that about health care. I am going to have to
make a test, and I think most congressmen will have to make the
test. Will countv A, B, C, D, E, and F continue to have a fair level
of service or will they be prejudiced in some way. All I want to say
is you are getting very involved in the details as you have to do
it, but every now and then, step back and consider the impact that
this may have on rural America.

I am not here to endorse any particular plan, to look to your wis-
dom and what finally comes out, but Roy Rowland has an idea
about the use of community health centers that has worked in my

436

district. I am not endorsing the way he would seek them to be paid
for.

Chairman Stark. If the gentleman would yield, we have had
some testimony, and we have worked in this subcommittee. The
concerns of community health centers are identical for those of us
who represent large urban or metropolitan areas and those of our
colleagues who represent the most remote rural areas. It is a con-
cern that I think, on a bipartisan basis, this subcommittee cer-
tainly has been concerned about, and we have tried at least in our
previous Medicare legislation to find a way to provide access in
both of these underserved areas.

Dr. Phil Lee, who is now at Health and Human Services, had
provided extensive testimony about the administration's concern
that any health plan recognized these unique areas. It is not all of
an urban area, but there are parts where there is a problem, and
it is not all rural America, but, indeed, selected parts with unusual
circumstances who will need the opportunity to have special atten-
tion.

I can assure the gentleman that his concerns — and I am pleased
he made the committee more aware of them — are shared here, and
we will look forward to your counsel on that issue as we try and
craft legislation that will meet, as he has heard, a variety of con-
cerns.

Mr. Rose. Thank you.

Mr. McDekmott. If I could just say, I think part of the reason
why I look for support in rural areas as well as in inner cities for
the single-payer plan is that those are both chronically underserved
areas, and nobody is rushing out into the woods and nobody is
rushing into the middle of the Bronx to deliver health care. So that
is why I think we do have a lot of common ground, and we do share
your concern.

Mr. Rose. Thank you, and you can count on my support for the
product that addresses these concerns. I want to help you get the
218 votes for what will work, and I commend Leon Panetta for his
challenge before the Budget Committee. We need to get on with
this. We need to do it, and I want to help be part of the solution
and help eliminate the problems.

Thank you very much.

Chairman Stark. We have a 5-minute vote. The Chair will re-
cess subject to the call of the Chair which will be sometime be-
tween 1:20 p.m., more like 1:30 p.m.

Thank you.

[Recess.]

Mr. McDermott [presiding!. The next panel is Dr. Thomas Rice
who is professor of public health at the University of California at
Los Angeles; CONSAD Research Corp., represented by Wilbur
Steger; John Lott, assistant professor of public policy and manage-
ment, the Wharton School; Robert Helms of the American Enter-
prise Institute; Elizabeth McCaughey of the Manhattan Institute;
and Leonard Schaeffer of Blue Cross of California.

So we will begin with Dr. Rice.

437

STATEMENT OF THOMAS RICE, PH.D., PROFESSOR OF PUBLIC
HEALTH, UNIVERSITY OF CALIFORNIA-LOS ANGELES,
SCHOOL OF PUBLIC HEALTH

Mr. Rice. Thank you.

I am pleased to be here today to analyze how two bills, the
Cooper-Grandy bill and the Thomas-Chafee bill, will affect access
to care and health care cost. I should mention that I have not been
involved in the development of any health care proposals now be-
fore Congress nor have I publicly expressed support or opposition
to any particular bills.

With regard to access, I will begin with Cooper-Grandy. Com-
pared to our present situation, I think it would improve access by
making it possible for all poor people to afford coverage, by pre-
venting insurers from denying coverage to those in poor health or
charging them more, and by encouraging preventive services. But
several access barriers would remain under the Cooper-Grandy bill.

First, employers would still not be required to contribute toward
an employee's coverage. This has been the major reason why we
have almost 40 million uninsured Americans. Individuals would be
covered only if those chose to purchase it themselves. They might
also continue to find themselves locked into a job that offers health
benefits. In fact, some small employers may drop coverage they al-
ready provide and let low-wage workers fend for themselves with
the aid of the premium subsidies.

Second, because the alliances would be comprised primarily of
small firms, the uninsured, the self-employed, and those previous
on Medicaid, they would have a relatively unhealthy mix of enroll-
ees. This could result in premium levels that might be out of the
reach of many small firms and individuals.

Third, the premium subsidies provided to those above the pov-
erty level might not be sufficient to allow them to purchase cov-
erage. I calculated that for a family of 4 with a $25,000 income,
they would have to spend about 10 percent of their income for just
the cheapest plan, and that doesn't even count any of the cost-
sharing requirements they would have to pay.

Fourth, with the exception of some preventive services, the spe-
cific benefits covered in the cost-sharing requirements are not spec-
ified in the bill. If the benefits ultimately chosen are modest and
the cost-sharing requirements are high, then many people might
lose benefits that they currently have.

Finally, people with higher incomes will find it much easier to
purchase the more expensive plans, and that could result in two
tiers of medicine. In the higher-income tier, plans might offer more
flexibility, shorter waits, better-trained providers, easier access to
specialists, and more technologies, but those in the lower tier might
find accessing high-quality care to be difficult.

The Thomas-Chafee bill would also improve access to care. It
would provide the same benefits as Cooper-Grandy. In addition,
there would be universal coverage by the year 2005 if targeted sav-
ings in Medicare and Medicaid are met. Furthermore, individuals
and families below the poverty level would not necessarily be lim-
ited to the cheapest plan available in their area. However, there
still would be some barriers to access.

438

First, although universal coverage is a goal of Thomas-Chafee, it
is not guaranteed. The individual mandate is only binding if there
is enough money available from Medicare and Medicaid savings. In
addition, the onus of paying for coverage is put on the individual
rather than the firm, and as a result, millions of Americans may
not be able to afford to pay for the coverage that they are required
to buy.

Second, like the Cooper-Grandy bill, the health alliances under
Thomas-Chafee would be comprised of relatively unhealthy individ-
uals. This would tend to raise premiums, making it difficult for
both individuals and small firms to afford coverage.

Third, although the benefits included are outlined in more detail
than in Cooper-Grandy, there are still some important uncertain-
ties. In particularly, it is not stated what level of cost sharing will
be required. This could be very harmful to lower-income individuals
if the level chosen is high because they have more health problems.

I want to conclude with just a short discussion of cost contain-
ment. Managed competition is an untested concept, and in my
opinion, there is no convincing evidence to indicate that it can suc-
cessfully control health care cost. There are several reasons to
doubt its effectiveness.

First, consumers, especially those who are in poor health and,
therefore, attached to a particular provider, may continue to pur-
chase costly fee-for-service plans.

Second, for a variety of reasons, HMOs have not been able to
control growth in health care cost, and this problem is even more
acute in the IPAs where the lion's growth of HMO enrollment is
now occurring.

Third, providers may continue to wield considerable market
power even with the formation of the health alliances. If the pro-
viders are allowed to join more than one alliance, each plan is
going to have less clout, and this is becoming even worse now be-
cause so many provider groups are merging together to consolidate
their own market power.

These problems will be accentuated under both bills. The health
alliances are geared only to small employers, and then the enroll-
ment is voluntary. The alliances, therefore, are likely to lack the
necessary muscle to effectively bargain with the provider groups.
This could be even a bigger problem under Thomas-Chafee, where
the health alliances compete with one another.

Given the lack of evidence that managed competition can control
health care costs, it may be necessary to impose overall budgetary
limits. Although this is unattractive in some ways, I believe it is
the only way to ensure that costs will be controlled in a managed
competition environment. Other countries have operated such a
system, but neither bill includes any such controls, and as a result,
I would say that at the very best, the cost containment potential
is untested.

Thank you very much.

[The prepared statement follow:!

439

STATEMENT OF THOMAS RICE, PH.D.,
PROFESSOR OF PUBLIC HEALTH, UNIVERSITY OF CALIFORNIA

Mr. Chairman and Members of the Committee:

My name is Thomas Rice. I am a Professor of Public Health at
the University of California at Los Angeles. I am pleased to be
here today to provide an analysis of how two bills -- Cooper-Grandy
(H.R. 3222) and Thomas-Chafee (H.R. 3704) -- will affect access to
health care services and health care costs.

I would like to state at the outset that I have not been
personally involved in the development of any health care reform
bills now before Congress, nor have I publicly expressed support or
opposition to any particular bill .

I will begin with a discussion of how these bills are likely
to affect access to care, and conclude with an analysis of their
cost containment potential.

ACCESS TO CARE

Cooper - Gr andy

Compared to the present situation, the Cooper-Grandy bill
would improve access to health care services. I am impressed with
several aspects of the bill :

• All people below the poverty level would be aible to
afford health insurance coverage;

• Insurance companies would be prevented from denying
coverage to individuals in poor health, and could not
charge sicker people more; and

• Preventive services would be encouraged.

There would, however, continue to exist several barriers to
access. First, as is the case today, employers would not be
required to contribute towards an employee's health insurance
coverage. This has been the major reason that we have almost 40
million uninsured people in the country. Without employer
contributions, an individual and his or her family would be covered
only if they chose to purchase it themselves. In fact, some small
employers with low wage workers might choose to drop the, coverage
they already provide, letting their workers instead obtairt. coverage
individually with the aid of the premium subsidies provided by the
federal government to those with incomes below 200 percent of the
poverty level .

Second, because the alliances would be comprised primarily of
small firms, the uninsured, the self-employed, and individuals
previously on Medicaid, they would have a relatively unhealthy mix
of enrollees. This would result in premium levels that might be
out of the reach of many small firms, and also make it difficult
for individuals to afford to purchase coverage even with the help
of premium subsidies.

Third, individuals might still find themselves "locked" into
a job because it offers health benefits. Since employers are not
required to contribute to their employees' health insurance plans,
changing jobs could become very costly, particularly to a person
whose income is just cibove the threshold for receiving premium
subsidies .

Fourth, the premium subsidies provided to individuals cibove
the poverty level might not be sufficient to induce them to
purchase coverage. Suppose that a family of four had an income of
75 percent above the poverty level -- about $25,000. If the lowest
cost plan in an area would cost $4,000, they would have to spend
$2250 ($4,000 X .75) towards the premiums of that plan, almost 10
percent of their income.

440

Fifth, with the exception of some preventive services, the
specific benefits to be covered, and patient cost sharing
requirements, are not specified. Rather, they will be determined
after passage by the Health Care Standards Commission. This is
worrisome because budgetary constraints might force the Commission
to opt for a relatively narrow set of benefits, along with
relatively high cost sharing requirements. This could lead, in
turn, to many people losing benefits for which they currently have
coverage .

Sixth, it is not clear that adequate funding will be available
to pay for long-term care services -- particularly nursing home
care. Medicaid now pays for over 40 percent of the cost of nursing
home care, but this component of Medicaid would be eliminated and
responsibility would be transferred to the states. While some
states would have sufficient funding available to shoulder this
burden because the federal government will be subsidizing the
purchase of insurance by low- income persons, one worry is that
other states -- especially those with a higher proportion of
severely disabled elderly -- will not be able to adequately fund
long-term care. In addition, this change would undo the many
consumer protections guaranteed to nursing homes patients during
the late 1980s that were tied to the Medicaid program.

Finally, people with higher incomes will find it much easier
to purchase more expensive health plans, which in turn could result
in segmentation of the insurance market into two tiers. In the
higher income tier, plans might offer more flexibility, better
trained providers, easier access to specialists, and more
technologies. In contrast, those in the lower tier might have
difficulty finding a nearby provider willing to treat them,
experience longer waits, and not have access to the best providers
and technologies. Using the earlier example of the family with
income 75 percent above the poverty level -- even if they could
afford the $2,250 in premiums for the lowest cost plan, it is
extremely unlikely that they could afford to pay, say, $3,750 for
a plan costing $5,500.

Thomas - Chafee

Compared to our current health care system, the Thomas-Chafee
bill would also improve access to care. In particular, it would
provide the same advantages discussed earlier with respect in the
Cooper-Grandy bill. It also has two other advantages:

• There would be universal coverage by the year 2005 if
specific savings from Medicare and Medicaid are met; and

• Individuals and families below the poverty level would
not necessarily be limited to the cheapest plan available
in their area. Rather, they would receive subsidies
equal to the mean premium averaged over the cheapest half
of all plans. Thus, they might receive coverage that
allows them to be better integrated into "mainstream"
medical care.

Both of these elements are extremely important and should not
be overlooked when assessing the desirability of this bill.
Nevertheless, there remain some barriers to access.

First, although universal coverage is a goal of the Thomas-
Chafee bill, it is not guaranteed. This is because the individual
mandate upon which it is based will be binding only if there is
enough money available to fully fund specified subsidy levels for
low- income persons. If Medicare and Medicaid savings are not as
great as hoped, then benefits could be reduced or the eligibility
for and/or size of the vouchers could be tightened; as a result,
universal coverage could be delayed or put off indefinitely.

Whether growth in Medicare spending can be reduced from 12 to

441

7 percent per year is anyone's guess. The most likely way this
could be achieved is by reducing provider payments. But hospitals
report that they are already losing 10 cents on the dollar for
treating Medicare patients, and physicians now receive only about
70 percent as much for their Medicare patients as their privately
insured patients . It is not clear how much more Medicare provider
payments can be cut and still be able to assure adequate access to
care for the elderly and disabled population.

Second, as the case of Cooper-Grandy, the health alliances
under the Thomas-Chafee bill would tend to have relatively
unhealthy enrollees because they would be primarily comprised of
small firms, the uninsured, the self-employed, and individuals
previously on Medicaid. This would tend to raise premiums, making
it difficult for both individuals and small firms to afford to
purchase coverage .

Third, the onus of financing coverage is put on the individual
rather than the firm. Without contributions from their firms,
millions of Americans may find it financially difficult to afford
health insurance coverage. Subsidies will help, but the bill does
not guarantee the size of these subsidies since the magnitude of
Medicare and Medicaid savings is unclear. Furthermore, subsidies
are to be phased out at 240 percent of the poverty level. Thus, a
family with an income of, say, $35,000 could be forced to spend
well over 10 percent of total income for a health insurance policy
without any help from an employer, or the benefit of a government
subsidy. And this does not even include the financial burdens that
would be caused by higher cost sharing levels. Millions of
families are likely to find these increased premium and cost
sharing payments to be an onerous burden.

Fourth, the same issue of "job lock" discussed above could
also occur under the Thomas-Chafee bill --in fact, it could become
even more severe. Because employers are not required to contribute
towards an employee's coverage, some individuals will find it
financially painful to move from an employer that offers coverage
to another that does not . This would be accentuated by the
individual mandate -- since individuals would be required to
purchase coverage, many would feel forced to stick with an employer
that helped them make such payments.

Fifth, although the benefits to be included are outlined in
more detail than in Cooper-Grandy, there are still some important
uncertainties. In particular, it is not stated what level of cost
sharing will be required in both the standard and the catastrophic
benefit packages. This could be particularly harmful to lower
income individuals, who tend to have more health problems.

Finally, as in the earlier discussion, those with higher
incomes will find it easier to purchase more expensive plans,
resulting in segmentation of the insurance market. This problem is
likely to be somewhat less extensive than with Cooper-Grandy,
because subsidy levels are based not on the lowest cost plan in an
area, but on the mean premium averaged over the cheapest half of
all plans.

COST CONTAINMENT

Because Cooper-Grandy and Thomas-Chafee both rely on managed
competition to control health care costs, most of my remarks apply
to both. A more detailed discussion of the points I will make
appears in an article I jointly authored with E. Richard Brown and
Roberta Wyn, entitled "Holes in the Jackson Hole Approach to Health
Care Reform," that appeared in the Sept. 15, 1993 issue of the
Journal of the Americsm Medical Association. I have attached a
copy of this article to my written testimony and ask that it be
included in the Record.

Managed competition is an untested concept. In my opinion,

442

there is no convincing evidence to indicate that it can
successfully control growth in health care spending. There are
several reasons to doubt the effectiveness of managed competition
in controlling health care costs. They include the following:

• Consumers -- particularly those with health problems and
who are therefore attached to particular providers -- may
continue to purchase costly fee-f or-service health plans
that provide them maximum flexibility.

• HMOs have shown little success controlling the overall
rate of growth in health care costs . This is due in part
to the fact that they attract a favorable mix of
patients, leaving sicker ones to the unmanaged fee-f or-
service sector. Nor have they shown any ability to
control the use of expensive technologies. The problem
is even more acute in independent practice associations
(IPAs) , in which the vast majority of HMO growth is
occurring. In many parts of the country, the only types
of HMOs that can be supported with the population base
are IPAs.

• Providers may continue to wield considercible market power
even with the formation of health alliances. If, as is
the case in all major bills before the Congress,
providers are allowed to join more than one health plan,
then each plan will have less clout. This problem is
becoming more pronounced now that so many provider groups
are merging together. In doing so, they hope to be able
to keep their prices higher and the profit margins up.

The problems just mentioned will, in my opinion, be
accentuated under both the Cooper-Grandy and Thomas-Chaf ee bills.
Under both, health alliances will be geared only to small
employers, and even then, enrollment through the alliances will be
voluntary. Thus, the purchasing alliances are likely to lack the
necessary muscle to effectively bargain with provider groups. This
could be even a greater problem under Thomas -Chafee, where health
alliances may compete with each other. Not only will this weaken
their bargaining position, but it could also result in competition
among alliances for the best risks .

The example usually given of a successful working model of
managed competition is the California Public Employees' Retirement
System (CalPERS) . But this is not a convincing model because
CalPERS members make up only a small portion of most health plans'
total enrollments. As a result, plans have been able to make price
concessions to CalPERS and still maintain revenues by charging
other buyers more. Furthermore, the program is not generalizable
to the rest of the country because its members are all employed and
tend to be fairly well paid, it does not offer a fee-f or-service
option, and it operates in an area with tremendous HMO competition.
There is also evidence that the non-HMO (i.e., PPO) plan has
experienced adverse selection.

Given the lack of evidence that managed competition can
control health care costs, it may be necessary to impose overall
budgetary controls over the U.S. health care system. Although
unattractive in many ways, I believe that this is the only way to
ensure that costs will be controlled. Such systems have operated
successfully in other countries and might also work in the United
States. Neither bill, however, includes any such controls. As a
result, their cost containment potential is at the very best,
untested.

Thank you very much.

443

Caring for the Uninsured and Underinsjred

Holes in the Jackson Hole Approach
to Health Care Reform

jv^rr.^c, R.ce PhD E H'Cfard Brown PhD Bobe'ta Wyn MPH

MANAGED competition is synonymous
■Anth market-onented health care reform.
Those ■J.ho corned the phrase, the Jack-
son Hole Group,' have been identified,
incorrectly, by the .Veu,' York Times' as
the brain trust for the Clinton adminis-
tration s reform proposal. Many medical
industry groups have participated in de-
\ eloping the Jackson Hole version of man-
aged competition, including major insur-
ance companies, the Amencan Medical
Association, the Pharmaceutical Manu-
facturers Association, and large health
maintenance organizations (H.MOs).
About the only sigruiicant interest groups
that have not e.\pressed support for the
concept are those representing consum-
ers In this article, we critically assess
theJackson Hole Group's proposal to con-
trol health spending and provide access
to quality health care.

Boiled down to its fundamentals, the
Jackson Hole approach to managed com-
petition requires three major changes
in the L'S health insurance system. First,
regional health insurance purchasing co-
operatives (HIPCs) are formed to man-
age the marketplace for health care cov-
erage, especially for small firms and in-
dividuals. Second, employers and HIPCs
contribute the same amount of money
for coverage regardless of which plan a
consumer chooses. This provision re-
quires limiting the ta.x excludability of
health benefits to the rate charged by
the least costly qualified health plan, so
that premium payments above that lev-
el would be with after ux dollars. Third,
to level the playing field among all health
plans, new rules make it more difficult
for plans to avoid enrolling high-risk in-
dividuals

This critique focuses on the Jackson
Hole model of managed competition; it
applies to other versions of managed

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competition only to the extent that they
share important features with this ap-
proach.

THE JACKSON HOLE APPROACH
WILL NOT CONTROL HEALTH CARE
EXPENDITURES

Jackson Hole advocates argue that
their approach to health care reform will
help control health care expenditures
by making consumers more cost-con-
scious purchasers of health insurance
and health care services. The Jackson
Hole approach assumes that savings will
be generated largely through greater
enrollment in HMOs. Providers, in turn,
will have to compete among themselves
to be selected as members of health plans
by charging less and/or providing ser-
vices in a cost-effective manner.

There are three reasons, however,
why the Jackson Hole approach is un-
likely to succeed in controlling US health
care expenditures: ( I ) consumers^par-
ticularly high users— will continue to
purchase expensive health plans; (2)
greater enrollment in HMOs will pro-
vide few savings; and '3i providers will
continue to have considerable bargain-
ing power in their dealings .vith health
plans.

Consumers Will Continue

to Purchase Rich Benefit Packages

One of the central as.sumptions in this
approach is that consumers will not
readily spend their own i after-tax 1 dol-
lars to purchase relatively expensive
health care coverage. Embedded in this
argument are two suppositions consum-
ers are responsive to premium differ-
ences among plans, and m:iny will be
satisfied with the minimum required set
of benefits. Neither of these assump-
tions is likely to be true.

The economic evidence on how respon-
sive consumers will be to differences in
premiums is embodied by the economic
concept of the price elasticity of demand
for health insurance. This is defined as
the percentage of change in the amount
of insurance purchased divided by the

percentage of change in premiums. Ad-
mittedly, previous research on these
elasticities provides only indirect evi-
dence concerning the Jackson Hole ap-
proach because the latter is likely to
result in a different set of insurance
choices for consumers.

The literature reports a great deal of
uncertainty concerning the magnitude
of the price elasticity of demand for
health insurance. Estimates from some
of the more sophisticated studies vary
greatly, from as little as -0.16 to as
much as - 2.8.'' " The Congressional Bud-
get Office reports, however, that when
similar methods are used to compute
these elasticities, the results from most
studies fall into a much narrower range
(internal memorandum. March 17, 1993).
It estimates that the price elasticity of
demand for health insurance equals
about -0.2 in the short run, and -0.6 in
the long run. (The short run is defined
as the period over which a group, such
as organized labor, cannot renegotiate
its collective bargaining contract— typ-
ically, about 2 years.) Thus, although
consumers would be expected to respond
somewhat to premium differences when
choosing their health plans, the magni-
tude of this response does not appear to
be particularly great.

Even if consumers as a whole were
responsive to premium differences, this
still might not result in substantial cost
savings. This is because the people most
likely to respond to premium differ-
ences are those who are relatively low
users of service. One percent of the US
population is responsible for a full 30%
of health expenditures; 2% account for
41%; and 10% are responsible for 72%.'
High users, who tend to have significant
health problems, are likely to have a
much stronger interest in staying with
their current physicians. As a result,
they would not be easily swayed to
switch health plans even with the pros-
pect of lower premiums. This is espe-
cially true of a switch to a group or staff
model HMO— the health plan of choice
for the Jackson Hole Group — where the

444

patient is locked into the plans own pro-
vider panels.

High users of health services will also
be inclined to purchase plans with more
comprehensive benefits, further under-
mining the Jackson Hole strategy to con-
trol total health spending. Alternative-
ly, if benefits were completely standard-
ized so that health plans could not in-
clude any extra types of benefits — as
some Jackson Hole advocates, such as
Enthoven,' recommend — individuals
could purchase supplemental policies
(not unlike current Medigap insurance,
which IS owned by TO^of the elderly) to
cover any gaps and. possibly, cost-shar-
ing requirements.

No direct evidence is available to in-
dicate the e.xtent to which the public
will wish to purchase benefits above the
basic plan The only research that sheds
much light on this issue comes from the
RAND Health Insurance Experiment.'
Although the experiment covered almost
all services, copayments were required.
Participants were asked whether they
wished to purchase supplemental in-
surance that covered all or part of
their out-of-pocket expenses; 60% said
they would. There was also a substan-
tial amount of adverse selection; fami-
lies that anticipated facing higher
health expenditures were much more
likely to want to purchase supplemental
coverage.

Under managed competition, the de-
velopment of new technologies is likely
to create further upward pressures on
the benefits package. Although very dis-
cretionary and perhaps experimental
services would not be covered, they could
be obtained either by purchasing a more
comprehensive health plan or by paying
for these services directly with out-of-
pocket dollars. Over time, however, con-
sumers and providers will insist that
many expensive new technologies and
services be included in the basic plan for
the simple reason that someone else will
be paying the lion's share of the costs.
Examples could include the dramatic —
an acquired immunodeficiency syndrome
vaccine or a drug treatment that slows
the loss of mental capacity or even re-
versed Alzheimer's disease— or the more
pedestrian, such as ultrasonograms with
better resolution.'

The types of pressures that will be
faced by government can be seen by
examining the extent of sute-man-
dated health benefits. State govern-
ments had enacted more than 730 man-
dated health insurance benefits by 1988.'
The same interest groups that were able
to get state mandates approved are al-
most certain to fight hard to make sure
that their particular type of coverage is
included in any basic plan.

Greater Enrollment in HMOs Will Do
Little to Control Expenditures

A common thread in the writing of
the Jackson Hole Group and other ad-
vocates of managed competition is the
reliance on group or staff model
HMOs."° But there are several reasons
why greater enrollment in HMOs will
do little by itself to control health care
expenditures. First, most people mov-
ing into HMOs will join independent
practice associations (IPAs). In 1990,
about 60% of individuals in HMOs were
enrolled in individual or network model
IP.As," and this trend is becoming more
pronounced.

Between 1988 and 1990, 77% of HMO
enrollment growth was accounted for
by individual or network IPA plans."
Available evidence concerning the cost-
containing potential of IPA is mixed.
Although recent findings reported in
JAMA from the Medical Outcomes
Study" do report some cost savings,
most other analysts, including the Con-
gressional Budget Office, have found lit-
tle evidence of savings.'^"

Second, consumers who join group or
staff model HMOs tend to be healthier;
for such persons, managed care offers
the fewest cost savings because they
have less potential to need large vol-
umes of services. Although many of the
rules of managed competition are sup-
posed to reduce the amount of favorable
selection into HMOs, selection bias may
continue to be a problem, and in fact,
insurers have a bevy of such techniques
available, many of which could still per-
sist even under the Jackson Hole ap-
proach."The Federal Employees Health
Benefits Program ( FEHBP) and the Cal-
ifornia Public Employees' Retirement
System (CalPERS) provide some evi-
dence for this, although the compari-
sons to the Jackson Hole approach are
not directly applicable because neither
of these programs risk-adjusts and be-
cause both include retirees in their in-
surance pools. The FEHBP's high-
option service and indemnity plans have
attracted a much higher proportion of
retired people and high-risk people than
the HMOs." The same is true of
CalPERS — which is often touted as a
prototypical Jackson Hole model —
where the statewide preferred provider
option, which has the most flexible and
extensive benefits of the health plans
offered, has experienced adverse selec-
tion relative to the HMOs."

The Jackson Hole approach attempts
to deal with any remaining problems of
selection bias by "risk adjusting" con-
tnbutions. That is, plans with sicker en-
rollees will get higher payments, al-
though these proposals are silent on ex-

actly what the formula would look like.
Many efforts have been made to find
factors that are good predictors of fu-
ture utilization; one study" reviewed
more than 40 such efforts published
through 1985. Factors examined include
sociodemographic factors, some clinical
and self-assessed health measures, dai-
ly activity limitations, and prior utiliza-
tion and costs.

Perhaps the best of these variables
for explaining future health care utili-
zation IS past utilization.'" It could there-
fore be argued that plan contributions
to health plans should be based in part
on previous utilization levels of enroll-
ees- Unfortunately, this approach is in-
herently infiationary. If plans are com-
pensated more in subsequent years if
enrollees use more services now. there
would be an incentive to increase cur-
rent utilization levels, which in turn
would result in higher expenditures. Re-
searchers are using some of the vari-
ables mentioned in the previous para-
graph to develop more powerful formu-
las that are not inherently inflationary Z'
But until the state of the art is farenough
along to take away plans' advantages
from obtaining a favorable selection of
enrollees, purchasing cooperatives will
have to use less technically sophisti-
cated means of adjusting payments to
plans.

Third, although HMOs cost less than
fee-for-service plans for a particular ar-
ray of benefits, they have not been suc-
cessful in controlling the rate of increase
in health care expenditures. This has
been shown to be the case consistently
for the last 30 years." ° Part of the prob-
lem IS due to HMOs' inability to control
the rate of technology diffusion and oth-
er input costs. If HMOs are to compete
with fee-for-service medicine, they must
provide the same types of services that
make their physicians feel that they are
providing state-of-the-art medicine and
their patients believe that they are re-
ceiving the best medical care possible.
In this regard, Newhouse" has stated
that "whatever is driving up costs in
fee-for-service medicine has been driv-
ing them up in HMOs as well Technol-
ogy is a factor that applies to both." Of
course, if approaches such as Jackson
Hole result in a much higher rate of
HMO enrollment than previously, then
future experience might differ from the
past, as HMOs compete more against
each other than against fee-for-service
plans. But at this point, such a scenario
Is speculative.

Finally, in most parts of the country
there is not a sufficient population base
to support adequate HMO competition.
Kronick et al'" recently conducted an
analysis that assumed that three com-

445

peting health plans were necessary to
ensure minimally adequate competition
m an area. They found that only 42% to
63% of the population lives in areas that
could support three or more HMOs. Jack-
son Hole proponents argue that in the
majority of rural areas, managed com-
petition would work through the use of
flexible health plan arrangements (eg.
competition among small pnmary- care
facilities or among primary care provid-
ers) But they do acknowledge that there
are settings, and in fact whole states
(eg, Wyoming and Montana), where the
approach may not work and would need
to be replaced by a "managed coopera-
tion" approach.^

Whether or not one accepts these
numbers, it is clear that the Jackson
Hole model would not be effective in a
large proportion of the country Fur-
thermore, just because the population
exists does not ensure that the mini-
mum number of HMOs will enter the
market Even when there is a sufficient
population base to support a number of
HMOs, It may take years for enough
groupor staff model HMOs to enter the
market and achieve adequate enroll-
ments.-'

Providers Will Continue to Have
Considerable Bargaining Power

One of the linchpins of the Jackson
Hole approach is that health plans will
have considerable leverage over pro-
viders. Because it is assumed that plans
that are too costly will not be chosen by
consumers, the only way for plans to
survive is to e.xercise strong bargaining
power over provider groups. And since
being a member of a health plan is the
only game in town, providers will have to
play ball or else lose most of their busi-
ness. This scenario may not be realistic,
however, for the following reasons.

First, if providers join multiple
plans— which purportedly will be al-
lowed under the Clinton administration's
proposal— then plans will continue to
have little effective bargaining power.
Most advocates of managed competition
recognize that little is gained when pro-
viders contract with large numbers of
managed care plans.'"-'' As the number
of health plans increases, each has less
market power over individual provid-
ers, particularly when providers become
members of more than one plan. This
places plans at a disadvantage in bar-
gaining with providers, and the price
they receive may not be as low as it
would be otherwise. It is, therefore, sur-
prising that most managed competition
proposals, including Jackson Hole, do
not explicitly control the number of com-
peting plans or the number of plans with
which individual providers may contract.

Although the HI PCs or other bodies
certify plan eligibility, in most propos-
als any qualified plan may market itself.

An example of this problem is the
experience of preferred provider orga-
nizations (PPOs). In 1988, the typical
insurer-sponsored PPO had 155 000 el-
igible participants, and 13 000 physi-
cians.* Thus, on average, each physi-
cian had only 11 members from a par-
ticular PPO, who may not have even
used the PPO network. The PPOs there-
fore have little bargaining power over
providers since they are responsible for
so little of each provider's practice. In
fact, recent studies^" have almost uni-
versally concluded that PPOs either do
not reduce health care expenditures or
even raise them.

The second problem is that providers
may respond to the formation of HI PCs
by consolidating into larger practices to
obtain countervailing market power.
This appears to be what has occurred in
Minnesota As a reaction to the increas-
ingly competitive nature of the public
and pnvate health insurance market dur-
ing the 1980s, practitioners and "hospi-
tals have organized into bigger chains to
give themselves the clout to negoti-
ate."^^ This countervailing market pow-
er has allowed providers to raise their
prices and keep their margins up." Jack-
son Hole advocates offer no clear solu-
tion to this problem.

THE JACKSON HOLE APPROACH
WILL NOT ENSURE
ACCESS AND QUALITY

Advocates of the Jackson Hole ap-
proach argue that it will improve access
and quality of care for several reasons:
universal coverage would be assured,
with the poor and near-poor receiving
subsidies toward purchasing health cov-
erage, insurers would no longer be per-
mitted to deny coverage or charge more
to people in poor health; more people
would be offered a choice of health plans
than currently have such a choice; and
the poor could receive coverage from
the same plans as the nonpoor. Quality
would also improve as plans compete
with each other to provide the best prod-
uct, medical outcomes, and satisfaction
per premium dollar This kind of com-
petition would be facilitated by requir-
ing plans to disseminate information
about these outcomes to prospective and
current enrollees.

Conversely, it can be argued that ac-
cess and quality problems would persist
under managed competition. By relying
on price competition among plans and
providers, access and quality could be
jeopardized through the segmentation
of the market into two tiers. One tier
would be composed of lower-income en-

rollees who, for economic reasons, were
forced to join the least costly plan in an
area; the other tier would include al-
most everyone else. A discussion of these
issues follows.

Limited Access (or
LovK-lncome People

Capping employer payments and gov-
ernment subsidies to health plans at the
rate charged by the lowest-cost certi-
fied plan tn an area would, in practice,
restrict the lower-income population to
these basic plans. This is not so much a
problem in the existing programs that
Jackson Hole advocates frequently point
to — the Minnesota State employees pro-
gram, CalPERS. the FEHBP, and oth-
er large public-sector employers — tffe-
cause nearly all employees in these
groups are paid sufficient wages to af-
ford some choice. The same cannot be
said for people employed in low-wage
occupations or industnes

Stale-level studies for Massachusetts
and Vermont estimated that, after tak-
ing account of typical essential monthly
expenses, families below 200% of the
poverty line had little or no disposable
income available for sliding-scale con-
tributions to health insurance premi-
ums." Another study found that lower-
income families' spending on health in-
surance is much more infiuenced by the
price of the plan: price elasticity esti-
mates for health insurance were tvi'ice
as high for families with incomes be-
tween $15000 and $25 000 as for those
with incomes of more than $40 000 (-0.14
vs -0.06); for families with incomes less
than $15000, elasticity estimates were
six times higher ( -0.39) than for those
with incomes of more than $40000.'

Thus, persons with family incomes be-
low 200% of the federal poverty level
are unlikely to be able to afford premi-
um surcharges Using this standard, 80
million people — 32% of the entire pop-
ulation— will be able to "choose" only
among basic plans (unpublished analy-
sis of March 1991 Current Population
Survey). Market choice requires the fi-
nancial means to choose, but the Jack-
son Hole approach would limit the choice
of lower-wage workers and other lower-
income persons to basic plans.

If low-income people are financially
restricted to basic plans, differentials in
premium charges between plans would
result in segmentation of the market.
Although Jackson Hole advocates as-
sume that some plans will market to
persons who cannot afford out-of-pock-
et premium charges, it is likely that most
plans would prefer to market to a more
affluent market niche where profit mar-
gins may be higher. These plans would
entice middle- and upper-income groups

446

to pay more of their after-tax income for
more choice of physicians, shorter waits
for appointments with primary care phy-
sicians and specialists, more convenient-
1 V located physicians, hospitals, and phar-
macies, and/or broader coverage Mar-
ket segmentation would adversely af-
fect people who are unable to afford more
than a basic plan. They would find that
there are not enough plans with enough
capacity willing to participate; they
would find few providers willing to serve
them; and they would have less access
to specialty care and e.xpensive medical
technologies.

Low-income persons are likely to have
a difficult time finding plans in which
they can enroll because few plans may
choose to market themselves at the most
affordable basic plan rates. This has been
the experience with managed care in
• the Medicaid program. A recent survey
found that only 22% of HMOs were par-
ticipating in the Medicaid program; low
participation rates by plans are due
mainly to low premiums paid by Med-
icaid, discontinuous Medicaid eligibility
of enrollees, and marketing problems."^

In addition, people who can afford only
a basic plan may have poorer access to
health services and poorer quality care
compared with more affluent persons.
Although all plans would be required to
provide a comprehensive benefit pack-
age, enrollees in basic plans may find it
difficult to obtain many of the services
that are covered by the plan. The more
limited economic base of low-cost plans
would restrict their ability to match the
fees paid by higher-cost plans. Many
providers would refuse to contract with
low-cost plans, relegating enrollees in
basic plans to a limited-access and some-
times lower-quality market niche simi-
lar to the situation in which Medicaid
patients find themselves."'" Many Med-
icaid programs contain benefit pack-
ages that are far more generous than
those offered by private industry, but
Medicaid beneficiaries have difficulty ob-
taining these services from willing pro-
viders." People in low-cost plans would
have coverage, but actually getting cov-
ered services may require a trip across
town to the nearest contract provider,
waiting weeks for an appointment, or
being restricted to a group of marginal
physicians, hospitals, and other provid-
ers that contract only with basic plans.

Plans would also vary in their access
to specialty care and expensive tech-
nologies. More expensive plans, which
middle- and upper-income people would
have the resources to choose, are likely
to provide somewhat easier or more
timely referrals to specialists. Lower-
cost plans, to which lower-income peo-
ple would be limited, would be more

likely to restrict use of such services
even when they are necessary and ef-
fective or contract with specialists who
are less experienced and less skilled.
Patients in more expensive plans would
be more likely to receive costly proce-
dures, such as coronary artery bypass
surgery or hip replacements when these
are appropriate, than enrollees in lower-
cost plans This has been the expenence
of Medicaid patients, who are now cov-
ered by a program that pays physicians
and hospitals less than they receive for
treating other patients and who receive
fewer such services and procedures than
privately insured patients, often with
adverse effects on their health status."
This difference in access between basic-
premium plans and those that impose a
premium surcharge would perpetuate
differences in access to health services
based on socioeconomic status rather
than on medical condition and appropri-
ateness only, continuing fundamental in-
equities in access to care.

These practices would be especially
detrimental for persons with disabili-
ties or chronic conditions who have low
incomes and cannot afford more than
the basic plan premiums. Most persons
with disabilities have a "narrow margin
of health" that "must be carefully main-
tained if medical problems are to be
avoided."" If inadequately or improp-
erly managed, such conditions may de-
teriorate rapidly and result in other-
wise avoidable hospitalization, as well
as time lost from work or school, in-
creased disability, or even death. Prompt
access to a primary care practitioner
who is knowledgeable about the multi-
plicity of factors that accompany a dis-
ability and that influence the person's
health status is essential in order to avert
major medical problems and rapid de-
cline in functional ability."

The risks of such delays are likely to
be higher in basic plans, due to the com-
bination of financial incentives of capi-
tation payment (which makes each re-
ferral a cost to the plan) and the limited
market choice of plans that may be avail-
able at the basic plan premium. There is
considerable evidence, from research
findings and anecdotal accounts, that
low-income persons with chronic condi-
tions do not fare well in managed care
plans, such as HMOs."" Primary care
case management involves a physician
or other practitioner coordinating care
for a person, but it also makes the case
manager the gatekeeper to control use
of expensive services. The HMOs are
likely to emphasize the gatekeeping role;
they may delay or withhold referrals to
specialists and other services that would
cost the plan money out of its pool of
prepaid premiums "** Although special-

ty care and expensive procedures are
undoubtedly overused, simply tighten-
ing the reins on utilization — whether by
restrictive practices in HMOs or by im-
posing deductibles and coinsurance in
fee-for-service plans — reduces use of ap-
propriate and effective services, as well
as inappropnate care," The greater need
for services by people with chronic health
problems often leads to considerable fnc-
tion between them and their managed
care plan

Restrictive practices do not seem to
adversely affect most people in good
health or those with only minor health
problems, but these practices pose spe-
cial risks for people whose health is poor.
In the RAND Health Insurance Exper-
iment, low-income individuals and fam-
ilies who were in poor heaUh at the start
of the study and who were randomly
assigned to a large, well-established
HMO had, by the end of the experiment,
more bed-days per year due to poor
health and more serious symptoms than
those assigned to the fee-for-service plan
with no patient cost sharing, and they
had a greater risk of dying than those in
the fee-for-service plan with cost shar-
ing." These findings suggest that low-
income persons in poorer health whose
incomes limit them to a basic plan may
have poorer outcomes than those who
have access to more costly and better
plans.

Potentially Poorer Quality
Health Services

Jackson Hole advocates assume that
HI PCs would be the guardians of both
access to health services and the quality
of plans and services." Health plans must
agree to report medical outcomes and
other quality assessment data to the
HIPC and the public. Such information
can assure the quality of plans and med-
ical care provided by plans only if the
HIPCs have a strong interest in moni-
toring and enforcing standards and if
the covered population has effective mar-
ket choice among competing health
plans.

An HIPCs costs would be determined
by the per capita cost of the basic plan;
its total financial liability would be lim-
ited to this per capita premium multi-
plied by the number of persons in the
area. The quality of care and access avail-
able in basic plans would likely be sec-
ondary to their cost. Enforcing quality
standards depends on the HIPC iden-
tifying those plans that do not comply
and, for those that fail to improve, being
willing to use a "club"— freezing the er-
rant plan's enrollments or premium rates
or terminating the plan's contract with
the HIPC. But for the HIPC to be will-
ing to terminate contracts with the low-

447

est-cosl plans would require the HI PC
to pay a higher basic plan premium, a
policy they would be more likely to adopt
for a politically influential constituency
than for the lower-income population
that will predominate in the lowest cost
plans.

It is possible to pressure public agen-
cies to take seriously the needs of en-
rolled populations. Oregon's Medicaid
managed care program has avoided sev-
eral of these problems through more
ngorous enforcement of standards." But
vigilant oversight is not the rule when
it comes to low-income communities.
Low-income populations tend to be less
organized, participate less in the polit-
ical process, and have less personal po-
litical influence than more affluent com-
munities. Programs and ser\iccs tar-
geted to low-income people are there-
fore often the first victims of budgetary
axes in a fiscal squeeze " .advocacy for
the interests of low-income people is spo-
radic and only occasionally successful.

Giving consumers market freedom to
take their business elsewhere could of-
fer some protection against being locked
into uru-esponsive, low-quality plans, but
this freedom may not be available to
low-income families and individuals. If
the HIPC is not vigilant in enforcing
quality standards and is excessively fo-
cused on the bottom line, some health
plans may try to capture the basic plan
market by deliberately offering bids be-
low the level necessary to provide ad-
equate access to quality services. Some
unscrupulous plans may skim excessive
profits, leaving insufficient funds to pro-
vide reasonable access or quality. If the
H IPC is not exercising appropriate over-
sight of plans, market choice could en-
able better-off enrollees to escape from
poor-quality plans and enroll in better
ones. Although middle- and upper-in-
come groups are likely to have economic
choice among alternative plans, people
restricted by their incomes to basic plans
would find themselves stuck in the sys-
tem's bottom tier where they will en-
dure poor access and questionable qual-
ity of care.

THE OVERALL IMPACT OF THE
JACKSON HOLE APPROACH

We have described a number of spe-
cific problems with the Jackson Hole
approach. Here, we provide a broader
and more dynamic picture of how con-
sumers, employers, and government are
likely to be affected by the implemen-
tation of this model, the scenario we
envision would look like the following:

For all of the reasons discussed here-
in, the system will result in little if any
savings in health care expenditures.
(This conclusion is not just ours but also

that ol the Congrebsional Budget Of-
fice, which has stated with regard to the
Conservative Democratic Forum's man-
aged competition proposal (HR 59361,
that "after a few years, (the bill) would
leave national health expenditures at
approximately the same level they would
reach otherwise. "'*"""" Although ex-
penditures are likely to continue to rise
at the same rate as in the past, govern-
ment's ability to subsidize health care
purchases for the poor and near-poor
probably cannot rise as fast as the over-
all increase in health care premiums As
a result, a major gap will quickly emerge
between the plans being offered.

The lowest-cost plans in an area will
tend to be ones that are the least de-
sirable but which are the only ones af-
fordable for the poor and near-poor. They
will have limited provider networks that
may be geographically inconvenient, pro-
vide only the most basic services re-
quired, provide the least choice of phy-
sicians and hospitals, make it difficult to
obtain specialist care and new technol-
ogies, and have the least thorough qual-
ity assurance programs. We thus antic-
ipate segmentation of the market for
health plans and health services, with
more costly plans providing more ac-
cessible and often better-quality ser-
vices for their enrollees — in short, a con-
tinuation of two-tier medicine under the
Jackson Hole approach.

By offering more prestigious physi-
cians and hospitals higher payment rates
than low-priced plans could afford and
by making state-of-the-art technologies
and services accessible, health plans that
cater to the more affiuent population
would put upward pressure on health
care prices and expenditures. Providers
would tend to restrict their services to
particular market niches, with most hos-
pitals and physicians preferring to serve
patients whose plans pay the higher
rates and offer the most opportunity to
provide state-of-the-art medicine. This
pressure driving up the costs of more
expensive plans will, in turn, drag up
the costs of basic plans because they
must buy services and labor from the
same markets as the more expensive
plans.

Such a scenario will have a number of
undesirable consequences for consum-
ers, employers, and government. .Most
consumers will see their out-of-pocket
payments toward premiums continue to
rise quickly Since employer and gov-
ernment contributions would be linked
to the lowest-cost plans, those opting
for the higher-tier plans will have to pay
for them with their own, after-tax dol-
lars. Although this is one of the purpos-
es of Jackson Hole reforms, the origi-
nators of the concept believe that in-

tluilcil ,im.mi,' thi- tht-.ipc-i |il.in~ *ill lie
the Kaiser Permanentes ut the world —
high-quality, low -cost group 0! staff mo<l-
el HMOs In contrast. v.e believe that
such plans will end up competing for
more affiuent patients, leaving the poor
and near-poor in plans that may skimp
on quality

This financial burden on those choos-
ing to opt out of the cheapest plans will
not only increase over time, it is likely
to be very unpredictable Because em-
ployer and government contributions
will be tied to the lowest-cost plan in an
area, out-of-pocket premiums for higher-
end plans may jump wildly from year to
year, depending on the vagaries of what
one plan in a particular area decidesao
charge for basic coverage If a plan low-
balls its price to try to increase its mar-
ket share, two things could happen: it
may not provide what it promises to the
less affluent people who choose that plan.
and It will result in a ballooning of out-
of-pocket premiums for everyone else
living in that area.

Employers and government are also
likely to be burdened under this sce-
nario because they will find it difficult to
control their own health care spending.
As all health expenditures continue to
rise, employer and government health
spending would be pulled up This will
result in strong pressures to increase
their contribution levels to the basic
plans so that ( 1 ) the quality of the basic
plans is acceptable, and (2) those who
choose more expensive plans will not
have to pay as much in out-of-pocket
premiums. Such a dynamic would re-
quire increased taxation for subsidies or
add to the deficit. It also would under-
mine employers' desires to stem rising
health spending

This dynamic results in large part from
Jackson Hole advocates' heavy reliance
on making people cost-conscious consum-
ers of health plans in order to control
the growth of health spending Advo-
cates propose to limit employers' con-
tributions and the tax excludability of
health benefits in order to make con-
sumers bear an increased share of the
cost for choosing health plans that are
more expensive than the lowest-cost
plan. Relying on enrollees' cost con-
sciousness IS a fundamentally weak strat-
egy, in part because people, especially
those who are in poorer health. .»re like-
ly to buy additional coverage to protect
themselves from excessive costs when
they need health services In addition,
the intense focus on controlling patients'
demand for health services avoids ad-
dressing supply-side factors that are nec-
essary to control the upward spiral of
health spending The central role of pro-
viders in stimulating demand for health

448

■services is a critically important focus
lor effective efforts to conti ol expendi-
tures— and It IS a focus that is largely
absent in the Jackson Hole approach.

CONCLUSIONS

This cntique has focused on the po-
tential problems of the Jackson Hole
Group's managed competition proposal.
Major modifications would be required
to address these criticisms. Some of
these — for e.xample. imposing a global
budget on HIPCs, limiting the amount
of supplemental insurance consumers
need and are allowed to buy, and reg-
ulating new investment in facilities and
expensive equipment — would control ex-
penditures more effectively Others —
^uch as subsidizing low-income people

Ret>f«nc*l

1 ElUood PM. Enlhoven AC. Elheredge L The
Jackson Hole initiatives for a twenty-first century
Amencan health care system Health Econ 1992.

1 149-168

2 Toner R Hillar>- Clintons potent brain trust on
health reform Sew t ortk nmes February 2S. 1993.

3 1.8

J Holmer M Tax policy and the demand for health
insurance J Health Econ 19&4,3:203.221
4- Momsey MA Pnce SeiuilivKjr m HealtK Care
/mp(icalioiu/or Health Care Policy Washington.
DC NFIB Foundation. 1992
5 Berk ML. Monheil AC The concentration of
health e-\penditures an update Health Aff 1992.
\ USI49 2

6. EnthovenAC Thehislory and principles of man-
aged competition Health Aff I993:10(suppll24-t8
7 Marquis SM. Phelps CE Demand [or Supple-
mentary Health Injumnce Santa Monica. Calif
RAND. 1985

8. Fielding JE. Rice T Can managed competition
solve the problems of market failure' Health Aff
l99J:10lsuppll 216-228

9 Gabel JR. Jensen GA The pnce of stale man-
dated benefits /mjuiTv 1989:26:419-431

10. Kjonick R. Goodman DC. Wennberj J The
marketplace in health care reform: the demograph-
ic limtutions of managed competition. S Enfl J
\ted 1993 328 148-152

1 1. Group Health Association of America. PaltrmM
in HMO EnrotlTnent Washington, DC: Group
Health Association of Amenca: 1991.

12 US Congress. Congressional Budget Office Th£
EfTeeti of Managed Care on Use and Cost of Health
Vaahington. DC Con^freasional Budget

Oflici

1992

13. Greenfields. Nelson EC. ZubkotfM.etal Vari-
ations in resource utilization among medical spe-
cialties and systems of care results from the Med-
ical Outcomes Study JAMA 1992.267 1624-1630

14 Bro»n R Biased Selection m the Medicare
Competition DemanjtrationA Pnnceton. NJ Math
fm,4titj Policy Research. 1987

15 Light DW Thepracticeandethicsofnsk-rated
health insurance JAMA 1992.267 2503-2508

16. LS Office of Personnel Management. Study of
:he Federal Employees Health Benefits Program
Washington. DC US Office of Personnel Manage-
ment. 1988

17 Weflnn^j Before tht VS Senate Labor and Hu-
man Retourcea Committee. 102nd Cong, 2nd Sess.
19921 (testimony of Tom J Elkin. California Public
Employees' Retu-ement System. 'Managed Com-
petition in Practice'!

IH. Epstein AM. Cumella EJ Capitation payment,
using predictors of medical uti Illation to adjust rates
Health Care Finan Ret 1988.1051-69

to purchaiie higher-cost plans — would
enhance access to quality care Some —
such as capping the differential between
the highest- and lowest-cost plans in an
area or prohibiting plans from charging
premiums in excess of a uniform rate set
(or negotiated) and paid by the HIPC —
would control expenditures and improve
access.

The proposal by President Clinton's
Task Force on National Health Care
Reform incorporates some basic ele-
ments of managed competition but. wise-
ly in our opinion, reportedly departs from
the Jackson Hole approach in important
ways. Among other departures from the
Jackson Hole model, the President's pro-
posal may include global budgets, allow
HIPCs to be more aggressive negotia-

19 Thomas JW. Lichtenstein R Including health
sutus in Medicare's adjusted average per capiu
cost capitation formula MedCare 1986^4 259-275

20. Robinson JC. l.ufl HS. Gardner LB. Morrison
EM A method for nsk. adjusting employer contn
butions to competing health insurance plans In
Tiiirv 1991.28 107. 116

21. LuttHS Trends in medical care costs doHMOs
lower the rate of growth' Med Care 1980:18 116

22. Newhouse JP. Schwani WB. Williams AP.
Witsberger C Are fee for service costs increasing
faster than HMO costs' Med Care 198523 960-966
23 CabelJR Witness to a thousand stones a look
at insurance data Health Aff 1992,11 186-190

24. Newhouse JP An iconoclastic view of health
cost containment. Health Aff 1993. I0<suppl) 152-
171

25. Buck C. Rur^l Health Care Imprwerntntj
Through Managed CompetitioruCooperatton Jack-
son Hole, Wyo: Jackson Hole Group, 1993 Draft
discussion paper.

26. Jones SB Multiple choice health insurance: the
lessons and challenge to pnvate insurers Irufuiry.
1990^7:161-166.

27. Enthoven AC Effective management if com
petition in the FEHBP Health Atf l9H'Jn. 13-50

28. Rice T. Gabel J. Mick S l.ippert C, Dowd C
Continuity and change in preferred prov ider orga-
nizations HealUt Policy l*.<) IL I IS

29. Zwaniigcr J, Auerbach RK Evaluating PPG
performance using pnor e«pen^i'.ure data. -Med
Care 199129142-151

30. Hester JA. Wouters A. ^^nght S Evaluation
of a preferred provider orRar s-mon Milhank Q
1987.li0 575 01:)

31. Gamick DW. Lult HS, r;ar.ln,r l.R et al Ser-
vices and charges by PPO ph.-.i ans fur PPO and
indemnity patients an episcnle .f :are comparison.
-MedCare 199028 894 906

32. Dtehr P Silberg N. Mjr-:n DP Arlow 8.
Leickly R Use of a preferrf l tjrnvi.ler plan by
employees of the city of F^eaf. .- W-.l Care 1990;
28 I07:l 1088

.33 Reece RL FifXeen veir. ■' -m r.t.es health
competition Mmn Med l•J^^ " : " ■ ! " 15

34. Shaw DA, Hoban TW T. -: :' -..es nealth care
mergers, acquisitions, and afT;iatiL>ns Vfmn .Med
1992.75 24. 31

35. Jones SB Where Does Marketplace Competi
tion m Health Care Take Us ' Impressionj. Issues,
and i'nansu-ered QuestionM From the SHPF Stti
Visit 10 .Mmneapolu-Sl Paul Washington. DC:
National Health Policy Forum. 1991

36. Kolodinsky M. Arnold T Developing a Sliding
Fee Scale foi Health Care Insurance in Vermont
Th£ Calculation of Disposable Iricornt Burlington
University of Vermont. 1989

tors with health plans and providers,
and allow state options for all-payer rate
setting and single-payer systems.

Any health care reform proposal, if it
IS to succeed as policy, must effectively
control expenditures while improving
access to health services and taking steps
to enhance quality of care. At the same
time, It will need to restructure health
care financing in ways that are uniquely
suited to the institutional and cultural
complexities of Amencan society while
gamenng enthusiastic popular support
that can pressure a Congress, torn in
different directions by special interests,
to enact the reform. This is a tall order
for any reform, and. in our analysis, the
Jackson Hole approach does not meet
the test.

37 Merlis M Medicaid Source Sou* Washington.
DC Congressional Research Service. 1993 appen-
dix G

38. Anderson MD. Fox PD Lessons learned from
Medicaid managed care approaches Health Aff
1987.6 71. 86

39. Hadley J Physician participation in Medicaid
evidence from California Health Sm Re^ 1979.
14 266280

40. Perloff JD. Kletke PR. Neckerman KM Phy.
sicians' decision to limit Medicaid participation de-
terminants and policy implications J Health Polit
Policy Laui 1987,12221 235

41. Wenneker MB. WeismannJS. Epstein AM The
association of payer with utiliution of cardiac pro-
cedures JAMA I990i5-' 1255-1260

42. DeJong G. Bauvia Al. Gma R. Amenca's ne-
glected health minonty working-age persons vvith
disabilities MilbankQ 1989:67(suppl 2. pt III 311-
35!

«3. Bauvia Al. DeJong G. Halstead L, Smith QW
The primary medical needs of people with disabil-
ities. Am Rehab 1988:14 9-12.
44. SchlesingerM On the limiu of expanding health
care reform chronic care in prepaid settings Mil
bank Q 1986,64 1«9 215

45 SchlesingerM, Mechanic D Challenges for man-
aged competition from chronic illness Health Aff
199.1.12l«uppl) 12.3-137

46. Lua H Health Maintenance O^anizattons.
Dimtnjionj of Performaruie New York. .NY: John
Wiley k Sons Inc: 1981

47. Lohr KN. Brook RH. Kamberg CJ. et al Use
of medical care in the RAND health insurance ex-

m a randomired controlloil tnal Med Care 1986
IsuppllSl Sa7

48. Ware JE. Brook RH. Rogers WH.etal Com-
parison of health outcomes at t health maintenance
org«niaation with those of fecfor. service care Lan-
cet 1986.1 10171022

49- Enthoven AC. Kronick R A consumer-choice
health plan for the I'lOlh. V Enijt J Med 1989:120
29-37

so USCongress. Genera! Accounting Office Med-
icaid t>-egon J .Managed Care Program and Im-
plications fo' E rpanttnnt Washington. DC Gen-
eral Accounting OITlce. 1992

51. Brown ER. Dallek G. State approaches to H-
nancing of health care for the poor Annu Rev Pub
lie Health 1990;ll 377-400.

52. Hearings Before ths Subcommittee on Health.
Committee on Mr'oyj and Meanj. 103rd Cong. 1st
Sess. 119931 (testimony of Robert D Reischauer.
director. Congressional Budget OfTicei

449

Mr. McDermott. Thank you.
Mr. Steger.

STATEMENT OF WILBUR A. STEGER, PH.D., CHAIRMAN OF THE
BOARD AND PRESIDENT, CONSAD RESEARCH CORP., PITTS-
BURGH, PA.

Mr. Stkgkr. The bases of this testimony are several reports that
are cited in the appendix to the testimony, but the heart of the tes-
timony has to do with some colored charts. You can't see them from
there, but in your black-and-white rendition, page 11 and on, there
are some maps of the United States showing where the estimated
job losses were from a series of employer mandates we looked at
last year.

We are currently examining the job loss estimates for the admin-
istration plan and for 5 or 6 of the other plans, Cooper, et cetera.
We won't be finished with that probably until sometime at the end
of March, but I thought what I would do today, since we had stud-
ied employer mandates pretty thoroughly as well as individual
mandates, is that I would take you through some of the conclusions
about both job losses and other kinds of effects that are mostly
likely to happen to employees and employers under the range of
plans that are before us, all the way from employer mandates to
individual mandates, as well as some more voluntary plans.

I am testifying here today as a private citizen. I am chairman of
the board of CONSAD. I am an adjunct professor at schools in
Pittsburgh, Carnegie-Mellon and University of Pittsburgh.

There nas been a lot of complaint, I guess, about the wide range
of job loss estimates under the plans. You have the Council of Eco-
nomic Advisers, et cetera. The range of estimates is wide. At the
lowest level, it is 400,000 jobs lost. Now, again, I am talking about
other plans, other than the actual ones that specifically are here
today because, as far as I know, I don't think anybody yet has real-
ly focussed on the current plans, but we are all doing it, obviously.

Anyway, the lowest level is something like 400,000, and the high-
est level is 3 million. Somebody might say, well, that is not really
much of a difference out of 120 million workers, but if you are one
of the extra ones above 400,000, it is very, very important.

The contribution of putting this on a map, showing, if you will,
the kind of density of where these losses take place, showing the
industries they are in, showing the size companies they are in,
showing the hourly wages of employees in the firms that are going
to suffer these either job losses — and by the way, there are job
gains, too. So let me talk about that in a minute, but let's just focus
on losses for a minute — also, by the employment status of the em-
ployees.

Basically, in the way we do our work, we separate out the entire
country and all firms in up to 23,000 categories, (actually, many
less, given the degree to which data is available), if you will, by
their sector, by where they are, by their asset size, and we then
characterize these firms as being able to withstand or not (that is,
their vulnerability) the certain kinds of changes that each of these
statutes, each of these policies are bringing to the table.

There is no economist that I know of that says that in the long
run that the premium changes will not ultimately be a disbenefit

450

to the worker, in terms of either other compensation, education, or
iob losses. What our focus is, is also on the short run, what actually
happens during the next 4 or 5 years.

The other day in the CBO testimony, I think that Mr. Reischauer
said that he was mostly interested in the long run. It isn't that we
are all dead in the long run, but I think that we have to be inter-
ested in both short- and long-term. You may have to be interested
in what happens the first couple of years and the next couple, and,
of course, anybody like myself that is in business and anybody like
you that is in your business, those are important. Getting there
from here is what our focus has been because that is where the gap
is. The gap in estimating job effects have been mostly in these long
term. It will happen some day when we get there. Our purpose is
trying to fill that gap with numbers that make sense, that are cred-
ible.

There is another thing that when we published

Mr. McDkrmott. May I ask one question?

Mr. Stkgkr. Of course.

Mr. McDkrmott. I am looking at your chart. What is S. 1227?

Mr. Stegkr. ok These are all the acts from last year.

Mr. McDkrmott. Oh, from last year.

Mr. Stegkr. Exactly.

Mr. McDkrmott. All right. Not bills introduced in this Congress.

Mr. Stkgkr. No, but by next month, by the way, if you ask me
back, we will be happy to give you the latest results.

Mr. McDkrmott. All right.

Mr. Stkgkr. On page 9, for example, the Cooper bill last year
was 1992, HealthAmerica, et cetera, but there were a lot of bills
to learn from, and I am sure we have learned, for example, that
rather than having 100-percent mandate, we have an 80/20 man-
date. Rather than not have any subsidy for small business, we have
small business subsidy. So that, the thing we have with the current
bills are a lot of addea complexities, if you will, versus those earlier
bills.

Our computer models take about 4 or 5 months to complete, and
I think that the way that we are running them now, we are run-
ning the base level. We are running the President's plan as it
would work. Then we are going to depart from it because it might
not work exactly as if planned. It might have a 10-percent cost
overage or a 3-percent overage and what have you, and we will do
that with every one of the proposals that are now on the table that
are sensible proposals.

In addition to job losses, we are also focused on one other aspect.
We are focused on what happens to the worker. He may keep or
lose his job. He gets his health benefit, and his health benefit pack-
age could possibly change if he had one before. His family is a dif-
ferent status under most of these proposals than he has today. So
we are going to keep track of that.

His wages will be different. His hours will be different. His fringe
benefits will be different. So, when we say that a worker is af-
fected, we don't mean his job is lost necessarily. Something like 5
to 10 percent of those who are affected will lose their jobs.

On the gain side, another thing happens. Let's say that pre-
miums are lower than they were before. What happens with the

451

extra money? Does the employer immediately pay that extra money
out to his employees as sort of like a windfall? Well, we know that
that isn't the way the world works. Does the employer run out and
hire more people? Well, that is the interesting thing about job
losses and job gains. Job losses is when a firm is strapped. It had
10 workers. I can now afford 9 if it is a very heavy, extra increase
in cost.

On the up side, let's say that it now has an extra 10 percent of
good things for the employer. He now has more money. (In those
cases, the premiums are less.) Why doesn't he rush out and hire
an extra worker? He doesn't do that unless there is an extra de-
mand for his product, and the economist says that only happens
when the economy is now revved up as a result of whatever this
policy is.

At the current time, the estimates I have seen by the macro mod-
els, if you will, like DRI or CBO the other day, they mostly say
there is going to be a decrease in gross national product or de-
mand. So it is our estimate that if there are job increases, they will
come later than the job losses, I think that is important in terms
of thinking about what happens in the next several years versus
the years tnat are further out.

I have covered the primary points of difference between our esti-
mates and others. I think that the way that we go about estimating
these job effects are very reasonable because they are like what a
businessman and a worker thinks about when they are either join-
ing a firm or a businessman in hiring workers.

These aren't complex models. Wnen the time comes and you
would like to see the results of our — well, let me just also say that
the results last year showed that approximately a million job losses
would occur in small firms, and something like 10 to 12 million
other workers would be affected in the way that I present it. Do
I think those will be different? I am sure they will be different. I
will be very happy to present those when we are ready.

Thank you very much.

[The prepared statement follows:!

452

TESTIMONY OF WILBUR A. STEGER
CONSAD RESEARCH CORPORATION

The bases of this testimony are several reports (cited in the
attached Bibliography), prepared by my CONSAD colleagues and myself
since the late 1980's, analyzing the prospective employment
consequences of alternative approaches to health care reform.
These studies have been prepared for and supported by Federal
agencies, research foundations, corporations and trade
associations, and CONSAD, itself. I am an Adjunct Professor of
Public Policy at Carnegie Mellon University and of Public Health at
the University of Pittsburgh. I am Chairman of the Board and
President of CONSAD Research Corporation, headquartered in
Pittsburgh, Pennsylvania, since 1963, and the author of dozens of
economic impact studies for Federal agencies, the U.S. Congress,
and private sector corporations and associations. I appear here
today as a private citizen and the President of CONSAD, to discuss
findings and approaches which, I believe, will help to inform the
current course of study and assessment.

For a profession so replete with differing opinions,
economists do pretty well at things they do agree about concerning
the employment effects of health care plans (Klerman, 1992; CONSAD,
1990b, 1992a, 1992b, 1993a, 1993b; O'Neill and O'Neill, 1993;
Employee Benefit Research Institute, 1987; Morrisey, 1991; Klerman
and Goldman, 1993; Feldstein, 1993). For example, relative to an
employer mandate which raises the health care costs of many firms,
and lowers the costs of others:

1. For firms whose health care costs are increased, they can
either absorb the costs in reduced profits, raise prices,
reduce workers' wages, and/or reduce employment; analogously,
for firms whose costs are reduced, job gains are possible if
demand for their product increases.

2. In something approximating the middle to longer run, increased
costs to firms — particularly those costs tied directly to
labor as are health care premiums — will be passed on to
workers in the form of lower real wages and/or conditions of
employment (e.g., reduced hours, fewer jobs, etc.).

3. With employers backward-shifting the costs of an employer
mandates to wages, the currently uninsured will pay for much
of their (new) health care out of reduced terms and conditions
of employment .

That is where the agreement stops, however. At this point,
where potential changes in jobs and earnings are to be estimated,
the relative importance and modus operandi of different factors
take over. The Employment Effects of Health Care (KPMG, 1993)
cites the following difficulties in the conventional economic
doctrine about these employment effects:

The most difficult piece of the analysis is converting
the potential change in wages into an effect on
employment. The sensitivity of one variable to another
is called "the elasticity." It is expressed as the
percentage change in one variable, given a 1 percent
increase in another. Previous studies provide some
guidance, but are not available at the level of detail
desired. For example, industry level elasticities would
be desirable, but are not available. Thus, an economy-
wide elasticity would have to be applied equally across
industries. The number of workers expected to lose their
jobs due to health care reform would then equal the
population at risk multiplied by the estimated employment
elasticity.

Given this framework, economists have estimated the job loss
impacts from a "pure form" employer mandate at 600,000 (Klerman;
U.S. Council of Economic Advisers); 400,000 to 1 . 5 million (CONSAD,
1993a, 1993b); almost 3 million (O'Neill and O'Neill); 710,000
(Joint Economic Conunittee); and 200,000 to 1.2 million (Employee
Benefit Research Institute). Economists who estimate the net
differences of job gainers and job losers (e.g., Custer of EBRI,

453

Gruber of MIT) may even, with rather unique assumptions, come up
with net gains in jobs (though with many "gross" job losers).

No question: there is indeed a need for research and reliable
data into the topics of labor flexibility and labor demand
elasticity. However, much good thought and work has already been
accomplished in this area that have produced results. My own
research in this arena (since the late 70's) and that of my
colleagues has built on the increasing national interest in
estimating the prospective "jobs" consequences for public policy
options, i.e., changes in both gross and net employment (gained and
lost) and by characteristic and "quality" of job, industry, and
geographical region, the timing and direction of these
consequences, and other size and qualitative dimensions of a total
"jobs" picture.

The purpose of the discussion (below) is to present an
approach to the assessment of such prospective employment
consequences — the jobs impacts — of health care policy and
regulatory options, and to illustrate these, using recent studies.
The presentation draws upon a set of analytic approaches that have
been developed, tested, and applied by CONSAD to evaluate a variety
of policy options relating to environmental economics (CONSAD,
1988, 1991, 1990a, 1990c), and, presently, to health care reform
options (CONSAD, 1990b, 1992a, 1992b, 1993a, 1993b).

Methods and approaches — In a way, these applications have
given CONSAD a sense of the many choices — and objectives —
facing an analyst when performing a jobs impact analysis, e.g.:
Should the short-term, transitional jobs effects be given a
particular emphasis? Are states or U.S. regions experiencing
impacts of particular interest? Are jobs gained and lost the only
interest, or are other job effects (e.g., prospective wage or hours
changes) important, too? Should the age and condition of an
industry's current equipment, the characteristics of the v7ork
force, and/or the employer-employee bargaining relationship play a
role? Or an industry's domestic and globally competitive position?
And, if so (in each instance), what methods of analysis — data
bases, models, validation criteria — make the most sense for each
given level of analytic resources? - '

The methodology used by CONSAD in each instance, as much an
art as a science, eclectically selects from a menu of data bases
and models — none of which is proprietary (to CONSAD) — seeking
to achieve policy-relevant, economically-valid information yields
about critical economic impact subjects, for given levels of
resource commitment and data quality and availability.

Most economics-oriented policy analyses of the impacts of
policy options emphasize longer-term consequences, describing the
impacts in broad terms, such as changes in gross national product
(GNP), changes in total employment nationwide (i.e., netting out
job gainers and losers), and changes in the national unemployment
rate. Input-output, econometric and computable general equilibrium
(CGE) models dot the analytic landscape. Although CONSAD's
analytic approaches also consider impacts on employment in the
intermediate and longer terms, we have provided a unique
perspective to the evaluation of jobs impacts by focusing as well
on the short-term and transitional effects of policy options on
employment, particularly in the specific industries and geographic
areas where jobs are most likely to be affected by the options.

Not surprisingly, the most significant gap in our
unoerstanding of the demand elasticity for labor — in the short
and longer run — are ways to operationalize the relevant
microanalytic theory. Clearly, any unintended, indirect jobs
effects that might result from a health care policy option would
derive from the impacts on the economic status (in particular, the
employment and real income) of individuals (employees, owners of
capital, etc.) and the firms, themselves. Such impacts emanate
directly from the production and employment decisions of individual
establishments subject to the policy; in turn, these propagate
indirectly throughout the economy in response to the modified
supply and demand decisions of those establishments and their
employees. Consequently, any assessment of the unintended.

454

inoirect effects of incremental policy logically must begin with an
evaluation of the direct impacts of the regulation on managerial
and ownership decision-making in individual establishments.

The most limiting case is one in which the only decision
option for the affected firm (following the promulgation of the
policy/regulation) is the selection of the level of production,
i.e., if everything else is fixed, as is a likely, realistic
assumption, in the short-run. Applying analytic concepts from the
microeconomic theory of production, it is easily demonstrated that
the adoption of more costly health care, for firms experiencing
this result, will unambiguously result in some decrease in
employment. A portion of the workforce will be laid off or hours
of current workers reduced if the establishment remains in
operation, or all jobs will be terminated if the facility is
closed. While this is a limiting case, it speaks to the need for
investigating effects over different time periods, for differently
situated firms.

As to the matter of time periods, we (typically) assess the
employment consequences that are likely to occur during three
distinct time periods:

• The immediate, short-term period during which industrial
facilities generally are restricted to producing their outputs
using their existing physical equipment and workers with
"sticky wages": here, the ability of firms to adapt to
increases in costs by adjusting their production methods is
severely limited. With some policy options, the short-term
cost increases — for some firms — will be small enough that
impacts on employment will be negligible. For some firms,
however, the incremental costs will evoke substantial adverse
changes in the terms and conditions of employment. At the
extreme, workers might lose their jobs in companies and
facilities that cannot afford to pay the increased costs of
doing business. More commonly, workers may find their jobs to
be at increased risk of decreases in wages and benefits,
increases in the frequency and duration of layoffs, and
increases in the potential for job loss.

• The intermediate, transition period during which existing
equipment and processes become obsolete and wages become more
flexible in both directions: here, within individual
facilities, there are windows of opportunity open for
implementing cost-effective changes to production processes in
response to increases in costs. The process changes that
companies decide to implement will have impacts — often quite
profound impacts — on employment. This is particularly true
where the policy option affects a particular factor of
production (e.g., labor). The magnitudes of the impacts and
the extents to which they are favorable (or adverse) will
depend upon the degrees to which the process changes that are
instituted in individual facilities, first, reduce (or
increase) costs and, second, increase (or decrease) the labor-
intensity of production.

• The long-term period when all currently perceived, potential
modifications to production processes will have been either
implemented or rejected for use by each individual company and
facility. Analyses, pertaining to the long-term period,
therefore, will not describe circumstances that are predicted
to actually occur, rather, they describe the employment
consequences toward which the economy is currently expected to
converge, given the specific policy option.

Elmployment consequences in all three time periods depend upon
the- susceptibility of each firm (or "representative firms") to
a.iverse or favorable economic impacts as a result of the policy-
related cost changes. Such economic impacts and employment
consequences are, also, determined by the responsiveness of demand
foi the firm's output to increases or decreases in costs and
prices. If, as is generally true, demand for the commodities or
services produced by an industry sector exhibits some
responsiveness to changes in costs of production and product
prices, any policy option that increases (or decreases) costs

455

appreciably will result in decreases (or increases) in sales and
production, and hence some amount of job loss (or gain). Price
change consequences are both micro and macro in nature. CONSAD's
macroeconomic efforts, here, have either utilized partial
equilibrium approaches or macro modeling (e.g., REMI, DRI, WEFA) .

As for the differences between firms in their reaction to
health care reform cost options, we use the following dimensions to
characterize such variation, e.g.:

Industry category

Employment size

Assets

Net income

Census region

Hourly wage of employees

Employment status of employees

Coverage/type of employee

Results of applying these approaches are discussed in the next
section.

2.0 SOME ESTIMATION

We have not yet fully examined the Administration proposal or
the other newer health care reform plans to date but are currently
in the process of doing so. Our latest publications, however, can,
nevertheless, inform this debate because they do cast light on the
more extreme, unmitigated, non-subsidized, "pure" employer mandate
strategies.

2.1 Job Impacts

The proposals examined in these earlier reports (CONSAD 1993a,
1993b) were the most recent plans put before the public prior to
the Administration plan and newer House and Senate plans of late
1993 and 1994:

• H.R. 5936: The Managed Competition Act of 1992 (the House
proposal )

• S. 1227: HealthAmerica: Affordable Health Care for All
Americans Act (the Senate proposal)

• A California Health Care System for the 21st Century (the
California proposal)

• The 21st Century American Health System, devised by the
Jackson Hole Group (the Jackson Hole Group proposal)

• The Heritage Foundation Consumer Choice Health Plan (the
Heritage Foundation proposal).

Each proposal, except the Heritage Foundation proposal,
contains provisions that will require industry to expand its role
in providing and paying for health care insurance for employees.
If the resulting labor cost increases are large enough, employers
will compensate by changing other components of their employees'
compensation and benefits packages or their employment status.
These (earlier) studies estimate the numbers of jobs that will,
consequently, be affected, and the proportions of those jobs that
will be placed at-risk, if each of the proposed employer mandate
based health care systems are implemented. A job-at-risk is one
where there is a significant, recurring, unavoidable increase in
total costs. Job losses are, typically, small percentages of the
total estimate of "jobs at-risk," per se.

The particular importance of job gains and losses (first,
gross, then net) — our focus, here — derives from the fact that
important health care reform proposals involve the mandating
funding by employers of employee health care insurance coverage.
Although a reform proposal may mandate payment for insurance for
employees, an employer does retain the option of changing other
terms or conditions of a worker's employment to reduce or eliminate
the new financial burden resulting from the reform provisions.

456

Thus, there is potential for substantial jobs impacts, including
job losses and jobs placed at-risk of losing other benefits, wages,
hours worked, etc.

These earlier studies (CONSAD, 1993a, 1993b) reported the
following conclusions regarding the employment impacts of these
proposals on small businesses:

1. The quality of job terms of many millions of small businesses
workers, depending on the proposal, are at risk of substantial
deterioration during the first several years of the operation
of these plans. By "quality," we include significant
reductions in wages, hours worked, and benefits, in addition
to substantially increased probability of job loss.

2. Small business job losses will be substantial unless there is
substantial flexibility and choice in the employer-employee
relationship. While the earlier studies did not focus on job
losses, a conservative, lower-bound estimate yielded a range
of 390,000 to 900,000 lost jobs for the three rigorous
business mandated proposals (California, Senate, Jackson Hole)
and negligible job losses for the House and Heritage
proposals. An upper-bound estimate finds the range for the
three rigorous mandates to lie between 650,000 and 1.5 million
job losses. A best-estimate for the earlier employer mandate
proposals exceeds one million jobs lost.

3. Small business job consequences will vary among states and
business sizes. California and Texas will feel the largest
effects of health care reform, in terms of total number of
impacted jobs and the percentage of total employment that will
be severely affected. As a general rule, the smaller the size
of a business, the larger is the impact in any given state.

4. Alternatives to increased corporate mandates have
substantially different jobs effects. Payment schemes
different from business mandates -- such as a value-added tax,
a personal income tax, sin taxes, et al . — will have
decidedly different effects on small business jobs. Since
these payment schemes, essentially, are not taxes on labor (as
are the business mandates), they are likely, by and large, to
have a lesser impact on small business jobs.

The U.S. /state-by-state map exhibits which follow portray the
states with the highest degrees of risk of job/impact for each of
three earlier plans (no longer on the table per se) tied most
closely to the pure-form employer mandates.

2 . 2 Demographic Impacts

This section describes the demographic characteristics of
individuals whose jobs are estimated to be severely impacted by
reforms based on a substantially employer mandate.

The demographic groups estimated to comprise the most severely
affected workers are described below. The percentage of jobs that
art at-risk among all of the jobs held by a demographic group and
the proportional distribution of all jobs at-risk among various
demographic groups are presented in the following Figures. The
percentage of jobs at-risk within a demographic group is the ratio
of the number of jobs at-risk to the total number of employed
workers in the group. The proportional distribution of jobs at-
risk among a demographic group is the percentage of the total
number of jobs at-risk that are held by members of each demographic
group. The proportional distribution of jobs at-risk reflects the
absolute number of affected workers. The percentage of jobs at-
risk within a demographic group relates the total number of workers
in the group that are highly impacted. The data characterizing the
workers at-risk are depicted graphically in Figures 1 through 10.
It is important to note that, to improve clarity, the vertical
scale on some of these graphs does not extend to 100 percent. The
numbers displayed in the graphs and discussed below relate to the
intermediate scenario of employees' health care insurance costs for
each proposal. The discussion focuses on the distribution of the
impacts estimated for different demographic groups and not on the

457

Exr.ibit I : Jot), at-Risk by State for Small Businesses

(<S00 Emptoyees). Resulting from the 8.1227 Proposal

Exhibit 2:

Jot>s at-Risk by State for Small Businesses
Emptoyees), Resulting from the Califomia Proposal

Exhibit 3:

Jobs at-Risk by State for Small Businesses
(<500 Emptoyees), Resulting from the Jackson Hole Proposal

458

nmiierical values of the estimated impacts. Each demographic
characteristic is examined in a separate subsection.

Age Characteristics — The results summarizing the age
characteristics of the employees whose jobs are at-risk are
presented in Figures 1 and 2. Young workers comprise the most
highly impacted age group. The largest number of severely impacted
workers are between 19 and 24 years of age, followed by workers who
are between 25 and 34 years old. The least affected workers in
absolute terms are those who are 65 years of age and older.

In relative terms, the workers who are 18 years of age and
younger experience the highest impact. The oldest age group is the
next most impacted: although the group of workers 65 years of age
and older is small compared to other age groups of workers, the
results show that a large percentage of employees in this age
group, up to 45 percent for the more costly employer mandate
proposals, will be potentially at-risk. This large impact is due,
primarily, to the small average salary of employees who are
65 years old or older.

Gender Characteristics — The results summarizing the gender
characteristics of the workers whose jobs are at-risk are depicted
in Figures 3 and 4. In both relative and absolute terms, female
workers comprise the more highly impacted gender. The impact on
female workers for the three employer mandates ranges from
17.8 percent of all female workers being at risk for the California
proposal to 40.9 percent for the Jackson Hole Group proposal.

Race/Ethnicity Characteristics — The results summarizing the
race/ethnicity characteristics of the employees whose jobs are at-
risk are portrayed in Figures 5 and 6. In absolute terms, whites
comprise the most highly impacted group; in relative terms, blacks
and hispanics are most affected.

Wage and Income Level Characteristics — The results
summarizing the individual wage level characteristics of the
employees whose jobs are at-risk are depicted in Figures 7 and 8,
and the results describing those workers in terms of their total
family income levels are displayed in Figures 9 and 10. The
findings relating to total individual annual income indicate that
low wage/income workers will experience the greatest adverse
effects from the proposals because their health care insurance
costs will be large compared to their incomes. The interesting
finding revealed in Figures 9 and 10 is that, for the Jackson Hole
Group proposal, the impacts are not concentrated as heavily on
those with very low incomes as are the impacts for the other
proposals. In the Jackson Hole Group proposal, the number of
workers with jobs at-risk is equally divided among all three
cohorts of workers who earn less than $20,000 annually. In the
three other proposals, the impacts decrease as income increases.

An interesting feature of the results relating to total annual
family income is that a considerable number of jobs at-risk are
held by workers whose family incomes are greater than $40,000.
Indeed, for all employer mandates, the largest proportion of jobs
at-risk are held by workers with family incomes above $40,000. The
second highest percentage of jobs at-risk are held by individuals
with annual family incomes between $10,000 and $20,000, and the
third highest percentage by individuals with annual family incomes
between $30,000 and $40,000.

Exhibit 1 presents the bottom-line results of these
demographic analyses.

459

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461

3.0 CURRENT ONGOING STUDIES

Our current efforts are focused on the Administration's
proposal. Cooper (H.R. 3222), Chafee (S. 1770), Michel (H.R. 3080),
and Nickles/Stearns . Exhibit 2 describes the approach -- more
sophisticated and realistic than our earlier health care reform
economic studies — based on CONSAD's approach to short- to longer-
term jobs estimation forecasting (CONSAD, 1993c).

Estimated changes in costs to the employer will, again, be the
catalyst, particularly for the short-term, transitional impacts.
The following are factors which are being considered as
conditioning the firm's reaction (initial to later) to changes in
costs (either reduced or increased):

• The firm's financial wherewithal (net income, liquidity)

• The competitiveness of the firm's product market, both
domestically and internationally

• The importance of labor costs to total costs

• The difficulty and time period for substituting other than
labor factors and their availability.

Exhibit 3 illustrates our logic process for the consideration of
these factors.

4.0 CONCLUDING REMARKS

Health care reform proposals, in particular those proposals
that require employers to provide health insurance coverage for
their full- and part-time employees may have unintended and
sometimes perverse consequences on the job-creation capacity of
small- to medium-size business. In these instances where labor
costs to businesses increase due to mandated health care coverage:

• Employers may need to reduce the wages and benefits of
numerous workers, lay off others, and possibly cease
operation,

• The ability of employers to adapt health benefits to the needs
of their employees and enterprises may be reduced or totally
eliminated.

• Existing businesses may be constrained from expanding and
creating new jobs.

• New businesses may be inhibited from opening their doors.

Similarly, analogous impacts attend firms whose labor costs
are reduced — though these efforts are not necessarily parallel
and in no ways "cancel out" the adverse effects.

The effect of health care reform on job gains and losses is,
clearly, only one concern relevant to the health care debate.
Other important economic and non-economic issues have not been
directly considered, e.g., the ease of implementation of a new
system; the number of additional workers and families who will
receive health care insurance coverage; possible changes in total
national health care expenditure; and changes in the health care
status of all Americans. The particular importance of the job-
impact issue derives from the fact that nearly all health care
reform proposals involve consideration of either individual- or
employer-funding (or mixed systems) of employee health care
insurance. As a result, a health care reform proposal may,
paradoxically, adversely affect the employment conditions of the
particular groups of workers that it is intended to help through
enhanced health care insurance coverage. Therefore, the potential
effects on jobs must be carefully analyzed before the overall
effect of a health care proposal can be evaluated in full: this is
the contribution we are hoping to make.

462

CONSAO Hodel for Estinating Econoaic Inpacts of Health Car« Rtfor

Approaen for Estimating Employment Directly
Affected by a Policy Option During the
Short Term

ntinwiai 9

" OIIRIV^P^ICTIS

463

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Government, Baruch College, City University of New York,
September .

Shells, John (1992), "Testimony Before the Senate Finance
Committee," June 9.

U.S. Congress, Office of Technology Assessment (1993), An
Inconsistent Picture: A Complication of Analyses of Economic
Impacts of Competing Approaches to Health Care Reform by
Experts and Stakeholders, OTA-H-540, U.S. Government Printing
Office, Washington, DC, June.

U.S. Department of Labor (1992), Health Benefits and The Workforce,
Washington, DC.

U.S. General Accounting Office (1992), Access to Health Insurance:
State Efforts to Assist Small Businesses, GAO/HRD-92-90,
Washington, DC, May.

Zedlewski, Sheila R., Gregory P. Acs, and Colin W. Winterbottom
(1992), "Play-or-Pay Employer Mandates: Potential Effects,"
Health Affairs, Spring.

Zedlewski, Sheila R. (1990), Exp>anding the Employer Provided Group
Health Insurance System: Effects of Workers and Their
Employers, unpublished report. The Urban Institute,
Washington, DC, May.

465

Mr. McDermott. Thank you.

Mr. Lott.

STATEMENT OF JOHN R. LOTT, JR., CARL D. COVITZ TERM AS-
SISTANT PROFESSOR, THE 'VHARTON SCHOOL, UNIVERSITY
OF PENNSYLVANIA

Mr. Lott. Thank you very much. It is, indeed, an honor to be
here today.

I would like to comment on two things.

Mr. McDermott. Excuse me.

Mr. Lott. Yes, sir.

Mr. McDermott. Let me stipulate everybody is a doctor, I think,
except Mr. Schaeffer.

Mr. Schaeffer. No, I am not a physician.

Ms. McCaughey. I am not a medical doctor either.

Mr. Lott. I am usually not called "doctor."

Mr. McDermott. OK. Mr. Lott.

Mr. Lott. Thank you very much.

There are two things I would like to comment on. The first is the
spectrum of price controls in President Clinton's health care pro-
posal, and the second is what problems do exist with the current
health care system, and I believe that those are exaggerated. They
can be traced to previous Government regulations. The pattern
seems to be that initial Government regulations generate problems
and calls for eventually even more Government regulations.

With regard to the first point, on January 13 of this year, 565
Ph.D. economists from across the political spectrum, almost all of
them academic economists, sent an open letter to President Clinton
warning about the dangers of price controls in his health care plan.
I am unaware of anywhere near this number of academic econo-
mists signing such a letter during at least the last few decades.
Some of the economists had even signed the 1992 Clinton campaign
letter endorsing some of his economic proposals.

Because I was disappointed with Dr. Reischauer's comments on
Tuesday with regard to whether there were really price control as-
pects in the bill, I would like to take just a moment to read to you
the letter that was sent to President Clinton on the 13th.

Dear President Clinton: Price controls produce shortages, black markets, and re-
duced quality. This has been the universal experience in the 4,000 years the govern-
ments have tried to artificially hold down prices using regulations.

You insist that your health care plan avoids price controls. We respectfully dis-
agree. Your plan sets the fees charged by doctors and hospitals, caps annual spend-
ing on health care, limits insurance premiums, and imposes price limitations on new
and existing drugs.

In countries that have imposed these types of regulations, patients face delays of
months and years for surgery, government bureaucrats decide treatment options in-
stead of doctors or patients, and innovations in medical techniques and pharma-
ceuticals are dramatically reduced. Here in America, the threat of price controls on
medicines has already decreased research and development at drug companies,
which will lead to reduced discoveries and the loss of life in the future.

In the 1970s, the government tried to regulate the price of a simple homogeneous
product, gasoline. The result was a social and economic disaster. People were forced
to waste nours waiting in long lines to purchase gasoline. Long waits for surgery
and other medical care will have far more serious consequences.

Caps, fee schedules, and other government regulations may appear to reduce med-
ical spending, but such gains are illusory. We will instead end up with lower quality
medical care, reduced medical innovation, and expensive new bureaucracies to mon-

466

itor compliance. These controls will hurt people, and they will damage the economy.
We urge you to remove price controls in any lorm from your health care plan.

I believe this letter is very straightforward and unambiguous. So
I won't spend much more of my comments talking about price con-
trols, but to me, if there is any one thing that economists agree on,
even more than the benefits of trade such as in the recent NAFTA
debate, it is that price controls produce shortages and that Govern-
ment is particularly inept to try and set the right price for goods.

My second point, the great irony in this debate is how infre-
quently two facts are linked together. The first is people's concerns
about the cost of health care. The second is that health care is al-
ready one of the most regulated areas of the economy.

The cost of Government regulations are huge and have been con-
tinually growing. You could almost present an endless list of regu-
lations. You have a 12-year average delay between when drugs are
developed and when they are finally approved by the FDA. Liabil-
ity rules are extremely costly. For example, they can easily account
for more than half the price differential between drugs in Canada
and the United States. When you have licensing and other restric-
tions, it will make it difficult for groups, even like midwives, to pro-
vide services in certain circumstances.

On the other side of the debate, advocates who have been impos-
ing national health care plans point to problems of "cost shifting"
caused by uninsured individuals; that these individuals are bur-
dening the system and shifting cost to those who are paying their
own way. Yet, the cost shifting produced by uninsured individuals
is trivial compared to the cost shifting created by the Federal Gov-
ernment.

Hospitals deliver $9 to $11 billion each year in unpaid medical
care, helping the uninsured and even insured individuals whose in-
surance fails to reimburse the hospitals. Approximately in 1987, at
least, another $15 billion were doctors who were unpaid for their
services. Even these numbers, though, exaggerate the burden of
the uninsured because it fails to take into account that the unin-
sured aren't receiving the tax subsidies that other workers are re-
ceiving, the tax subsidies for buying insurance.

By contrast, if you look at the cost shifting done by the Federal
Government, for instance, in the President's plan, he projects $236
billion in savings through the Grovernment simply lowering the fees
it pays through government insurance plans to doctors and hos-
pitals. The benefits remain the same, but we are simply cutting re-
imbursements. This is on top of "$56 billion in savings" that got
under the most recent budget agreement last year, and, of course,
there were similar types of cuts under the Reagan and Bush ad-
ministrations.

The additional $26 billion in savings in the Clinton health care
plan should be referred to what they really are, a massive tax in-
crease on the health care industry. It seems strange that imposing
a large tax is perceived as a solution to high prices.

Finally, Americans are overwhelmingly happy with the quality
and access to their own health care. Polls show that they believe
that the system is in trouble primarily because of lack of port-
ability and the possibility that individuals could lose their own in-
surance because of illness.

467

Again, I believe both of these problems arise because of existing
Government regulation. Let's take the case of lack of portability.
This problem largely stems from tax deductibility of health insur-
ance being tied to firms as opposed to it either being given directly
to individuals or eliminating the deduction entirely. There is no
reason why, other than inertia, for why this deductibility should be
tied to an individual's job.

In conclusion, I would like to say that we should think of why
we are in the situation to begin with. Why have these problems
arisen? I think that will provide us with some perspective whether
the solution is going to be even more greater Government regula-
tion in the future. I think if we realize that it is Government regu-
lation which produced a lot of the problems that people are worried
about today, if not most, then I think it should give us some cau-
tion before we advocate even further government involvement.

Thank you.

[The prepared statement follows;!

468

Keforming Health-care

John K l.ott Jr.*

I) Price Controls in President Clinton's llealth-care Plan

On Januar>' 13th of this year. 5()5 Ph.D. economists from across the political spectrum (almost all
them academic econumisl^) sent an open letter to Presideol Clinton warning about the dangers of price
controls in hi^ health-care plan. 1 am unaware uf anywhere near this number of academic economists
signing such a letter during at lca<n the last few decades. Some of the economists had even signed the
1992 Clinton campaign letter endoR>mg some of his economic proposals. Because I believe that this
letter is quite relevant to ti.«Ja> 's discussion of controlling the price of drugs, I would like to read the
letter to you.

An Open l.«tter to President Clinton on Health Care Keform

Dear Presideni CImlon:

Pi ice contruU produce shortages black oiarkct&. and reduceJ quality. This has been the universal
experience in the four thuui^ind yeai^ that government:) have tried tu anificially bold prices down using
regulations.

You insis:i (hat your healih-care plan av oids pncc controls. We respectfully disagree. Your plan sets the
fees charged h) doctors and hospitals caps annual .<!pcndingon hcalih-carc. limits insurance premiums,
and imposes pnce limitations on new ami existing drug!>

In countries that hav c imposed these ty|>cs i">f regulations, palicnis face delays of months and years for
surgery . government bureaucrab- decide treatment options instead of doctors or patients, and innovations
in medical techniques and pharmaceutical.'; arc dramatically reduced Here in .\merica, the threat of price
controls on medicines has alrcad) dccrcs-scd icscarch and dcvclopmcni at drug companies, which will
lead lo rt^duced diMrovenes and the loss ol life in the future

In the lyOs government tried to regulate the pric-.- otasimpic homogeneous product, gasoline. I'hc
result was a s(.K.°ial and economic disaster People were forced to wa^le hout:> waiting in lines lo
purchase gasoline. I .ong waits for surgcn, and other medical care will have far more serious
consequences

Caps, fee schedules, and other govcinriKnt regulations may appear lo reduce medical spending, hut such
gains are illusory. We will instead end up with lower quality medical care, reduced medical innovation,
and e.vpensive nevv bureaucracies lo monitor complunce. These controls will hurt people, and the> will
damage the economy. We urge jou to rcmov c price controls, in any form, from your hcalth-carc plan.

This letter is very straightforward and unambiguous '1 o me. if there is any one thing that
economists agice on. it is thai pncc controls produce shortages and that the government is particularly

l/itt is the Carl 0. Covitz lerm .\ssislant Professor at the Wharton School. L'niversity of
Pennsylvania

469

inept at determining u hat the concci price of a good should he. Anyone who sal in long lines at gas
iilalions dunng the I970"s can temcmber how unsuccessful the government was at setting prices for even
a relatively simple homogenous product like gasoline. .After Kcagan eliminated gas price controls in
I9KI . we never again experienced any more gasoline shortages.

Price controls cHnno! prev enl real price iacreases, but can only change the form that they take. With
gas, we paid through the time that wx* were stranded in lines I'or medical care, patients still pay for
higher medical care prices with their time b> waiting for care — just ask people suffering delays for
surgery in Canada or Britain.

l-or drugs, controls will reduce the number of new drugs with the resulting loss of lives that those
drugs would have saved. Inventing now drags is costly with an cx|)ectcd cost averaging $23 1 million
Id addition to research anJ de» elopmenl cost*, there is the twehe year average delay for new drugs
endure in getting through the government iipprv>val proi-ess.

Hcforc we can understand wh) drug C(mipanics set the prices that they do, wc must understand why
patents e.iist. Patents encourage mnovaiioo Without patents, a competitor could pnxJuce the new drugs
ut a low price and prevent the drug°> iavenlor> liom chutgmg a high enough price to cover both
pnxluclion costs and recoup the large developircnt costs The tcmporar%' monopoly insures the
incentives to develop new drug>. Ktilucms the p^cc^ thai companies can charge reduces innovation just
as suirl) as reducing the length I'l the patcul life, but regulating iudiv idual prices i<> much more arbitrary .

It Is politiiall) tempting li< force down the piici-s that drug companies can charge to make drugs more
affordable. Yet. v» hile the need to help the ptor who are iick ImJay is immediate, the long run
consequences to forcing drug companies u> puv (or stK'iety s compassion lakes the form of fewer new
life-saving dru8.< tomorrow.

I .CI me take one example. ! hex ha.« for '•ome years been an effort to force down the selling price of
AZ r. which delays the onslaugh', ol ,\1DS> hv en putting aside recent concerns over AZl's
effectiveness, the question is whether those sulfcring from .\1I)S really ficncfit from such a measure
Surely, they will get \/'l' at a l.>wcr pnce but what will happen to research for a cure? Depending on
bcvw restrictive the rontntls arc even companies which are most of the towards developing a cure will
have to rethink any additional investment". 'I'hrvse wrth AIDS should hope that drug companies view
inventing the cure as a niuncial bonanza and not as a pnAC whase nrotlts will be regulated away.

470

One ofC^linton's major themes is that drug prices are needlessly 32 percent higher in America than
they are in Canada. \Miile this Figure is exaggerated, a difference does exist even if the correct numbers
arc used.' A drug company will sell an already developed drug in Canada as long as they can cover the
drug's manufacturing costs. In sonic sense (!anadians are "free-riding" off Americans because the
drugs were only developed in the first place because of (he higher profits expected on American sales.
I 'nfortunatcly. with price controls all over the world, there remain no large markets for us to free-ride
on

While price controls on oil and («ther products are usually short-lived as people see the havoc created
by govcmtTKnt intervention, the pernicious effects of drugs regulations arc more obscure. With long
lags in the approval process for drugs, it will he years before we notice the lack of new drugs

Even » hen people evenluall) realize that controls are preventing new drugs from being Je\ eloped, it
will be very difficull to remove these controls. If controls are removed, there would be a long delay
before new drugs start being produced again It is unlikely that a future presidential candidate will be
\ er> successful if he goes before the \ t>leK and asks them to endure higher prices for man> years before
new drugs will again start appcunng. Nor is it i>bt lous Ihut such u lifting of regulations wilt have ihc
desired effect, since the drug comjianics would have to be convinced that new controls would not be
imposed as soon as neuly de« eloped drugs hil the market.

lu the last yeai >eai-aud-a-h4lf since then caudidale Cbiitou surged in the June 1992 opinion polls,
ihcsi.xteen largc>4 drug compaiiio ha^c lost nuarU SI(X> lilllion in Lx>mbincd stock market \aluc. and
companies began perceiving pnce legulatjons as a real threat .As the expected returns to being in the
phaimaccuiical iadustr\ have plummeted. hk>w nvin> future lives have already been k>sl because the ideas
for new drugs have been shelved '

In fact, a signiflcant portion of Ihc reduced growth in gross national product during the first half of
1 993 of 1 .3 percent alter the robust giuM ih duncg 1 992 of 3. 1 percent is altnbiilable not onl> to the
threat of higher taxes but more imporianlly to the rctanchmcnt that occurred in the medical sector of our
economy. When one seventh of our econom> retrenches becau.sc of the threat of price controls and other
regulations, il is not loo surprising thai it bad v isible alTects on the nation's grov^lh rale. V\'hen price

' RichdTtl Mamii'iK liii(l<> tIliI 5C pcrcciii o: l!iv drun pncc (lirkreiitial liciwctn Candida
;iiiil lilt I : ilcil SlHits cm In cxpUirtil iiy ■.liflcrciicc' i:i ko* ilii: iwi: touiilric> Irt.il
product liability isee Kichjrit .Mjn:-.!rg ".'Toc^'jcts L:jbility and Drug Prices in Canada and
lilt i iiilcti Si .tics" Rn)!li.iin Yi>.ii>: '. r:vtr.sil\ Workiii); P^per. January l'*94)

471

controls arc threatened, particularly when rumors abound that quality controls n hich will prevent
hospitals and other medical care providers from responding once controls are imposed — those affected
hy the controls immediately start reducing quality and output.

I'hc price controls will also produce one other devastating result when they are combined with
Cliatoa's planned reductions in reimbuisement rates for Medicare and Medicaid. In the past, hospitals
had to make up for the los.ses on government insured patients by charging their private patients more, but
the problem now is that the proposed government price controls will prevent that from occurring. So
what will happen? Hospitals w ill lose money and many will cither go bankrupt or, as a last resort, the
government will end up taking them over.

II) Is there a Crisis in HralUi-carc?

When people arc a.skcd to comment on their own personal health -care, recent polls do not indicate a
feeling of crisis. 83 percent of Amencani^ rate the qiiulit> of their own health care as "cicellent" or
"good." and 73 percent tell pollsicr> that lhc> aiv cither ""extremely happy" or""happ>" with their access
to health care 'i ct. polls also show a similar percentages of people believe our health care sy.stem is in
crisis w hen the) are asked ab<<ul the stale of the s) stem as a w hole. Unfortunately, these feelings of
crisis are being Uiggercd b> inislcadiug claims over the number of \mericans who go without health care
and the waste that is said to c.\ist in the sy.stem l.xaggcralions b> politicians of the chances that health
care ""won"t be there for ihem ne.M month or ne\t vear"" onl) serve to fan those fears.

The oft repeated claim is that 35 to 37 million .\mencans are now without health insurance, with the
implication that thej arc without hcahh caic. "icl. the .\dmini.stration's own numbers about the
uniasurcd indicate that almost -H) percent of these people find themselves in that position for less than
two mooth-s. More importantly, even among the H million people are uninsured for at least a year, being
without insurance docs not imply going without health care. Despite the uninsured being relatively
young (-U) percent are between IK and 29 years of age) and in relativeK good health, they arc 75 percent
as likely to visit a physician and almost 50 percent as likely to obtain hospitalization as those with private
hcahh insurance. Hospitals deliver %'} billion to $1 1 billion each year in unpaid medical care helping the

472

uninsured and insured individuals who insurance fails to reimburse the hospitals, and a 1987 survey of
doclois found unpaid care averaged 528,900 per phy-sician that year — totaling another$15 billion.

Not only do these numbers indicate that being uninsured docs not imply that one is without care, but
they also shed light on a related concern — the complaint that the uninsured arc bunJcning the health-care
s> stem and shifting large cost^ to those v\ ho are pay ing their own Ma> . While $26 billion per >'ear is
significant, it pales in comparison to the cost shifting produced by the federal government. These
numbers even overstate the burden imixised by the uninsured since they are not receiving the tax
subsidies provided to those who bu> im>uranc'«.

Uy contrast, Clinton's medical plan projects S2.^6 billion in "savings" though the government simply
by lowering the fees it pays through government insurance plans to the doctors and hospitals These
fees already fail to cover the costs of providing Medicare and Medicaid piilienls with mandated services
Clinton should call this S236 billion "savings" what they realK are — a massive la.x increase on the
hcahh care industry. This is on lop of the similar S.S<> billion in Medicare and Medicaid "savings'" just
enacted in last year's federal budget battle. It seems strange that imposing a large la,\ is perceived to be
the solution to high prices.

Ill) Purlnbility uf Insurance and the Pcrcrhed Threat that People Can Lose Their
Insurance

Polls indicate that Iwv imp<.<nant prublenis aic pcaeixcd as existing lu health-care. The first stems
from people 's inability to take their existing insurance plans » ith them vv ben thev change jobs. The
second is the fear that people will lose ihcii health insurance after a serious illnes.s. While the severity of
these two problems lends u.> be ex.iggeratrd (for example only about 0,7 percent of the population is
uninsurable), these problems exist in large pan due toe.xisting government regulation.

The problem of |x>itabilitx large!) stems from the tax deductibility of health insurance being tied to
firms as opposed to it cither being given directly to individuals, alternatively, the deduction could be
eliminated entirely . There is no reastm other than inertia for u hy this deduclibilit) should be lied to an
individual's job.

The problem of losing insurance could be solved hy insurance companies offering long term
insurance contracts. However, the rtuiin reason that the> do not offer it is because of how courts and
stale regulators treated those types of in.surance contracts in the pa.st 'f he .structure of these contracts

473

entailed people paying relatively high amounts during the initial periods of the insurance. However,
healthy indi\ iduids who desired tu leave the pi^licy when moK attractive alteroatives came aloDg sued
over the high up front payments I'X'king them into these contracts C'ourts and state insurance regulators
typically ruled that the insurance comfianics were required to rebate these initial high payments so that
these healthy individuals could leave [odividuaU in poor healib however would have no desire to leave
since the rates charged b> other new policies would definitely be higher than the guaranteed rates they
already had. insurance companies offering long term policies thus quickly realized that they could casil>^
be trapped into insuring a disproportionate!) large share of ill individuals.

iV) Conclusion

If Congress passes legislation containing price coDlruls. we will all be paying lor lhi;m long into the
future. Controls on somethings such as drugs, because of the long lag times before their more
pemicious effects aic rcali.Tcd will be particularly difficult to remove later. Possibly the most puzzling
aspect of this whole debate, however, is the focus ■^a more gov emment regulation and central planning
to solve existing problems. WhM i-^ rnvvst surprising i> that this is incurring after the failure of central
planning in l.asicrn l.uropc and the former Somci I nion and after so many countries like Sweden have
(umed awa) from their t)wn versions of the welfaie state

474

Mr. McDermott. Thank you.
Mr. Helms.

STATEMENT OF ROBERT B. HELMS, PH.D., RESffiENT SCHOL-
AR AND DIRECTOR OF HEALTH POLICY STUDIES, AMERICAN
ENTERPRISE INSTITUTE FOR PUBLIC POLICY RESEARCH

Mr. Helms. I wish to present some principles of health care re-
form that would achieve what economists have identified as "effi-
cient" health care reform. I think there is substantial agreement on
all sides that we would like to see a health care system that would
be cost effective, innovative, and would increase the quality of care.

There is no getting around the fact that expanding insurance
coverage will increase the demand for care. It will increase the de-
mand both by those who are presently uninsured and by those who
are presently insured, especially those who would get increased
benefits.

We know from a large body of economic research that people
with insurance try to use the system more extensively. This will
put upward pressure on both prices and expenditures.

Economists say that you can keep prices under control with in-
creased demand if you increase supply. But that really is not part
of the health care debate because it takes a long time to train new
people and add facilities. Expanding supply reduces prices but in-
creases total expenditures (assuming elastic demand).

What people want to get out of health care reform is the reduc-
tion of ilnit cost, that is, shifting the supply curve down through
improvements in efficiency.

In my view, there is a lot of wishful thinking going on about re-
ducing unit costs. Neither regulation nor so-called competition will
reduce unit costs without a lot of help from consumers on the de-
mand side.

There are basically two ways to get consumers to change their
behavior. Medical savings accounts might help in some sense, but
in my view they are far inferior to facing up to the fact that we
have a tax system which greatly distorts individual incentives.

I know this is a tough political issue for all Members of Congress,
but as an economist I think it is my duty, to remind you that you
can not get efficient reform unless you do something about this
issue. Changing the present tax treatment of health insurance is
very important to getting people to change their behavior to seek
out more cost-effective care. Any cost-containment strategy is
doomed if most consumers continue to try to increase their utiliza-
tion of health care services.

One reason I am particularly disappointed with the Clinton ap-
proach is that if effectively ignores the demand side of the equa-
tion. The Clinton task force started with the Jackson Hole proposal
but then walked away from what Alain Enthoven considers to be
an essential part of the proposal — a change in the tax treatment
of health insurance necessary to get the consumer behavior on the
demand side to make his system work.

In my view, the Clinton proposal will not give you effective com-
petition because of the way if has set up the alliances and the bid-
ding process. We are more apt to get numerous regional cartels

475

where each health plan is in a cozy little relationship that is regu-
lated by the health alliance.

The other thing that I would urge you to be leery about is the
notion that we know exactly how the process of competition should
work over time. That is very difficult for anyone to predict. We
probably has linders on about how this competitive process may
play out. In essence, if we get the incentives right on the demand
side, there will be lots of room for providers to think up new ways
to satisfy consumers and to compete on the basis of quality, con-
venience, and service. This is not the kind of competition you will
get in a regulatory system, as John Lott has just indicated.

I am happy to say I was one of the economists that signed that
statement.

In addition, individual incentives matter in all health care mar-
kets, which is my way of saying it is a mistake to leave out Medi-
care, Medicaid, the veterans programs, the Indian Health Service,
and any other health program. If we could get behavior changes
among all these consumers, it would make the whole market more
efficient.

Let me remind you that the Medicare health insurance trustees
have been saying for several years that the Medicare (HI) trust
fund is in serious trouble, especially in the next century when the
baby boomers begin to become eligible for Medicare. The Congress
has got to face up to this problem at some point, so I believe you
do not serve the American people well if you leave this issue out
of the consent debate.

Thank you, Mr. Chairman.

[The prepared statement follows:]

476

Testimony of

Robert B. Helms

February 10, 1994'

It is common to read in press accounts of the health reform debate that the difficult
topic of health care reform is not understood by most Americans or even by members of
Congress. While some aspects of health care reform arc indeed difficult to understand, I
believe the basic economic issues are straightforward and can provide a useful guide to
achieving health reform that will improve the efficiency of our health care system.

First, if through mandates or expansions of government programs we provide health
insurance coverage to additional individuals, we know that this will increase die demand to
use our health care system. Both people with serious medical conditions and people who are
relatively healthy will attempt to obtain care from providers simply because they will have an
insurance plan that covers these services. The effect of an increase in demand will put
upward pressure on both prices and total expenditures in the health care sector.

The rise in prices, but not necessarily in total expenditures, could be prevented if
there was a large enough increase in the supply of tnedical personnel and facilities. But it
typically takes years to add substantially to the supply of health care providers so that most
policy discussions do iK>t seriously consider the option of additional supply. Instead, policy
proposals typically focus on ways to get each consumer of health care services to reduce
their personal demand or to induce providers to improve the efficiency of their delivery (i.e.,
increasing supply through reductions in unit costs rather than increasing capacity).

However, a third approach, but in my view totally misguided, is always inserted into
such policy debates: a proposal to regulate prices.^ This approach ignores the fundamental
economic behavior of both consumers and providers (supply and demand) and assumes that
prices and total expenditures can be controlled by direct government controls. *Pricc
regulation can go by numerous names (eg. wage and price controls, incomes policies, global
budgets, or even private insurance premium caps), but whatever it is called it always
involves the notion of directly reducing unit prices below the level that would have been
established in a competitive market.

Such controls do cause both providers and consumers to change their behavior to try
to avoid the effects of non-price rationing that result from controls. These types of behavior
changes are wasteful and inefHcient when compared to the behavior changes that would be
brought about by changing market forces. For example, if consumers had stronger
incentives to reduce their personal demand for medical care, they would put nuare effort into
identifying and using those providers who can deliver more cost-effective and quaUty care.
Such providers would be rewarded relative to those providers not providing the quality and
convenience demanded by consumers. In a regulatory environment with effective price
controls, providers have incentives to ration the care they are willing to deliver. This
rationing can take several forms depending on the personal preferences of the provider to
serve certain people but not others. It is luuve to believe that the regulatory authority can
prevent all the types of personal discrimination that would result. Under controls the

'The views expressed in this testimony are my own and do not necessarily represent the
views of the American Enterprise Instimte.

H^n the history of wage and price controls, see Robert L. Scboettinger and Eamon F. Butler,
Forty Cemuries of Wage and Price Controls (Washington, DC: Heritage Fouodadon, 1979).
For an excellent review of the economics of govcnmient regulation, see Paul L. Joskow and
Roger C. Noll, "Regulation in Theory and Practice: An Overview," in Gary Fromm, ed.,
Studies in PubUc Regulation (Cambridge. MA: The MIT Press, 1981). pp. 1-65. For an
assessment of controls in more modem times, see Smart M. Butler, "The Fatal Attraction of
Price Controls," in Robert B. Helms (cd). Health Policy Reform: Competition and Controls
(Washington. D.C.: The AEI Press, 1993), pp. 3-21.

477

providers do not have incentives to meet the unmet needs of all consumers that have
incentives to try to obtain medical care. The result is a set of incentives that will lead to a
decrease in the quality and convenience of medical services.

While the lessons of economics may be straightforward, the Congress faces the
practical question of determining wtiat policy changes will bring about consumer and
provider individual incentives that will promote efficient health market reform. I believe the
very large body of economic and policy analysis conducted over the last 20 years provides
some guidance m this search for efficient policies.

My principal criticism of the Clinton administration's Health Security Act (HSA) is
that it walks away from policies designed to change consumer behavior and concentrates
almost entirely on changing the performance of providers. By expanding benefits both to the
uninsured and to many of those presently insured, the proposal obviously increases the
demand for care. Even though the administration started with the Jackson Hole Proposal as
the basis of their plan, they made some important changes that substantially change the
incentives of both providers and consumers from that envisioned by the architects of
managed competition.^ On the demand side, they essentially abandoned the change in tax
policy that would have eliminated the present exchision of employer-provided health
insurance, a policy change that I believe is a necessary condition for changing consumer
behavior. Without a change of behavior on the demand side, the Clinton proposal puts all of
it eggs in the basket of supply-side changes. While the administration has proposed to use
caps on health plan premiums only as a backup in case their competitive changes do not
sufficiently control costs, they have also made two important changes in the Jackson Hole
Proposal that I believe takes the linchpin out of the Jackson Hole competitive machine.

First, in the bidding process to determine which competing health plans will be
offered in each area, they changed the lowest-cost bidder standard to a weighted average cost
standard. The weighted average of the successful bids determines the per capita amount that
is the standard for computing each employers mandated payment (80 percent unless the firm
qualifies for one of the small firm, low wage, or expensive benefit exceptions). While a
competing health plan may have some incentive to be a low-cost plan to attract employees
(who can avoid paying some or all of their 20 percent share of the average premium), this
incentive would be much weaker than under the low-cost standard.

Second, by giving the health alliance exclusive power to qualify (and disqualify)
plans, administer the bidding and negotiating process, and collect and disperse all money
flows between employers, individuals, and health plans, the HSA substantially changes the
incentives of heal^ plans to aggressively compete on the basis of both price and quality, a
primary objective of the Jackson Hole Proposal. In fact, if looked at through the prism of
the economics of cartels, the most likely outcome of the HSA competitive process will by a
series of regional cartels managed by the regional health alliance. Aggressive competition to
reduce prices or expand quality or service would be viewed as disruptive to the best interests
of the health alliance officials and the other health plans. Instead of a competitive process
that would eliminate wasteful medical care and drive down costs as envisioned by the
Jackson Hole group, a series of health cartels would have little effea on total health
expenditures but would substantially stifle innovative changes in health care delivery and
financing.

The following is a discussion of several specific policies that I think should be
considered by the Congress as it seeks to improve the efficiency of our health care system.
It starts with a discussion of the role of tax policy, a difflcult political issue but one that I
think is essential for effective reform.

'For a description of the proposal, see Paul M. Ellwood, Alain C. Enthoven, and Lynn
Etheredge, "The Jackson Hole Initiatives for a Twenty-first Century American Health Care
System," Health Economics, vol. 1 (1992). pp. 149-168, and Alain C. Enthoven. "The History
and Principles of Managed Competition,' Heakh Affairs, vol. 12. suppl. (1993), pp. 24-48.

478

The Role of Tax Policy

Tax policy has played an inqjortant role in creating the distorted set of incentives we
now have. There is no way of avoiding the fact that the present treatment of eiiy)loyer-
provided health insurance benefits must be changed if we want to avoid govemment
regulation and establish a health care system that improves economic efficiency.

Economises and other health policy analysts have been writing about the distorting
effects of federal tax policies for over 20 years/ Beginning in World War II employers
started to provide health insurance as a way to compete for scarce labor under wage controls.
Health insurance has never been treated as taxable income by the IRS. While this SO year
old policy has been credited with preventing the nationalization of health insurance that we
have seen in other countries, it has also been identified as a major cause of "overinsuraoce"
and "too much insurance of the wrong land. " By distorting the choice between taxable
wages and oon-taxable health insurance, this tax treatment of health insurance has caused the
absolute growth of insurance, the gradual reduction of cost sharing, and the extension of
coverage to types of medical care such as dental and vision care that arc rarely associated
witib low-probability and expensive medical events. These large and long-teim subsidies
have gradually changed health insurance from the traditional concept of insurance (coverage
of large and unexpected events) to a form of medical prepayment.

Because this tax preference is limited to employer-provided insurance, it has
contributed to "the third-party payment problem" where each individual assumes that
someone else will pay for whatever medical care they consume. Under such a system, there
is little reward for choosing a hospital, physician, or medical procedure or product that costs
a little less.-'' This has led numerous analysts to identify the tax treatment of health insurance
as a major cause of the rapid rate of growth of both health care prices and expenditures.

The distorting effects of the present tax treatment of health insurance have led almost
all academic-based health reform proposals (except the single-payer proposals) to propose to

*To sample some of this literature, see Martin S. Feidsiein, "The Welfare Loss of Excess
Health Insurance, " Journal of Political Economy, vol. 81 (March 1973), pp. 251-80; Ronald
J. Vogel, "The Tax Treatment of Health Insurance Premiums as a Cause of Ovcrinsurance, " in
Mark V. Pauly, ed.. National Health Insurance, What Now? Wiat Later? What Never?
(Wasbbgton, D.C.: American Enterprise Institute, 1980), pp. 220-249; Jack A. Meyer, "Health
Care Competition: Are Tax Incentives Enough?" in Mancur Olson, ed., A New Approach to the
Economics of Health Care (Washington, D.C.; American Enterprise Institute, 1981), pp. 424-
449; Pauly, Danzon, Feldstein, and Hoff, Responsible National Health Insurance (Washington,
D.C.: AEI Press, 1992); Eugene Steuerle, "The Search for Adaptable Health Policy Through
Financcd-Bascd Reform" in Robert B. Helms, American Health Policy: Critical Issues fur
Reform (Washington, D.C. : AEI Press, 1993), pp. 334-361 ; Alain C. Enthoven, "Why Managed
Care Has Failed to Contain Health Costs," Health Affiurs, Vol. 12, No. 3 (Fall 1993), pp. 36-
37.

*rhe distorting effects of federal tax policy have been exacerbated by the growing
importance of state income taxes where employer-provided health insurance is not considered
part of state taxable income. But since sute income taxes rarely add more than S to 7
percentage points to federal marginal tax rates of 30 to 40 percent, the state effect remains
relatively small when compared to the effect of federal tax policy. For recent estimates of the
loss of tax revenue from different sources, see Stuart Butler A Policy Maker's Guide to the
Health Care Crisis. Part II (A^'ashington, DC; The Heritage Foundation, March 5. 1992) Table
12, p. 20.

These distorting effects are ftirther exacerbated by the open-ended nature of Medicare and
Medicaid which also gives little incentive for individuals to be cost-effective medical consumers.
See Steuerle, "The Search for Adaptable Health Policy Through Financed-Based Reform' in
Robert B. Helms, American Health Policy: Critical Issues for R^orm (Washington, D.C: AEI
Press, 1993), pp. 334-361.

479

either eliminate or limit the amount of the tax exclusion for health insurance.' In my view,
making such a change in tax policy is almost a necessary condition for achieving
economically efficient reform. It is the most effective policy change under consideration that
would affect the demand side of the market by giving individuals a greater incentive to be
cost-effective purchasers of health care. This change in consumer behavior is essential to
make competitive markets function as they should. If consumers demanded more cost
effective care (which may include even higher quality and service), then providers of all
types would have no choice but to change their practices and compete more on the basis of
price and quality.

Let me also say that calling for a change in the open-ended namre of the tax treatment
of employer-provided health insurance is not an argument for increasing federal tax revenues
or in any way "increasing the taxes on businesses or labor." This is an argument about
eliminating the distorting effects of these tax policies, not an argument about increasing the
level of taxes. If the Congress did not want to divert the expected increase in revenue to pay
for expanded coverage of the uninsured (as proposed in several health reform proposals), it
could lower both business and personal tax rates to assure no increase in fedeial revenues.^

Letting the Market Rule the Process of Competition

As this bearing illustrates, the focus of the national debate about health reform is
shifting from the administration's proposal to alternative health reform proposals, most of
which are based on some version of die concept of managed competition. While Alain
Enthoven and the Jackson Hole group should get substantial credit for bringing an important
set of ideas to the health policy debate, there is one aspect of their approach which I think
the Congress should resist. Ttje Jackson Hole Proposal goes to great lengths to specify the
basic benefit package the competing health plans must offer and the organization and
strucmre of these plans. This may have some advantages to assist consumers to make
comparisons among plans, but it also has some disadvantages. The process of competition in
all markets can take many forms including competition based on the design and quality of the
product or service. In health care markets characterized by more imensive competition than
we have experienced in the last few years, this competition could take forms which might be
impossible for us to foresee at this time. If we create the correct incentives on the demand
side and resist the temptation to be too restrictive on how providers might respond to the
desires of consumers, we do not lock ourselves into the equivalent of horse-and-buggy
technology, turn-of-the-century retailing, or present-day health insiwance policies. Neither
policy wonks or the wisest members of Congress should assume that we can predict the most
efficient form of health iasurance or health care delivery in the coming decades. The
principal advantage of competiuve markets is that they are far more efficient in adapting to
changing consumer preferences and technologies than any legislative or regulatory body.

^A tax exclusion cap which limits the amount of employer-provided health insurance an
individual can exclude from taxable income should not be conftised with a tax deduction cap (as
proposed in the Managed Competition Act of 1993, introduced by Reps. Jim Cooper and Fred
Grandy) which limits the amount a business firm can dedua for the expense of providing health
insuraitte to employees. Among other effects, these two types of tax caps could have
substantially different effects on labor-management relations. It is my opinion that the former
could create a mumal interest among labor and management in effective cost containment while
Che latter would tend to drive a wedge between the interests of labor and management.

^While this could be done in a revenue-neutral way, it would not be possible or desirable
to avoid the differential effects on mdividual businesses and individuals. While the net effect
on any one business or individual would depend on their level of benefits and marginal tax rate,
it is likely that such a policy would create incentives for firms and mdividuals with extensive
health insurance benefits to cut back arxl for fmns and individxials with little or no benefits to
obtain more coverage. While this would not assure universal coverage, it would increase the
level of health insurance coverage without the net job losses that are likely to result &om the
Clinton Plan's employer mandates and small firm subsidies.

480

Present Government Health Programs Should Not be Exempt from Refonn

Most health refonn proposals attempt some reform for the problem-ridden Medicaid
program, but few include any real revisions that would change the demand-side behavior for
those eligible for coverage under Medicare, the VA programs, the Indian Health Service and
the various military programs for civilians. The political wisdom seems to be that it is not
worth expending political capital by proposing tc include these programs. While there may
be specific budget or program reasons to include these programs in the debate (especially the
longer-term mist fund problems in Medicare), the primary reason they should not be left out
is that together they make up a substantial fraction of the United States health care market.
Even if we have efficient refonn in private health markets, we cannot get the fUll benefit of
reform if this substantial block of consumers still retains perverse incentives to overuse the
system and not ctiange tteii own personal behavior regarding their health care choices.

481

Mr. McDermott. Thank you.

Dr. McCaughey? I called you McCaughey before. That is the
Gaelic way.

STATEMENT OF ELIZABETH P. MCCAUGHEY, PH.D., JOHN M.
OLIN FELLOW, MANHATTAN INSTITUTE, NEW YORK, N.Y.

Ms. McCaughey. That is just fine with me.

It is an honor for me to be here and an opportunity to make a
contribution, and I am grateful. Thank you for inviting me.

I would like to make three points. The first is that under the
Clinton bill, universal coverage is financed with a regressive
antiurban tax. There has been a great deal of discussion about the
antiemployment nature of the financing, but I would like to focus
on these two other qualities of it.

Second, the bill is designed to push most Americans into HMOs,
and yet, there is an historic failure of Government, Federal and
State, to curb HMO cost-cutting practices that endanger patients.

Third, I would like to ofiTer an observation about how the plan
will work for most Americans, what it will mean when they go to
the doctor's office, and how that will imperil their privacy and also
ultimately make fee-for-service or choose-your-own-doctor insur-
ance very hard to get.

So let me start with the financing mechanism. If you live in or
near a city, good luck. The bill requires States to create health alli-
ance regions, similar to election districts, and I am pointing that
out because this will be quite meaningful. How those alliance lines
are drawn will determine which areas of a State are hit with the
highest health care premiums because they are shouldering the
cost of health coverage for the inner-city poor.

The system promises to pit black against white, poor against
rich, and city against suburb. The average treatment cost of a baby
born addicted to drugs is $63,000 just to bring that babv home
from the hospital. Because of community rating, anyone who lives
in an urban alliance is going to pay the highest premiums and get
the least amount of health care, regardless of his own health or be-
havior. Part of this premium will cover his own care, but part is
a hidden tax to provide universal health coverage within the alli-
ance, and, of course, some alliances will bear the especially heavy
burden.

Everyone will figure out that you get the least amount of health
care and pay the highest premiums if you live in an alliance with
inner-city problems. So this bill will be an incentive for employers
to abandon cities and relocate.

Considering the number of court battles when States draw elec-
tion districts, lawsuits over medical gerrymandering are inevitable.
The plan sets out the rules on how those lines are to be drawn —
they are right here on page 99 — remarkably similar to section 2 of
the Voting Rights Act for all of you who have struggled with that
for over a decade.

The States "may not discriminate on the basis of or otherwise
take into account race, age, language, religion, national origin, so-
cioeconomic status, disability or perceived health status." An alli-
ance that includes a consolidated metropolitan statistical area
within a State is presumed to be in compliance. Home prices and

482

litigation fees are going to rise and fall, depending on which sub-
urbs are sucked into these alliances with inner-city problems.

Now, to make matters worse, this bill is financed with a regres-
sive tax. The person who earns $50,000 a year and the fat cat who
earns $500,000 a year is going to be making the same contribution
toward the health care for their inner-city poor. Also, the bill would
shift cost now paid partly by the Federal Grovernment to the local
alliances.

For example, the bill halts what are called Medicaid-only pay-
ments for the ill. In New York City, 387,450 people received those
payments every year, an average of $13,000 per person. The total
bill in New York City, and this is for the Federal and State con-
tribution, is $4.9 billion a year. Under the Clinton bill, those people
are folded into the community-rated system, and their health care
needs, which on average are three times as great as the ordinary
New Yorkers, will have to be met out of that pot into which
everybody's premiums are paid.

The costs taken off the Federal budget are called savings by the
administration, but this cost amounts to a new tax on the backs
of urban employers and residents. I believe in universal health cov-
erage. I would like to see it accomplished, but making urban resi-
dents and businesses pick up the tab will devastate cities.

The second point regarding HMOs, under the Clinton plan, the
Federal Government uses price controls on premiums to curb dol-
lars paid into the health care system. It is a system designed to
encourage most Americans to sign up for managed care, prepaid
health care. Limiting how the health care dollars are spent is a job
taken on, in part, by alliance officials who will oversee the dwin-
dling fee-for-service of indemnity sector, but mostly, it is a job
taken on by HMO administrators who will do the lion's share of ra-
tioning.

Now, HMOs already have a track record of controlling patient ac-
cess to physicians and high-tech care, and current HMO cost-cut-
ting methods are already drawing criticism from Congress, from
the General Accounting Administration who has written several re-
ports on it, from Consumers Reports — see August 1992 — and from
many worried doctors.

The Clinton bill's premium caps will compel HMOs to use ever
more stringent methods of limiting care, but the bill omits any
safeguards to protect patients from these abusive practices, and I
would like to focus on iust one, if I can go on. May I?

Mr. McDermott. Why not finish?

Ms. McCaughey. Pardon me?

Mr. McDermott. Go ahead.

Ms. McCaughey. Thank you.

For example, missing from the bill is an effort to put a stop to
the withhold. This is a pervasive HMO practice of punishing doc-
tors financially for providing the care they believe their patients
need. Almost all of for-profit HMOs, those operated by Aetna,
Metlife, Prudential, Oxford — not Cigna — withhold between 10 and
25 percent of a doctor's payments per year, whether the doctor is
on a salary or it takes a per-capitated fee for each patient signed
on or a fee per clinical visit, but whatever the arrangement, the
HMO withholds between 10 and 25 percent of what the doctor

483

earns during the year seeing HMO enrollees and returns that
money to the doctor only if the doctor meets HMO targets for Hmit-
ing patient access to tests, referrals to specialists, and hospitaliza-
tion.

Now, the doctors with whom I have spoken, many, many have
told me that these targets are so stringent that they don't know
any doctor who has ever gotten his entire withhold back at the end
of the year. What does that mean? It means that whatever tests
or procedures a doctor orders for his patient comes out of his own
pocket at the end of the year, and this withhold mechanism has
caused a surge in dangerous hallway consultations, where one doc-
tor, a primary care doctor or an internist will stop a specialist, like
a pulmonologist in the hallway and say, "I have a patient with
breathing problems, and I will try and describe the patient's symp-
toms and ask the pulmonologist what to do about it." Why isn't he
just referring this patient to the pulmonologist for an examination?
Because he doesn't want points against his withhold. The trouble
is that he may forget to tell the pulmonologist that his patient is
86 years old or also has diabetes.

Will the Government protect people once they are enrolled in
large numbers in these HMOs? The Clinton bill establishes two na-
tional boards to develop quality standards and depends on alliance
officials to enforce them, but the history shows that Federal and
State officials have failed to protect the patients they have encour-
aged to enroll in HMOs.

For example, in 1990, Florida newspapers were filled with lurid
accounts of abuses by a Humana medical plan, an HMO paid to
care for the elderly and to reduce Medicare costs. Congress ordered
an investigation of Humana's performance. Here it is. Janet
Shikles, in charge of the probe for the General Accounting Office,
testified about the company's failure to order the diagnostic test
that patients needed and failure to follow up on abnormal test re-
sults.

Consumers Reports in August 1992 did a similar investigation of
the shortcomings of pilot Medicare HMO programs in Florida and
concluded that government oversight was, in their words, lackadai-
sical.

A nationwide investigation for Congress by the GAO drew the
same conclusion. Senator John Heinz, the late Senator John Heinz,
pointed out in his summary of the report that only 21 of 57 HMOs
investigated received a passing grade.

I will conclude in just a moment.

So he warned then in 1990 that government has given a priority
to promoting enrollment in HMOs and has not given equal priority
to monitoring what happens to people after they have enrolled.

Far from protecting patients in HMOs, the Clinton bill ties the
hands of lawmakers who want to pass protective legislation. I refer
you to page 238 in which the bill preempts State laws protecting
consumer choice, enabling patients to choose, for example, the hos-
pital they think is best or the pharmaceutical supplier.

Maybe you can ask me about the third point if we have time for
questioning because I think that is also important.

[The prepared statement follows:]

484

TESTIMONY OF ELIZABETH P. McCAUGHEY
JOHN M. OLIN FELLOW
MANHATTAN INSTITUTE

NOBXTT

If you are not worried about the Clinton health bttl, keep reading. If the bU passes, you will have to aettle
for one of the low^mdget health plana tdected by the govenunent. Tht law wUl prevent you from going
ouliide the ayatem to buy basic health coverage you think is better, even after you pay the mandatory
premium (see the bill, page 244). The bill guarantee* you a package of medical services, but you can't
have them unless they arc deemed "necessary" and "appropriate' (pages 90-91). That decision will be
made by the government, not by you and your doctor. Escaping the system and paving out-of-pocket to
see a specialist for the tests and treatment you think you need ivill bealmost impossibte. If you walk into
a doctor's office and ask for treatment for an Ulnesa, you muit ahow proof that you are enrolled in one of
the health plans offered by the government (pages 139. 143.) The doctor can be paid only by the plan, not
by you (page 236). To keep controls ti^t, the bill requires the doctor to report your visit to a national
data bank containing the medical histories of all Americans (page 236).

The administration state* that the Mil win not lower the quality of your medical care or take away
personal choices you now make. This statement goes right to the issues that matter most. How true is it?
To help you decide, here is a gukie to the 1,364-page Hedth Security Act.

The Law Will Make You Gel Healtk Can Through Your 'Alliance' Under the bill, unless you get Medicare,
military benefits or veteran's benefits, or you or your spouse work for a company with more than 5/)00
employees, you must enroll in one of the limited number of health plans offered by the "r^oital
alliance' where you Uve (page 15). Regiottal aUiances are government-run monopolies that select health
plans, collect premiums from residents and their employers and pay most of the money to HMOs axtd
insurers. If you fail to cnndl, or the plan you choose is oversubscribed, alliance officials will assign you to
orte (pages 144, 146). The goal is to curb health care spending by limiting what every American is
allowed to pay for health insurance . Restricting how much people can pay for iiuurance limits how
much money is in the pot to take care of them what they're sick.

The Health Care You Can Get Wai Be Limttei. Under the biU. A National Health Board-seven people
appointed by the president-will decide how much the nation can spend on health plans beginning in
1996 (the basdine year). Based on that national budget, the board will set a budget for each region and a
ceiling can cost. Regional alliance officiab cannot permit the average premium paid in the region to
exceed the ceiling, (pp. 1,{XX)-1,(X)5) ADiance ofikials are empowered to exclude any plan that costs 20%
more than the average plan (p. 132). They will have to apply the 20% rule virtually all the time. In order
to offer plans that exceed the 20% rule, there would have to be others offered at well below the avertgod
priced plan. That is unlikely. The bill pegs annual Increases in premium prices to an ii\fIation factor
based on the Consumer Price Index (pp. 256, 984-7, 990, 995), well below annual increases in current
denumd for medical services.

Putting price controls on premiums to limit the amount of nwney in the health care system might wring
out waste during the first year or two, but there is not doubt it will cause hardship later on. Seventy-
seven million baby boomers will be reachirtg the age when they need more medical care. Increasing
numbers of teen pregnancies and iow-birth-weight babies also will require more health care dollars—
il58,000 on average for each severely uitderwright newborn. Even the bill's authors antidpale that
restricting the dollars available for health care in the teeth of these trends will produce grave shortages:
the bill provides that when modical needs outpace the budget and premium money runs low, state
governments and insurers must make 'automatic, nnandatoiy, nondiscrctionary reductions in payments'
to doctors, nurses and hospitals to "assure that exjxmditures will not exceed budget' (pages 113, 137).

48d

Above ft thrcaKold level of quslity, oMctals will approvt health plans based on lowest cost, not highest
quality, to Stay under the premium Milir^ set by the National Health Board, explains Cara Wallnsky of
tiw Health Can Advisory Board and Governance Cotnmlttee, which advises SOD hospitals worldwide.
This is why Anthony L. Watson, chief executive of tlw Hcadth Insurance Plan (HIT) of Greater New York,
it optindstic. If the CKnton bill passes. *>lew Yorlc Is mine," he told The New York Timee, Tm going to
be the loweal-cost plan l-tlP, vHth a phyaidan staff that Is 57 percent foreign-trained, alrejKly has what
that newspaper calls "the image of being the least desirable health care option for dty workers and others
who cannot afford anything more.'

StMjftng Yfiik tfiM Dcefon You Uu Now Vfit! Be Hard. Deciding for yoimelf when la wc a specialist or get a
aecond opinion and selecting the hospital you think Is best will be even harder. The bill l6 designed to
piuh people into HMOa, which restrict your choice of physicians and hospitals, and use gate-keepers to
curb the use of ipedallsta, expensive tests and costly high-tech treatments. What most of us call fce-foi^
service (choose-yotirown-doctor) insuraitce will be difficult to buy. The ceiling on premiums and the 20
percent rule will diminate most fee-for-servicc plans, which tef>d to be more expensive than their pre-
paid counterparts. Although the Clinton administration insists that Americans always will be able to
choose fee-for-«crvice insurance, experts, such as Dr. John Ludden, medical director of the Harvard
Community Health Plan, say that option will "vanish quickly.'

Even where it is possible to buy fee-for-servicc iitsurance, it will be hard to find doctors practicing on that
basis. According to Walinsky, the Qinton proposal contains 'very strong inctrntives" against fee-for-
servioe 'on the consumer side but also on the provider side." Price controls on doctors' fees and other
regulations will push doctors to give up independent practice and sign on with HMOs.. We've been told
that the government won't be putting price controls on doctors, but the bill lin\iis what health plans can
pay physicians and prohibits patients from paying their doctors dirccdy. Alliance officials post a
schedule of fees, and it is illegal for doctors to take more (pages 134, 236).

In addition, alliance officials set yearly limits on payments to fee-for-servicc doctors in each field of
medidne, like cardiology or pulmonology. What if a flu epidemic causes puknonologists to see more
patients with breatlUng problems than the region's budget allovrt? The bill compels insurance plans to
slash doctors' fees or cut off their payments entirely until the next year " to assure that expenditure* will
not exceed the budget" (page 137).

Con you pay any doctor any price for any service you roarxt. 1 Although it is possible to buy cosmetic surgery,
psychotherapy or other uncovered services out-of-pocket, the bill prohibits doctors from accepting
payments directly from you for the basic kinds of ntedical care listed in the Clinton benefit package.
Below are the regulations barring doctors from taking your money. If you go to a doctor for treatmeitt,
the doctor will be paid by your health plan. That is true ik> matter what kind of health plan you are
enrolled in. The doctor Is prohibited from accepting payments from you (except fixed co-payments) for
any basic medical services listed in the Clinton benefit package That applies to doctors treating patients
in HM(Db and doctors outside HMO networks. Doctors outside HMOs must submit charges for your care
to your health plan, accept reimbursement based on the govenmienf s schedule of price-controlled fees
artd report your visit according to the requirements of title V of the bill, establishing the national
electronic data bank;

Sec. 1406(d) DIRECT BILUNG-A provider may not charge or collect from an enrollcc amounts that are
payable by the health pLan...and shall submit charges to such plan in accordance with any applicable
requirements of part 1 of subtitle B of title V (relating to health information systems).

486

Are you allowed to pay • •orgeonnioR, in hope* of getting the iraMteqwit experienced caref No:

See. 1406(dKl) PItOHIBmON OF BALANCE BILUNG-A provider may not diarge or collect from tn
enroUee a f^ In exceas of the applicable payment amount under the applicable fee schedule (page
236).-Sk. 1406(dX3) AGREEMENTS WITH PLANS-Hic agreeineni9...between a health plan and the
health care provldera providing the comprehensive benefit package to individuals enrolled with the plan
■hall prohibit a provider from engaging in balance billing described in paragraph (1) (page 237).

The While Hbuse attacke the use of the phrase 'price controls on doctors' fees" in my article. "Wrong
says the White House. There are no price controls in the president's plan. Price controls-calling for
government mlcromanagement of every health care service, doctor's feea, drug technobgy and product-
wtn oonsidered and •peciAcally leiected."

The text of the bill proves there are price controls on health plan premiums, new drugs and doctors' fees.
Het«are the price controls on docton' fees:

Sec. 1322(c) ESTABUSHMENT OF FEE-POR-SERVICE SCHEDULE

(1) IN CSENERAL-oach regional alliance shall establish a fee schedule setting forth the payment rates

apf^cable to services furnished during a year to individuals enrolled in fee-for-scrvice plans (or services

furnished under the fee-for-servico component of any regional alliance health plan) (page 134)..,.

(4) ANNUAL REVl5lON~A regional alliance... shall annually update the payment rates provided under

the fee schedule (page 135).

The White House says It is not clear why a patient would want to pay a doctor "directly" for any
services that their insurance company is obligated to buy." One reason is privacy. Evading government
regulations and paying the doctor directly would allow you to keep your personal medical problems out
of the national data bank.

Will your penofial medical history be stored in a tiational data bank? The While House says "not true''and
"patently untrue" to my statement that "the bill requires the doctor to report your visit to a national data
bank containing the medical histories of all Americans. The administration argues that although
"physicians may be required to submit data...f6r the purpose of improving quality and assessing
tiealments and outcontes," the bill "prevents against tying this data to spcdfic indivkluate."

The text of the bill proves that the adminlstralion is mistaken. Information about you physical and
mental health and any treatments or tests you have will be entered in a national data network and linked
to you through you health security number. Here is what the bill says: The National Health Board will
establish an "electronic data network" with regional centers to collect, compile and transmit information.
The information expressly includes "clinical encounters," that is, when a pbysidan treats a patient (page
861). A doctor who treats you (except for an uncovered service such as denul work or cosmedc surgery)
and does not record your "clinical encounter" on the standardized form and subndt it to your health plan
will be fined up to "$10,000 for each sudt violation" (pages 236, 885-6). As Ihe data about you travel from
doctor's ofAce to the health plan, aivd then to the national electronic data network^ this information
continues to be tagged %^th your "unique identifier number."

The bill leaves no doubt that the network contains "individually IdentlBable health information," which
is defined in the bin to include your "post, present or future physical or mental health" and health care
piovidod to you (page 877). To protect your privacy, the bill offers diis vagueness:

487

All dlKkMui«« of IndlvlduaUy identlfUUe hMlth In/onnatlon shall be r«Bt[lcted to the minimum amount
mcMMiy to «ccam]dl«h the purpose for which the Information b being dIscloKd (page 873)... (You) have
the right to receive a wriHen ttatement conceTnlng...thc purposes for which individually idendflable
information provided to a health care provider, a health plan, a regional alliance, a corporate alliance or
the National Health Board may be used or disclosed by, or disclosed to, any indlYidual or entity (page
874).

It would be urvfair to suggest that the bill's authors are unconcerned about privacy. The bill mandates
that the National Health Board will "promulgate sUndards respecting the privacy of individually
identifiable health information that Is in the health information system" within two years and propose
privacy legislation within three years (pages 871, 876). But doctors must report their podents' personal
medical information to a national data bank or risk lursh penalties, and the information continues to be
individually Idantiflablc.

HMOa Do Ike Job of RMtloHing. Under the Clinton bin, the federal government uses price controls on
premiums to curt> dollars paid into the health care system. Limiting how those dollars are spent is a job
shared by alliance officials who budget payments to doctors in the dv^ndling fce-for-service sector, and
HMO administrators, who are expected to do the lion's shaic of health care rationing. Is "rationing" too
strong a word? Not according to Dr. John Luddcn, who HMO serves 570,000 people. He predicts that
"price controls on premiums will drive tis ati«ight to rationing at bedside." Princeton Professor Paul
Starr, a key designer of the Qinton plan, prefers to say that premium caps will induce "a different frame
of mind" in both doctors and health care administrators. "They wlD have lo manage under constraint"

HMOs already have a track record of tightly controlling a patlenf s access to physicians. At Kaiser
I*ermanente, the first person a sick patient sees Is the 'advice nurse," who makes the decision whether a
doctor is iweded. In HMOs, the ratio of physicians to members averages 1 to 800, about half the ratio of
physicians to the general population. Specialists are particularly hard to see.

Current HMO cost-cutting methods already are drawing criticism from Congress, government
investigators and worried doctors. The Qinton bill's premium caps will compel HMOs to use even more
stringent methods of limiting care, but the bill omits any safeguards to protect patients from abusive
practices.

Por example, missing from the bill is any effort to put a stop to "the withhold." the pervasive HMO
practice of pimishing doctors financially for providing care they believe their patients need. Almost all
large, for-profit HMOs including those operated by Aetna, Mctlife, Oxford and Prudential (but not
Cigna) withhold between 10 percent and 25 percent of a doctor's compensation until year's end, aitd
return it only if the doctor has met HMO targets for limiting patient tests, referrals to specialists and
hosplulizations. Doctors report that targets are aj stringent that HM(Ds almost always keep part of the
withhold, which means that what a doctor orders for a patient comes out of the doctor's own pocket at
the end of the year.

The withhold has caused a surge in dangerous "hall-way consultations," according to Dr. Alan Jasper, a
pulmonologist and critical care specialist at St. Vincent's Medical C^enter in Los Angeles. Other doctors
slop Jasper in the hospital corridors, describe their paticnf s breathing problem and seek a diagnosis, ir
order to avoid referring the patient for a specially consultation and incurring points agaittf t the wit}\hold.
lite danger, says Jasper, is that the other doctor might fail to mention a critically important aspect of the
patlenf s condition.

488

The withhold motivates primary cu« doctoTs to take a'well aee how you feel next week" or *lef 8 try
thia fint "approach, even If It meana additional vtony and needless suffering for the patient. At a
Humana-owned HMO in San Antonio, for example, a 40-ye«r-old woman with back pain was told by the
orthopedist that she needed an MRI. But her primary oare doctor rejected the spedallsf s request for the
testa, saying the patient would have to try something leas expensive , and sent her for acupuiwture,
followed by months of hot packs and phyolotherapy. When nothing worked, the gate-keeper authorized
the MRI, which revealed that the women needed a lumbar dlachetomy (disc removal), as the orthopedist
had auapected. The story was related by the woman's surgeon. Dr William V. Healey, a clinical
prafesaor at the University of Texas, who said the lesson was that HMO cost-cutting Incentives such as
the withhold fail to account for the far graver cost-the months a patient is home from work worried and
In pain.

Another HMO co«t<utting strategy that makes doctors and patients worry Is the utilization review-a
aick patient must wait while the doctor telephones a utilization review company, describes the symptoms
and medical history to a nurse or clerk seated at a computer terminal and hopes for an O.K. to proceed
wi^ tests and treatment.

Tliree hundred and fifty utilization review companies that claim to slash health care costs sell their
services to HMOs, hospitals and others at a rate of $1 to $3 per patient reviewed. It's a $7 billion industry.
Stich "cookbook medicine" ignores the non-average, abnormally sick patient who may need more intense
treatment that the computer program recommends. It also discounts the value of examining a patient,
and ignores the physician's judgment and expertise. Dr. Jerome Croopman, head of oncology and
hematology at the New England Deaconess Hospital in Boston, says, "Ifs an 800 number. They don't
know me from Adam!'

'Honor stories abound* about utilization review, according to a 1993 report for the Natiorul Association
of Attorneys General. Doctors' treatment plans arc 'r^ectcd by inadequately trained personnel,"
according to the report, and utilization review companies refuse to give reasons for their decisions, even
to doctors, because it is presumed doctors would Hgure out ways to get around the review guidelines
once they were known.

Even when doctors' reconunendations are ultimately approved, it can take weeks longer to diagnose and
begin treating an HMO patient than a patient with fcc-for-service insurance, ]aspcr explains, because of
the successive delays in getting each test approved- One HMO patient with coughing trouble was given
andbioticB by his primary care doctor, who Oiought the problem was pneumonia. The patient lost thirty-
five pounds while waiting from October 27 to December 24 for an O.K. to see Dr, Jasper, then to have a
CAT scan and lung biopsy, aitd firudly to Icam that the correct diagnosis was a lung fungal disease.
Jasper said he could have had a fec-for-service patient on anti-fungal medicine within fourteen days,
in^ead of nine weeks.

The Attorneys General report urges state lawmakers to look into curbing utilization review in HMOs. In
contrast, the Clinton trill calls utilization review a "reasonable restriction" on patient care and expressly
includes it for doctors treating patients with fee-for-eervice insurance as well (f^ge 134).

The Cooemment Vion 't Pivlect You From HMO Abuses. If most Amcricatu arc moved into HMOs, who will
ensure that they get good health care? The Ointon bill establishes two national boards to develop quality
Standards and depends on alliance officials in each state to enforce them (pages 843-844). But history
slwws that federal and state officials have failed to protect patients from HMO abuses, even in small pilot
piograms.

bi 1990 Florida newspapers printed lurid accounts of abuses by Humaiu Medical Plan, an HMO paid to
care for the elderly under a small, experimental program to reduce Medicare costs. Congress ordered an
investigation of Humana's performance, aitd Janet Shikles, in charge of the probe for the Gerteral

489

Accounting Office tectUled about the company's falluie to order appropriate diagnostic tests and failure
to follow up on abnomuil teat result*.' Consume Reports (August 1992) also investigated the
ahortconnlnga of the pilot Medloarc-HMO program In Florida, and concluded that government oversight
was lackadaisical."

A nationwide investigation for Congresa drew the sanw conclusion. Pointing out that only twenty-one of
fifty-t«v«n HMOs investigated received a passing g^ade, the late Senator John Heinz warned that the
priority 'has be«n to pronvote enrollment in HMC^ and we have not given equal priority to monitoring
what happens* to people 'after they have eiuoUcd.'

Far from protectlAg patients in HMOs, the Olnton but Ues the hands of state lawmakers who want to pass
protective legislation. Some slates recently have enacted laws to safeguard choices patients want to make
for themselves, such as which hospital or pharmacy to use. HMOs protest that these laws hobble cost
containment and the Ointon admirJslration apparently agrees. The Qlnton bill pre-empts State laws
protecting patient choice (page 238).

YouV Get More Prtmary Care Than High-Tech Medicine, and That 's Not Good Sews. Will patients get the care
they need when gatekeepers limit their access to spedalisls and high-tech medidnc, as the Qinton bill
intends? The evidence strongly suggests that low-tech care will not be good enough. People with heart
disease, for example, will suffer. HMOs already ration high-lech care to heart attack patients, according
to a study in The New England Jaumal of Medicine (December 1993). HMO patients hosplulized with
coronary disease (myocardial infraction, unstable angina, angina pectoris or Ischemic heart disease are 30
percent less likely to be given bypass surgery or a coronary angioplasty (dedogging of the arteries) than
sinularly sick patients with fee-for-service insurance. Another recent study by Duke University points to
the consequences of such low-tech care. In the study, American heart attack patients who tended to be
treated with three costly, high-tech proccdures-catheterizatun (inserting a thin tube into the heart for
diagnosis), angioplasty and by7>ass surgery-recovered far better than Canadian heart attack patients,
who had less access to the procedures. American patients, who were twice as likely to undergo th»e
procedures, tended to have a better qualify of life after a heart attack. Ginadians suffenxi more recurring
pain, felt more depressed and were less able to go back to work and pick up their oW activities. Dr.
Robert Califf says the Duke study may hdp people understand "the implications of reducing services in a
health care system"

Is it true that we need less care by specialists? Not acconjing to the National Institutes of Health, which
recently issued a warning that patients with many cornmon conditions should be treated routinely by a
renal (kidney) specialist. According to the NlH panel, primary care doctors fre<3uently are overlooking
the early signs of kidney failure and are hanging on to patients too long. Patients should be referred to
specialists for dialysis sooner, said the NIH, before it is too late to save their Kvcs. Twenty-five percent of
kidney patients who don't receive dialysis until it is an emergency die. Dr. C. Craig Tisher, chairman of
the NIH panel, warned that patients with high blood pressure, diabetes, weight problems and
metabolism abnormalities should be regularly cared for by a renal specialist, not only a prinury care
doctor.

In the short run, die Clinton bill depends on HMOs to limit access to specialists dn high-tech care. As a
longer-term strategy to limit such care, the Clinton bill seizes control of medical education and requires
that by 1998, no more than 45 percent of young doctors be permitted to go on to advanced training in
specialty. Specialty programs at leading medical schoob will be downsized. Restricting medical
education by government fiat undoubtedly will reduce the consumption of expensive, cutting-edge care.
Doctors who are not trained in sophisticated technology cannot use it. But preventing doctors from
learning about the most advanced medical procedures is a lethal way to curb health care consumption.
Keeping doctors uninformed could not possSily be an improvement.

490

Kadal ri;ita in meiieal tndtdtig. The White House calls such a suggestion 'ridioiloua,* but the biD shows
it is tnie. Govenunent will aUoeate graduate training positions at the nation's teaching hospitals based on
race and ethnldty. In determining how nuny training positions teaching hospitals will have, the
National Council on Graduate Medical Training will calculate the petcenuge of trainees at each teaciung
hospital 'who are members o' racial or ethnic minority groups' and whidt minority trainees are from
groups 'under-represented in the Held of medicine generally and in the various medical specialties" (page
515).

If You Uotin or Star* Ctiy, Good Ludc. The bill's biggest surprise is who bears the cost of universal health
coverage. The bill requires states to create health alliance regions-similar to election districts. How those
alliance lines are drawn will determine which areas of the state arc hit with the highest health care
premiums, becsuie they are shouldering the costs of health coverage for the inner dty poor. The system
pramiaea to pit black against white, poor against rich, dty against suburb.

The average treatment coat of a baby bom sddlcted to drugs is $63,000. B^t^use of community rating,
anyone who lives in an urban alliance is going to pay high prcmiunts, jgardlcss of his health or
behavior. Part of the premium covers his own caie; part is a hidden tax to provide universal health
coverage within the alliance. Some alliances will bear espedalty heavy social burdens, others will not.
Everyone will figure out that you get more health care for your dollar or pay lower premiums in an
alliance without inner dty problems. The bill will be an incentive for employers to abandon dtics and
relocate.

Considering the number of court battles when states draw election districts, lawsuits over "medical
gerrymaitdering' are inevitable. The plan sets out rules that will be dissected in courtrooms across the
nation: 5w ss 'may not discriminate on the ba«s of or otherwise take into accoimt race, age, language,
religion, national origin, sodoeconomic status, disability, or perceived health status." An alliance 'thst
indudes a Consolidated Metropolitan Statistical Area within a State is presurrKd to* be in compliance.
(Page 99) Home prices and litigation fees will rise and fall depending on which suburbs are sucked into a
metropolitan alliance and which escape.

To make matters worse, the bill would shift costs now paid partly by the Federal Government onto the
local alliances. For example, the bill halts "Medicaid only' payments for the ill (50 percent of the $4.9
billion distributed to New York City beneficiaries in 1991) and disproportionate share payments to urban
hospitals that treat the poor ($807 million to New York City hospitals the same year). Costs taken off the
federal budget arc called "savings" by the Ginton administration, but the cost shift amounts to a new tax
on urban residents and employers, hidden inside their 'premiums.' Universal health coverage is an
important goal, but making urban residents and businesses pick up most of the lab will devastate dtics.

Before Signing On, You Should Know .... The Ginton bill will prevent people frc-" buying the medical
care they tteed. Price controls on premiums will pxish most Americans into HMOs and pressure HMOs
into sharply cutting access to spedalists and effective, high-tech cures. Price controls on doctors' fees and
regulations tyii\g doctors' hands will curb the care physidans can give patients. Price controls on new
drugs will keq> people over 65 from getting the medicatioiu that can help them. Most Important,
government controls on medical education will limit what fu'-.j- ('odors know, costing lives and
suffcrii\g no one can calculate.

The administration often dtes two statistics-America's relatively high infant mortality rate ani its lower
'\(c expectancy-lo support the need for the Ginton health bill. But these have almost nothing to do with
the quality of American medical care. Both statistics reflect the epidemic of low-birth-weight babies bom
to teenage and drug'^addictcd mothers, as well as the large number of homiddes in American dHcs and
drug-rdated deaths.

491

fat feet it you «re •erloualy 111. the best pUce to be is In the United State*. Among all indurtriallzMl
natkuu, the United Stales haa the highest cure rates for stomach, oerWcal and uterine cancers, the second
higlMSt cure rate for breast cancer and Is seoNvt to none in treating heart disease. In other oounlrtea that
apeiui less, people who are sick get less care, are leas bkcly to survive and have a poorer quality of life
after major lUness. Consider what happena in Canada. M^>ose health core system oAen b held up as a
model for the United States. In Canada nwdleal technology is rationed to dangerously low levels. The
United States has $.26 open-heart surgery units per million people; Canada has otUy 1.23 units per
million. Cardiovascular disease is Canada's number one health problem, yet open-heart surgery units
and catheterization equipment are kept in such short supply that the average wait for urgent (not
elective) sui^eiy is ei^ weeks. The shocking result is that in Canada, a cardiac patient is ten timet as
likely to die waiting in line for surgciy as on the opersting table. In the United States, there is no wait.

Ttw choice is not between the Clinton bill and the status quo. Mcmbeis of Congress should read this bill,
instead of relying on what they hear, and then turn their attention to alternatives sponsored by
Denucrab and Republicans. These alternatives attack the worst abuses by health insurance companies,
reform liability laws that force doctors to practice wasteful, defensive medicine and devise ways to nuke
insurance affordable if you don't work for a large company. Congress also should consider ways to
povidc insurance for those who cannot afford it, and level with the public about what universal coverage
will cost. Whatever the price, ultimately, it will be less expensive than the consequences of the Clinton
biU.

««f

492

- The admiMion by the anc's longtime standard-bearer
among colored*, the Reverend Allan Boesak, to having
an affair with a white reporter has further compro-
mised its reputation. Achnat Davjdi, a colored anc can-
didate for the Wejtern Case's regional legislature,
admits, This is a very religious community. Many have
not forgiven Allan Boesak an 1 quesdon his moral right
to be a leader if he cannot uphold Cod's law.* After a
prolonged struggle, Boesak was chosen as the a.nc's
candidate for premier in the Western Cape, but as anc
spokesman PaJlo Jordan said recently, "His credibility
in the colored community is not terribly high."

The N.r., billing itself :is a 'Christian Democradc
law-and-order, free-rrarket alliance,' has seized
on these perceived weaknesses. De Klerk,
accompanied by his wife, kicked off his cam-
paign in Cenadendal (VaUi^ of Grace), a predomi-
nandy colored town founded as a Moravian Church
mission in the eighteenth cenmry. A recent .N.r. adver-
tisement in the progressive r ewspaper South disingenu-
ously predicted that If the ftsc gained power. Winnie
Mandela, 'convicted of kidnapping.' would become
"minister of law and order" or even of 'child welfare.'
N.p. stump speeches slam her statement that 'the
matchbox is our weapon," ind condemn the role of
ANC supporters in the kangijoo court trials and neck-
lacings of black policemen and suspected informen in
the Cape squatter settlements of Crossroads and
KhayeUtsha. A campaign flyer declares, "Don't vote for
an intimidator.'

The N.P. is betting that su>:h appeals will have panic-
tilar resonance with colorecj, who live closer to black
areas than whites. In parbcular, the S'.P. has attacked
the ANC for condonmg the S'lizure by black squatters of
houses intended for colorcds in the Cape Town suburb
of Mitchell's Plam. The .n.p.'; newsletter calls the a.sc an
"architect of anarchy."

In South Africa discussio is of policy are rarelv free
from questions of racial tdendty. Durwg apartheid, the
people of the Cape were encouraged to believe that
because they did not have a black majority, they would
not face the same polidcal. .iodal and moral reckoning
as the rest of the country. Through a labor system that
gave them preference over blacks, coloreds were en-
couraged to feel superior lo and distinct from them.
McKeruie argues that the pi:rception of coloreds as the
"stepchildren" of whites is t thing of the pasL But he
admits that he fears black oppression as much as white.
For colored leaders in the a<>c the very notion of a col-
ored identity separate from a black or African one is a
pernicious relic of aparthc id— a relic that a colored-
elected .N.p. regional government m the Western Cape
would institutionalise In the words of the renowned
colored jazz pianist Abdulbih Ibrahim, *I have to keep
reminding people that Cap; Town is m Africa. They've
repressed and (jenied ewerypan of it There's a massive
identity crisis."

PntR Beinart is a former TNII reporter-researcher.

Clinton's plan on the ropes.

HE'S BAAACK!

By Elizabeth McCaughey

On January 31 the White House press office
released a statement quesdoning the accuracy
of my recent article in tnr ("No Exit.' Febru-
ary 7, 1993). I welcome this oppommity to
engage in a dialogue with the White House about the
content of its health bill. As I did in my original ardde,
I will be documenting my description of the bill — and
my point-by-point rebuttal of their arguments—with
page numben from the November 20, 1995, version. If
White House rcpreseniarivcs challenge the accuracy of
my descripdon again, I hope they will provide page
numbers, too. so that tnk readers can compare the evi-
dence and decide for themselves.

.Most of the White House challenge focused on this
paragraph from my ardde:

If the bill pauet. you will have lo settle for one of the low-
budget health plans selected by the government. The law
will prevent you from going outside the system to buy basic
health coverage you tnink is better, even after you pay the
mandatory premium (see the bill, page 244). The bill guar-
antees j-ou a package of medical service], but you can't nave
them unless they are deemed "necessary' and "appropriate"
(pages 90-91). That decision will be made by the govern-
ment, not by you and your doctor. Escaping the system and
pa^nng outof-pocket Co see a specialist for the tests and treat-
ment you thini: you need will be almost impossible. If you
walk, into a doctor's office and aslt for treatment for an Ill-
ness, you must show proof that you are enrolled in one of
the health plans offered by the government (pages 1S9.
US). The doctor can be paid only by the plan, not by you
(page 236). To keep controls tight, the bill requires the cioc-
lor to report your visit to a nadonal data bank containing the
medical hutories of all Americans (page 336).

The White House responded:

There is nothing in this .\ct to prohibit any individ-
ual from going to any doctor and paying, with their own
funds, for any service." "Under the Act, you can pay 'out-
of-pocket[sic] ' for anything you want at any time, to any
physician or hospital willing to treat you." Price controls
on doctors' fees? "That is wrong," according to the
White House. There are no price controls —

How accurate are these statements from the White
House.- The text of the bill proves they are untrue.

Can you pay any doctor any price /or any service you want?
Although It is possible to buy cosmetic surgery, psy-
chotherapy or other uncovered services out-of-pocket,
the bill prohibits doctors .from accepting payments
direcdy from you for the basic kinds of medical care
listed in the Clinton benefit package. Below are the reg-

493

uladoiu barring docton £rcm taking your monry. If you
go to a doctor for treatmei c, the doctor will be paid by
your health plan. That is true no matter what kind of
health plan you are enrolled in. The doctor is prohibited
firom accepting payment from you (except fixed co-
payments) for any basic medical services Usted in the
Qinton benefit package. Tl.at applies to doctors treadng
patients in HMOs and doctors outside HMO networks, Doc-
tors outside HMOS must submit charges for your care to
your health plan, accept r'Simbursement based on the
government's schedule a:' price-controlled fees and
report your visit according to the re<]uirement of tide v
of the bill, which establishei the national electronic data
bank:

Sec. 1406(tf)(2) Dszcr tiLUNC-^\ provider may not
charge or colleu from an eniollee amouna thai arc payable
hf the health plan . . . and shall tubtnit ctur{es co such plan
in accordance wiUi any appii ubie requirements of part 1 of
subtitle a of tide V (relaimg ti> health tnibrmaiion rruejnt) .

Are you allowed to pay -i surgeon more, in hopes of
getting the most expert, experienced care? No:

Sec H06(rf)(l) fioHBnoji on ialanci inxiNc— A
provider tnay not charge or ; ollect from an enrollee a fee in
exceu of the applicable pz>'nient amount under the applica-
ble fee schedule [page 236]

(S) ACAItvOKTS wrrH RAM — The agreements . . . between
a health plan and the healin care providers providing the
comprehenitvc benefit package to Individuals enrolled with
the plan shall prohibit a pro4der from ennnng in balance
billing described in paragraph (11 (page 237].

The White House atuclis the use of the phrase "price
controls on doctors' fees' in my article. TVrong.' lays
the White House. There are no price controls in the
president's plan. Price conTols — calling for government
micromanagement of every health care service, doctor's
fee. drug technology and product— were considered
and speciRcally rejected.*

But the text of (he bill proves there are price controls
on health plan premiums, new drugs and docton' fees.
Here arc the pnce controls on doctors' fees:

Sec lS22(c)tjTAiusio<£yrof rtr.fOBSirvicncMtouLi
(1) tN CCMCIAL — each regiotul alliance shall auibliah a
fee schedule seiong forth th>; pa>'meni ram applleabte to ser-
vices ftjrnuhed during a ye:ir to individuals enrolled in fee-
(or^iervice plans (or tervscn Airaiafced under the fee-fbr-
service component of any regional alliance health plan)
(page 134]....

(4) A.NNU.M. alvistON — A reiponal alliance . . . shall annually
update the payment races t rovided under the fee schedule
(page 135].

The White Hotise says It Is not dear why a padent
would want to pay a doctor 'directly' Cor services that
their [sic] insurance company is obligated to buy.* One
reason is privacy. Evading government regulations and
paying the doctor direcd) would allow you to keep your
personal medical problenrs out of the national data bank.

WUl your pmonnl itdicil hutorj U tlortd in a national
data banki The White Hoiue says 'not true* and
*patendy untrue* to my siatement that "the bill requires
the doctor to report your visit to a nauonal data bank
containing the medical histories of all Americans. The

adtninistradon argues that although "physicians may be
required to submit data ... for the purpose of improving
quality and assessing treatments and outcomes," the bill
"prcvenu against tying this daa to specific individuals."
The text of the bill proves that the administration ii
mistaken. Information about your physical and mental
health and any treatments or tests you have will be
entered in a national data network and linked to >x>u
through your health security number. Here is what the
bill says: the National Health Board will establish an
"electronic data network' with regional centers to col-
lect, compile and transmit informadon. The informa-
tion expressly includes "clinical encounters," that is,
when a physician treats a padent (page 861), A doctor
who treats you (except for an uncovered service such as
dental work or cosmetic surgery) and does not record
your "clinical encounter' on the standardiaed form and
submit it to your health plan will be fmed up to *SlO,000
for each such violation" (pages 236, 885-886). As the
daa about you travel from your doctor's office to the
health plan, and then to the national electronic daa
network, thb information continues to be tagged with
your '^inique identifier number."

The bill leaves no doubt that the network con-
t^s 'individually identifiable health informa-
tion," which is ciefincd in the bill to include
your "past, present or future physical or menol
health" and health care provided to you (page 877). To
protect your privacy, the bill offers this vagueness:

All diKlosures of individually identifiable health informal
don shall be rcitricied to the minimum amount necessary to
accomplish the purpose for which the information is being
disclosed [page 873].

and this:

[You] have the right to receiw a wriaen satement concern-
ing.. . the^urposes for which Individually identifiable infor-
mation provided to a health care provider, a health plan, a
regional alliance, a corporate alliance or the Nadonal
Health Board may be used or disclosed by. or disclosed to.
any individual or ent>l>' [page 874] .

It would be unfair to suggest that the bill's authors are
unconcerned about privacy. The bill mandates that the
Nanonal Health Board will "promulgate standards
respecting the privacy of individually identifiable health
information that is in the health information system'
within two years and propose privacy legislation within
three years (pages 871, 876). But contrary to the White
Hdfise itatement, docton must report their patients'
personal medical information to a nauonal daa bank or
risk harsh penalties, and the information in the bank
remains individually identifiable.

Prict controls on pnmiums will mean too little momy to can
for the nek. Limiting how much money people can
choose to pay for basic health coverage limia how much
money is in the pot to take care of them when they are
sick. 'That was the point of the ad on television that the
First Lady criticized. A couple are discussing what price
controls on premiums will mean, and the woman asks,
"But what if there's not enough money?'

494

The bill'] authors andcipaie that restricting dollars
available for health care viill produce shonages: when
medical needs ouqiace the budget and premium
money runs low. sate governments and insurers must
make 'automatic, mandatory, nondiscretionary rcduc-
dons in payments' to doctors, nurses and hospitals to
"assure that expenditures will not exceed budget'
(pages 113. 137).

In a charge echoed by Michael Weinstein of Tlu New
York Tina, die White House accused me of misleading
readers by "implying that sich a mechanism exists in the
main proposal." The VVhii* House stated emphatically
that "it does not." The iVhite House and Weinstein
argue that only under a single-payer system would pay-
ments to doctors and otlicrs be cue off if needs out-
pace the budget and premium money runs low. They
expressly charge me with ([Uoting the single-payer regu-
lations and tnisrepresenting them to be rules for the
"main" Clinton health propo»al.

The text of the bill promts that the While House and
Weinstein'are wrong. Cutting or delaying payments to
doctors, other health care workers and hospitals (o stay
in budget is an integral niechaoism in the administra-
tion's bill, and one of the two passages I quoted (page
137) is from the "main jiroposal." It pro%ides that if
needs exceed budget and premium money runs low:

Sec. 1322 (c) (2) prostecti/z »VDCrnNC duouud . ihe
plan shall reduce the amount ofpaymenu otherwuc made
CO provider! (through a wiihhola or delay in paymrno or
adjustmenis) in such a man:ier and tif nich amouna u ncc-
cwary to assure chat expendicuret wtil noc cured budjcL

The gtwemmtnt will dtcidt mkat is 'neastary ' and 'apfm>-
fmau' care. The White House attacks as "wrong" and
"very misleading' my sutement that 'the bill guarantees
you a package of medica services, but you can't have
them unless they are deemed 'necessary' and appropri-
ate." * The administration also «ays it is "untrue" that
that decision will be made by the government, not b>'
you and >x>ur doctor.

Let's look at the actual 'sill:

Sec. 1141. tXCLUSIONS

(a) utoicrL NECEJsrrv — ^T ie comprchcnut* bcn«flc pack-
age does not include

(1) an iccm or service thic it noc mcdicaUi ncccuary or
appropriace: or.

(2) an item or service thai the Naoorul Hnlch Board mav
decermine is noc medically ixceaurr or appropriate m a reg-
ulacion promulgaced under lecucn 1 IM [pafet 9&91 ] .

Sec. 1 154. ESTABLRSLULVT }? fTVOMUIt alCAUOC >aOCC<i.

sicessrrv
The National Health Board may promulgacc such regula-

uons as may be necessary A carry oui ictQon 1 141 (a) (2)

(relating co che exclusion of certain Kr^1cet ihac are noc

medically necessary or appopriatc).
The bill uses the word 'regulaoons,* net "recommen-
dations," to describe the Vauonal Health Board's deci-
sions. The bill also gran.s the National Health Board
power CO change the pre\entive treatments guaranteed
in the benefit package and decide at what age and how
often you are entitled u- tesa and screenings, immu-
nizations and check-ups ^page 94). Regarding practice
guidelines, che bill makes it clear that the National (Qual-

ity Management Council will develop measures of
"appropriateness of health care services" (page 839)
and "shall establish standards and procedures fbr evalu-
ating the clinical appropriateneu of protocols used to
manage health service utilization' (page 848).

Radal quotas m medical training. The White House calls
such a suggestion "ridiculous,* but the bill shows it is
true. Government will allocate graduate training posi-
tions at the nation's teaching hospitals based on race
and ethnicity. In determining how siany training posi-
tions teaching hospitals will have, the National Council
on Graduate Medical Training will calculate the per-
centage of trainees at each leaching hospital "who are
members of racial or ethnic minority groups" and which
minority trainees are from groups "undei^represented
in the field of medicine generally and in the various
medical specialties" (page 315).

Pntgctijig consumers or HMOs? The White House
calls it "deliberately inaccurate' to say that the
bill pre-empts important state laws protecting
the ability of patients to choose che hospital they
think is best and make other choices about their health
care. Here is what the bill provides:

Sec. 1407. fM-iMJTioN OF ciRT.ys staTE laws mlaTOJc to

HEALTH n.^^•S _

(a) ... no scace law shall apply . . . if such law has the effect
of prohibiting or otherwise rescriccing plans from—

(1) ... limiting che number zoid cype of healch care
providers who partictpate in che plan:

(21 requiring enrollees Co obcain health services (oiher
Chan emergency services) from parciclpacing providers or
from providers auchohzed by the plan:

(3) requiring enrollees co obuin a referral for creacment
bf a specialized ph>'sician or healch iiucicubon —

(6) requiring the use of single-iource suppliers for phar-
macy, medical equipmenc and other healch products and
terviees.

Fee-for.,service will ht almost impossibli to buy. The White
House labels it wrong to predict that fee-for-scrvice
insurance will be extremely hard to buy. They point to
the provision that "in general, each regional alliance
shall include among its healch plan offerings at least one
fee-for-service plan." But many doctors, hospital admin-
istraton and health insurance experts say confidently
that m practice, because of the broader provisions of the
bill, fee-for-service will seldom be available. I cited these
experts in my article. Here are their reasons:

(1) Regional alliances cannot permit the average pre-
mium paid in che region co exceed che ceiling imposed
by che National Health Board (pages 1 ,000-1 ,005) . Fee-
for-service insurance, which allows patienu to get a sec-
ond opinion when they have doubts and sec a specialist
when they feel they need one. generally costs more than
prepaid healch plans chac control patient access to med-
ical care.

(2) Regional alliance officials are empowered to
exclude any plan that costs 20 percent more chan Che
average plan (page 132). They will have co apply the
20 percent riJe virnially all the time, in order to keep
total spending on healch plans below the ceiling
imposed by the National Health Board. In order to offer

495

a plan that eoiu more ihan 20 percent above the aver-
age plan and itill say ur der the ceiling, there would
have to be other plani offured at well below the average-
priced plan. That \s unlikely. The bUl limit', the annual
increate in premium pricei to the Consumer Price
Index, which ii significantly below current annual
increases In medlcaJ spending. Insuren will have a diHl-
cult time staying under the premium celling, and cer-
tainly will not oEFer plans mcU below it

(3) Regional alliance offlcLals arc empowered to set
the fees for doctors treating patienu on a fee-for-service
b;uii. and It l5 illegal for doctors to take more. In addi-
Qon, prospective budgeting limiu what fee-for-service
doctors can earn yearly, "ven if they tee more patients
and work longer hours Ui make up for reduced fees. As
Cara Walinsky of the Health Care Advisory Board and
Governance Committee, which advises 800 hospitals,
explains, the Qlnton bi'J contains "very strong incen-
tives" against doctors practicing on a fee-for^ervjce
basil. For all these reascns. Dr. John Ludden, medical
director of the Harvard Community Health Plan, pre-
dicu that fce-for-servicc 'vill "vanish quickly"

Does ruppUmmtal insu vnce providt an 'ixil'fThe bill
requires you to buy one of the low-budget health plans
offered by your regional alliance. You can't go outside
the 5>'Stem to buy basic :overage you prefer, even after
you pay the mandatory premium. Is supplemental insur-
ance the way out? The VTiite House states 'there arc no
restrictions on the purchase of supplemental insurance."
The fact is the bill contains txi-o important restrictions

that will effectively close the door to better basic medical
care: supplemental Insurance cannot duplicate any of
the coverage in the comprehensive benefit package, and
It must be offered to "every individual who seeks' to buy
it, regardless of health history or disability (page 244).
Those two restrictions mean that the seriously HI will line
up to buy It; insurers will not line up to sell it.

Finally, it Is important to note one of the points the
White House did not challenge: the Clinton bill Is
designed to push people into ilmos, which aim to limit
patient acceu to specialized medicine and high-tech
care. The premium price controls will preuure H7.40S to
use even more stringent methods of restricting care, yet
the bill omits any safeguards to protect patients from
abusive cost-cutting pracdces such as the withhold.

These facts, straight from the text of the bill, demon-
strate the accuracy of my article "No Eut." and the
appropriateness of its title. The White House would
have you believe that its bill can stop rising health care
spending arid extend coverage to millions of uninsured
Americans, without changing the quality and choice of
the medical care you have now. Common sense suggests
otherwise. A close reading of the bill proves it is untrue.
Several alternarives by other Democrats and Republi-
cans offer promising health insurance reform without
limiting what you can buy and how mu'ch you can pay
for it. It's time to give those bills a close look.

ELlZAErm McCaOCHEv is John .M. Olin Fellow at the
Mafihattan Institute.

Bentsen, Riley, Pena: vldims of Clinton's style.

496

Mr. McDermott. Thank you.
Mr. Schaeffer.

STATEMENT OF LEONARD SCHAEFFER, CHAIRMAN AND
CHIEF EXECUTIVE OFFICER, BLUE CROSS OF CALIFORNIA

Mr. Schaeffer. Thank you, Mr. Chairman, Mr. Thomas, mem-
bers of the subcommittee. My name is Leonard Schaeffer. I am
chairman and CEO of Blue Cross of Cahfomia and chair of the Na-
tional Institute for Health Care Management. I appreciate the op-
portunity to testify today.

Both of these organizations strongly support reform in the health
care system. The challenge, though, is to develop a plan that meets
the objectives of reform and that can be implemented in a prag-
matic matter in States and communities throughout our Nation.

Based on my 20-year experience in government and in private
health care organizations, including service as a State budget offi-
cer and as Administrator of the Health Care Financing Administra-
tion, I recognize that the pitfalls of reform reside in its implemen-
tation.

Mandatory, exclusive regional health alliances are the feature of
the administration's plan that present the greatest obstacle to suc-
cessful implementation. A single, government-run monopoly pur-
chaser of health benefits in the community will have disastrous
consequences. This structure will increase bureaucracy. It will in-
hibit innovation and, I believe, decrease accountability.

Alliances insert an unnecessary bureaucratic layer that will du-
plicate and complicate administrative functions. Alliances will
eliminate one of the key sources of innovation which is the pur-
chaser's drive to reduce costs. Finally, alliances diffuse the account-
ability for cost, quality, and service which will result in poorer out-
comes, higher costs, and increased politicization.

In California, some of our legislators are pushing for a manda-
tory, exclusive Statewide alliance. That alliance would have a
budget of over $80 billion. That is twice the size of our State budg-
et, the largest State in the Nation, and it would become the great-
est concentration of economic power outside of Washington, D.C.

These problems are especially troublesome since mandatory alli-
ances are not necessary to achieve the objectives of reform. Alter-
natives exist to meet the same objectives without requiring a new
bureaucratic structure. My prepared statement contains a detailed
review of how alliance functions can be replaced by more efficient
alternatives.

Many States have already moved ahead with health care reform
initiatives that are compatible with the goals of national reform.
California, for example, provides an effective model for future re-
form. The State has a market based on increasingly competitive
managed care systems. In 1993, California enacted significant leg-
islative reform that restructured the small group insurance mar-
ket.

The State also established a voluntary health alliance. As of
December o^ this year, 1,900 groups were enrolled. About 22 per-
cent of this voluntary alliance's new sales were to employers that
previously were uninsured. So it is reaching out to the uninsured
community.

497

I would like to note for your record that Blue Cross of Califor-
nia's own small ^oup pool, which is growing more rapidly than the
State-funded pool, had a 24-percent outreach to previously unin-
sured small groups. So the combination of a voluntary government
pool and a competitive private sector results in outreach to the cur-
rently uninsured.

California's small employers can join the voluntary alliance or
choose to purchase coverage directly from a health plan. This ap-
proach retains a role for employers that is essential if they are ex-
pected to pay 80 percent of the bill. In addition, the voluntary alli-
ance administration costs are low because of its reliance on user
fees. Those employers that choose to join the alliance pay for it.
Those that don't, don't.

The administration's alliance structure is neither desirable nor,
do I think, feasible. While the Cooper bill provides for smaller alli-
ances, it still mandates these structures as the only source of
health coverage. I think alliances should be kept voluntary and
competitive to ensure that they are responsive to consumers. The
Chafee-Thomas voluntary alliance proposal comes closest to the
California model, a working model that has measurable results.
Therefore, we urge you to consider this approach.

I want to briefly touch on only two other issues that could poten-
tially undermine reform efforts. First, reform has to be sensitive to
States such as California with problem economies. While other
States are emerging from the recession, we are now in our 44th
month. We understand that to reach out beyond the currently in-
sured, some of you are considering mandates, and that may well
be feasible and appropriate at some point. However, in California,
a mandate would have a devastating impact on our economy.

The Lewin-VHI study on the impact of the President's reform
plan in California predicted a loss of up to 80,000 jobs and con-
cluded that "implementation of the [President's] health reform pro-
duces a mild recession" with "no sign of a recovery even 8 years
after implementation." California can't take that.

Second, regulatory premium caps should be opposed. The history
is clear: Caps like tnat don't work.

Finally, the private sector can and will innovate. Three years
ago, Blue Cross of California set out to address the insurance needs
of small groups. Today, we cover more than 1 million people in this
market. Last month, we announced the guaranteed coverage pro-
gram to guarantee health coverage to all currently uninsured indi-
viduals. We take all comers regardless of their health history. We
do this voluntarily, and we would expect other California carriers
to follow suit.

I am pleased to submit a detailed statement and would be happy
to respond to your questions.

[The prepared statement and attachments follow:]

498

STATEMENT OF LEONARD D. SCHAEFFER
BLUE CROSS OF CALIFORNIA

Mr. Chairman, Mr. Thomas, Members of the subcommittee, I am Leonard
D. SchaeflFer, Chairman and CEO of Blue Cross of California and Chair of th^
National Institute for Health Care Management. I appreciate this
opportunity to testify on health care reform and to assess the structure of
the President's plan, the Chafee/Thomas plan, and the Cooper/Grandy
managed competition bill.

Blue Cross of California has been and continues to be a strong supporter of
reforming the health care system. Our positions on health reform are basei
on the following core beliefs:

• All Califomians should have access to a choice of
affordable health care services through private,
innovative managed health care plans.

• Health care is a locally delivered and locally consumed
service which is best administered at the local level.

• Private health plans, employers, consumers, providers and
government must meet their respective responsibilities in
order to achieve to goal of affordable health care
alternatives for all Califomians.

Congress is confronted with enormously difficult decisions on
health reform. The challenge is to develop a plan that addresses the
objectives of reform and that can actually be implemented in a pragmatic
manner that works in states and communities throughout the nation.
Because of my twenty year experience in government and private health
care organizations, including service as Administrator of the Health
Care Financing Organization, I recognize that the pitfalls of reform reside ii
its implementation.

In California, I believe we have a model of health care reform that Is the
result of policy makers and the private sector working together to solve
public policy issues. California's approach is successful because it relies on:

• A voluntary alliance and insurance reform to increase
competition in a predominately managed care market;

• Considers the state's fragile economy; and

• Does not resort to regulatory price control such as
premium caps.

Concerns with Mandatory, Exclusive Alliances

The President's proposal requires mandatory and exclusive
"regional Health alliances " — a structure which presents the greatest
obstacle to implementation. The plan would force all individuals
and employers of fewer than a 5,000 employees into a single,
quasi-governmental regional alliance that will be the exclusive purchaser of
nearly all health benefits in the community.

This means that hundreds of billions of dollars will be channeled through
these new, untested entities, instead of flowing directly from employers to
health plans. In California, for example, about $80 billion would be
controlled through such an alliance This unnecessarily duplicates the
pooling mechanisms that are already provided by large managed care plans
like Blue Cross of California, which currently pools more than one million
small groups and individuals. The negative consequences of alliances arise
from a number of interrelated factors.

New bureaucratic layer. The alliance Is a new quasi-governmental entity
Inserted between employers (who pay most of the cost) and health benefit
plans. Its functions duplicate and add to those of existing health care
entities. For instance, alliances are required to:

• locate and identily all citizens, which means obtaining and
continually updating home and work addresses;

• collect premium dollars for each enrollee from appropriate
sources-- employer, employee, government and private citizens

• manage general enrollment and record appropriate AHP for
each citizen; and

• disperse funds to appropriate AHPs.

499

AHPs, likewise, must conduct nearly the same activities — locate, number
and account for each member, manage enrollment, and collect and record
premium. Even in a restructured market, both entities will do marketing,
dispute resolution, eligibility enforcement, file processing and a host of
other duplicative administrative functions. Not surprisingly, Lewin-VHI
estimates that alliances will increase administrative costs by $5 billion.
Since the alliances are monopolies and not subject to market forces, these
administrative costs will undoubtedly grow.

Loss of employer innovation. Forcing large employers to buy through an
alliance eliminates one of the key sources of continuing innovation in the
health system: informed employer and bargaining unit purchasers designlr
and aggressively managing their health benefit plans.

Loss of accountability. Health alliances diffuse the accountability of cost
quality and service, which will result in poorer outcomes and higher costs.
It will inevitably politicize the decision making process.

The problems with the alliances are especially troublesome since
they are not necessary to achieve the objectives of reform. Alliances are on
possible mechanism to achieve certain objectives, but alternatives exist to
fulfill those same objectives more efficientiy and effectively. Attachment A
an executive summary of BCC's review of alliance issues, options and
alternative means to fulfill the functions performed by alliances.

The key point is that it is not necessary to funnel hundreds of billions of
dollars through these new bureaucracies in order to meet government
reform objectives: market regulation, cross-subsidies for low income
individuals, risk adjustment, and even enforcement of premium caps shouh
the Congress decide to take this step. While we may disagree on some of
these measures, such as premium caps (as noted below), such policies do
not require an alliance— better alternatives exist to implement such plems.
States should be accorded significant flexibility to design structures that
achieve federal reform objectives.

EXren as the federal debate moves forward, health caire financing and delivei
systems are evolving in different ways across the country to expand access
and control costs. States are already proceeding with health care reforms
that meet their unique situations. California, for example, has already
developed a market based on increasingly competitive managed care plans:
75 percent of Calif omians are covered under managed care plans; nearly 3^
percent are enrolled in health maintenance organizations.

In this evolving marketplace. Blue Cross of Callfomia believes that we have {
responsibility to solve problems of access and costs now. In the
communities it serves, BCC has built on the strengths of this market-based
system to increase access to health care for all CaSfomians. Attachment B
provides an overview of the BCC initiatives that are designed to meet these
needs, including a new Guaranteed Coverage Program for uninsured
individuals.

The California Model: Voluntary Alliances and Insurance Reform

California serves as a model for regulatory action as well. In 1992, the statt
took a significant step to broaden access to insurance coverage for small
employers. The private sector worked extensively with the California
legislature in the development of these small group reforms. Assembly Bil
1672 provided for sm3dl group reform measures that require edl carriers
serving the small group market to:

• guarantee issue and renewal to employer groups with five to 50
employees (declining to groups of three by 1995);

• implement rate bands, compressing to +/- 10 percent by
1996;

• limit pre-existing condition exclusions to six months: and

• disclose all small group products sold by a carrier to all small
groups.

500

These reforms were implemented in 1993. As part of this reform, the stat
also established a voluntary state-administered purchasing pool for small
employers. The statewide purchasing pool, the Health Insurance Plan of
Calif omia (HIPC), represents a working model of a voluntary health alliance
It offers managed care health plans to small employers at aJGTordable proces;
on a voluntary basis— they can join the HIPC or purchase health benefits
directly from a health plan.

The HIPC was implemented in July 1993, and offers very competitive rates
As of December 1,1993, employer groups (32,587 members) were enroUec
through the alliance. HIPC officials predict at least 250,000 members
within the first two years. About 22 percent of HIPC employers were
previously uninsured; the rate for BCC's private purchasing pool is slightly
higher: 24 percent of new groups are previously uninsured.

The voluntary alliance in its current configuration is expanding access to
affordable coverage. However, some state officials are concerned about the
voluntary design, and reportedly believe that a mandatory alliance would
produce greater "savings." Given the lack of any valid information on the
"preferred" alternative, it is difficult to determine how the state officials
have reached this conclusion.

A voluntary alliance such as California's retains a roie for employers that is
essential if they are expected to pay a substantial portion of the bill. In
addition, the HIPC's administration costs are low because they are funded b
user fees. This alliance design forces health plan and the alliances to
compete with each other to serve consumers more effectively.

As we assess the health care plans under consideration. Blue Cross of
California concludes that the President's alliance structure is neither
desirable no feasible. While the President deserves enormous credit for

putting health reform on the national agenda, his alliance structure is simp!

unworkable, unnecessary, and should be modified.

Representative Cooper's bill provides for smaller alliances with a somewhat
less regulatory role, but it still mandates one exclusive alliance in each
community for all employers of fewer than 100 employees. Tliese
structures should be voluntary and competitive to ensure that they are
responsive to consumers.

The Chafee/Thomas structure of voluntary alliances comes closest to the
California model -- a working model with measurable results. As you develc
health reform, we urge you to adopt that alliance structure.

California's fragile economy

California has certain features and problems in its economy and health
system that shape our views on reform and merit special consideration in
the policy debate.

• California is struggling to emerge firom a severe recession in
which 800,000 jobs were lost; 150,000 in the aerospace
industry alone.

• An estimated 6 million Califomlans were uninsured in 1992 —
19.3 percent of the population under the age of 65, which is
substantially higher than the national rate of 14.7 percent.
Eighty-seven percent of the uninsured are employed or
dependents of employed persons.

• The California economy largely consists of small businesses,
part-time and seasonal workers; growth in the economy wiU be
driven by this small business sector, which complicates the
provision of employment-based health coverage.

• California accounts for about 50 percent of all undocumented
persons in the U.S. -- nearly two million people. A 1992 study
of Los Angeles estimated the net cost of providing care to
undocumented persons to be $159 million, not including
federal or state contributions.

501

California's recession has serious economic effects on individuals,
businesses, and government. We urge you to develop a reform plan
that can be implemented in a manner that reflects the economic
realities of the State. Needless to say, a year of riots, fires, and a major
earthquake has only exacerbated Califomla's attempts to recover.

BCC supports universal coverage which may necessitate some form of
employer mandate. However, the economic climate in California
raises the concern that immediate implementation of cin employer
mandate could adversely affect the state. A recent study by Lewln-VHI
estimated the impact of implementing the President's plan in
California. The study: '

• estimated net increases in cost of about $4.5 billion in the
year 1997 for California's employers;

• projected a loss of about 58,500 jobs in the first year of
Implementation, rising to 83,500 by year eight; and

• concluded that "implementation of the health reform
produces a mild recession in the California economy," and
"[Tlhe simulation shows no sign of a recovery even eight
years after implementation."

Regulatory premium caps

Global budgets and premium caps are arbitrary limits that do not
reflect the cost of and demand for csire. Such limits have not worked
in the past, and will not work today. Unfortunately, to the extent that
they do temporarily limit spending below levels dictated by market
pressures, they will reduce access and services in a manner that will
be unacceptable to most Americans.

The combination of insurance reforms and voluntary alliances that we
have enacted in California sets up a fi-amework for a more competitive
health care market. We urge you to allow that market to continue
working, without resorting to arbitrary premium caps.

Blue Cross of California is pleased to continue to work with the
members and staff of the Subcommittee and the California delegation
as you develop and assess health care reform proposals. 1 thank you
again for the opportunity to testify, and would be pleased to answer
any questions.

Attachments

'Lewln-VHI. Inc. and the UCLA Business Forecasting Project. Potential Finanrial
and Economic Impacts of Health Reform in Califnmia Prpparfrt for Blue Cross of
Ceillfomla. November 10, 1993.

502

Attachment A
ALLIANCE FUNCTIONS AND OPTIONS

Introduction

The Administration is trying to address a range of problems and objectives
through exclusive, mandatory alliances. A number of alliance flinctions are
proposed that are expected to achieve the goals of health care reform. A review
of these functions suggests that alternatives exist to achieve the same goals.
This paper reviews the functions, provides comments, and explores alternative
mechanisms.

(A) Function: vehicle to make products available to the small group market
with lower marketing costs

Comments /alternatives :

(1) Insurance reform and a voluntary alliance for small employers
meets this need.

(2) The competition that results among alliance health plans and
health plans outside the alliance keeps everyone's overhead costs
low.

(B) Function: vehicle to enforce insurance product and pricing rules
Comments /alternatives:

(1) This is a necessary function;

(2) However, enforcing product/pricing rules can continue to be
performed as a state regulatory function (e.g. California's A.B.
1672)

(1) The Jackson Hole group term "managed competition" is a
confusing concept. Competition in afi markets, including health
care, should occur within a set of ground rules to ensure a level
playing field.

(2) Market competition that controls cost does not require an alliance:

(a) Assuring proper marketplace conduct is a standard
regulatory function.

(b) There may be disagreement on how much regulation is
desirable, but a single health alliance is not needed to
enforce Congress' decision regarding the degree of
marketplace regulation and competition required.

(1) It can require annual open enrollment;

(2) It can review plan premium bids if the Congress
determines that to be necessary;

(3) It can screen out high price and/or low quality plans;

(4) It can collect and provide to consumers comparative
Information on health plan prices and quality; and

(5) It can regulate marketing to the extent that the
Congress decides that is necessary.

(3) An alliance is not necessary to serve as an

intermediary for all funds in the system to accomplish
these functions.

(D) Function: vehicle to manage budget and premium caps
Comments /alternatives :

(1) Most economists believe price controls are not effective.

(2) However, if Congress decides to use price controls, an alliance is
not needed;

(3) State agencies or commissions can regulate premiums within a
nationad process. The Maryland Commission is an example of a
state agency regulating provider rates.

503

(E) Function: vehicle to manage some of the cross subsidies In health
reform — this is one of the most difficult areas to address, but it Is
preferable to identify such cross-subsidies up front.
Comments /alternatives:

(1) For example, Medicaid would continue to underpay, and Federal
subsidies for health reform would be capped. The impact would be
further underpayment for the low income, especially iS the economy
declines.

(2) The Administration proposes the alliance as the vehicle to
implicitly shift and subsidize these costs.

(3) The alliance becomes an entity that determines income eligibility
for the low income (other than cash assistance recipients).

(4) Government programs should pay their fair share, but that has not
been the precedent.

(5) Given that fact, implicit subsidies should not be Imposed on health
plans and other payors within an alliance. The subsidy should be
made explicit instead through assessments on health plans not
serving Uie poor.

(6) Government agencies, not an alliance, should be responsible for
any income testing under the plan.

(F) Function: vehicle to manage risk selection among health plans through
a "risk adjuster"

Comments /alternatives :

(1) Strong insurance reforms and rating requirements eliminate the
need for risk adjusters.

(2) If Congress decides that risk adjusters are required, and some risk
adjustment system is made available, the state can manage the
risk adjusters among health plans outside an alliance just as they
do within an alliance.

Conclusion

If Congress concludes that the foregoing functions of exclusive mandatory
£dliances are necessary, alternatives exist to perform these same functions.
Alternatives that build on existing state structures may actually achieve the
Administration's health care reform goals more quickly. Finally, such
alternatives might be the bridge toward reform for some moderates and
conservatives that have concerns about exclusive, mandatory alliances.

ALLIANCE FUNCTIONS AND ALTERNATIVES

FEATURE/FUNCTION

COMMENTS/ALTERNATIVES

Offer pioducta to small group market

Insurance reform and voluntary alliance can
meet this need

Enforce Insormnce product, pricing rules

State regulatory function

Degree of regulation required Is an Issue: but
whatever requirements are enacted can be
enforced as state regulatory function (i.e.,
annual open enrollment, premium reviews.

information, regulation of marketing)

Necessity of price controls Is an Issue; but If
enacted, can be enforced at premium level by
state commission

Degree of cross subsidies Is an Issue; but
whatever decided, make explicit assessments
on payors/health plans

Manage risk selection, risk adjusters

Necessity of risk acyustment at Issue If
insurance reform enacted; but whatever
decided, state <aui make risk a4iustments
among plans without alliance

Serve as vehicle to include Medicaid, other low
Income In private health plans; and potential
vehicle tor Medicare

Federal or state reform could require all private
health plans to serve Medicaid and Medicare
populations as condition of serving private
market

Administer income testing for low Income
indivlduaU

State agency function

Serve as vehicle for covering part-time, part-
jrear, seasons! workers

SUte program should fnlflU these functions

504

Attachment B

BLUE CROSS OF CALIFORNIA INITIATIVES TO
INCREASE ACCESS TO AFFORDABLE CARE

Blue Cross of California believes that we have a responsibility to take
action now to increase access to health care for Califomians. After examining
the composition of the uninsixred in California, BCC developed a number of
innovative programs to target underserved populations, many in collaboration
with local organizations and state agencies; six of the initiatives are
summarized below.

• Small group access: BCC insures over one million members who
work {or are dependents of workers) for small businesses with
fewer than fifty employees. The Small Group Access Program was
created in 1990. It does not limit participation based on industry
(blacklisting) or geographical location (redlining). The program
combines high risk groups, normally unable to obtain insiarance,
with standard groups in order to spread the health care risk
throughout the whole pool.

• The medically tininsurable: Individuals once deemed "medically
uninsurable" can now obtain state-subsidized insurance through
the BCC-administered MRMIP (Major Risk Medical Insurance
Program). As of January 1994, the program served 15,521
individuals. Nearly 70% of the enrollees choose BCC as their
carrier. BCC assumes full underwriting risk. This arrangement
brings the benefits of risk management to disadvantaged
populations.

• Uninsured individuals: BCC armounced earlier this month a new
Guaranteed Coverage Program for all uninsiared individuals. The
program will cover 100 percent of all laninsured applicants by
placing them into one of three levels of coverage based on
underwriting guidelines. The new program is effiective March 1,
1994.

• Uninsured children: BCC addresses the needs of uninsured
children through two different programs.

One program, CalifomiaKids, a collaborative eff"ort between
BCC and community organizations, provide primary,
outpatient medical care to children from uninsured, low-
income families.

BCC also administers and peirticipates in the state's Access
for Infants and Mothers (AIM) program which subsidizes
private insurance for poor, working pregnant women and
their newborns. As of December 1993, the AIM program
served 14,610 working uninsured women and 7900 infants.
BCC recently donated $1 million to AIM to assure the
continued enrollment of pregnant women.

• Medicaid: BCC was selected to participate in the new Geographic
Managed Care Program in Sacramento which seeks to enroll
Medi-Cal beneficiaries in managed care plans. It is estimated that
50,000 to 100,000 beneficiaries will choose BCC

• Rural access: BCC is a California Public Employers Retirement
System (CalPERS) heeilth plan. BCC was chosen, in part, because
it has implemented an outreach strategy to offer its HMO,
CalifomiaCare. to residents in 16 rural counties.

505

Mr. McDermott. Thank you. I hope you know that your full
statement will appear in the record. So anything you didn't get to
say or you skipped over, the full statement will be there.

Dr. Rice, is it your view that either the Cooper or the Chafee bill
provides universal coverage? Could you elaborate on that?

Mr. Rice. V/ell, I definitely don't think that the Cooper bill pro-
vides universal coverage. It doesn't mandate it. I don't think that
the premium subsidies will be sufficient to get universal coverage.

The Thomas-Chafee bill mandates that there be universal cov-
erage if specific Medicare and Medicaid savings are met. There are
two things that I am concerned about; one, whether we are going
to be meeting those Medicare and Medicaid savings. If we don't,
then they are going to have to push back the implementation of
universal coverage. It could conceivably be pushed back indefi-
nitely. The second thing is I am concerned about the individual
mandate, whether the subsidies are going to be large enough to
make people afford it. Even if the Medicare and Medicaid savings
are met, it may be that the out-of-pocket cost toward premiums
will be so onerous that people will be forced to pay for this in
money that they just can't afford to pay. So I am concerned that
there might not be universal coverage or, if there is universal cov-
erage, it will just cost people too much of their own salary.

Mr. McDermott. As I read the Cooper bill, it would actually per-
haps artificially increase the cost for small employers because they
have to obtain their insurance through a HPPC where they are
rolled into coverage with Medicaid and other uninsured people. Is
that your understanding?

It seemed to me that it would make employers less likely to cover
their people if they have to go into a pool where they meet the
Medicaid population and the uninsured.

Mr. Rice. I think that that is a possibility. It depends on what
pool the small business will be in under that scenario versus where
they are now, but under that scenario, they will be lumped with
other people that are currently not being lumped, the people who
are currently on Medicaid, and the uninsured. So it may be an
unhealthier risk pool. It may raise premiums that may make it
harder for people to afford it. It may make it harder for businesses
to offer health care coverage.

So I think that by having only a subgroup of the population,
rather than everyone in the health alliance, as you could get an
unhealthy mix, as you say, and, therefore, make health care cov-
erage through the health alliances more expensive.

Mr. McDermott. Mr. Steger, I have a question of you, and that
is: Do you think a payroll tax is better than the President's pay-
ment mechanism? Let's just theoretically talk about it. Suppose
you got rid of the health care premium and you went to a payroll
tax.

Mr. Steger. Right.

Mr. McDermott. Less job losses? More job losses?

Mr. Steger. The difference, of course, is, among other things,
that the President's plan now is a graduated, if you will, tax or
payment. In other words, it starts so high, and on larger compa-
nies, 7.9, it goes down, which, of course, the payroll tax would be
the same. So that certainly is one difference.

506

I would expect that the inherent subsidy, if you will, everything
else being equal, it should mean job losses should be less. The prob-
lem with it, however, is that if the amounts of money raised by the
3.5 percent, by the subsidy at the lowest levels, is not enough, then
the way that the plan cycles, it cycles and comes back, and the first
place it comes to is employers. Right now, as least as I understand
it, the 3.5 percent can then be raised, if need be, to be able to get
the extra funds.

That is a complicated answer, but I would just say that I think
the President actually did with the Clinton plan take into account
the fact that this graduated, if you will, tax or payment would
mean for less job losses, and I just hope that our results may indi-
cate just along those lines.

Mr. McDermott. Mr. Thomas.

Mr. Thomas. Thank you, Mr. Chairman. We have 5 minutes to
go on a vote, and I am torn between asking questions or missing
a vote, and it disturbs me a lot. I don't want to miss the vote, and
I don't want to miss the questions.

Would you folks give us 7 minutes to run over and run back?

Mr. McDermott. We would appreciate it if you would be willing
to wait because we do have other questions. I have some others as
well. So we will be right back.

The meeting stands in recess.

[Recess.]

Mr. McDermott. The committee will come back to order.

I apologize for health care reform from the back of the galloping
horse. Mr. Thomas will inquire.

Mr. Thomas. Thank you very much, Mr. Chairman.

I will thank Dr. McCaughey while she is talking to our other
member in terms of the particulars that she is providing us with,
but that we are looking for alternatives beyond the Clinton plan
because I think, clearly, for all the reasons that, Doctor, you have
outlined, the Clinton plan is deficient in the alliances. I think the
CBO report finally now clearly indicates in chapter 5 that some of
these new and novel structures, even if they are not pernicious,
given the controlling structure that is there, make it probably im-
possible for them to perform in the manner that they are antici-
pated to perform, and if they don't, the system doesn't work.

So I hope we are going to conclude phase 1 of explaining why the
Clinton plan doesn't work because I think the vast majority on this
panel believe that in terms of the way the alliances are structured,
and we are looking for viable alternatives.

Dr. Rice, did you write your analysis prior to the CBO? I assume
you did.

Mr. Rice. Yes, I wrote it last week.

Mr. Thomas. I think you misunderstand partially the mandate
structure in Chafee-Thomas, and that is that if the money isn't
found, the mandate still goes into effect, but it does not go into ef-
fect for those folk who have not been brought under the subsidy
cap, but would if, in fact, the moneys were there.

Frankly, I think one of the interesting points out of the CBO
study is that if you compare the President's ramping down of Medi-
care within the time frame that he has indicated he wants it to
come about, the glideslope of the Chafee-Thomas bill from 12 to 7

507

percent over a 10-year period is really not the Procrustean bed, I
think, that some folks say it is. But that if, in fact, we did it, the
added incentive of buying down that area, I think, creates a nice
synergism in terms of keeping us honest.

One of the reasons we have put that in there was when the First
Lady was in front of us on the first day of our hearings, I said,
"Given the benefits up front, you hope the payment comes later.
Could we tie it together in some way, so that you would create an
incentive for Congress to provide the payment for those benefits?"
In essence, she said no.

So what we have done in this bill is tie the two together. If you
really want the benefits for those folks, then let's make sure we
make the changes.

Your concern about the adverse selection in the purchasing co-
operatives from a relative point of view, I think would be very real
under the alliances because they have got to have a risk-adjust-
ment mechanism, and there just ain't no way to build one.

In Cooper-Grandy, because they are mandatory and especially
because they put an employer cutoff number, I think it is partially
true as well, but I have difficulties seeing that argument carried
over to our structure which is a voluntary purchasing system with
multiple cooperatives within a given area. The private sector with
the insurance reforms and the antitrust reforms, organizing their
own groups, Chamber of Commerce, Farm Bureau, or whatever, so
that, if, in fact, a particular purchasing cooperative does wind up
with adverse selection, it either fades away and they move to oth-
ers or they redo the way in which they are doing business. There
is a lot more dynamism in the structure that we are offering than
most of the others that mandate or make it rigid.

Is that a fair comeback to your criticism?

Mr. Rice. Sure. I guess one concern I would have on the last
point would be whether these purchasing alliances, since they can
compete with each other, might try to compete on the basis of get-
ting the better risks.

Mr. Thomas. That is a concern, and in the tradeoff between price
and package, that is why I opted for a relatively defined benefit
package, so that basic structure would be available and you would
have to look at it without being able to structure a package under
a dollar amount that would, in fact, enhance that risk selection.

We aren't going to be perfect, but I think we minimize the down
side of the unknown far greater than virtually any other plan, and
perhaps Mr. Schaeffer would like to talk about what has happened
under the California voluntary purchasing and whether or not they
have seen a massive adverse risk selection structure occurring so
far in California.

Mr. ScHAEH'FP^R. Mr. Thomas, I think you make an important
point. In California and in your bill and in some other bills, it is
important to look at the health alliance in conjunction with the in-
surance reform changes.

In California, all of the discriminatory practices, redlining, black-
listing, cherrypicking, job lock, all those practices are illegal. The
law requires guaranteed issue, guaranteed renewability, 20-percent
rate bands going down to 10-percent rate bands, and limits on pre-
existing condition provisions. If you take that and you put it next

508

to a voluntary alliance, many of these distortions that we worry
about today just aren't there. In California, I can tell you, there are
very few ways you can do risk selection as opposed to having to
manage the cost of care.

Mr. Thomas. It is certainly far less than the creative area today
and, more importantly, probably not enough to make it worth your
while in the margin of difference versus a good, honest product,
honestly presented, and that is the key.

I am looking forward to increased information from the experi-
ence in California. We have only been on it, what, since July

Mr. SCHAEFFER. Right.

Mr. Thomas [continuing]. Of last year, but I am very pleased
with the information we are getting now because it is some of the
first factual stuff we have had to knock down some of the myths
that continue to be presented about what the brave new world is
going to look like, but I agree with you completely. Don't read
pieces of the bill, read the whole bill, and with those insurance re-
forms and the antitrust reforms, it creates a synergism in the in-
dustry which I think keeps everybody honest and doesn't have gov-
ernment pick winners, as those mandated structures do.

Frankly, if these new structures are destined to rule the day and
they do it in a free, competitive structure, more power to them. I
just don't want to give them an unfair advantage.

Mr. ScHAEFFER. Absolutely. If they can do a better job than we
can, then they ought to win. The irony is that, although some in-
surers have left the State because they don't want to compete
under the new rules, those that have remained, I think have done
better. Blue Cross has had a great period since the voluntary alli-
ance went in, and so has the voluntary alliance. So much more cov-
erage has been made available.

As I mentioned in my testimony, 24 percent of the coverage we
are selling is going to groups who were previously uninsured. So
it is working. We are reaching out, as is the voluntary alliance.

Mr. Thomas. Mr. Chairman, let me just close by saying that had
we locked in the purchasing pattern 20 years ago, managed care
would not have been in the law, and that the last thing I want to
do is lock in any one particular structure and let the private sector
with fair rules, honestly supervised, continue to be creative in of-
fering us new patterns that, in fact, will probably drive the price
down in new and creative ways that we don't know about today.

Thank you, Mr. Chairman.

Mr. McDermott. Mrs. Johnson will inquire.

Mrs. Johnson. Thank you, Mr. Chairman.

I do appreciate, Mr. Schaeffer, your comments. I have pulled out
of the Chafee-Thomas bill the voluntary purchasing cooperative
piece, so that it can be examined by everyone, so the issue can be
raised about diversity in the market and its importance to cov-
erage, to quality in the future, to being able to meet our citizens'
needs. So your testimony has been very useful, and I particularly
commend you on opening your plan to all the uninsured on a guar-
anteed coverage basis.

I believe that a lot of others are going to begin to notice that that
is a very good market for them, and you may actually solve your
problem before we do.

509

Dr. McCaughey, you have raised a very, very serious challenge
to the President's health care reform proposal, and I mention it be-
cause I think that is not the only reform proposal that could, as
we debate this issue, fall into the same trap.

You make the claim that you will not be able to buy a doctor's
services outside of your plan. Now, that is a really big problem.
There is a lot of judgment involved in medicine. It is as much an
art as it is a science.

Ms. McCaughey. That is right.

Mrs. Johnson. Acute pain may mean bed rest to one doctor and
an operative procedure to the other.

In reading the President's staffs response to your accusation in
the New York Times recently, I was interested that they claim un-
equivocally that people could decide to pay for care out of their own
pocket. Would you comment on this issue?

Ms. McCaughey. Yes, because I think it really goes right to the
heart of the matter, and here is what happens. You have to buy
one of the low budget health plans offered by the regional alliance
where you live. That is the first factor. Paying the mandatory pre-
mium and then going outside the system to buy a plan you think
is better is not permitted.

Second, when you go see the doctor, you have to show him your
health security card and prove that you are enrolled in a plan. If
not, he must begin the procedure to enroll you in a plan right then,
and if he is going to treat you for basic illnesses and offer the kind
of basic medical services that are listed in this bill, he has to be
paid by the plan, not by you, except for a fixed copayment. In other
words, if he takes payment directly from you, rather than filling
out the form and sending it into the alliance for payment, it is a
$10,000 fine for each offense.

That goes for doctors inside HMOs and doctors practicing on a
fee-for-service basis, and it doesn't matter what kind of plan you
are in. If you buy a fee-for-service policy, your doctor still has to
fill out that form and get paid by the plan, not directly by you. You
can't pay him extra.

Balanced billing and direct billing are prohibited. It is on page
236 of the plan. It is also in next week's New Republic magazine.

It is also important to note that he must report your visit accord-
ing to the requirements of Title V establishing a national
databank. Now, this leads to two really critical issues. One is that
it is going to be very hard to go outside your prepaid plan and find
a doctor who will serve you on a PPO or fee-for-service basis if you
don't like the doctor in your health plan or if your health plan gate-
keeper doesn't want to let you see a specialist. Why? Because fee-
for-service insurance is going to be almost impossible to buy. So
very few doctors will be practicing outside these prepaid plans, out-
side of contractors with HMOs.

Why will fee-for-service insurance be so hard to buy, and why
will so few doctors be out there willing to see you on that basis?
Well, there are three reasons.

First, the regional alliances cannot permit the average premium
paid in the region to exceed the ceilings imposed by the National
Health . There is a whole series of renegotiations that occur on

510

pages 1000 to 1005 in which the plans must voluntary reduce their
premiums each year in order to do business in the region.

Second, the regional alliance officials are empowered to exclude
any plan that costs 20 percent more than any of the other health
plans, 20 percent more than the average weighted plan in the re-
gion. It is kind of like passing a law that you can't buy a car that
cost 20 percent more than the average car.

They will have to apply that 20 percent rule virtually all the
time which means that fee-for-service insurance which is always
more expensive than prepaid or managed care, even when there is
a large deductible and copayment, will be eliminated.

The bill says that, in general, each regional alliance shall include
among its health plans one fee-for-service or choose-your-own-doc-
tor plan, but it is not always true because there are these other
rules that will make it virtually impossible for regional alliance of-
ficials to do it. They will only be able to offer a plan that costs 20
percent more than the average plan if other plans come in way
under the ceiling imposed by the National Health , and that is
highly unlikely because the increase in the price of the plans per
year is pegged to the consumer price index, and you know that the
current annual increases in medical spending are rising much fast-
er than that.

Third, because the regional alliance officials are empowered to
set the fees for doctors per clinical visit or treatment and to limit
how much are paid to doctors in each specialty per year, doctors
are not going to be able to focus on that basis. Perspective budget-
ing means that their salaries are going to drop precipitously toward
the end of the year, as they do in Canada when the budget in the
region for pulmonologists or cardiologists runs out of money.

So is it going to be possible for a patient to go outside his prepaid
plan when he has a heart problem and the doctor recommends rest
and he thinks he may need angioplasty? In practice, it is highly un-
likely that he will be able to do that, and he certainly won't be able
to go to any doctor and pay any price for any service.

Mrs. Johnson. Unfortunately, so that my other colleagues can
finish, after this vote, we have a 5-minute vote. So we do want to
have the panel have the right to go on its way after this question-
ing. So thank you very much, and I look forward to your additional
articles and thank the panel for their good input.

Mr. McDermott. Mr. McCrery will inquire.

Mr. McCrery. Thank you, Mr. Chairman.

Mr. Helms, I was interested in your testimony, your oral presen-
tation to the committee, in which you said that in an effort to con-
trol costs, medical savings accounts might do some good, but the
most important thing would be to cap the tax deductibility and tax
exclusion for insurance products.

Both of those things have to do with getting the individual back
in the ball game of controlling cost, putting some of the burden for
controlling cost in the system on the individual. Is that correct?

Mr. Helms. That is right. There is a large body of literature on
the role that the tax treatment of health insurance has played
since World War II when it started. The tax exclusion of health in-
surance gives people incentives to bargain for more and more
health insurance and to include more benefits into the policy be-

511

cause it is worth more to people to get things that they know they
are going to spend money on into the health plan, which is tax-free,
than to get the wages which are taxable.

Mr. McCrery. Right. Absent getting back into the health care
system some of these personal incentives to control cost, about the
only thing we can do is bureaucratically impose cost controls.
Wouldn't that be the conclusion that you would reach?

Mr. Helms. Yes, I tried to say in my testimony that if you don't
have anything to change consumer behavior on the demand side,
then you put all your eggs in the basket of controls.

Mr. McCrery. Right, and that is essentially where the Clinton
plan goes and Mr. McDermott goes with his single-payer plan.

Mr. Helms. Yes, the administration would argue that they have
put their eggs in the basket of competition and so will not need the
controls. But my argument is that their version of competition will
not work so that they will be forced to go to controls.

Mr. McCrery. I agree.

I have handed you a slip of paper with just a brief synopsis of
my health care plan that I am currently drafting with the legisla-
tive counsel, and in that plan, I combine the two things that you
mentioned, medical savings accounts and a tax cap. I also limit the
tax-favored treatment of insurance products in the Tax Code to
high-deductible products coupled with medical savings accounts or
a managed car plan, thereby denying a deduction for first-dollar
coverage insurance and for low-deductible insurance. In your opin-
ion, is that a powerful combination to get individuals back in the
ball game?

Mr. Helms. Very much so, and let me say I was only aware of
your efforts when you gave this to me. From my glance at it, your
plan is very close to a plan called Responsible National Health In-
surance that was authored by Mark Pauly, Patricia Danzon, Paul
Feldstein, and John Hoff that AEI published in 1992. It seems to
have a lot of the same features that were written in to that plan.
In addition, your plan looks to be very close to the simple tax cap
approach that we pushed early on in the Reagan administration
when I was at HHS under Secretary Schweiker.

We argued at that time that where you set the cap was not so
important as sending a message that this is not an open-ended
game anymore, that way you give people incentives to start looking
around to produce what we would call private cost containment as
opposed to public cost containment. I look forward to finding out
more about your proposal.

Mr. McCrery. Thank you.

Mr. Steger, you wanted to comment?

Mr. Steger. Yes. It is also the kind of plan that I think certainly
would not have the million job losses of the employer mandate, but,
also, given what you have talked about with the tax angle, I think
it would probably increase demand in the short run, too. So you
probably can have a million-plus the other way. It is attractive at
least from that angle.

Mr. McCrery. Thank you.

The one question that we don't have time to get into, but I would
like to perhaps hear your thoughts on it, would be whether to

512

couple this with an individual mandate. If you can respond in 30
seconds, that would be great.

Mr. Helms. Oh, you actually want me to respond?

Mr. McCrery. Well, if you want to, but you may want to give
it some more thought.

Mr. Helms. I just attended a major conference at Princetown
University looking at employer versus individual mandates. Sev-
eral economists argued that you could get any effect from either
mandate depending on how you structured them. But at least one
economist Mark Pauly of the University of Pennsylvania, argued
that the individual mandates were much more effective in terms of
being able to target on the behavioral effects that you want. There-
fore, I am more in favor of the individual mandate than an em-
ployer mandate.

Mr. McCrery. I am trying to work an individual mandate into
my plan. The problem with one, of course, is how you pay for very
low-income individuals on whom you place the mandate — and they
have no way to pay for the coverage.

Mr. Helms. Correct. It is a difficult issue, and I do not want to
say it is an easy thing to do, but between the two, I favor the indi-
vidual mandate.

Mr. McCrery. If I can find a good way to do it, though, and fi-
nance it, I am going to include that in my bill.

Ms. McCaughey? Yes.

Ms. McCaughey. May I offer one comment that is not in my tes-
timony, but may be very helpful to everyone, and that is New York
City has just realized how unsuccessful it is in our city to try to
enroll the urban poor in HMOs as a way of keeping them from
using emergency rooms for basic medical care.

What we have found ends up happening is that the government
entity, whatever it is, pays the premium to the HMO, but because
of cultural differences, the people who need that care, instead of
going to the HMO and meeting a doctor's appointment, still report
to the emergency room at 2 or 3 in the morning, whatever day they
are free, whatever time they need care, and so what ends up hap-
pening is that the hospital provides the care. Often these people lie
about — I shouldn't say lie — evade the question of who they are and
whether they have any kind of coverage with a prepaid health plan
in order to be able to be served in an emergency room, and then,
by the time the hospital figures out who they are, the notification
period with the prepaid health plan has expired or the prepaid
health plan tells the hospital that the care given does not qualify,
is emergency care.

So, as we discuss this concept of universal coverage and paying
premiums for every single person who needs health care, we prob-
ably shouldn't forget that it may not be practical to enroll everyone
in one of these prepaid plans or it may take a long time to achieve
that kind of cultural transition, and in the meantime, we can't halt
the payments to hospitals who care for the urban poor.

Mr. McCrery. Interesting.

Mr. McDermott. I would comment that that sounds like we
need a single-payer system, and I won't give you much time to com-
ment on that because we only have 4 minutes to make a vote.

513

The committee is grateful for your testimony. We thank you for
coming. The committee will be in recess. We will be back in about
10 minutes for the next panel. Thank you all very much.

[Recess.]

Chairman Stark. You have the distinction of not only being the
final panel today, but the final panel for the whole issue in 1994
of health reform before the Ways and Means Committee. So I com-
mend you. I hope it was worth the wait, and you have the chance
for the very last word before we start to make sausage.

Dr. Simmons, it is good to see your back. Dr. Simmons is presi-
dent of the National Leadership Coalition for Health Care Reform,
and you are accompanied, I noticed, by Mark Groldberg, who is the
deputy director for the Coalition. We also have Gail Shearer, who
is the manager for policy analysis of Consumers Union; Pam Bai-
ley, who is the president of the Healthcare Leadership Council; An-
thony Knettel, who is the health policy director of the ERISA In-
dustry Committee; and Dirk Van Dongen, cochairman of the
Healthcare Equity Action League.

I would suggest to the witnesses that your complete statements
will be included in the record in their entirety, and the chairman
would ask that you summarize or expand on your testimony within
the allotted time.

Henry, do you want to lead off?

STATEMENT OF HENRY E. SIMMONS, M.D., PRESmENT,
NATIONAL LEADERSHIP COALITION FOR HEALTH CARE
REFORM; ACCOMPANIED BY MARK A. GOLDBERG, DEPUTY
DIRECTOR

Dr. Simmons. Thanks, Mr. Chairman. I appreciate the oppor-
tunity to speak about system reform and about some of the propos-
als under consideration and, as you stated, on behalf of the Na-
tional Leadership Coalition.

That coalition is the Nation's largest and most diverse alliance
on health care issues. The coalition consists of nearly 100 organiza-
tions-— 65 businesses in all sorts of industries and many of the Na-
tion's largest unions, consumer and provider groups. Taken to-
gether, these organizations include as employees or individual
members about 100 million Americans.

Our coalition is absolutely nonpartisan. Our honorary cochair-
men are former Presidents Carter and Ford, and our cochairmen
are former Iowa Governor Bob Ray, a Republican, and former Con-
gressman Paul Rogers, a Democrat.

We began working nearly 4 years ago to develop an effective
strategy for health care reform, and it is striking to us and, frank-
ly, heartening that virtually all of the major health reform bills in
this Congress attempt to address the 8 goals that our members
identified more than 2 years ago and continue to support: Improve-
ments in quality, universal coverage, cost control, the development
of organized delivery systems, insurance and malpractice reforms,
and administrative simplification.

I am going to concentrate today, Mr. Chairman, on just two of
those goals, universal coverage and cost control.

Our coalition believes that universal coverage is a crucial ele-
ment of health reform to provide a health care safety net for every

514

American. Improving access to health insurance, which many of the
bills before you would seek to do, is good, but it is not enough. We
must insist on making sure that every American actually has cov-
erage.

As you know, we fall well short of that ideal today. According to
a recent report, the number of Americans without health coverage
increased by 2.3 million between 1991 and 1992, the largest in-
crease in the past decade.

In light of that, we urge you to report out a bill that includes
both an individual mandate and an employer mandate. Why do we
believe that an employer mandate makes sense? First, the over-
whelming preponderance of those nonelderly Americans who have
private health insurance, 88 percent, receive it through their em-
ployers or the employers of their family members, and we believe
it is sensible to build on that very large base, and there is broad
and strong support for that approach.

Second, a similar proportion of the uninsured, about 84 percent,
are either in the work force or in families that are headed by some-
one who is. That means that an employer mandate would permit
us to maintain and sustain the coverage now received by most of
the Americans who have it and, at the same time, extend coverage
to most of the Americans who do not.

Contrary to some recent reports, the health care spending crisis
continues to grow worse. The Department of Commerce recently es-
timated that U.S. health care spending last year increased over
$100 billion, the largest 1-year increase in our history, and Com-
merce projects health care spending will rise at an average rate of
13.5 percent per year over the next 5 years. We can't go on that
way.

We need insurance and malpractice reforms and more efficient
delivery systems, yes, but we also need more. Our recommendation
is that your legislation include expenditure targets and rate-setting
for the fee-for-service segment of the system, to keep spending in-
creases in bounds while organized delivery systems which would be
exempted from rate schedules, are encouraged to grow.

Experience here and elsewhere has made it clear that rate-set-
ting is an effective tool for controlling cost, and in the context of
a reform strategy that also includes increased competition among
health plans, it can establish, in effect, a cost ceiling for that com-
petition.

We would caution that bills that cut the rates of growth in Medi-
care and Medicaid in the short term without establishing tough
cost controls that operate concurrently with those cuts invite pro-
viders to shift costs to the private sector.

We would caution as well against reliance for cost constraint
largely on measures designed to increase competition. We believe,
as the CBO testified yesterday, that such steps, although important
and useful, are not sufficient to meet America's urgent need for
health care cost control.

First, the leading advocates of managed competition have ac-
knowledged at least a third of the U.S. population lives in areas
that are not populated enough to permit the creation of effective
competition.

515

Second, time is of the essence, and even if managed competition
alone would be effective over the longer run in constraining cost,
and we cannot be assured of that, we oelieve the country needs re-
lief in the shorter term. The Department of Commerce projections
are bracing. Total health care spending is on track to double in the
next 5 years.

Mr. Chairman, we look forward to working with you and your
colleagues, Democrats and Republicans alike, to achieve health
care reform that disciplines health care spending, that assures
comprehensive health coverage, and that brings better care for all
Americans.

[The prepared statement follows:]

516

STATEMENT OF HENRY E. SIMMONS, M.D., M.P.H., F.A.C.P.

PRESIDENT OF THE NATIONAL LEADERSHIP COALITION
FOR HEALTH CARE REFORM

I eun Dr. Henry E. Simmons, president of the National Leadership
Coalition for Health Care Reform. I am pleased to have this op-
portunity to speak with you today about health care reform and some of
the proposed reform bills now under consideration. With me is Mark A.
Goldberg, the deputy director of the Coalition.

The National Leadership Coalition is the nation's largest and
most diverse alliance on health care issues. As the list appended to
my written testimony indicates, the Coalition consists of nearly 100
organizations -- major businesses in all sorts of industries, unions,
consumer groups, and associations of health care providers. Taken to-
gether, these organizations include -- as employees or individual mem-
bers -- about 100 million Americans.

The Coalition is absolutely non-partisan. Our honorary co-
chairmen are former Presidents Jimmy Carter and Gerald R. Ford. Our
co-chairmen are former Iowa Governor Robert D. Ray, a Republican, and
former Congressman (and Chairman of the Energy and Commerce Sub-
committee on Health and the Environment) Paul G. Rogers. We believe,
as Presidents Carter and Ford recently wrote in The Washington Post,
that

the problems of our health care system do add up to a
crisis -- and we need to attend to it with the urgency,
and the willingness to put aside partisanship, that a
real crisis warrants.

It is in that spirit, and with that sense of urgency, that we
have been working with members of both parties toward the achievement
of effective reform. I would like to discuss briefly what we believe
the essential ingredients of effective reform are and to offer some
thoughts on the alternative proposals before this Subcommittee.

The members of the National Leadership Coalition began working
together nearly four years ago to develop, jointly and by consensus,
an effective strategy for health care reform. The product of that ef-
fort was the plan set out in our November, 1991, report. Excellent
Health Care for All Americans at a Reasonable Cost. I have appended
to my written testimony an essay from the New England Journal of Medi-
cine, in which we summarized that plan..

It is striking -- and, frankly, it is heartening — that vir-
tually all of the major health care reform bills in this Congress at-
tempt to address the eight goals that our members identified more than
two years ago and continue to support:

o improvements in the quality of the health care that

Americans receive;
o universal coverage;
o cost control;
o encouragement of the development of organized delivery

systems;
o effective management and oversight through a public-
private partnership;
o insurance reform;
o malpractice reform; and

0 administrative simplification.

To be sure, real differences of opinion do exist about how best to
achieve these objectives -- and how fast to approach them. But as
those differences are debated, here and across the country, we should
recognize, and be encouraged by, how much agreement, on ends if not
means, has already been achieved.

1 want to concentrate, in my brief remarks here today, on two of
the eight goals that I just enumerated: universal coverage and cost
control . ^

Congress has a chance this year to make history -- to assure, for
the first time, that every American, rich or poor, healthy or ill,
will have comprehensive health coverage every day of his or her life
That, at Its very core, is what the debate about health care reform
needs to be about: how to make that dream come true, how to make that
guarantee real.

517

The members of the Coalition believe that universal coverage is a
crucial element of health care reform -- to provide a health care
safety net for Americans that virtually all other industrialized na-
tions provide for their citizens. Improving access to health insur-
ance, which many of the bills before you would seek to do, is good,
but it is not enough. We should insist on making sure that all Amer-
icans actually have coverage.

We fall well short of that ideal today. According to a recent
report by the Employee Benefit Research Institute, the number of Amer-
icans without health coverage jumped between 1991 and 1992 from 36.6
million to 38.9 million -- an increase in just one year of 2.3 million
and the largest increase in the past decade. These men, women, and
children live every day in physical and financial peril -- literally
in crisis.

The Coalition urges the Subcommittee to report out a bill that
includes both an individual mandate, such as is contained in H.R.
3704, and an employer mandate. Why do we believe that an employer
mandate makes sense? First, the overwhelming preponderance of those
non-elderly Americans who have private health insurance -- 88 percent
-- receive it through their employers or the employers of their family
members. It is sensible to build on that very large base -- of
coverage and of financial support for coverage.

Second, a similar proportion of the uninsured -- about 84 percent
-- are either in the workforce or in families that are headed by some-
one who is. That means that an employer mandate would permit us to
maintain and sustain the coverage now received by most of the Amer-
icans who have it -- and at the same time extend coverage to most of
the Americans who do not.

For those businesses that already provide coverage to their em-
ployees, a mandate would, not be so burdensome, if properly con-
structed, because it would require them to do what they are already
doing. Of the minority of small businesses that do not provide
coverage now, most have fewer than 10 employees and relatively low
average wages. An employer mandate should be accompanied by measures
to cushion the impact of a mandate on these firms. At present, in the
absence of a level playing field, those firms that provide coverage
are disadvantaged in their competition with those that do not —
first, because they have taken on this additional responsibility and
cost, and, second, because the premiums they pay help to cover the
costs of emergency care for employees of the firms that do not provide
coverage. When all similarly situated firms have similar
responsibilities, companies will compete on price, quality, and ser-
vice -- not on whether they are able to avoid providing health insur-
ance.

The support for universal coverage through a combination of
mandates -- an individual mandate and an employer mandate -- is
broader than is sometimes recognized. The National Leadership Coali-
tion for Health Care Reform, as I mentioned earlier, includes nearly
100 organizations that strongly support this combination of mandates.
And I want to emphasize that about 65 of these organizations are
businesses. In addition, the American Hospital Association, the U.S.
Chamber of Commerce, the Catholic Health Association, the Corporate
Health Care Coalition all back this approach as well, although their
preferences as to other aspects of health care reform may differ from
the Coalition's. And, as you know, H.R. 3600 incorporates a commit-
ment to the achievement of universal coverage through this combination
of mandates.

The Coalition believes -- and I want to be very clear about this
-- the assurance of universal coverage must be accompanied by tough
cost control and initiatives to improve the quality of care. We sup-
port an individual mandate conjoined with an employer mandate in the
context of comprehensive reform that includes these other elements.
It would not be wise to extend health coverage to 39 million more
Americans without making sure that we had in place strong mechanisms
to keep costs contained and measures to assure that the quality of
care in an expanded system improves, rather than deteriorates. We
need to proceed on all these fronts at once.

518

Contrary to some recent reports, the health care spending crisis
is continuing to get worse. The Department of Commerce recently
estimated — in a study that received little attention because it was
released between Christmas and New Year's Day -- that U.S. health care
spending in 1993 totaled $942.5 billion. That's an increase from 1992
to 1993 of $102.3 billion — the largest one-year increase in history.
And Commerece projects that health care spending will rise at an aver-
age rate of 13.5 percent per year over the next five years, doubling
our health care costs.

We can't go on this way. We need insurance reforms and adminis-
trative simplification and more efficient delivery structures, yes,
but we also need more. Our recommendation is that the Subcomittee
report out legislation that includes expenditure targets and rate-
setting for the fee-for-service segment of the health care system —
to keep spending increases in bounds while organized delivery systems,
which would be explicitly exempted from rate schedules, are encouraged
to grow. Experience here in the United States and elsewhere in the
world has made it clear that rate-setting is an effective tool for
controlling costs — and in the context of a reform strategy that also
includes increased competition among health plans, can establish in
effect a cost ceiling for that competition. Over time, we can and
should increase the competitiveness of health care delivery systems;
in the meanwhile, we ought to make sure that costs don't continue to
spiral out of any control.

We would caution that bills that cut the rates of growth in
Medicare and Medicaid in the short term without establishing tough
cost controls that operate concurrently with those cuts invite pro-
viders to make up for their lost revenue by raising premiums paid by
businesses and other private payers. We would caution as well against
reliance for cost constraint solely on measures designed to increase
the competitiveness of health care markets. We believe that such
steps, although important and useful, are not sufficient to meet Amer-
ica's urgent need for health care cost inhibition. First, as the
leading academic advocates of managed competition have readily ack-
nowledged, at least a third of the U.S. population lives in areas that
are not densely enough popluated to permit the creation of effective
competition among multiple health plans. Second, time is of the es-
sence. Even if managed competition alone would be effective over the
longer run in constraining increases in health care spending, the
country needs relief in the shorter term. The Department of Commerce
projections are bracing: Total health care spending is on track to
double in the next five years .

We look forward to working with you and your colleagues to
achieve health care reform that disciplines health care spending and
that assures comprehensive health coverage, and excellent care, for
all Americans.

519

MEMBERS OF THE NATIONAL LEADERSHIP COALITION FOR
HEALTH CARE REFORM

Acme Steel Company

Amalgamated Clothing & Textile Workers Union, AFL-CIO

American Academy of Family Physicians

American Academy of Pediatrics

American Association of Retired Persons

American College of Physicians

American Federation of Teachers, AFL-CIO

American Iron & Steel Institute

American Nurses Association, Inc.

American Physical Therapy Association

American Psychological Association

Association of Academic Health Centers

Association of Minority Health Professional Schools

B. C. Enterprises

Banc One Corporation

Bank South Corporation

Bannon Research

Bethlehem Steel Corporation

Blue Diamond Growers

Brown & Cole Stores

Burlington Coat Factory

Caterpillar Inc.

Ceridian Corporation

Christian Children's Fund

Chrysler Corporation

Cold Finished Steel Bar Institute

Communication Workers of America

CoreStates Financial Corp.

Del Monte Foods

Drummond Company Inc.

Families USA Foundation

Filter Materials

First Interstate Bancorp

Ford Motor Company

Georgia-Pacific Corporation

Giant Food Inc.

The Great Atlantic & Pacific Tea Company, Inc.

Gross Electric Inc.

The Heights Group

H. J. Heinz Co.

Geo. A. Hormel & Company

Hunt-Wesson Inc.

Inland Steel Company

INSIGHT Treatment Services, Inc.

International Brotherhood of Electrical Workers

International Multifoods

International Union of Bricklayers and Allied Craftsmen

James River Corporation

Johnstown Corporation

Keebler Company

Keller Glass Company

Lincoln Telephone & Telegraph Co.

Lockheed Corporation

LTV Steel Company

520

Lukens Inc.

Mars, Incorporated

Maternity Center Association

National Association of Childbearing Centers

National Association of State Boards of Education

National Easter Seal Society

National Education Association

National Steel Corporation

Norwest Corporation

Olympia West Plaza, Inc.

Pacific Gas & Electric

PAR Associates

Pella Corporation

Preferred Benefits

R. R. Donnelley & Sons Co.

Ralphs Grocery Company

Regis Corporation

Rohm & Haas Company

Safeway Inc.

Sara Lee Corporation

Scott Paper Co.

Service Employees International Union, AFL-CIO

Sokolov Strategic Alliance

Southern California Edison Company

Strategic Marketing Information, Inc.

Texas Heart Institute

Time Warner Inc.

United Air Lines, Inc.

United Food and Commercial Workers International Union, AFL-CIO

United Paperworkers International Union, AFL-CIO

United States Catholic Conference

United Steelworkers of America, AFL-CIO

UNUM Life Insurance Company of America

U.S. Bancorp

The Vons Companies, Inc.

Westinghouse Electric Corporation

Wheat, First Securities, Inc.

Wheeling-Pittsburgh Steel Corp.

The Whitman Group

Wisconsin Public Service Corporation

Xerox Corporation

January 24, 1994

521

Chairman Stark. Thank you.
Ms. Shearer.

STATEMENT OF GAIL SHEARER, MANAGER FOR POLICY
ANALYSIS, CONSUMERS UNION

Ms. Shearer. Thank you, Mr. Chairman, and thank you for in-
viting Consumers Union to testify today on the issue of national
health reform legislation.

To analyze the five proposals on the agenda today, we have cre-
ated a checklist of consumer concerns in health reform. None of the
five bills under consideration today, however well-intentioned they
may be, comes close to meeting the needs of consumers.

I plan to focus in my oral statement on three of the issues of
most concern to consumers, universality, catastrophic coverage, and
comprehensive benefits.

No question is more central to the success of health care reform
than the issue of universality. As long as insurance coverage is vol-
untary, there will continue to be horror stories of the suffering of
families who are left out of the system. A recent poll found that 79
percent of those polled favored health care reform that provides
guaranteed coverage for everyone.

The five bills under consideration today will not provide univer-
sal health care protection. Three of the bills, those sponsored by
Representatives Michel, Johnson, and Cooper-Grandy rely on mar-
ket incentives without a mandate or employer contribution to in-
crease access to health insurance and are likely to leave millions
of Americans without insurance. xxx

Two of the bills, those sponsored by Representatives Thomas and
Steams, have an individual mandate, but fail to assure universal-
ity because either subsidies for low-income families are dependent
on nonguaranteed cost savings or because there is no mechanism
for making insurance premiums affordable to all families.

Neither bill calls for an employer contribution. Neither limits the
percent of income that must be spent on premiums. Even families
with modest incomes would have to pay 100 percent of the pre-
mium cost if their employers don't contribute.

Universality is also undercut by the preexisting condition clauses
in these bills. While H.R. 3652 appears to leave preexisting condi-
tion regulations to the States, the other bills allow for the possibil-
ity that people, even children who do not have continuous health
care coverage, could be subject to 6- to 12-month periods of pre-
existing condition restrictions. It is important for everybody to un-
derstand that restricting preexisting condition limitations is not
the same as eliminating them altogether.

Under these four bills, children may not get their needed asthma
medicine and may end up in the emergency room. Diabetics may
not get their needed insulin. People with high blood pressure may
not get the medicine they need. Only a truly universal system, one
that eliminates the need for people to go in and out of health insur-
ance coverage can truly eliminate preexisting condition traps.

The promise of comprehensive benefits will be hollow if families
can buy a catastrophic policy with a high deductible and be consid-
ered insured. A $3,000 deductible does not deliver preventive care

522

to children, insulin to a diabetic amounting to $2,500 or many
other pressing health care needs.

If covered By only a catastrophic policy, many low- and middle-
income families will not get access to comprehensive care. Instead,
they will end up with an unfunded medical savings account and an
insurance policy with a $2,000 or $4,000 deductible. Financial bar-
riers will continue to restrict access to care.

Four of the bills under consideration today, all except for the
Cooper-Grandy bill, undermine the value of health insurance cov-
erage by allowing for catastrophic coverage to be considered health
insurance coverage. Family deductibles in these four bills range
from $2,000 to $4,000. Consumers strongly support comprehensive
benefit packages. They need comprehensive benefits because the
private market has incentives to exclude coverage for your most
likely health care needs.

The cliche that you can't buy fire insurance when the bam is al-
ready burning applies to health insurance. Once a family needs
long-term care, insulin, chemotherapy, insurance companies prefer
not to take your call. Each family has its own unique health profile
and its own set of health care needs.

I would like to close by modifying the popular slogan of the week
regarding crime control. Three strikes and you're out. Strike one,
make participation and employer contribution voluntary. Strike
two, pass the buck on defining benefits to an outside commission.
Strike three, encourage catastrophic policies with a $3,000 deduct-
ible. Any of these crucial mistakes will totally undermine health
care reform and result in gaps in coverage and continuing suffer-
ing, lack of needed health care, and financial barriers to care.

Thank you.

[The prepared statement and attachment follow:]

523

TESTIMONY OF GAIL SHEARER
CONSUMERS UNION

Thank you for inviting Consumers Union' to testify today on the issue of comprehensive
benefits in national health reform legislation. Members of this Subcommittee have worked for
health reform for many years; I don't think you need convincing about the fact that there truly is
a health care crisis in this country. In conjunction with the Campaign for Health Security, we
have recently released reports that show how the health care crisis affects people at both ends of
the age spectrum -- seniors and children. Despite Medicare coverage, seniors suffer in the health
care system because they can't afford prescriptions or the high cost of long-term care. They have
restricted choice of doctors when low Medicare reimbursement rates decrease doctors' willingness
to accept them as patients. They are forced to use their limited funds to pay their hospital
deductible and their 20 percent copayments. They are victimized by a private long-term care
insurance market that puts the profits of the insurance companies above the needs of policyholders.

Americans' children, and their parents, know there's a health care crisis. When 450,000
pregnant women have no health insurance, inadequate prenatal care — and low birth-weight babies
with a variety of ailments ~ are inevitable. Insurance policies regularly exclude the all-important
well-baby and well-child check-ups. They rarely cover immunizations such as measles shots that
can prevent serious chronic illness. Pre-existing condition exclusions and outright denial of
coverage often leave children with serious illnesses uninsured. Children in need of chronic care
including rehabilitation, such as children with cerebral palsy or children recovering from brain
tumors, too often find that their needs are unmet. As families struggle to work their way out of
poverty, they often find that they lose their Medicaid eligibility and the health care that their
children so desperately need.

The nation urgently needs health care reform. But we do not believe that reform that is
voluntary will come close to providing health care security for all. Nor do we believe that the
nation will be able to pay the bill for health reform unless employers are required to make a
substantial contribution toward the cost. Furthermore, legislation that counts you as insured if
your family faces a $4000 deductible is not the type of reform that consumers need.

We believe that health care reform must offer:

universal, quality health care with comprehensive benefits for all U.S. residents ~
regardless of age, income, employment status or health status;

cost contaimnent with a national health care budget and control over wasteful paperwork
and procedures;

fair-share financiag with savings from cost containment as a central funding source and
additional funding obtained on a fair and equitable basis;

public accountability with the structure being shaped by consumers' interests, not
insurance companies' or pharmaceutical companies' profitability, and with consumers well-
represented on all boards overseeing health care; and

consumer choice giving consumers the freedom to choose where they will go for health
care and who will provide it.

The subject of today's hearing is the following five health reform bills:

• The Affordable Health Care Now Act of 1993 (H.R. 3080)
Sponsor: Representative Michel

• Health Equity and Access Reform Today (H.R. 3704)
Sponsor: Representative Thomas

• Health Plan Purchasing Cooperative Act of 1993 (H.R. 3652)
Sponsor: Representative Johnson

• The Managed Competition Act of 1993 (H.R. 3222)
Sponsors: Representatives Cooper and Grandy

• The Consumer Choice Health Security Act (H.R. 3698)
Sponsor: Representative Steams

'Consumers Union is a nonprofit membership organization chartered in 1936 under the laws
of the State of New York to provide consumers with information, education and counsel about
goods, services, health, and personal finance; and to initiate and cooperate with individual and
group efforts to maintain and enhance the quality of life for consumers. Consumers Union's
income is solely derived from the sale of Consumer Reports, its other publications and from
noncommercial contributions, grants and fees. In addition to reports on Consumers Union's own
product testing, Consumer Reports with approximately 5 million paid circulation, regularly,
carries articles on health, product safety, marketplace economics and legislative, judicial and
regulatory actions which affect consumer welfare. Consumers Union's publications carry no
advertising and receive no commercial support.

524

To analyze these proposals, we have created a checklist of consumer concerns in health reform.
The table summarizes the performance of each of the bills against the checklist. Our conclusion
is unambiguous. None of these bills -- however well-intentioned they may be — comes close to
meeting the needs of consumers. While the bills offer some hope for consumers who are presently
excluded from coverage due to pre-existing conditions, all five of these bills are likely to leave
many people without the health care security they desire.

Two bills that are not under consideration today do much better at meeting consumers'
needs. Consumers Union continues to believe that the McDermott/Conyers single payer plan is
the best option. The Administration's Health Security Act would also offer consumers health care
security. Consumers Union has issued an analysis of the Clinton plan. A copy of our
recommendations for how to make it better serve consumers is attached.

The remainder of my testimony describes twelve "consumer checklist" issues and analyzes
how the five bills address each issue.

CONSUMER CHECKLIST: ANALYSIS OF FIVE HEALTH REFORM BILLS

• DOES THE BILL PROVIDE FOR UNIVERSAL COVERAGE?

Description of the issue: No question can be more central to the success of health care
reform than the issue of universality ~ health care coverage for all regardless of age, income,
employment status or health status. We believe that universality is so important, that it should
NOT be dependent on achieving cost savings, and must not be phased-in with a vague timetable.
As long as insurance coverage is voluntary, there will continue to be horror stories of the suffering
of families who are left out of the system — families will continue to face financial hardship of
uncovered health bills, children will not get the health services they need, insurance companies
will continue to game the system to find ways to select the best risks and leave people in need
uncovered.

Americans want universal coverage ~ last weeks's USA Today/CNN/Gallup Poll found
that 79 percent of respondents favor reform that provides guaranteed health care for everyone.

Analysis of the bills:

• H.R, 3080 (Michel). H.R. 3080 does not provide universal coverage. Coverage
under the bill is voluntary. There is neither an employer nor an individual mandate to purchase
insurance, and no proven method to finance coverage for those who cannot afford it. Last year,
the Congressional Budget Office estimated that a predecessor bill (H.R. 5919) would leave 39
million people without coverage in the year 20(X).

Even the insurance reforms in H.R. 3080 (such as guaranteed issue or renewal) that are
designed to assure universal access to coverage (though not universal coverage) do not apply to
all firms, but only to firms with 2 to 50 employees. This leaves individuals and employees of
large firms with the very real prospect of being excluded from coverage.

• H.R. 3704 (Thomas). H.R. 3704 is unlikely to result in universal coverage.
While the bill includes an individual mandate to purchase insurance by the year 2005, there is a
loophole — low-income families would not be required to be insured if there are not adequate
savings to fund subsidies for them. Even families that are required to buy insurance may be
unable to afford it (despite the mandate), because there are no limits on premiums and no required
contribution ft-om employers.

• H.R. 3652 (Johnson). H.R. 3652 aims to assure access to health coverage to
individuals and employees, but not universal coverage. Each state would establish one or more
health plan purchasing cooperatives to enable employees of small companies and individuals to
have access to insurance. H.R. 3652 contains neither an individual nor an employer mandate, and
is likely leave millions of people without insurance because they can not afford to pay the
premiums.

• H.R. 3222 (Cooper and Grandy). H.R. 3222 creates health insurance purchasing
cooperatives through which small businesses and individuals could purchase insurance, possibly
increasing the affordability and availability of insurance to employees of small companies. Some
low-income families who are not now eligible for Medicaid would be eligible for subsidies (for
an unspecified benefit package), thereby increasing the chance that they will have some protection.
Families purchasing individual policies today might receive some reduction in premiums because
of the voluntary purchasing cooperatives.

However, universal coverage is not guaranteed because coverage remains voluntary. The
Congressional Budget Office estimated that H.R. 5936, last year's predecessor bill, would leave
25 million people without insurance in the year 2000. Insurance would remain unaffordable for
millions of American families.

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• H.R. 3698 (Stearns). H.R. 3698 is unlikely to provide universal coverage. While
the bill includes an individual mandate with severe financial penalties for failing to buy insurance
(elimination of personal tax exemption), it does not make clear how families will be able to afford
the coverage.

• DOES THE BILL REQUIRE AN EMPLOYER CONTRIBUTION?

Description of the issue: We believe that a required employer contribution is needed to
pay for a reformed health care system. Private employers will pay premiums totalling $185 billion
in 1994, approximately 20 percent of the nation's health care spending. Without a mandatory
contribution, this figure is very likely to decrease as employers continue the trend of responding
to high costs by cutting health care benefits (for employees and/or dependents). Shifting the entire
premium to individuals, even with subsidization of the premium for the lowest income families,
will put a very steep burden on many families and is likely to result in premiums being
unaffordable by many families. Not only will this leave millions of people without insurance, but
it will mean that their families -- children with diabetes, fathers with high blood pressure,
grandmothers with Alzheimer's disease -- will be subject to pre-existing condition exclusions
(typically for a period of six months) if they are able to afford health care coverage in the future.

Analysis of the bills:

• H.R. 3080 (Michel). Employers are not required to make a contribution toward
employees' premiums. Many (but not all)^ employers are required to offer insurance coverage
to their employees.

• H.R. 3704 (Thomas). Employers are not required to contribute toward the cost
of employees' premiums; they are required only to offer coverage to employees.

• H.R. 3652 (Johnson). H.R. 3652 does not require an employer contribution. It
requires that small employers offer employees a choice of at least three different insurance plans,
"medisave" coverage, a fee-for-service plan, and a managed care plan.

• H.R. 3222 (Cooper and Grandy). Employers are not required to make a
contribution toward employees' premiums, but are only required to offer coverage.

• H.R. 3698 (Stearns). Employers are not required to contribute toward the cost
of employees' premiums. H.R. 3698 shifts insurance decisions from employers to individuals,
by ending employer insurance expense tax exclusions and limiting deductibility of individuals'
insurance premiums. If employers stop contributing to employees' health insurance premiums,
they will be required to add the value of their contributions to employees' wages.

• DOES THE BILL EXPLICITLY DEFINE A COMPREHENSIVE BENEFITS

PACKAGE?

Description of the issue: Consumers want comprehensive benefits in a guaranteed
benefits package. About 90 percent of consumers polled in a Consumers Union/Gallup poll in
April 1993 favored including doctor care, hospitalization, prescription drugs, well-child visits and
immunizations, nursing home care, long-term care at home, mental health treatment, dental care,
prenatal care, and vision care in the benefits package.

Consumers need comprehensive benefits because the private market has incentives to
exclude coverage for your most likely health care needs. The cliche that you can't buy fire
insurance when the bam is already burning applies to health insurance — once a family needs long-
term care, insulin for diabetes, chemotherapy to treat cancer, insurance companies prefer not to
take your call. Each family has its own unique health profile and its own set of health care needs.
As long as there are gaps in coverage, there will be horror stories where the lack of coverage
prevented needed treatment and resulted in poor health outcomes or more expensive treatments.

Congress should not leave the design of the benefits package to a benefits commission.
Passing health reform with an unspecified benefits package is like an arranged marriage -- you
simply don't know what you're getting! Consumers Union would never recommend that a
consumer buy any insurance policy without reading the fine print that could limit coverage.
Passing the buck to a commission does not even give the American taxpayer an opportunity to read
the fine print, and threatens to reduce the health benefits many people have worked hard to attain.

If Congress designs a barebones benefits package, the market response is both predictable
and alarming. Insurance companies that are excluded from participating in health alliances
(probably because they are less efficient and provide less value) will rush in to find their market

'For example, new businesses do not have to offer coverage for two years.

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niche — the supplemental market. All of the problems that have plagued the medigap market for
25 years before Congress enacted the successful reform plan in 1990, will be shifted to the
supplemental market. There will be pre-existing conditions, denied coverage, frivolous variations
in policies. The bottom line will be a multi-tiered health care system.
Analysis of the bills:

• H.R. 3080 (Michel). H.R. 3080 does not define the specific benefit plan. It
allows the National Association of Insurance Commissioners to set actuarial guidelines for
benefits; insurers would be allowed to vary the actual benefits if they stay within the actuarial
guidelines. H.R. 3080 requires that in setting the actuarial target, benefits for MedAccess plans
(which must be offered to small employers) should include only medical, surgical, hospital and
preventive services, but it also states that "no specific procedure or treatment, or classes thereof,
is required to be covered in such a plan, by this Act or through regulations." Therefore, even
basic coverage is not guaranteed in the health plans offered by small employers. In addition,
important benefits such as prescription drugs, mental health care, home care, durable medical
equipment, hospice, and long-term care are missing from the list.

H.R. 3080 further limits coverage by setting an "essential and medically necessary"
standard which is more restrictive than other alternatives which use language such as "medically
necessary or appropriate." Increased insurance company restriction of benefits and intrusion into
the doctor/patient relationship are likely to result.

• H.R. 3704 (Thomas). A Benefits Commission would develop a benefits package.
It could (but would not be required to) include the following categories of benefits: medical and
surgical services, medical equipment, prescription drugs, preventive services, rehabilitation and
home health services related to an acute care episode, services for severe mental illness, substance
abuse services, hospital services, and emergency transportation. The Commission could delete
services from this list. Not included on the list are long-term care services or full mental health
services.

• H.R. 3652 (Johnson). The Secretary of Health and Human Services would
establish a standard benefit package for small employers, but the scope of benefits is not clear.

• H.R. 3222 (Cooper and Grandy). A Health Care Standards Commission would
establish a uniform benefit package that must be offered by accountable health plans. The
Commission's recommended benefit package would be considered for approval by the Congress.
H.R. 3222 requires that the benefits package include "the full range of effective clinical preventive
services." There is no guarantee that the benefits package would be comprehensive, including
coverage for prescription drugs, mental health care, long-term care, or other needed health care.

• H.R. 3698 (Steams). Qualified plans must include physician and hospital services
and prescription drugs, but are not required to include prenatal care, well-child care, mental health
care, or long-term care. The Department of Health and Human Services and state insurance
commissions would develop and enforce coverage standards.

• DOES THE BILL ALLOW FOR A "CATASTROPHIC ONLY" OPTION, WITH

DEDUCTIBLES OF $2000 OR $3000 PER FAMILY?

Description of the issue: The promise of comprehensive benefits will be hollow if
families can buy a catastrophic insurance policy with a $2000 or $3000 deductible, and be
considered "insured." A $3000 deductible does not deliver preventive care to children, $2500
worth of insulin to a diabetic, or many other pressing health care needs.

Many low- and middle-income families will not get access to comprehensive care. Instead,
they will end up with an unfunded Medical Savings Account and a catastrophic policy with a
$2000 or $3000 deductible. Financial barriers to health care will continue for these families.

Analysis of the bills:

• H.R. 3080 (Michel). The bill encourages catastrophic health insurance policies
with individual deductibles of $1800 and family deductibles of $3600.

• H.R. 3704 (Thomas). H.R. 3704 encourages the purchase of a catastrophic
insurance policy with high deductibles.

• H.R. 3652 (Johnson). H.R. 3652 would allow for a "qualified catastrophic health
plan" to be considered insurance coverage. The individual deductible would be $2000, and the
family deductible would be $4000.

• H.R. 3222 (Cooper and Grandy). The bill does not allow for a catastrophic only
coverage to qualify as insurance coverage.

• H.R. 3698 (Steams). H.R. 3698 encourages the purchase of caUstrophic health
insurance with a $1000 deductible for single individuals and $2000 deductible for families.

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• DOES THE BILL REIGN IN HEALTH CARE COSTS THROUGH CONTROLS ON
BOTH THE PUBLIC AND PRIVATE SECTOR?

Description of the issue: Global budgets and premium caps to curb cost growth in both
the public and private sector health spending are essential. This protection should not be sacrificed
to give the failed "free market" cost containment efforts yet another chance to drive up health care
costs. Two other essential ingredients to help curb growing health care costs are banning balance
billing and prohibiting physician self-referral. These are two culprits that have contributed to
today's high costs. In addition, we urge you to oppose granting antitrust exemptions for doctors,
hospitals, and pharmaceutical companies. Legislation should not create new antitrust exemptions
that would allow doctors to collude in negotiating any reimbursement schedules.

Analysis of the bills:

• H.R. 3080 (Michel). H.R. 3080 does not control either public or private health
spending. The Congressional Budget Office estimated that H.R. 5919 (a predecessor bill) would
have virtually no effect either on near-term or far-term health care savings.

• H.R. 3704 (Thomas). H.R. 3704 constrains public spending (for Medicare and
Medicaid) but relies on price competition and niarket forces to constrain private spending. H.R.
3704 encourages the purchase of low cost insurance by setting a cap (equal to lowest half of
cenified plans in an area) on deductibility of individuals' insurance premiums from income (for
income tax purposes). There are no provisions that guarantee cost savings in the private sector.

• H.R. 3652 (Johnson). H.R. 3652 contains no guarantees of health care cost
control in either the private or the public sector. Instead, it relies on increased price competition
that will result from a standardized benefit package, and catastrophic policies that would
discourage utilization of health care services.

• H.R. 3222 (Cooper and Grandy). H.R. 3222 creates tax incentives for employers
to offer low-cost health insurance plans only, and relies on the free market forces to control health
care costs. It restricts future Medicare spending by reducing payments for providers (and reduces
Medicare savings by increasing Part B premiums for high income individuals). H.R. 3222 would
not expand Medicare benefits to include prescription drugs or community based care (though it
includes a "sense of Congress" that these benefits should be expanded in the future if savings
allow). It repeals the Medicaid program, covering people with income below 100 percent of
poverty through purchasing cooperatives (with subsidies for others up to 200 percent of poverty),
and turns the long-term care portion of Medicaid over to the states. Cost savings from the public
sector (Medicare and Medicaid) are likely to be substantial; cost savings from the private sector
are less certain and are by no means guaranteed.

• H.R. 3698 (Stearns). H.R. 3698 does not have global budgets or premium limits,
relying instead on price competition to limit private sector costs. At the same time, it imposes
limits on Medicare and Medicaid spending.

• DOES THE BILL REIGN IN PRESCRIPTION DRUG COSTS?

Description of the issue: Two recently released reports demonstrate the failure of the free
market to lead to consumer-friendly prices for prescription dmgs. A report' by the Senate Special
Committee on Aging staff found that during 1993, prescription dnig prices increased 15.5 times
greater than the overall rale of inflation. A new General Accounting Office report estimated that
on average U.S. consumers pay 60 percent higher prices for identical prescription medications than
do their counterparts in England.

The United States is the only industrialized country that makes no effort to regulate drug
prices, forcing U.S. consumers to pay higher prices and to help pay for research that benefits
citizens of other countries, who pay much lower prices. The Office of Technology Assessment
reported that during the 1980's, pharmaceutical companies on average earned about 15 to 30
percent more profit than was needed to attract adequate investment capital. If drug prices were
a river, they would already be well over flood stage. A critical ingredient of a reformed health
care system is prescription drug pricing that is accountable to consumers, not the bottom line
profitability of the pharmaceutical industry.

Analysis of the bills:

• H.R. 3080 (Michel); H.R. 3704 (Thomas); H.R. 3652 (Johnson); H.R. 3222
(Cooper and Grandy); and H.R. 3698 (Stearns). None of these bills regulates prescription drug

'"A Report on 1993 Pharmaceutical Price Inflation: Drug Prices for Older Americans Still
Increasing Much Faster than Inflation," January 1994.

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prices.

• DOES THE BILL ALLOW FOR FREEDOM OF CHOICE OF DOCTORS?

Description of the issue: Freedom to choose their health care provider is one of the most
highly valued features that consumers seek in the health care system. Consumers want to be able
to continue long-standing relationships with their family doctors, specialists, pediatricians, and
other health care providers. Often, one family will have an array of doctors, making it impossible
to follow them all to one HMO. Consumers want to be assured that if serious illness strikes, they
will have access to the highest quality specialist and specialized treatment centers.

But freedom of choice of provider is a meaningless freedom if the high cost of insurance
premiums render it unaffordable, leaving many families with not coverage at all. In addition, to
the extent thai proposals provide strong financial inducements (that may even make traditional fee-
for-service out of the question) for families to enroll in managed care networks, these families will
have restricted freedom of choice of provider, especially if the bill does not build in (as does the
Health Security Act) a poinl-of-servicc requirement that would allow you to go outside of your
network.

Analysis of the bills:

• H.R. 3080 (Michel). Freedom of choice of provider is limited for many reasons:
millions of uninsured consumers will continue to have extremely limited options because of the
lack of insurance; consumers who are offered (by their employer) one plan such as an HMO will
be constrained to the providers offered by that HMO; consumers who are offered a catastrophic
plan and are unable to afford to contribute to a Medical Savings Account will have limited choice
of provider.

• H.R. 3704 (Thomas). Many families will face reduced freedom of choice of
doctor under H.R. 3704. This results from the cap on deductibility of health insurance premiums.
Limited funds will force many families to enroll in managed care plans, and will force many other
families to buy catastrophic only policies. These families -- as well as those that can't afford
insurance at all (despite the individual mandate) will face restricted choice of providers. There
is no provision to allow enrollees in HMO's to have the opportunity to go outside of the network
for care. H.R. 3704 encourages expansion of managed care contracts for Medicaid, possibly
further restricting the Medicaid population's choice of provider.

• H.R. 3652 (Johnson). H.R. 3652 does not include any provisions (e.g., such as
limitations on tax deductibility) that would provide strong financial incentives for employers to
offer or individuals to purchase a managed care health plan. It is unlikely, therefore, to have a
major impact on consumers' freedom to choose a physician. The bill does not require HMO's to
offer a point-of-service option to consumers.

• H.R. 3222 (Cooper and Grandy). Many families would find their freedom to
choose a health care provider would be reduced if H.R. 3222 were enacted. Employers will face
a stiff tax to the extent that they provide coverage for their employees that exceeds the lowest cost
plan offered in a purchasing cooperative. Self-employed individuals would be able to deduct
premium costs from their income taxes only up to the level of the low-cost health plan. Subsidies
for low-income consumers are based on the least-cost plan in the region. The effect of these
provisions is to provide a very strong incentive (and in the case of employer provided coverage
a necessity) for people to enroll in the lowest cost health plan available. In many cases, the lowest
cost plan will be a Health Maintenance Organization. There is no provision in H.R. 3222 to build
in protections to assure that consumers enrolled in an HMO will have the ability to go outside of
the HMO for care if they need (or choose) to do so.

• H.R. 3698 (Stearns). Changes in tax treatment of premiums are likely to result
in more people being enrolled in managed care, with restricted provider choice. The bill does not
build in a point-of-service requirement that would allow HMO enrollees to go outside their HMO
for care.

• DOES THE BILL EXPA.N'D ACCOUNTABILITY TO CONSUMERS OR IS THE
SYSTE.M ACCOUNTABLE TO INSURANCE OR PHARMACELTICAL
COMPANIES' BOTTOM LINE?

Description of the issue: The recent health care crisis has resulted, at least in part, from
the profit-maximizing strategies of insurance companies to cherry pick the best health care risks
and deny coverage (or iinpose pre-existing condition restrictions) to people who are higher risks.
If a reform proposal allows for a major role for insurance companies, then there are several
critical ingredients needed to provide for accountability to the public. For example, is the

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insurance company (or health plan) allowed to undercut standardization by deciding which
experimental treatment to cover, or by using its own utilization review company or treatment
protocols? Are insurance policyholders able to appeal treatment denials and other complaints in
a timely matter through an appeals process located OUTSIDE of the insurance company to assure
objectivity? Are any medical malpractice "reforms" designed with the objective of decreasing the
incidence of medical malpractice and fairly compensating injured consumers, or are they unfairly
limiting compensation to the most seriously injured victims of physician negligence?*
Analysis of the bills:

• H.R. 3080 (Michel). The health care system remains accountable in large part to
the profitability of insurance and pharmaceutical companies, not consumers. The bill includes
anti-consumer medical malpractice reforms such as capping noneconomic damages that can be
awarded to an injured patient at $250,000. The bill does not provide for expanded consumer
representation in the health care system.

• H.R. 3704 (Thomas). The bill includes several elements that expand accountability
to the public: the Secretary of the Department of Health and Human Services must develop and
publish standards that quality assurance programs must comply with. The federal government
would also develop a national health data system that would provide information about health
plans. States would be responsible for implementing insurance market reforms. The 5 member
Benefits Commission (appointed by the President in consultation with various Leaders of
Congress) would be composed of people from a mix of professions (with geographic balance and
urban/rural balance), but could include physicians and other providers of health care services.
While employer representatives could be included, there is no provision for representation of
consumers on the commission. H.R. 3794 restricts noneconomic damages for victims of medical
malpractice to $250,000.

Overall, H.R. 3704 allows insurance and pharmaceutical company profitability to drive
many of the decisions in the health care marketplace.

• H.R. 3652 (Johnson). The Secretary of Health and Human Services would have
increased regulatory responsibilities, possibly expanding accountability of the health insurance
system to the public. The Boards of Directors of purchasing cooperatives would include a
majority of members that are either small employers or "eligible individuals that participate in the
Cooperative." While there is no requirement that the board include consumer representatives, the
requirement that future board members be elected by small employer members and individual
members could help increase accountability of cooperatives to the public. Unfortunately, the
language regarding advisory committees suggests that these committees should consist of
representatives from health plans, agents, and health care providers, but not consumers. Overall,
this legislation preserves too much control of the health care system in the hands of insurance and
pharmaceutical companies.

H.R. 3542 does not include any provisions that would limit consumers' access to fair
treatment in the medical malpractice system.

• H.R. 3222 (Cooper and Grandy). To the extent that individuals and small
employers are pooled in purchasing alliances, they will have increased bargaining power under
H.R. 3222. Beyond this, however, H.R. 3222 does little to increase accountability of the health
care system to consumers, and includes some provisions that reduce accountability to consumers.
While there is a provision prohibiting members of each health plan purchasing cooperative (HPPC)
from receiving remuneration for services from any accountable health plan, there is no assurance
that the members will be selected based on their ability to represent the public (or employers')
interests. The cooperative is not required to have any consumer members. Bottom-line
profitability of insurance companies and pharmaceutical companies will continue to be a major
driving force of the health care system. In addition, the bill limits medical malpractice awards
on noneconomic damages to $250,000.

• H.R. 3698 (Steams). Profitability of insurance and pharmaceutical companies will
continue to be a driving force of the nation's health care system. Expanded regulatory roles by
the Secretary of the Department of Health and Human Services and the National Association of
Insurance Commissioners could help somewhat, but offer little assurance of increased consumer
participation. The bill limits medical malpractice awards on noneconomic damages to $250,000,
contrary to consumers' interests.

*The Congressional Budget Office has concluded that so-called medical malpractice reforms
such as capping damages for pain and suffering do not produce measurable health care savings.

530

• WILL PREMIUMS BE A nNANCIAL BARRIER TO HEALTH CARE COVERAGE
FOR SOME FAMILIES?

Description of the issue: Our current health care system is financed in the most regressive
way possible ~ through unreimbursed out-of-pocket health expenses and flat premiums that are
most burdensome to low-income families. Because of uncovered ex[>enses and the experience-
rated premium structure, the sicker you are, the more you pay. Consumers Union favors
overhauling the financing of health care, by financing reform based on ability to pay. We prefer
increased payroll taxes and income taxes to premiums. If premiums are to be used, then we favor
subsidies for low-income consumers. We support discounts geared to income that will assure that
all families will have protection without facing burdensome premiums.

Analysis of the bills:

• H.R. 3080 (Michel). Under H.R. 3080, premiums will continue to present
financial barriers to coverage for many families. Many families would be required to pay 100
percent of the cost of an unlimited premium, with no limit on the percentage of family income
paid for premiums. The bill provides very limited protections to small firms (with less than 51
employees); insurers could vary premiums among classes of small businesses by 20 percent, and
could charge small businesses within the same class ISO percent of the base premium for that class
(falling to 135 percent eventually). Small employers would have premium increases limited to 15
percent plus the premium rate increase for a newly-covered small employer within the same class
of business rate.

• H.R. 3704 (Thomas). Premiums could present a financial barrier for many
families. While there are vouchers for low-income families, the availability and amount of those
vouchers are uncertain. Many families would be required to pay 100 percent of the cost of an
unlimited premium, with no limit on the percentage of family income paid for premiums.

• H.R. 3652 (Johnson). Within purchasing cooperatives, premiums would not be
allowed to vary based on health risks, and a risk adjustment mechanism in the bill provides for
adjustments in payments to health plans to assure that people with existing conditions should not
be discriminated against. Premiums could vary by age, gender, and number of family members,
lessening this bill's "community rating." There are no controls on premium increases, no limit
of percent of income that must be spent on premiums, no required employer contribution and no
spelled-out subsidies to help low-income families pay for premiums. As a result, high premiums
are likely to keep many families from being able to purchase health insurance.

• H.R. 3222 (Cooper and Grandy). Premiums will continue to be unaffordable for
many families. Premium subsidies for low-income families will help these families purchase the
least-cost plan (but they are unlikely to be able to able to afford a policy that costs more than the
least-cost policy). The bill does not impose limits on health insurance premiums, even as a
backstop in the event that market forces are unsuccessful in controlling premiums. H.R. 3222
includes no limit on percentage of income that must be spent on premiums. A couple (without
children) earning $20,000 would be ineligible for any subsidy and is unlikely to be able to afford
health insurance premiums. A family of four earning $22,000 would be eligible for a partial
subsidy, but (without a required employer contribution) would be unlikely to afford to buy health
insurance.

• H.R. 3698 (Steams). Tax credits will help ease the burden of premiums, but many
families will face hardship from paying premiunui, especially since employers are not required to
contribute toward premiums. There is no percent of income limit on premiums. Premiums can
continue to increase, free from any government controls.

• WILL OUT-OF-POCKET COSTS SUCH AS DEDUCTIBLES AND COINSURANCE
PRESENT FINANCIAL BARRIERS TO HEALTH CARE?

Description of the issue: It is critical that deductibles and coinsurance not present
financial barriers to care, and that health reform include subsidies for cost-sharing for low-income
consumers and special protections (e.g., waivers of cost-sharing) to provide flexibility to assure
that the inability to come up with a few dollars for a prescription or $10 for a doctor's visit never
be the cause of denied care.

Analysis of the bills:

• H.R. 3080 (Michel). Apart from the possibility of "catastrophic only" coverage,
families would be required to pay "substantial" but unspecified, cost-sharing under the standard
plan. This required cost-sharing could create a financial barrier to care.

• H.R. 3704 (Thomas). Apart from "catastrophic only coverage, families will face
cost-sharing that could present a barrier to care. The Commission will determine the cost-sharing
limits.

531

• H.R. 3652 (Johnson). Under H.R. 3652, deductibles and cost-sharing (without
any subsidies for low-income families) could present a barrier to care.

• H.R. 3222 (Cooper and Grandy). With the exception of preventive care, there
are no limits on deductibles and copayments for covered services. Low-income families would
have some protection because cost-sharing must be "nominal" for low-income families. (The
Commission would determine what cost-sharing would be considered to be "nominal.") Cost-
sharing could, therefore, continue to present financial barriers to health care. The Commission
would set an out-of-pocket limit on expenses, so families with insurance coverage would have
some protection (but families without insurance would have none).

• H.R. 3698 (Stearns). A $5(XX) limit on annual family out-of-pocket expenses
limits each family's total liability. However, cost-sharing limits are unspecified and could prove
burdensome.

• WILL THE BILL CREATE A MULTI-TIER SYSTEM WITH DIFFERENT LEVELS
OF QUALITY AND DIFFERENT LEVELS OF COVERAGE THAT DEPEND ON
INCOME, AGE, EMPLOYMENT, OR HEALTH STATUS?

Description of the issue: The Consumers Union/Gallup poll (April 1993) showed clearly
that Americans want a single, comprehensive health care plan that covers everyone, regardless of
income, age, employment or health status. Will legislation result in the continuation of a separate
program for low-income families, with different provider reimbursement levels and inferior care?
Will benefits be the same regardless of age? Will employed individuals have cadillac coverage,
while unemployed are stuck with barebones coverage (or even no coverage)? Will insurers
continue to charge higher premiums based on pre-existing conditions, pushing the less healthy into
less comprehensive coverage plans?

Analysis of the bills:

• H.R. 3080 (Michel). H.R. 3080 gives states the option of expanding Medicaid by
allowing a buy-in option for persons up to 200 percent of poverty. But this option would be
funded by using existing Medicaid funds (including funds for disproportionate share hospitals,
meaning that there would be a reduction in the quality and level of benefits available to existing
beneficiaries.

• H.R. 3704 (Thomas). H.R. 3704 imposes a cap on Medicaid spending that could
further erode the quality of care (and access to providers) to Medicaid enrolles. Medicare and
Medicaid enroUees might find it difficult to find a doctor to treat them in light of the lack of
uniform payments for providers. Low-income families could find themselves in low cost health
plans with low quality, with insurance premium and health plan quality increasing with income.

• H.R. 3652 (Johnson). A multi-tiered health care system would continue to exist
under H.R. 3652. Large employers would not be part of the purchasing cooperatives. Separate
Medicare and Medicaid programs would continue, with differential provider payments (and
restricted access to care). Low-income families would have limited options when it comes to their
health insurance, and many would find themselves without any coverage at all.

• H.R. 3222 (Cooper and Grandy). The incentives (on employers, the self-
employed, and subsidized families) to enroll in the least cost plan are very strong and could result
in a continued multi-tiered health care system. People with low incomes and with employers who
want to avoid higher taxes will end up with the lowest cost health plan in their region; this is
likely to be the lowest quality health plan, and these families will not have the ability to buy a
higher priced plan. Higher income self-employed individuals, and employees with more generous
employers (or employers who will adjust wages to reflect changes in their health costs) can afford
to pay the full cost (without tax benefits) of higher quality plans. Medicare providers could be
reimbursed at rates below those of non-Medicare providers, resulting in different levels of care
and accessibility for the Medicare population.

• H.R. 3698 (Stearns). The lack of uniform payments (e.g., for Medicaid) and the
financial incentives to buy low-cost (and catastrophic) insurance will perpetuate, and possibly
aggravate, a multi-tiered health care system.

• WILL PRE-EXISTING CONDITION RESTRICTIONS CONTINUE TO LEAVE
SOME PEOPLE UNCOVERED?

Description of the issue: Pre-existing conditions limit the health insurance options for
81 million Americans. Many supporters of a voluntary approach proclaim the fact that problems
of "pre-existing condition' restrictions will be solved by this type of bill. But in fact, pre-existing

532

condition restrictions will continue to exist under reform that is voluntary, and even under bills
with an individual mandate. Without a six-month pre-existing condition restriction, consumers
would be rewarded for avoiding premiums and being uninsured while they are healthy, and then
buying health insurance when they are sick. Yet as long as there are "pre-existing condition"
periods of six months in a bill, children with diabetes, children in need of therapy, pregnant
women, and millions of others who get sick, will have their own horror story to tell about the
gaps in the system.

Analysis of the bills:

• H.R. 3080 (Michel). H.R. 3080 does not eliminate the use of pre-existing
condition clauses. The limits in on pre-existing condition clauses in H.R. 3080 apply only to
group health plans. Individuals with pre-existing health conditions are not protected, and may be
charged significantly higher premiums or denied coverage altogether. Even in group health plans,
a six-month limitation or exclusion is allowed except for newborns covered under the plan and
pregnancy. Anyone (including children) who is not continually insured (and many will fall in and
out of the insurance system, since premiums may be unaffordable) could face six month gaps in
coverage for pre-existing conditions.

• H.R. 3704 (Thomas). H.R. 3704 limits pre-existing condition restrictions to a
period of 6 months, excluding pregnancy from these restrictions. An individual or family that
goes for a period of time without health insurance could face a six-month period with limited
coverage.

• H.R. 3652 (Johuson). While H.R. 3652 includes provisions for modified
community rating, assured renewal (with a few exceptions), and open enrollment, it defers to state
law on matters relating to rating, underwriting, claims handling, sales solicitation, licensing, and
unfair trade practices. It is not clear what the limitations on pre-existing condition restrictions
would be.

• H.R. 3222 (Cooper and Grandy). Consumers will be able to avoid preexisting
condition restrictions under H.R. 3222 only if they have continuous insurance protection ~
something that is unlikely to be the case for millions of American families who are unable to
afford to pay premiums continuously. Accountable health plans are allowed to limit coverage for
preexisting conditions for a period of 6 months for conditions that were diagnosed or treated
within 3 months of the beginning of coverage. The only exceptions are for newborns and pregnant
women.

• H.R. 3698 (Stearns). Consumers (and their families) who have had a break in
their insurance coverage can be subject to pre-existing condition restrictions for as long as one
year.

In sum, the popular slogan of the week regarding crime control "3 strikes and you're out"
can be applied to health care reform:

Strike one: make participation (and employer contribution) voluntary;

Strike two: pass the buck on defining benefits to an outside commission;

Strike three: encourage catastrophic policies with a $3000 deductible.
Any of these crucial mistakes will totally undermine health care reform, and result in gaps in
coverage and continuing suffering, lack of needed health care, and financial barriers to care. We
urge you to avoid these mistakes, and assure that consumers' dream for universal, comprehensive
health care benefits becomes a reality. The five bills under consideration by this Subcommittee,
regrettably, strike out when it comes to meeting the needs of consumers.

25 Ways to Make A Good Plan Even Better

Recommended Changes to the Health Security Act

Consumers Union

1 . Make the benefits provided by health plans truly standard. Require all health plans in
any regional alliance to have the same treatment protocols, including policies toward
experimental treatments.

2. Require the alliances to handle disputes and appeals for denied treatment.

3. Integrate all segments of the population into a single system with a global budget within
five years.

4. If market conditions warrant (an area has too few high-quality, low -cost health plans
available), require alliances to create a Medicare-buy-in type of option that allows
consumers to get coverage outside of the insurance industry.

5. Expand benefits to include nursing home care, expanded home care, more extensive
mental health care, and care for children with congenital problems.

6. Require that alliances limit fee-for-service plans to one in order to achieve administrative
cost savings and avoid risk selection problems.

7. Limit the difference in cost between fee-for-service plans and the average premium plan
so that low- and middle-income consumers can enjoy freedom-of-choice of health care
providers. (This is especially important for migrant workers.)

8. Protect low-income consumers by reducing the portion of income that must be spent on
premiums to 2 percent, by expanding the premium discount for low-income consumers,
and by reducing or eliminating the cost-sharing required of low-income persons.

9. Standardize the supplemental benefits market.

10. Provide the National Health Board with authority to regulate - and roll back -
prescription drug prices.

11. Give the National Health Board the authority to set minimum quality and access
requirements for health plans.

12. Eliminate the antitrust exemption that allows doctors to rig bids.

13. Modify the medical malpractice reforms so that they serve consumers' interests.

14. Establish a national guaranty fund for health plans. This fund would pay outstanding
policyholder claims in the event of company insolvency.

15. Regulate health plan finances to protect consumers. Specifically, expand federal capital
and surplus standards to cover all health plans and health alliances; health plan assets
should be separate from the rest of a company's assets. Antitrust laws should be
extended and exemptions should be limited to prevent companies from using predatory
pricing practices in non-health portion of business to bolster health plan business.

16. Expand counseling programs (that now serve senior citizens) so that all consumers have
access to an objective source of advice about selection of health plans.

17. Improve the regulation of the private long-term care insurance market.

Exempt low-income senior citizens (those earning up to about 150 percent of the poverty
line) from the increase in the Medicare Part B premium.

19. Provide for nationwide risk adjustment, so that the costs associated with high-risk

534

populations are spread fairly. This is the only way that small groups of high-risk
populations (who may be grouped within one regional alliance) will not pay
disproportionately higher premiums. In addition to health problems, risk adjustment
should include non-health related factors that can restrict access to health care, such as
transportation, translation, and other related services.

20. Adjust the subsidy for early retirees so that those with incomes substantially above the
poverty level pay their fair share of health care costs.

21. Ban hospital indemnity and dread disease policies.

22. Ban variations on the standard benefit package.

23. Require insurance companies to have legitimate consumer representation on boards;
expose insurance company executives' salaries to public scrutiny.

24. The plan should be consistent in how it deals with supplemental insurance policies
designed to cover cost-sharing, or the out-of-pocket expenses a consumer would face.
Either this coverage should be banned across the board, or it should be allowed under
both low cost-sharing plans and high cost-sharing plans.

25. Impose an income tax surtax, a tax on new hospital revenues that are created by reduced
spending for uncompensated care, and increase the tax on corporate alliances to pay for
additional benefits and subsidies.

535

FIVE/FIVE PLAN FOR HEALTH CARE REFORM

CONSUMERS UNION

FEBRUARY 4, 1994

Congress should fight hard against special interests to preserve these important provisions of the
Health Security Act:

1 . Universal health care must be a reality within three or four years.

2. Cost containment through limits on public and private spending must be kept.

3. Employers must be required to contribute to the cost of their employees' health care.

4. Keep the benefits package comprehensive.

5. Maintain the state single payer option.

Congress should improve the Health Security Act to make it better serve the needs of
consumers:

1. Protect low- and middle- income consumers from facing financial barriers to care or
burdensome premiums.

2. Increase accountability to consumers by prohibiting insurance companies from varying
the benefits offered within each alliance, by shifting the appeals process outside the
insurance company, and by reducing the ability of insurance companies to deny coverage.

3. Make freedom-of-choice of provider a real option for people of all income levels by
requiring all health alliances to offer a fee-for-service plan that costs little more than the
average cost plan.

4. Include the blueprint for phasing-in nursing home benefits and expanded community care
benefits.

5. Give the National Health Board the authority to regulate prescription drug prices that
apply to all Americans.

536

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537

Chairman Stark. Thank you.
Ms. Bailey.

STATEMENT OF PAMELA G. BAILEY, PRESmENT,
HEALTHCARE LEADERSHIP COUNCIL

Ms. Bailey. Thank you, Mr. Chairman. It is a pleasure to be
here at this concluding hearing today.

I am here as a representative of the Healthcare Leadership
Council, an organization of some 50 chief executives representing
the 5 sectors of the health care system.

The HLC was created over 5 years ago for the sole purpose of
developing and advocating solutions to our health care crisis, but
our members do more than talk about reform. They have been in
the forefront of the marketplace revolution that is now the hall-
mark of the American health care system.

What we have seen quite dramatically over these past 5 years is
that the delivery system is constantly renewing itself in response
to market forces, consumer demand, and innovation. Examples in-
clude the development of managed care, a focus among our manu-
facturing members on developing only cost-effective technologies, a
recognition by our insurance members that their future is not in
iust processing claims and managing risk but in helping to manage
nealth care, and a substantial deceleration in health care costs in
response to probably the most important force over this past dec-
ade, the demand by employers for value in the health care provided
to their employees.

We urge that legislative reform build on these market forces, not
replace them with government mandates, price controls and regula-
tions. The challenge, then, is how to design reforms that can con-
tain costs, can lead us to universal coverage without jeopardizing
the high quality, cost consciousness, and innovation that character-
izes our system at its best.

The principles and key elements of the bills before this commit-
tee today are all consistent with HLC principles for health care re-
form. Specifically, I would like to note the provisions that we sup-
port that can enable us to work toward universal coverage without
employer mandates.

By eliminating the barriers based on employment, on income,
and on health status that currently keep 38 million Americans
from having coverage, we see that we can move toward eliminating
a significant majority of the uninsured Americans. It is our rec-
ommendation that we take a look at that point at what is left and
target solutions specifically to that population, so that we can have
universal coverage.

The goal of cost containment should be to get the most value out
of every health care dollar spent. This means increasing efficiency
by reducing administrative costs, eliminating unnecessary proce-
dures, reforming the malpractice system, and revising antitrust
regulations. In short, we advocate using market competition, not
price controls, to contain costs.

Proposals to cap tax deductions would give consumers incentives
to choose the highest quality, lowest-cost health plans, and we rec-
ommend that they be part of any market reform plan.

538

Finally, as we debate approaches to reform, it is important that
we keep in mind the many areas of agreement. Unlike when we in
our organization first started talking about health care reform 5
years ago, the debate is no longer over whether we need reform,
nor is it even over the goals of reform. In fact, we note a significant
body of agreement on measures that can get all Americans covered,
can keep them covered, and can contain costs.

These areas of agreement include insurance reforms, definition of
a basic benefit package, government subsidies, administrative re-
form, consumer information, malpractice reform, tax equity re-
forms, and some sort of small business purchasing pools.

It is our hope that as the committee moves forward and we par-
ticipate in this process that we not lose sight of where we have
made significant progress and agreement and that we can move
forward to complete this process before the end of this year.

Thank you.

[The prepared statement follows:]

539

TESTIMONY OF PAMELA G. BAILEY
HEALTHCARE LEADERSHIP COUNCIL

Good morning. My name is Pamela Bailey. I am the president of the Healthcare
Leadership Council. The HLC is a group of nearly 50 CEOs from the health care industry. It
originated almost five years ago from discussions among its founding members after the 1988
Presidential election. They realized then a crisis was facing our health care system, that as a
nation we weren't prepared to face up to that crisis and that as leaders in the industry they had a
responsibility to provide leadership toward reform. And so, the HLC was created with the sole
purpose of developing and advocating action on consensus solutions to health care.

Our members are not protectors of the status quo. Quite the opposite. They are the risk
takers, the entrepreneurs, the ones who seek change, who shake up the status quo. Whether it's
consolidation of hospitals and the creation of doctor and hospital networks, the targeting of R&D
and manufacturing on new cost-efiFective technology, or the recognition by our insurance
members that the future for them was not to merely process claims or manage risk, but to manage
health care — our members have been in the forefront of the market place revolution that is now
the hallmark of the best of American health care. Just as importantly, our members are committed
to working for legislative reforms.

We applaud President Clinton's commitment to health care reform and his efiForts to
initiate a natioiul discussion. Unlike five years ago, the debate this year is no longer over the
need for reform, or even the goals. On both these points all Americans agree. Rather, the debate
will now focus on how to achieve our shared vision without compromising the quality, choice and
innovation that characterizes our nation's health care system at its best.

A REVOLUTION IN PROGRESS

Reform of the health care system is already in progress. In recent decades, there has been
a revolution in the health care system. Treatments that once were cutting edge, like coronary
bypass surgery, have become commonplace. High tech medical devices like diagnostic imaging
and cardiac pacemakers are now widely available. And more investment in research and
development has produced a wealth of new life-saving drugs. These advances have made our
population healthier. Infant mortality is down and life-expectancy is up. While many U.S.
industries have been hurt by world-wide competition, our health care industry has thrived. Our
investment in new technologies and drugs leads the world. People from across the globe come to
the United States to receive the highest quality care. In this respect, our health care system is the
envy of the world. It is proof that our system does more for its patients.

There has also been a radical change in the way we buy health care coverage. Responding
to market place signals, more and more of us are covered through managed care. A soon-to-be-
released report by the National Committee for Quality Health Care finds that 95 percent of
employed workers were participating in some kind of managed care plan by 1990.

This move toward managed care has helped to contain costs. For example, average
premium increases from HMOs declined from 10.6 percent in 1992 to 8. 1 percent in 1993 and are
expected to drop to 5.6 percent this year. Some HLC members even report negative premium
increases in the past year. Consistent with these reports, a U.S. Chamber of Commerce survey of
1,100 corporations found that the average employer's costs for medical and dental coverage
decreased between 1991 and 1992 — from $2,81 1 to $2,754 a worker. Illustrating managed
care's ability to minimize uimecessary care, HMOs alone have reduced hospital admissions and
total hospital days anywhere from 20 percent to 30 percent. Yet savings from these reductions
outweigh the costs of increased outpatient visits.

Recent studies demonstrate the market is responding in other ways to demands for lower
costs. Demands by employers and other payers for lower prices have caused increases in health
care prices to drop from 9.6 percent in 1990 to 7.9 percent in 1991 to 6.6 percent in 1992.
According to the Labor Department, health care prices increased only 5.5 percent between
November 1992 and November 1993. This is the smallest increase since 1973 - when health care

540

was subject to wage and price controls. This cost containment is not due to the fear of reform. It
is part of a steady and on-going trend toward using and providing care more efiBciently.

These reforms were initiated even before the impetus of health care reform legislation.
They have been driven by employers, who pay most of the nation's private health care bill.
Employers are turning to providers who offer low-cost, high-quality care to their employees. And
providers are responding by becoming more efiBcient and innovative. The market is proving it
can reform itself National reform should build on this success, not short circuit it.

THE DELIVERY SYSTEM

It's important to remember there are two aspects to the health care system: the delivery
system and the financing system. The issues that need to be addressed in the delivery system are
access and quality of care. The issues driving the financing crisis are ones of coverage and cost;
we must make sure everybody can get the quality care they need at a reasonable price.

Our delivery system is undoubtedly the best in the world. It is constantly renewing itself in
response to market forces, consumer demand and innovation. Policy makers may find that the
delivery of health care is changing so fast that they will soon be trying to reform a system that no
longer exists in many parts of the United States.

A new National Committee for Quality Health Care report by Lewin-VHI points out that
both technological advances and changes in reimbursement have lead to an increase in more cost-
effective outpatient services. Investment in R&D, for example, has produced cost-saving
therapies like laser surgery for cataract removal. This technological advance has saved money by
shifting the procedure fi'om an inpatient to an outpatient setting. The report also shows how
hospitals were able to respond to a shortage of registered nurses that began in the late 1970s.
They increased the supply and lowered the demand for registered nurses by raising the salaries of
RNs and relieving them of certain tasks like making beds and delivering meals. These are just two
examples of how the delivery system is effectively responding to market demand. The National
Committee will release its annual index on health care trends tomorrow.

Reform legislation must not interfere with these market mechanisms. We fear that
premium caps and government regulations may have the unintended consequence of lower
investment in R&D. As a resuh, innovative new procedures like cataract laser surgery may not be
developed. We are also concerned that premium caps would prevent hospitals fi'om responding
appropriately to future nursing shortages. Imposing price controls on the health care industry
could force hospitals and other health care employers to freeze wages. But by imposing price
controls exclusively on the health care industry, skilled health care workers would be given an
incentive to leave for better-paying jobs in other industries. Even more important, price controls
would fi'eeze in place the status quo.

Instead, reform should build on what is working by providing incentives for higher quality
and greater choice and innovation. By arming consumers with needed information, providers
would have to compete on objective standards of quality.

THE FINANCING SYSTEM

Yet the financing system does require swift legislative reform. The incentives in the
current system need to be reversed. Today, insurers too often seek to minimize risk by excluding
high-risk populations. Patients and providers have little incentive to be cost conscious because
the insurance company will pick up the tab. And often they don't know the true cost of their
health care choices. This system results in the exclusion of many from health coverage and an
inflation in health care costs. This must be changed now.

Insurers must be prohibited from excluding people with pre-existing conditions and
dropping people when they become sick or change jobs. Providers and consumers must become
aware of the true cost of the health care services they dispense and receive. The only way to
contain costs without risking quality is to give consumers an incentive to choose the lowest-cost,
highest-quality health plan and to force providers to compete on the basis on price and quality.

541

Congress must pass and the President must sign a bill that contains health care costs and
makes coverage afifordable and accessible to all -- but without jeopardizing the high-quality,
choice and innovation that Americans have come to expect from their health care system. Reform
should build on the positive market reforms we are now witnessing — not replace them with
government regulations and price controls.

PRINCIPLES OF REFORM

The Healthcare Leadership Council believes there are five fundamental principles of
reform. They are:

Access: Everyone must have available to them the right treatments and facilities ■
where and when they need them.

Coverage: Everyone should have the ability to pay for their health care services.
No American should ever lose sleep over the possibility their coverage may be
dropped if they become sick or change jobs.

Choice: People should have the option to choose the kind of coverage and the
kind of providers that n.eet their particular needs.

Quality: Everyone should have care and treatment by the best health care
professionals - selected on the basis of need, not cost.

Innovation: We believe developing innovative new cost-eflFective technologies and
treatments is critical to increasing the quality of care and to reducing costs.

ACCESS VS. COVERAGE

The distinction between access and coverage is an important one. Access means having
quality care available at an affordable price. Coverage means you have insurance and the peace of
mind of knowing you can pay for healthcare. The goal ofreform should be to promote both. In
the idealized health care system, they go hand in hand. Coverage is meaningless if you cannot find
a doctor to treat you or if the quality of care is poor. Similarly, access to the best health care
system in the world doesnt offer much if you cannot afford it.

We must make sure that health care reform doesnt sacrifice one for the other. The
President has said he wants reform to guarantee everyone private health insurance that can never
be taken away. In order to achieve this goal without a broad-based tax, the Clinton plan relies on
price controls and government regulations. But if these controls and regulations put at risk our
high quality care, universal coverage would be a Pyrrhic victory at best. In too many places,
particularly inner city and rural areas, people who have coverage are still unable to see a doctor.
What good is insurance coverage if there are inadequate facilities in the community or if there are
long waits for treatment?

Reform should make coverage affordable and accessible to everyone. The first step
should be to remove the barriers to coverage - health status, income and employment ~ that are
responsible for 38 million Americans being uninsured. The employment barrier could be
eliminated by creating purchasing pools for small businesses and individuals, giving them the same
purchasing power large businesses now enjoy. No employer could be refiised access to an
affordable plan. Also, coverage could be made portable and guaranteed renewable and include
some form of community rating. The income barrier could be eliminated by providing subsidies
for low-income individuals on a sliding scale basis. And health barriers could be eliminated by
preventing insurers from denying coverage to those with pre-existing conditions, or dropping
coverage when someone files a claim. All applicants could be guaranteed an affordable health
policy.

542

Eliminating these barriers would provide coverage to a significant majority of the
uninsured. No American would be without coverage because of income, health or employment.
The remaining uninsured could then be identified and targeted solutions developed to provide
them coverage. This could be done by 1998 - the same timetable set by the President. Such a
strategy would fix the 1 S percent of the system that is broken without totally disrupting the 85
pCTcent that works well.

We do not believe an employer mandate combined with regulatory alliances is a good
solution. It would allow government to dictate how businesses and individuals spend their
resources and it could force businesses with small profit margins to fi'eeze wages or lay-off
workers. A Lewin-VHI study for the HLC found that an employer mandate is a clumsy way of
providing universal coverage because it would provide subsidies to companies that already are
able to afford coverage on their own.

INCREASING THE VALUE OF THE HEALTH CARE DOLLAR

Cost containment is vitally important. For too many people, health care is becoming too
expensive. It is depleting family savings, driving up business expenses and increasing government
budget deficits. But cost containment is ultimately about value. It is inaccurate for some to
suggest we are paying more and more for less and less care. We are paying more and more for
greater and greater care.

The question is not just how much we pay but whether we are getting our money's worth.
The United States spends a lot on health care — 14 percent of GDP. But would the American
people rather spend half that amount if the quality of care was similarly cut in half? How much is
too much? And how quickly can we reduce our national health spending without negatively
impacting quality?

The goal of cost-containment should be to get the most value out of every health care
dollar spent. This means increasing efficiency by reducing administrative costs, eliminating
uimecessary procedures, reforming the malpractice system and revising anti-trust regulations.

LOOKING AT THE ALTERNATIVES

We believe all of these reform proposals — Cooper/Grandy's "Managed Competition Act
of 1993" (HR 3222), Chafee/Thomas's "Health Equity & Access Reform Today Act" (HR 3704),
Nickles/Steams's "Consumer Choice Health Security Act" (HR 3698), Michel/Lott's "Affordable
Health Care Now Act" (HR 3080) and Ms. Johnson's "Health Plan Purchasing Cooperative Act"
(HR 36S2) — contain provisions consistent with the principles of the Healthcare Leadership
Council.

The Healthcare Leadership Council advocates insurance reforms. All these proposals
would implement insurance reforms to make coverage portable and to prohibit insurers from
denying coverage to those with pre-existing conditions or dropping coverage when you become
sick ~ making them compete in the market based on service, not risk selection.

The HLC advocates using market competition, not government regulations, to contain
costs. Cooper/Grandy and Chafee/Thomas would contain costs by providing tax deductions only
for the most cost-effective health plans, which would give consumers an incentive to choose the
highest-quality, lowest-cost health plan. Competing for consumers would give providers
incentives to operate more efficiently. Nickles/Steams would replace current tax deductions with
tax credits, thereby allowing consumers to shop for the most cost-effective health plans

The HLC endorses small group purchasing pools. Most of these bills acknowledge the
merits of purchasing groups. They also believe participation in purchasing pools should be
restricted to those whom it was originally intended ~ small businesses and individuals.
Purchasing pools would give small businesses and individuals the same purchasing power larger
businesses now enjoy. They also would cut down on administrative costs, which can be 35

543

percent more for small businesses and individuals, without burdening big business with
unnecessary solutions. The Cooper/Grandy bill would require small businesses (those with fewer
than 100 employees) to join purchasing cooperatives while Chafee/Thomas would make
participation voluntary. Michel/Lott would set standards and incentives for group purchasing.

The Healthcare Leadership Council believes health care coverage can be affordable and
accessible to all without an employer mandate. All these proposals seek universal access to
coverage without using an employer mandate. They use a combination of subsidies or tax credits,
insurance reforms and purchasing groups. Cooper/Grandy would immediately eliminate barriers
to coverage and would achieve universal coverage by 1998 without a mandate. HR 3222 would
require businesses to offer coverage to their employees but not necessarily pay for it.
Chafee/Thomas would use an individual mandate to guarantee coverage, but subsidies would be
phased in by 2005 and would be dependent upon achieving projected savings. Nickles/Steams,
meanwhile, would require everyone to purchase at least catastrophic coverage. Chafee/Thomas,
Nickles/Steams and Michel/Lott would all offer Medical Savings Accounts.

AREAS OF CONSENSUS

A look at all the reform proposals on the table reveals a remarkable degree of agreement.
Everyone agrees health costs need to be contained and access to care expanded. There is also
agreement on many of the ways of achieving these goals. Virtually all plans advocate insurance
reforms, a basic benefits package, purchasing pools, consumer information, administrative and
malpractice reform, subsidies and changes in the tax code.

As we debate the differences in these proposals, we must keep in mind there are more
areas of agreement than disagreement. The HLC believes a bipartisan consensus can be forged.
It is essential for successful passage and implementation of reform that support comes from both
parties. We hope members of Congress will be able to tell their constituents next fall that they
passed legislation that makes health care affordable and accessible to all while maintaining the
quality, choice and innovation people expect.

Thank you for giving me the opportunity to speak wath you.

544

Chairman Stark. Thank you.
Mr. Knettel, proceed.

STATEMENT OF ANTHONY J. KNETTEL, DIRECTOR, HEALTH
POLICY THE ERISA INDUSTRY COMMITTEE

Mr. Knettel. Thank you, Mr. Chairman. I am testifying today
on behalf of the ERISA Industry Committee, which is an associa-
tion of 120 of the country's largest employers.

In the interest of time, I will skip to page 2 of my statement if
you are interested in following along with the written text.

ERIC's board of directors recently took several days to analyze
in depth each of the following bills: H.R. 3080, H.R. 3222, H.R.
3600 which I will occasionally refer to for comparative purposes,
H.R. 3698, and H.R. 3704.

Chairman Stark. Do for me what I do when I read Consumer
Reports auto recommendation. I get right to the last page, so I
don't have to read about all those cheap American cars, and I find
out which good foreign car they are going to recommend. Which
one of these plans did you pick?

Mr. Knettel. Frankly, Mr. Chairman, the board concluded that
none of the bills adequately address the needs of major employers.

Chairman Stark. OK. Well, go ahead.

Mr. Knettel. I think the important information is in the details
of what particular pieces of the bills posed problems.

I would like to very briefly summarize both the positive aspects
that the board found in each of these bills, as well as some of the
troubling aspects.

For example, the Michel-Gingrich bill recognizes a need to ad-
dress a number of specific factors that contribute to the high cost
of health care. It preempts State benefit mandates, antimanaged
care laws, antiutilization review laws, and so forth.

The Cooper-Grandy bill recognizes the need to improve the qual-
ity and the cost effectiveness of health care delivery, and it at-
tempts to do so by forming a marketplace where providers can be
held accountable for their performance.

The administration bill recognizes that employers who currently
provide voluntary coverage to employees, dependents, and early re-
tirees bear a disproportionate share of national health care costs.

The Steams bill recognizes that the health care system can never
operate at optimal efficiency unless everyone is in the system.

The Thomas bill recognizes the need for employers to maintain
control of the health care they purchase on behalf of employees and
dependents.

So each of these bills, taken together, make important contribu-
tions to the debate and together include many, though not all of
what we believe are the necessary elements for successful reform.

On the other hand, each bill has clear deficits as well, and I
would like to very briefly summarize some of those for you. All of
the bills examined, including the administration bill, lacked in one
or more areas uniform Federal rules governing the organization
and operation of the reformed health care marketplace. Uniformity
is essential to ensure consistent health care quality and cost effec-
tiveness throughout the system. In addition. Federal preemption of
inconsistent State laws attempting to regulate employer-sponsored

545

benefit plans is essential for major employers to offer and maintain
their health plans. This was of particular concern under the
Steams bill, for example, which would subject all employer-spon-
sored health plans to 50 different State insurance laws.

Second, the Cooper-Grandy bill, like the administration bill,
would impose a specific combination of community rating, open en-
rollment, and prospective individual risk adjustment on the private
marketplace. ERIC is not confident that either of these bills' ver-
sions of managed competition can be fully implemented without
causing excessive instability in the reformed marketplace and an
unacceptable number of insolvencies among both health plans and
purchasing groups.

Third, under several of the proposals, employers would not be
able to exert a sufficient degree of control over their financial liabil-
ities, or the quality and cost effectiveness of health care they fi-
nance. Major employers in this country are in the vanguard of both
effective cost containment and the encouragement of high-quality,
cost-effective care, and to the degree they lose control over the care
they finance, we are turning our backs on some of the most effec-
tive innovators within the health care system.

This was a particular concern under the administration bill,
which gives States both the option to implement single-payer sys-
tems as well as the option to form regional alliances as State agen-
cies.

Finally, to conclude, all of the bills institutionalize in one form
or another cost-shifting in a number of areas, and the ERIC board
was particularly concerned that each bill failed to adequately en-
sure that Medicare would purchase health care on the basis of the
same market principles that would be applicable to private pur-
chasers. It simply doesn't make sense to have one portion of the
marketplace purchasing care in one way and having the rest of the
marketplace purchasing it differently with a different set of incen-
tives.

Chairman Stark. So you are suggesting I take cost controls off
Medicare?

Mr. Knettel. I am suggesting that what we need is an inte-
grated health care system with uniform incentives throughout the
system.

Chairman Stark. Should there be cost controls or not cost con-
trols? That is their choice. We have cost controls on Medicare. You
put us all in the same system, we have a choice, either something
besides cost controls, which then takes the wraps off Medicare, or
put cost controls on everybody. There are only two sides to that
coin.

Mr. Knettkl. Mr. Chairman, I think there is a third alternative
which is to move Medicare in the direction of greater utilization of
capitated payments which puts

Chairman Stark. I am not arguing with you. I am just saying
right now 90 percent of Medicare is under cost controls on hospitals
and doctors. It is a matter of your choice which one of all these
plans you would prefer, but I happen to agree with you that we
ought to have the same system or you have some problem of cost-
shifting. You want to stop cost-shifting.

546

Now, I am asking you. You have a choice. I am giving you the
choice, Mr. Knettel. Take cost controls off Medicare, and then, if
you are wrong, your payroll tax is going to go through the roof,
which is all right with me because I just raise it and you guys pay
it. We will just put more on the employer than the employee, but
we will do it. Or, we put everybody under some kind of a Medicare-
like system, and we control cost of the private and public side. You
don't have any other choice.

You want to bet the store that managed competition will hold
your payroll tax where it is? Be careful.

Mr. Knettel. I think managed competition as defined in the
Cooper bill or in the administration bill would not be a bet that our
members would be willing to take; but they believe there are other
forms of market competition, the ones that they engage in in their
voluntary purchasing groups

Chairman Stark. You go back. I like that your board is willing
to accept whatever they want to accept, take the controls off Medi-
care and we pay what the market demands under whatever kind
of structure you want to put on the private market, and your mem-
bers will pay the increased payroll tax necessary to fund the enti-
tlement cost to Medicare. I will wait for that day.

Just think it over, and send me your board's thoughts.

Mr. Knettel. Well, the members of the board have thought
about it, and they believe that part of the problem that Medicare
has had in containing its cost is the structure of the benefit and
the fee-for-service payment system, to begin with. So, if we don't
change that benefit structure within the program, I think there is
a very real problem. But I think the problem is the result not just
of the payment methodology or the cost controls, I think the prob-
lem is the structure of the underlying benefit.

Chairman Stark. You have got a choice. I am just saying you
have one shot at the apple here, and I am willing to play that game
with you. I think it is highly risky, but I am secure in the fact that
your board would recognize the dangers in that.

Mr. Knettel. They also recognize the dangers of the current sys-
tem where

Chairman Stark. Good.

Mr. Knettel [continuing]. Tens of billions of dollars have been
shifted to them on an annual basis.

Chairman STARK. Just giving you the choice, there is no middle
ground if you are talking about Medicare. Now, you can do any-
thing you want on the private side, but, frankly, I don't care. You
can triple the cost of insurance to General Motors. It doesn't bother
me one iota, but you be careful. When I am spending the taxpayers'
money, I am not so willing to do that.

[The prepared statement follows:]

547

Written Statement for the Hearing Record

Subcommittee on Health, Committee on Ways and Means

U.S. House of Representatives

February 10, 1994

Anthony J. Knettel, Director, HeaUh PoHcy
on behalf of The ERISA Industry Committee

Reforming the Health Care System:
ERIC'S Analysis of Reform Proposals

The ERISA Industry Committee (ERIC)' submits to the Subcommittee on
Heahh, Committee on Ways & Means, the following testimony regarding the impact of
selected health care reform proposals on employer-sponsored health benefit plans.

Background

ERIC believes that improving the quality, cost-effectiveness, and accessibility of
the current health care system in our country demands focused structural and financial
reforms to address its deficiencies. Health care providers must be accountable to third-
party payers and consumers for both the quality of their performance and the cost-
effectiveness of the services provided. Reform must produce greater value for health
care expenditures by improving the consistency and quality of care while managing cost.

Failure to reduce expenditures in real terms jeopardizes the affordabihty of health
care coverage, reduces the number of people covered, and undermines the productivity
and competitiveness of American businesses. The success or failure of reform proposals
cannot be measured solely in terms of federal budget savings. Any measure of success
or failure must take into account the impact of reform on the quality, as well as the
cost-effectiveness, of health care delivery in both the private and public sectors. It must
also take into account the impact of reform on those who pay for it, those who consume
it, and those who provide health care services.

ERIC consistently has articulated a broad consensus among major employers that
the keys to making health care affordable for all Americans are, first, a commitment to
improve the way health care is organized and delivered with respect to both quality and
cost, and second, a commitment to eliminate the cost-shifting that plagues current health
care financing. ERIC's March 1993 Policy Statement on Comprehensive Health Care
System Reform^ states that significant reform of the current health care system is needed
and should be consistent with these general principles:

• A public-private partnership encompassing payers, providers and consumers to
design and implement reform;

ERIC is a non-profit employer association committed to the advancement of the employee retirement, health,
and welfare benefit plans of America's major employers. ERIC represents the employee benefits interests of more
than 120 of the nation's largest employers. As sponsors of health, disability, pension, savings, life insurance, and
other welfare benefit plans directly covering approximately 25 million plan participants and beneficiaries, ERICs
members have a strong interest in the success and expansion of the employee benefit plan system in the private
sector. All of ERIC's members provide comprehensive health care coverage to their employees. Together, they
provide coverage to about 10 percent of the U.S. population.

Copies of ERICs Policy Slalemeni can be obtained by writing to The ERISA Industry Committee, 1400 L Street
N.W., Suite 350, Washington DC 20005 or calling 202-789-1400.

548

• A comprehensive strategy for making the health care system coherent, efficient and
cost effective;

• An opportunity for employers to voluntarily continue to be the primary source of
health care coverage for their employees and their employees' dependents; and

• Exclusive federal authority over a national health care policy.

The following ERIC analysis is based on these four general principles of reform,
as well as the specific market-based reforms that are articulated in the Policy Statement.

Analysis

1. Bills Reviewed:

ERIC's Board of Directors has reviewed the following proposals, which are
analyzed in this statement:

• the Michel-Gingrich bill (H.R.3080);

• the Cooper-Grandy and Breaux-Durenberger bills (H.R.3222 and S.1579,
respectively);

• the Administration bill (H.R.3600/S.1757);

• the Nickles and Stearns bills (S.1743 and H.R.3698, respectively); and

• the Chafee and Thomas bills (S.1770 and H.R.3704, respectively).

ERIC continues to oppose single-payer health care reform proposals, whether
they would establish a unified national single-payer system or individual state-by-state
single-payer systems. ERIC believes that employers must retain control over any health
benefits they help finance in order to manage their financial liabilities. In addition,
ERIC believes that single-payer systems, in practice, are too inflexible and bureaucratic
to fulfill the commitment to improve the quality and cost-effectiveness of health care
delivery that is embodied in the health plans sponsored by major employers. Therefore,
ERIC'S analysis did not include the McDermott bill (H.R.1200) or other similar bills
that have been introduced during the 103rd Congress.

2. General Assessment:

Each of the bills reviewed recognizes, either explicitly or implicitly, one or more
of the principles and strategies for reform articulated in ERIC's Policy Statement. For
example:

• The Michel-Gingrich bill recognizes the need to address a number of specific
factors contributing to the high cost of health care. It preempts state mandated
benefit, anti-managed care and anti-utilization review laws, and it includes small
group insurance market reforms and medical malpractice reforms.

• The Cooper-Grandy I Breaux-Durenberger bills recognize the need to improve the
quality and cost-effectiveness of health care delivery. They seek to create a
marketplace where health care providers can be held accountable for their
performance with respect to both quality and cost. Under the current health care
system, where health care is often financed on a piece-work, fee-for-service basis,
there is insufficient accountability.

• The Administration bill recognizes that employers that currently provide voluntary
coverage to employees, dependents and early retirees, or that voluntarily provide
prescription drug coverage to Medicare-eligible retirees, bear a disproportionate
share of national health care costs. It seeks to distribute the burden of financing
health care more broadly across the economy and to achieve universal coverage.

549

• The NickleslSteams bills recognize that the health care system can never operate
at optimal efficiency unless all individuals participate in the system. They impose
a significant tax penalty on taxpayers who do not obtain health insurance.

• The Cfiafee/Tliomas bills recognize the need for employers to maintain control
over the health care they purchase on behalf of employees and dependents. They
provide for voluntary private group purchasing arrangements, building on the
important contributions already being made by employer-led coalitions that have
emerged in more than 90 locations around the country.

We believe the introduction of each bill has been an important contribution to the
health care system reform debate. Taken together, these five bills contain among them
many of the necessary elements of successful health care system reform.

Each of the bills also has deficits, however, either in the manner in which certain
key issues are addressed or in the failure to address certain key issues at all. When each
bill was measured individually against the criteria set out in ERIC's Policy Statement,^
none of the alternative bills examined was deemed to adequately address the interests
and concerns of major employers.

In general, each of the bills (in its present form) raises one or more of the
following concerns:

• All of the bills lacked, in one or more areas, uniform federal rules governing the
organization and operation of a reformed health care marketplace that are
essential for major employers to offer and maintain their health benefit plans.

• All of the bills institutionalize, rather than reduce, cost shifting in one or more
areas, including cost shifting from the public sector to the private sector. In
addition, some of the bills fail to address cost shifting that results from the failure
to achieve universal coverage.

• Employers would not be able to exert a sufficient degree of control (direct or
indirect) over their financial liabilities, or the value {e.g., quality and cost-
effectiveness) of the care they purchase, under several of the proposals.

• ERIC is not confident that adequate data and technology are currently available
to implement the system of broad community rating, open enrollment and
prospective risk adjustment called for under some of the bills without potentially
causing unacceptable instability in the marketplace.

• Financing schemes under several of the bills fail to address adequately or
realistically the costs created by the bills.

3. Bill-by-bill Assessment:

The following bill-by-bill assessments delineate the strengths and weaknesses of
each bill in five areas that are essential to successful reform.

a. Nationally uniform rules and standards.

For major employers, which generally have employees geographically dispersed in
multiple states, uniformity in the rules governing health reform is a very high priority.
Moreover, health care is among our biggest industries in interstate commerce. Major
employers believe that to the degree the health care system is regulated at all, it must be
subject to nationally uniform rules and standards to assure the quality and consistency of

ERICs Policy Statement is summarized in an appendix at the end or this statement.

550

care throughout our health care system, and the common treatment of employees of the
same employer.

ERIC'S assessment of the bills under consideration with respect to thi$ issue is as
follows:

• Michel-Gingrich: The bill increases uniformity in some areas relative to current
law by preempting counterproductive state laws that interfere with the
development of cost-effective health plans.

• Cooper-GrandylBreaux-Durenberger. The bills increase uniformity in some areas
relative to current law by preempting counterproductive state laws that interfere
with the development of cost-effective health plans, but potentially erode
uniformity in other respects. For example, granting states discretion in organizing
health plan purchasing cooperatives and certifying accountable health plans would
likely result in an undesirable degree of inconsistency from state-to-state.

• Administration: The bill erodes uniformity by providing excessive discretion to
states in implementing regional alliance structures and in exercising the option to
form single-payer systems. Financial incentives and administrative complexities
are so heavily weighted against forming a corporate alliance that the advantage of
limited federal preemption of state law afforded to corporate alliance sponsors is
not enough to make forming a corporate alliance a viable option for most major
employers. Thus, such employers effectively would be forced into state-run
regional alliances - bureaucratic state government agencies with all their
attendant problems and deficiencies.

• Nickles/Steams: The bills erode uniformity by making all employer health plans,
including self-insured plans, subject to state insurance laws. Model insurance
reforms contemplated by the bills do not appear to guarantee state-to-state
consistency.

• Cliafee/Tfiomas: The bills erode uniformity for insured health plans by subjecting
them to state regulation, but largely preserve uniformity for self-insured plans by
subjecting them to federal regulation.

Recommendation: ERIC urges that any bill favorably reported by the Committee
provide that federal law preempts any and all relevant state laws to preclude state
discretion and ensure there will be national uniformity in all rules and standards that
apply to how the health care system in general, and employer-sponsored health plans
and purchasing groups in particular, will be organized and operated.

b. Eliminating cost shifting.

In the current health care system, ERIC member companies bear a
disproportionate share of health care costs compared with other payers, particularly with
respect to coverage of employed spouses who are not offered or who decline coverage
from their own employers, coverage for pre-Medicare eligible retirees, and cost shifting
resulting from uncompensated care (Le., the uninsured) and undercompensated care
(Le., from Medicare and Medicaid). Cost shifting distorts the health care marketplace
and undermines its efficient operation. Thus, the reduction, if not elimination, of such
cost shifting is a high priority for ERIC member companies.

ERIC's insistence on the elimination of cost shifting does not mean major
employers are unwilling to contribute their fair share toward the cost of providing
appropriate income-related public subsidies for the purchase of health care. To ensure
that there is public accountability for the amount and financing of such subsidies,
however, at a minimum: (1) any such subsidies must be explicit (Le., not merely built
into the structure of health care premiums), and (2) any taxes or other surcharges

551

imposed on employers to help finance the cost of such income-related subsidies must be
expHcit (te, not merely built into the structure of health care premiums) and must be
imposed on all payers.

ERIC'S assessment of the bills under consideration with respect to this issue is as
follows:

• Michel-Gingrich: The bill does not address cost shifting.

• Cooper-GrandylBreaitx-Durenberger. The bills do not directly address cost shifting
attributable to employed spouses, or the expense of voluntary coverage for early
retirees. In some cases, the bills appear to make cost shifting a permanent part of
the structure of health care premiums. For example, by including current
Medicaid beneficiaries in the same purchasing cooperative premium pool as
private payers, the bills effectively shift part of the cost of financing coverage for
such persons from general revenues to a per capita percent-of-premium tax on
employment. The Medicare at-risk contract adjustment payment mechanism
institutionalizes a cost shift from the federal government to "closed" as well as
certain "open" accountable health plans. To the degree general Medicare cuts are
used to finance the bills, cost shifting to private payers will worsen.

• Administration: The employer mandate reduces current cost shifting from
employers that do not offer employees coverage to employers that offer
family/dependent coverage, and partially reduces the cost to employers of
providing pre-Medicare eligible retiree health coverage. On the other hand, by
including current Medicaid beneficiaries in the same regional alliance premium
pool as private payers, the bill effectively shifts part of the financing of such
persons from general revenues to a per capita percent-of-premium tax on
employment. By providing subsidies only to employers participating in regional
alliances, and by imposing percent-of-payroll taxes on employers forming
corporate alliances, the bill institutionalizes cost shifts to corporate alliance
sponsors, particularly those that have cost-effective plans. To the degree general
Medicare cuts are used to finance the bill, cost shifting from that source will
worsen.

• NickleslSteams: Tax incentives for individuals to purchase coverage may reduce
cost shifting to some extent, but many forms of cost shifting remain.

• ChafeelThomas: The individual mandate reduces cost shifting to some extent, but
other forms of cost shifting remain. To the degree Medicare cuts are used to
finance the bills, cost shifting will worsen.

Recommendation: ERIC urges that any bill reported favorably by the Committee
ensure that every individual who does not receive health care coverage either (1) from a
government program, or (2) from an employer by virtue of being an employee or a non-
employed spouse or dependent, obtains such coverage from a federally sanctioned
privately operated purchasing group. Any taxes or surcharges to finance subsidies
should be explicit {Le., not built into the premium structure) and apply to all payers. In
addition, all government health care programs should be required to purchase health
care coverage using the same market competition mechanisms that private purchasers
use and fund the full cost of such care.

c. Employers' control over their financial liabilities.

Because major employers have a long history of purchasing health care for large
groups of employees, they have the greatest expertise, and have achieved the greatest
success, in maximizing the value of the health care coverage purchased. Anyone who
pays a substantial portion of the cost of health care coverage is entitled to and needs
control over what and how it is purchased in order to control the payer's financial

552

liabilities. Therefore, maintaining a strong employer influence over health care coverage
purchasing decisions is a high priority for major employers.

ERICs assessment of the bills under consideration with respect to this issue is as
follows:

• Michel-Gingrich: The bill does no apparent significant harm to the degree of
employer control; it improves employer control to the extent it preempts state
laws that interfere with employers' plan design decisions (i.e., preempts state
mandated benefit laws, anti-managed care or anti-utilization review laws, etc.).

• Cooper-Grandy/Breaia-Durenberger. Although the bills limit all employers' control
over plan design by specifying a uniform set of effective benefits, they otherwise
largely preserves employer control over health coverage purchasing decisions
(such as which health plans to contract with) for those employers that remain
outside health plan purchasing cooperatives. Employers that are required to
purchase care through such cooperatives retain some influence over the operation
of the cooperative itself - by virtue of the fact that they are organized as
nonprofit entities, rather than state agencies or quasi-private entities run by a
board of political appointees as under the Administration bill - but they do not
retain direct control over purchasing decisions.

• Administration: The bill erodes employer control over plan design and purchasing
decisions. In addition to dictating a plan's scope of coverage, its cost-sharing
features, and the mandatory inclusion of a fee-for-service option, the bill subjects
all employers to state discretion as to whether to establish a state-based single-
payer system, and subjects employers participating in regional alliances (the vast
majority of businesses) to state discretion as to whether to operate such alliances
as state agencies or as quasi-private entities dominated by political appointees.
Even employers forming corporate alliances are subjected to significant
constraints, including requirements to offer three types of coverage even if an
employer's experience has demonstrated that one or more types of coverage
provide inferior value.

• Nickles I Steams: Although employers are not directly constrained by federal law
under these bills, employer control of both plan design and purchasing decisions
would still be eroded by virtue of the fact that all employer plans would be subject
to state insurance laws. States historically have sought to undermine employer
discretion through a variety means: mandated benefit laws interfering with plan
design and protecting health care provider special interests; anti-utilization review
and anti-managed care laws; and taxing benefit plans. Although some of these
avenues are foreclosed to states under the bills, others are not; states will
continue to undermine employer discretion by every means made available to
them under these bills.

• ChafeelTfiomas: The bills' benefit package requirements place constraints on plan
design, but employers generally retain full discretion with respect to purchasing
decisions due to the voluntary nature of purchasing groups and the employer's
role.

Recommendation: ERIC urges that any bill favorably reported by the Committee
ensure that no employer is required to participate in a purchasing group that is operated
as a government agency or that is run by political appointees. Further, to the degree
that plan design is constrained at all - for example, by requiring that employers offer
(but not necessarily contribute to the cost of) health care coverage, employers must still
retain the flexibility to set the specific employer and employee cost sharing features of
such coverage and to retain the option to offer actuarially equivalent benefits.

553

d. Financial stability of the reformed marketplace.

ERIC believes that health care reform must have as a primary goal changing the
way health care is organized and delivered. A prerequisite for improved health care
delivery is a more coherent and efficient health care marketplace.

Changes in the marketplace are dependent on available data and information
technology, however. Forcing the marketplace to operate in a fundamentally different
way than it does today, on the basis of inadequate data or immature information
technologies, could result in market volatility great enough to cause serious financial
harm (including insolvencies) to health plans or purchasing groups. Market-based
reforms must not be abandoned because they are essential to successful reform
generally; but they should be implemented cautiously, in stages where necessary, to
minimize disruption.

ERIC's assessment of the bills under consideration with respect to this issue is as
follows:

• Michel-Gingrich: The bill does little to destabilize the marketplace, but also does
httle to directly improve the quality and cost-effectiveness of health care delivery.

• Cooper-GrandylBreaia-Diirenberger. Arguably, no one currently knows how to set
age-banded, community-rated premiums in the context of both (1) unstable
enrollment due to the elimination of barriers to free movement between health
plans, and (2) prospective adjustments to payments made to accountable health
plans based on the health risk posed by individual enrollees. Even if adequate
data were currently available, which it is not, it is debatable that a single
generalized risk adjustment formula can be developed that will work in health
markets with disparate utilization patterns, demographic composition, and other
relevant differences. Moreover, if the financial pressure of an aggressive tax cap
is added, as under these bills, the marketplace volatility that could result from
near-to-immediate transition to the regulated market contemplated by these bills
may produce an unmanageable number of accountable health plan and health
plan purchasing cooperative insolvencies.

• Administration: The same concerns exist regarding the Administration bill as
those expressed regarding the Cooper-Grandy/Breaux-Durenberger bills, because
at its core this bill is based on very similar community rating, open enrollment and
risk adjustment requirements. The transition to the new principles is a little
slower relative to Cooper-Grandy/Breaux-Durenberger, but the principles would
be applied to a far greater proportion of employers and individuals. Market
instability {Le., health plan and regional alliance insolvencies) may be increased by
the financial pressure added by the bill's requirement that a surcharge be imposed
on health plans that exceed budget limits, which is another completely new risk
that must be taken into account when determining what premium to bid.

• NicklesI Steams: Though they would remove barriers to movement between
competing health plans, there is little reason to expect that this alone would
destabilize the marketplace as a whole. The bills are likely to do little to change
health care delivery or improve its cost-effectiveness, however, because the bills
encourage individual choice based on product differentiation {Le., the scope of
coverage and cost-sharing features) rather than the cost-effectiveness of health
care delivery.

• ChafeelJltomas: The voluntary nature of purchasing groups and the voluntary
adoption of prospective risk adjustment mechanisms, coupled with reliance on
community rating within age bands rather than pure community rating, appear to
mitigate the potential for instability in the operation of health care markets. The
long-term effectiveness of this approach in improving the quality and cost-

554

effectiveness of health care delivery depends on the emergence of specific
effective strategies from the marketplace itself, a grass-roots approach that is
likely to be more responsive to the needs of purchasers and providers, as well as
less disruptive, than more rigid proposals.

Recommendation: ERIC urges that any bill that is favorably reported by the
Committee strongly encourage group purchasing on a capitated basis, implement
consensus insurance market reforms, and provide for the voluntary adoption by
employer-led private purchasing groups of specific strategies to improve market
competition (such as prospective risk adjustment and related techniques) at an
appropriate point in time, rather than prematurely imposing such strategies on the
marketplace before they are fully developed.

e. Credibility of financing provisions.

Since health reform legislation inevitably has an impact on federal expenditures
and the federal deficit, major employers view any financing provisions with well-founded
skepticism. To be blunt, in the current budgetary environment, the benefits of various
bills are often overstated and the costs are often understated or hidden. Health reform
is no exception. ERIC members are particularly concerned that underfinanced health
reforms, based on overly optimistic revenue estimates, could ultimately impose far
greater than expected liabilities on employers.

ERIC'S assessment of the bills under consideration with respect to this issue is as
follows:

• Michel-Gingrich: The bill does not require a significant of amount of financing
relative to other bills.

• Cooper-Grandy/Breaiix-Durenberger: Revenues to be raised from a cap on
deductible employer health benefit expenses may be overstated since employer
behavior will be hard to predict. For example, employers are likely to respond by
seeking to shift/recharacterize their expenditures into other deductible expenses
(e.g., wages). In addition, the cap will increase the cost of providing coverage for
employers that voluntarily provide comprehensive benefits. Medicare savings may
be partially offset to the degree such Medicare cuts cause cost shifting to the
private sector, which in turn may result in increased deductible private employer
expenditures.

• Administration: Financing is so complex that there is little likelihood that needed
dollars can flow smoothly and efficiently from multiple sources to multiple
destinations without shortfalls and windfalls along the way. The high probability
that very few large employers will find forming a corporate alliance financially
viable could substantially alter the expected mix of revenues to be generated by
the percent-of-payroll tax on corporate alliance sponsors as compared to other
revenue sources (including community-rate premiums). Medicare savings may be
partially offset to the degree such Medicare cuts cause cost shifting to the private
sector, which in turn may result in increased deductible private employer
expenditures.

• Nickles/Steams: The difficulty in predicting individual behavior in light of radical
transformation of the tax treatment of health coverage (from income exclusion to
tax credit) makes financing uncertain. Capping federal Medicaid payments could
result in cost shifting, further distorting revenue estimates.

• ChafeelThomas: Revenues to be raised from tax caps may be overstated due to
the difficulty of predicting changes in employer and individual behavior caused by
restructured tax incentives. Medicare and Medicaid savings may be partially

555

offset by increased deductible private expenditures to the degree such cuts cause
cost shifting to the private sector.

Recommendation: ERIC urges that any bill that is reported favorably by the
Committee ensure that neither tax caps on the deductibility of employer health benefit
expenses nor Medicare/Medicaid cuts are relied on as financing mechanisms. Further,
any financing burden imposed on employers should not materially differ solely on the
basis of an employer's decision to join or not join a purchasing group.

Conclusion

ERIC asserts that successful health care system reform will respond to the
following needs:

•

Improving accountability for the quality of health care and the outcome of
treatment;

Improving the efficiency of the health care marketplace by encouraging cost-
effective group purchasing (through employer-led private purchasing coalitions)
under uniform federal rules and standards;

Allocating resources and financing burdens equitably throughout the entire
economy, including the elimination of cost shifting; and

Providing for a transition strategy that minimizes disruption in the marketplace.

By this standard, none of the bills under consideration is completely successful.

ERIC supports market-based strategies for health care system reform that
preserve the discretion of employers and the autonomy of employer-sponsored health
benefit plans, and have as their primary goal increased accountability for both the
quality and cost-effectiveness of care. The members of ERIC represent a tremendous
reservoir of experience and expertise regarding these issues. We look forward to the
opportunity to work toward these goals with the Congress and the Administration
generally, the Committee, and each of the individual bill sponsors.

Appendix

To summarize ERIC's position on reform as articulated in its March 1993 Policy
Statement, ERIC supports health care system reform that:

• Is implemented in a comprehensive rather than a piecemeal fashion; but may be
implemented in stages to minimize disruption.

• To the extent that regulation of health care delivery is necessary, provides for
exclusive federal regulation rather than state-by-state regulation.

• Restructures health care delivery through organized groups of providers, driven
aggressively and competitively by multiple group purchasers, to produce a
marketplace that encourages continuous improvement in provider performance and
cost containment.

• Creates federally sanctioned local and regional purchaser-controlled health care
coverage purchasing groups, whose mission includes identifying undercapacity and
overcapacity and allocating resources more efficiently; and allows employers to act as

556

stand-alone purchasers or form consortia with other employers that remain outside
purchasing groups.

• Reduces aggregate health care expenditures as a prerequisite to expanding access to
health care.

• Retains employers' ability to deduct the cost of health care coverage as an ordinary
business expense.

• Preempts state regulation of employer-sponsored health plans, including but not
limited to current state benefit mandates, state anti-managed care laws and state
anti-utilization review laws.

• Rejects short- or long-term cost containment mechanisms that fail to promote
delivery reform or that interfere with market reforms intended to encourage changes
in the current delivery system.

• Requires both quality and price competition among health care providers.

• Develops specific criteria for evaluating health care provider performance (e.g.,
measurable outcomes, quality and patient satisfaction) so that the quality of health
care can be measured and improved over time.

• Creates a federal health care standards body to articulate uniform, consistent and
compatible standards for the collection of provider performance, quality and cost
data, and to foster the development of uniform claims forms, electronic claims filing
standards, and similar administrative efficiencies.

• Equitably shares the financial burden of providing universal access to care among all
payers in a manner that eliminates cost shifting from uncompensated and
undercompensated care.

• Subjects Medicare, Medicaid, and other government health programs to the same
market and financing reforms as private sector health care coverage.

• Requires that individuals who otherwise would be without coverage (from a voluntary
employer-provided health plan or from a government program) obtain health care
coverage from a purchasing group.

» Reforms the insurance market; and reforms tort and malpractice laws to reduce the
cost of claims appeals and litigation and eliminate unreasonable awards.

• Preserves uniform federal rules regarding health benefit plan fiduciary standards,
claims dispute resolution procedures, and other plan administration standards -
which currently preempt any state efforts to regulate these aspects of employee
benefit plan administration; applies these same federal rules to all care purchased
under the reformed federal framework.

557

Chairman Stark. Mr. Van Dongen.

STATEMENT OF DIRK VAN DONGEN, COCHAIRMAN,
HEALTHCARE EQUITY ACTION LEAGUE, AND PRESIDENT,
NATIONAL ASSOCIATION OF WHOLESALER DISTRIBUTORS

Mr. Van Dongen. Good afternoon, Mr. Chairman. It is a pleas-
ure to be here at these obviously important hearings. It has been
a long day, sir, for the committee. I will be brief.

I would simply like to make five summary points and then get
to whatever questions you might wish to have me and other mem-
bers of the panel entertain.

First, HEAL is an employer-based coalition. Over 1 million em-
ployers are represented. We are a pro-health care reform group. We
came together in 1991 during the then-Bush administration for the
purpose of encouraging them as well as the Congress to move for-
ward with a results-oriented health care refonn.

In part, this committee is responsible for the existence of HEAL
in that part of the catalyst for its creation was the Ways and
Means Committee retreat on health care at West Point in which
I and some of the others involved in putting HEAL together were
privileged to participate.

Second, I think it is important that you know that HEAL sup-
ports universal coverage. As a practical matter, we believe univer-
sal coverage is necessary to achieve the solutions to the problems
that the employers in our coalition face in providing health care to
their employees.

Third, we have concluded, and, frankly, this was not even a close
call, that we cannot support the President's plan. It is simply the
wrong path to reform, in our view, and we don't

Chairman Stark. Can you support his goals?

Mr. Van Dongen. Very definitely.

Chairman Stai?k. OK.

Mr. Van Dongen. I don't think there is much debate, indeed, in
the Congress or about the land with regard to the goals that the
President has set forth. We don't support his plan because we don't
believe that mandates, price controls, spending caps, mandatory al-
liances are the right way to go. We think they add up to excessive
government intervention and fear that they may well produce what
is aptly been described by some as kind of a fatal cure.

Fourth, I think it is a legitimate question. Having said that, so
what do we support? We have listed several key elements in our
written statement which collectively we believe will send us well
along the path to results-oriented reform. They are based upon
market forces. We believe they fix what needs fixing while preserv-
ing what is right in our current system.

Fifth and to the point of these hearings, many of the major alter-
native reform plans, including those crafted by some of the mem-
bers of this subcommittee, contain many of the reform initiatives
which HEAL endorses. We have consistently urged and urge the
Congress again to act on these consensus measures now, not nec-
essarily as a grand and final solution where the issue will never
be revisited, but, rather, to begin to bring relief now as opposed to
the possibility of engaging in protracted, contentious battle, which

558

when all is said and done may result in a circumstance where, un-
fortunately, reform of any type is forestalled this year.

Mr. Chairman, thank you, and will try to respond to any ques-
tions.

[The prepared statement and attachments follow:]

559

February 10, 1994
Statement of:

Dirk Van Dongen

Co-Chairman, Healthcare Equity Action League (HEAL)

President, National Association of Wholesaler-Distributors (NAW)

Before the:

Subcommittee on Health

Committee on Ways and Means

U.S. House of Representatives

On:

HEALTHCARE REFORM:
ALTERNATIVE HEALTH REFORM PROPOSALS

INTRODUCTION

Mr. Chairman, Congressman Thomas, members of the Subcommittee, my
name is Dirk Van Dongen. I am President of the National Association of
Wholesaler-Distributors (NAW). NAW is composed of individual wholesale
distribution firms and a federation of 114 national commodity line
associations and regional, state and local associations and their member firms
v^hich, collectively, total more than 45,000 companies.

NAW serves as the Executive Secretariat of the Healthcare Equity Action
League (HEAL), a coalition of 630 companies, associations and organizations,
representing over 1 million employers and in excess of 25 million employees
nationwide. HEAL was created in 1991 for the purpose of encouraging the
then Bush Administration and the Congress to act quickly to reform the
healthcare system utilizing free enterprise, market-based principles. I appear
before you today on behalf of both HEAL and NAW.

Mr. Chairman, you and the Subcommittee are to be commended for your
commitment to healthcare reform and your willingness to explore
alternatives to the President's healthcare reform legislation.

Let me first speak on behalf of HEAL.

560

THE PRESIDENT'S HEALTH SECURITY ACT

While the President is to be commended for bringing the critical issue of
healthcare reform to the legislative forefront, HEAL cannot support the
President's Health Security Act. Simply stated, we have serious concerns
about its funding, scope, and cost.

Specifically, we are opposed to the following key provisions of the President's
bill:

Mandates on employers to pay the cost of coverage for all employees and their
dependents will inevitably result in the loss of jobs, predominantly from
those who can least afford it;

Price caps and global budgets are misguided attem.pts to control costs, avoid
the real causes of medical inflation, and have never worked in modern
history. Pure and simply, they both will cause rationing;

Mandatory health alliances that force almost all Americans into huge,
heavily regulated, monopolistic government purchasing groups will not
help, but will only add another costly and ineffective layer of government
bureaucracy between individuals and their medical care;

Excessive government intervention, in a structure not unlike that in a single
payer system, has never simplified or reduced costs and will only serve to
institutionalize many of our current problems;

The plan is administratively burdensome and extraordinarily complex.
compelling employers to be involuntary administrators for a massive new
government program; and

Employers would lose virtually all control over their employee health benefit
programs and the money they spend on them. They will be relegated to little
more than check v^iters and form filers for the government to determine
their employee benefit plans.

AN ALTERNATIVE REFORM AGENDA

The over 630 members of the Healthcare Equity Action League (membership
roster attached) came together to support free enterprise, market-based
healthcare reform. HEAL believes strongly that health system reform can be
achieved without exerting excessive federal control over prices, plans,
premiums, physicians and patients; in short without federal preemption of
the free market in healthcare.

561

HEAL urges Congress to:

Reform insurance practices to prohibit the abuse of preexisting condition
clauses, guarantee renewability and portability, provide for a more equitable
rating system, and encourage the creation of voluntary, nonregulatory
pooling mechanisms for individuals and small business;

Assist those who cannot afford to purchase insurance coverage;

Reject employer mandates;

Reject price controls and global budgets;

Inject cost-consciousness into our health insurance decisions by limiting the
tax deductibility and tax exclusion of employer-sponsored health benefits;

Level the playing field for self employed businesses by increasing the
deductibility of health insurance premiums from 25% to 100%;

Reform our medical liability lawrs to reduce costly defensive medicine and
ease resolution of malpractice disputes;

Disseminate cost and quality data to assist consumers in making more cost-
consdous choices; and

Lower health administrative costs by standardizing claims forms and
encouraging electronic filing.

HEAL's approach has been to lay out a set of principles that we believe should
characterize effective, results-oriented health reform. As such, HEAL has not
officially endorsed any specific proposal. We do believe, however, that with
the exception of the single payer bill, each of the major alternative reform
measures contains positive provisions that will control insurance costs and
increase access to coverage. Indeed, many of the reform items supported by
HEAL are contained in major alternative proposals, including:

• The Health Equity and Access Reform Today Act (S. 1770/H.R. 3704),
introduced by Senator Chafee and Representative Thomas;

• The Managed Competition Act (H.R. 3222/S.1579), introduced by
Representatives Cooper and Grandy, and Senators Breaux and
Durenberger;

• The Affordable Health Care Now Act (H.R. 3080/S. 1533), introduced by
Republican Leader Michel and Senator Lott;

562

• The Consumer Choice and Personal Health Security Act (H.R. 3698/

S. 1743), introduced by Representative Stearns and Senator Nickles; and

• The Health Plan Purchasing Cooperative Act (H.R. 3652), introduced
by Representative Johnson.

Healthcare reform is essential; a federal takeover of the healthcare system in
the name of reform is not. Congressional and public support is widespread
for the reforms outlined above. The Congress has an historic opportunity to
ensure true healthcare security and stability by reforming -- not replacing -
our healthcare system. HEAL will continue to work to change what is wrong
with our system and preserve what is right.

Obviously, Mr. Chairman, in my capacity at NAW, I am most familiar with
the experiences of the wholesale-distribution industry. And, as I stated when
I testified before the full committee in October of 1991, our overwhelming
problem is rooted in cost. While the vast majority of wholesaler-distributors
(over 97 percent) provide health insurance coverage to their employees, the
spiraling increases in premiums which have occurred over the past few years
have represented a higher and higher percentage of overall compensation
and have forced our mem.bers to reevaluate this vital employee benefit.
Some have restructured their health insurance plans; others have reduced
benefits or increased their employees' share of premium costs. Companies
who operate vdth very narrow margins ~ and wholesaler-distributors do ~
are finding it more and more difficult to maintain affordable healthcare plans
which deliver comprehensive and high quality coverage to their employees.

Yet, our industry has told us again and again that they do not believe that
government control, like that envisioned in the President's Health Security
Act, is the answer. I said it in 1991, and I will say it here again, it is our view
that a healthcare system run from Washington would inevitably result in
lower quality care at higher prices. Nothing in our national experience
suggests that the Federal government could ~ or should — effectively regulate
one-seventh of our economy; approximately $1 trillion in healthcare
spending annually.

Mr. Chairman, in October of 1993, we asked our members to tell us what
impact the Health Security Act would have on their health insurance cost.
Fully seventy percent of the respondents reported that their costs would
increase imder the Clinton Plan. Similarly, in that same month, in our
quarterly NAW Confidence Index Survey, we asked "What impact do you
expect the Clinton Administration healthcare proposals to have on your
business?" Seventy-nine percent answered "Negative," sixteen percent
responded "Neutral," and only five percent said the proposals would have a
positive effect.

563

Last week, NAW held its Annual Meeting here in Washington. After
considering the reform proposals currently on the table, our members made it
clear that they favor prompt passage of bipartisan legislation which addresses
those issues on which a consensus has emerged, such as guaranteed coverage,
renewability, portability, limits on pre-existing condition exclusions,
administrative simplification and medical malpractice reforms. These
elements exist in the President's legislation and in almost all other major
alternative bills. In our view, such legislation could pass Congress quickly
and would represent meaningful and effective healthcare reform with
minimum government intervention. Simply stated, Mr. Chairman, let us
fix now what is widely viewed to be broken-knowing that we can revisit
these, and other, issues if necessary in the future.

Finally, NAW is most encouraged by the efforts being undertaken in the
Congress to package and pass the reform items on which a strong consensus
exists now. Legislation is being drafted by Representatives Rowland and
Bilirakis. There is a similar bill in the Senate. And, former Senator Bentsen
succeeded in securing Senate passage of a similar bill twice in the last
Congress. Mr. Chairman, it is NAW's position that, at least as a beginning,
we ought to take the consensus items I listed above and pass them today. We
believe these would go a very long way toward bringing costs down and
therefore increasing access to coverage for millions of Americans.

CONCLUSION

Mr. Chairman, thank you for allowing me to testify before you today. HEAL
and NAW will continue to promote enactment of the reform items outlined
above and hope to see Congress pass healthcare reform this year. We look
forward to working with the Committee on these critical issues, and will be
happy to take any questions you may have.

ATTACHMENT:
HEAL Membership Roster

564

Healthcare Equity Action League (HEAL)

STEERING COMMITTEE

Acma Life & Casujily

Amcncan Assiviaiion of Preferred Provider Orgamzauons

American Home ProducLs Corporation

American Hold i Mou:l Association

American Managed Care & Review Association

American Ponland Cement .Alliance

AMGEN Inc.

.Am*ay Corporation

.Associated Builders and Contractors

Associated Equipment Distributors

Associauon for Suppliers of Pnnung and Publishing

Technologies
Blue Cross of Western Pennsylvania
Bnstol-Myers Squibb
Burger King Corporation
Burroughs Wellcome Company
Cancer Treatment Centers of Amenca
The CIGNA Corporation
Council of Smaller Enterpnses
The Doctors' Company
The Donnelly Group
DynCorp
Electronics Representatives Association Insurance

Trust (Chicago. IL)
Ell Lilly & Company
Epic Healthcare Group (Dallas, TX)
Evariston Hospital Corporation
Federation of American Health Systems
Food Markeung Insutute
General Mills Restaurants. Inc.
The Grand Union Company
Group Health Association of America
Hamnan Management Corporation
Hams Methodist Health System
Health Industry Distributors Associauon
Health Industry Manufacturers Association
Health Midwest
HealthSpan

Healthcare Leadership Council
HUlcrest Bapiisi Medical Center
Humana Inc.

John Hancock Mutual Life Insurance Company
The Law Offices of Deborah Steelman
Marrion Corporation
.McDonald's Cotporauon
Metropolitan Life Insurance Company
Midwestern Regional Medical Center
Morrison Incorporated

National-American Wholesale Grocers' Association
National Association of Aluminum Distributors
National Associauon of Convenience Stores
Nauonal Associauon of Temporary Services
Nauonal Associauon of Wholesaler-Distnbuiors
National Committee for Quality Health Care
National Council of Agricultural Employers

Nauonal Council of Chain Resuurants

Nauonal Council of Community Hospitals

Nauonal Federauon of Independent Business

Nauonal Medical Enterpnses. Inc.

National Restaurant Association

Nauonal Retail Federauon

Nauonal Wholesale Druggists Associauon

Olsten Kimberly QualityCare

PepsiCo

Pharmaceuucal Manufacuirers Associauon

The Prudenual

Schenng-Plough Corporauon

ServiceMaster Management Services

Shoney s. Inc.

Society of Amencan Flonsts

SYNTEX (U.S.A.). Inc.

The Travelers Companies

Wendy s Imemauonal. Inc.

Western Growers Assurance Trust

jATTACHMtzNTI

565
Healthcare Equity Action League (HEAL)

GENERAL MEMBERSHIP

Accounling By Computer (Bend, OR)

Adami & Co, Independent Insurance Agency (Rock Falls, IL)

Adirondack Regional (NY) Chambers of Commerce

Addison (IL) Association of Industry & Commerce

Advertising Specialty Institute

Aerospace Industries Association

Air-conditioning & Refrigeration Wholesalers Association

Alabama Hospital Association

Alabama Wholesale Beer & Wine Association

The Alan White Co., Inc. (Stamps, AR)

Albertson's, Inc.

Allatoona Sod (Kennesaw, GA)

Allen Construction Inc. (Lawrence, KS)

Allen Park (MI) Chamber of Commerce

Alliance of American Insurers

The Aluminum Association

Ambler & Hickerson, Inc. (Dallas, TX)

American Apparel Manufacturers Association

American Association of Nurserymen

American Concrete Pipe Association

American Council on Education

American Cyanamid Company

American Electronics Association

American Federation of Small Busmess

American Furniture Manufacturers Association

American Hardware Manufacturers Association

Amencan Health Care Association

American Machine Tool Distributors Association

American Meat Institute

American Paper Institute

American Rental Association

American Society of Computer Dealers

American Society of Travel Agents

American Supply Association

American Traffic Safety Services Association

American Veterinary Distributors Association

American Wholesale Marketers Association

Americans for Intelligent Health Care Reform

AMI Twelve Oaks Hospital (Houston, TX)

Anderson Remodeling & Maintenance (Roscoe, IL)

Ann's Flowers (Yoakum, TX)

AppUance Parts Distributors Association

A.R. Vetter Co. (Rebersburg, PA)

Arcadia (OH) Superette

Ardmore (OK) Chamber of Commerce

Arizona Restaurant Association

Amett & Company Health Communications

Associated Beer Distributors of Illinois

Associated General Contractors

Associated Landscape Contractors of America

Association of Commerce and Industry (MI)

Association of Horal Importers of Florida

Association of IngersoU-Rand Distributors

Association of Steel Distributors

Atkinson (IL) Veterinary Service

ATLAND Management Corporation (Pleasantville, NJ)

Atlanta (GA) Chamber of Commerce

Automotive Parts Rebuilders Association

Automotive Service Industry Association

Aviation Distributors & Manufacturers Association

Baker Industries, Inc.

Bankers Life & Casualty

Baptist Medical Center of Oklahoma

Beauty & Barber Supply Institute

Becton Dickinson & Company

Beer & Wine Association of Ohio

Beer Industry League of Louisiana

Beer Industry of Florida

Beer Wholesalers Association of New Jersey

Bellevue (WA) Chamber of Commerce

Beltone Hearing Aid Center (Odessa, TX)

Beneficial Management Corporation (Peapack, NJ)

Benefit Design Group, Inc.

Benihana National Corporation

Berghoff Restaurant Company

Bicycle Wholesale Disoibutors Association

Bill Jayson & Company (Dallas, TX)

Biscuit & Cracker Distributors Association

Bismarck-Mandan Area (ND) Chamber of Commerce

Dr. Donald G. Blain, M.D.

Blochs Restaurants Inc. (Bellevue, WA)

Bob Chinn's Crabhouse Restaurant (Wheeling, IL)

Boon -Chapman

Boulder (CO) Chamber of Commerce

Brattleboro Area (VT) Chamber of Commerce

Brookside Properties, Inc. (Nashville, TN)

The Business Council of New York Stale, Inc.

California Association of Tobacco & Candy Distributors

California Association of Wholesalers-Distributors

California Beer & Wine Wholesalers Association

California Trucking Association

Cambe Geological Services, Inc. (Houston, TX)

Carl Karcher Enterprises

Carlsbad (CA) Chamber of Commerce

Carroll Auto Parts, Inc. (Big Spring, TX)

Carroll County (MD) Chamber of Commerce

Cars & Stripes, Ltd. (Cleburne, TX)

Carson City (NV) Chamber of Commerce

Casa Ole, Inc. (Houston, TX)

Case Management Society of America

Central Louisiana Chamber of Commerce

Central Wholesalers Association

Century Office Systems (Austin, TX)

Ceramic Tile Distributors Association

Chamber of Commerce of Auburn and Cayuga (NY) County

Chamber of Commerce of Hawaii

Chamber of Commerce of New Rochelle (NY)

Chamber of Medford/Jackson County (OR)

566

Champaign County (IL) Chamber of Commerce

Charles M. Osiheimer & Associates, Inc. (Alpharetla. GA)

Cheekiowaga (NY) Chamber of Commerce

Chenango County (NY) Chamber of Commerce

Chicago Metropolitan Disinbutors Association

Chicago Tastce Freez Corporation

Chillicothe-Ross (OH) Chamber of Commerce

Chocolate Manufacturers Association

Christian Booksellers Association

Clarks Petoleum Service Inc. (Canastoia, NY)

Cleaning Equipment Trade Association

Clemson Area (SC) Chamber of Commerce

Clinton (MS) Chamber of Commerce

Colorado Restaurant Association

Colorado Springs (CO) Chamber of Commerce

Commerce and Industry Association of New Jersey

Computing Technology Industry Association

Copper & Brass Servicenier Association

Corporate Mailing Concepts (Louisville, KY)

Council for Periodical Distributors Association

The County (NY) Chamber of Commerce, Inc.

CPI Benenis Inc. (Morrislown, NJ)

Crawford Fitting Company

Creare Inc. (Hanover, NH)

CutCo Industries, Inc. (Jericho, NY)

Dahl Certifled Public Accountants (Lowell, IN)

Dairy and Food Industries Supply Association

Danville Area (VA) Chamber of Commerce

Davenport (lA) Chamber of Commerce

Diagnostic Support Services, Inc.

Dietz Construction (Findlay, OH)

Direct Selling Association

Douglas Area (WY) Chamber of Commerce

Eagle Creek Resort, Inc. (Northfield, IL)

Earth Resources Corporation (Ocoee, FL)

The East Concord (NTY) General Store

Eastern Land Management, Inc. (Shelton, CT)

Eckerd Drug Company

Electrical Apparatus Service Association

Electrical-Electronic Materials Distributors Association

Ellis Insurance Agency (Hobbs, NM)

Employee Benefits South, Inc. (Atlanta, GA)

Employee Managed Care Corporation

Engine Service Association

Environmental Technologies Group, Inc. (Baltimore, MD)

Eric Denton Inc. (Pana, IL)

Essex County (MA) Chamber of Commerce

Everett (MA) Chamber of Commerce

Express Visa Service, Inc.

Fairway Health Iruurance Services (Ventuia, CA)

Farm Equipment Wholesalers Association

Fu^t Maryland Bancorp (Baltimore, MD)

FL. Roberts & Co., Inc. (Springfield, MA)

Rorida Restaurant Association

Rorists' Transworld Delivery Association

Ruid Power Distributors Association

Folk's Folly Prime Steak House

Food Industries Suppliers Association

Food Processing Machinery and Supplies Association

Foodmaker, Inc.

Foodservice Equipment Distributors Association

Friend Laboratory, Inc. (Waverly, NY)

Gail F. Piltz Inc/DBA Comprehensive

Accounting (Indianapolis, IN)
Gainesville-Hall County (GA) Chamber of Commerce
Gaslonia (NC) Chamber of Commerce
General Merchandise Distributors Council
Georgia Beer Wholesalers Association
Georgia Chamber of Commerce
Gladstone (MO) Chamber of Commerce
Glenwood Springs (CO) Chamber Resort Association
Goldendale (WA) Chamber of Commerce
Grand Rapids Area (MR Chamber of Commerce
Greater Austin (TX) Chamber of Commerce
Greater Baton Rouge (LA) Chamber of Commerce
Greater Bethesda-Chevy Chase (MD) Chamber of Commerce
Greater Carlisle Area (PA) Chamber of Commerce
Greater Detroit Chamber of Commerce Wholesaler-Distributor

Association
Greater Florence (SC) Chamber of Commerce
Greater Fort Myers Beach Area (R,) Chamber of Commerce
Greater Fulton (NY) Chamber of Commerce, Inc.
Greater Iberia (LA) Chamber of Commerce
Greater Kansas City (MO) Chamber of Commerce
Greater Lafayette (IN) Chamber of Commerce
Greater Martinsville (IN) Chamber of Commerce
Greater North Dakota Assoc iation/W AM Council
Greater Ohare (IL) Association
Greater Omaha (NE) Chamber of Commerce
Greater Paradise Valley (AZ) Chamber of Commerce
Greater Raleigh (NC) Chamber of Commerce
Greater Riverside (CA) Chamber of Commerce
Greater Seattle (WA) Chamber of Commerce
Greater Syracuse (NY) Chamber of Commerce
Greater Valley (CT) Chamber of Commerce
Greater Waco (TX) Chamber of Commerce
Greater Washington Food Wholesalers
Greenscape Inc. (Holly Springs, NQ
GTE North (NoblesviUe, IN)
Guest Services, Inc.
Gwinnett (GA) Chamber of Commerce
Hackeostown (NJ) Chamber of Commerce
Hampshire House

Hampton Roads (VA) Chamber of Commerce
Hardee's Food Systems, Inc.
Hastings Area (NE) Chamber of Commerce
Health Care Partners, Inc. (San Antonio, TX)
HealthTrust, Iik.

Henderson (NV) Chamber of Commerce
Hershey Foods Corporation
Hiawatha Resort (Wetmore, MI)
Hobby Industry Association of America
Hoffmann-La Roche Inc.
Holiday Inn Worldwide
Home Health Care
Hospital Corporation of America

567

Hospiiality Association of Soulh Carolina

Howard Couniy (MD) Chamber of Commerce

Huniington Beach (CA) Chamber of Commerce

IMinois Rcsiaurani Associauon

Illinois Valley Area Chamber of Commence

The Image Producers, Inc. (Canfield. OH)

Independent Bankers Association of America

Independent Electrical Contractors. Inc.

Independent Medical Distributors Associauon

Independent Sealing Distributors

Independent X-ray Dealers Association

Indiana Beverage Alliance

Indiana Restaurant Association

Indianapolis (IN) Chamber of Commerce

Indianapolis Newspapers, Inc.

Indusinal Disinbulion Association

Insurance Administration Center, Inc. (Tampa, FL)

Insurance Association of Connecticut

The Interior Plant Company (Houston. TX)

Intemalional Association of Amusement Parks and Attractions

International Associauon of Plastics Disuibutors

International Dairy Foods Associauon

International Hand Protection Associauon

Intemalional Hardware Distributors Association

International Track Parts Association

International Sanitary Supply Association

International Wholesale Fumiuire Association

Iowa BeneHts, Inc. (Ames. lA)

Iowa Grain and Feed Association

Iowa Restaurant & Beverage Association

Irrigauon Association

Jack Faucett Associates, Inc. (Bethesda, MD)

Jackson (MS) Chamber of Commerce

Jcffersoniown (K Y) Chamber of Commeice

Jeffrey Conuacting (Prescott Valley, AZ)

Jewelry Indusuy DisuHbuKJrs Association

JLC, Inc. (LitUeton. CO)

Jobbers Credit Association

John M. Regan & Associates. Inc. (Metairie. LA)

John L. Wortliam & Son. L.L.P. (Houston, TX)

Johnson & Johnson

Johnson City Medical Center Hospital (Johnson City. TN)

JT&A. Inc.

Juneau (AK) Chamber of Commerce

Kansas Chamber of Commerce & Industry

KC Enterprises (Las Vegas, NV)

Keach & Grove Insurance, Inc. (Bedford. IN)

Kenosha Area (WI) Chamber of Commerce

Kentucky Restaurant Association

Keuler Forlines, Inc. (Gaithersburg, MD)

Ki-Siar Group of Texas. Inc.

The Krystal (Company (Chattanooga. TN)

Kyana Indusnial Supply (Louisville. KY)

L&L Landscape Services Inc. (Santa Clara, CA)

Lake Champlain (VT) Regional Chamber of Commerce

Lancaster (TX) (Thamber of Commerce

Landscape Design & Construction, Inc. (Grand Junction. CO)

Lavonia (GA) Chamber of Commerce

LeGro & Associates (Mount Vernon. WA)

Lcnert Plumbing. Inc. (Naperville. IL)

Lenoir County (NC) Health Cost Containment Coalition

Lettuce Entertain You

The Levy Organization (Chicago. IL)

Londoniown Corporation (Eldersburg. MD)

Long John Silver's. Inc.

Los Angeles Fasteners Association

Louisiana Resuurant Association

Louisville Area (KY) Chamber of Commerce

Machinery Dealers National Association

Maine Restaurant Association

Malcolm Thompson, Magaro & Associates (Houston. TX)

Maneval, Inc. (Jasper. MO)

Manitowoc -Two Rivers (WI) Chamber of Commerce

Massachusetts Restaurant Association

Material Handling Equipment DisUnbutors Association

McDonalds of Plymouth (WI)

McMann Giles & Associates Employee Benefits (Danville. VA)

MDU Resources Group. Inc. (Bismarck. ND)

MECCO (Medford. OR)

Medical Technology Development, Inc.

MedTrac, Inc. (Nashville, TN)

Meeker Sharkey Benefits (Cranford, NJ)

Melrose Diner, Inc. (Philadelphia. PA)

Memphis Area (TN) Chamber of Commerce

Mendota Area (IL) Chamber of Commerce

Memll Quality Landscapes (Rexburg. ID)

Metro East (MI) Chamber of Commerce

Metro Newark (NJ) (Thamber of Commerce

Metropolitan Milwaukee Associauon of Commerce

Michigan Association of Disuibutors

Michigan Beer & Wine Wholesalers Association

Michigan Disuibutors & Vendors

Michigan Restaurant Association

Mid-America Supply Association

Middle Atlantic Wholesalers Association

Miller & Loughry Insurance Services (Murfreesboro, TN)

Minnesota Beer Wholesalers Association

Minnesota Restaurant, Hotel & Resort Association

Mississippi Malt Beverage Association

Missouri Auction School (Kansas City, MO)

Missouri Beer Wholesalers Association

Missouri Restaurant Association

Monroe (LA) Chamber of Commerce

Montana Chamber of Commerce

Montgomery County Pharmaceutical Association of

Pennsylvania
Morning Glory Dairy (DePere, WI)
Morton's of Chicago, Inc.
Motorcycle Indusuy Council
Mount Carmel (IL) Chamber of Commerce
Mount Vernon (NY) Chamber of Commerce
Music Disuibutors Association
National Appliance Parts Suppliers Association
National Associauon of Chemical Disuibutors

568

National Associaiion of Computer Consultants and

Resellers
National Association of Container Distributors
National Association of Decorative Fabnc Distributors
Nauonal Associauon of Electrical Distributors
National Associauon of Fire Equipment Distributors
Nauonal Association of Floor Covering Distributors
Nauonal Association of Flour Distnbutoi3
National Association of Hose and Accessories Distributors
Nauonal Associaiion of Meat Purveyors
Nauonal Association of Realtors
Nauonal Associauon of Recording Merchandisers
Nauonal Association of Service Merchandising
National Association of Sign Supply Distributors
Nauonal Associauon of Sporting Goods Wholesalers
National Association of Wholesale Independent Distributors
Nauonal Beer Wholesalers Association
Nauonal Building Material Distributors Association
Nauonal Business Forms Association
National Business Owners Association
National Club Association

National Commercial Refrigeration Sales Associaiion
National Council of Agricultural Employere
Nauonal Elecuonic Disuibutors Associaiion
National Fastener Distributors Association
Nauonal Food Distributors Association
National Frozen Food Associaiion
National Grocers Associaiion
National Indusuial Glove Distributors Association
National Insulation and Abatement Contractors Associauon
National Lawn & Garden Distributors Association
National Locksmith Suppliers Association
National Marine Distributors Association
Nauonal Office Products Association
National Paint Disuibutors
National Paper Trade Association
National Poulu^ & Food Disuibutors
Nauonal Sash & Door Jobbers Association
National School Supply &Equip Assn
National Solid Wastes Management Association
National Spa & Pool Institute
National Staff Leasing Association
National Smne Association
National Technical Services Association
National Truck Equipment Association
National Welding Supply Associaiion
National Wheel & Rim Association
Nebraska Restaurant Associaiion
New Berlin (WI) Chamber of Commerce
New England Wholesalers Association
New Jersey Association of Temporary Services
New Jersey Restaurant Associaiion
New York State Beer Wholesalers Association
New York Stale Plumbing & Healing Wholesalers
New York State Restaurant Association
NMTBA-The Associaiion for Manufacturing Technology
North American Graphic Arts Suppliers Associauon
North American Horticultural Supply Association

North American Wholesale Lumber Association
Nonhamerican Heaung. Refngeration & Au-condiuonmg

Wholesalers
North Carolina Beer Wholesalers Association
North Carolina Restaurant Association
North Carolina Wholesalers Associauon
Northern Berkshire (MA) Chamber of Commerce
Northern Rhode Island Chamber of Commerce
Northwestern Public Service Company
Ocala/Marion County (FL) Chamber of Commerce
Odessa (TX) Chamber of Commerce
Ohio Restaurant Associauon
Oklahoma City (OK) Chamber of Commerce
Oklahoma Restaurant Association
Oklahoma State Chamber of Commerce & Industry
Opucal Laboratories Association
Orange County (NY) Chamber of Commerce
Oregon Restaurant and Hospitality Associaiion
Ott Enterprises Inc. (Norwalk, OH)
Outdoor Power Equipment Distributors Association
Pacific Automotive Trades Association
Pacific Southwest Distributors Associauon
Pasadena (CA) Chamber of Commerce
PDC Multimedia Productions (Norman, OK)
Pennsylvania Chamber of Business and Industry
Pennsylvania Hospital
Pennsylvania Restaurant Association
Pet Industry Disuibutors Association
Peterson Chemical Corporation (Sheboygan Falls. WI)
Petroleum Equipment Institute
Petroleum Marketers Associauon of America
Pfizer Inc.

Phenix City-Russell County (AL) Chamber of Commerce
Pike County (K Y) Chamber of Commerce
Piscataway-Middlesex Area (NJ) Chamber of Commerce
Pitt/Greenville (NC) Chamber of Commerce
Planimann Indusuies (Sl Louis, MO)
Plantscapes, Inc. (SeatUe, WA)
Pocono Mountains (PA) Chamber of Commerce
Poor Boy's Riverside Inn (Lafayette. LA)
Portland (OR) Metropolitan Building Owners and Managers

Association
Portland (OR) Visitors Associauon
Positive Chimney Shoppe (Cadillac. MI)
PoUatch Corporation

Poughkeepsie Area (NY) Chamber of Commerce
Power Transmission Distributors Association
Pnmary Medical Clinic (Midland. TX)
Printing Industries of America
Produce Marketing Associauon
Pueblo (CO) Chamber of Commerce
Quincy Area (IL) Chamber of Commerce
Rally's Inc.

Ransdell Surgical. Inc. (Louisville. KY)
Rapid City Area (SD) Chamber of Commerce
Reno Sparks Convention and Visitors Autiiority
Restaurant Associauon of Maryland
Restaurant Association of the State of Washington. Inc.

569

Rcsiaurant Enterpnses Group. Inc.

Restaurant Management Services

Retail Bakers of Amenca

Rhode Island Hospitality Association

Rivcrdale (NJ) Texaco

Riverton (WY) Chamber of Commerce

Rome Area (NY) Chamber of Commerce

Rosenberg/Richmond Area (TX) Chamber of Commerce

Rowan County (NC) Chamber of Commerce

Safety Equipment Distributors Association

Saint Paul Area (MN) Chamber of Commerce

Santa Ana (CA) Chamber of Commerce

Sarasota (FL) Chamber of Commerce

Schererville (IN) Chamber of Commerce

Schiffli Lace & Embroidery Manufacturers Association

Schoch Tiles and Carpets (Cincinnati, OH)

Scripps Memorial Hospitals

Selfridge & Associates, Inc. (New Albany, IN)

Shawnee (OK) Color Lab & Studio

Shoe Service Institute of America

The Sidwell Company (West Chicago, IL)

Siler City (NC) Chamber of Commerce

Simon Financial Company

Small Business of America

Snack Food Association

Society of Professional Benefits Administrators

South Carolina Beer Association

South Dakota Restaurant Association

South Pike Area (MS) Chamber of Commerce

South Shore (MA) Chamber of Commerce

Southern Wholesalers Association

Southworth-Milion, Inc. (Milford, MA)

Specialty Tools & Fasteners Distributors Association

Spraying Systems Company (Wheaton, IL)

Sl Joseph Healthcare Group, Inc.

St. Lawrence County (NY) Chamber of Commerce

St. Lucie County (PL) Chamber of Commerce

Star Administration Services, Inc. (San Antonio, TX)

Steel Service Center Institute

Stephen Fendos & Associates (Hayden Lake, ID)

Sterling Winthrop Inc. (New York, NY)

Storm Lake (lA) Chamber of Commerce

Structural Concepts Corporation (Spring Lake, MI)

Super Valu Stores, Inc.

Superior Basement Water Control (Walnut Creek, OH)

Suspension Specialists Association

Swartz Restaurants Corporation

Telecommimications Industry Association

Tennessee Restaurant Association

Terry Erickson Agency Inc. (Marshfield, Wl)

Texas Restaurant Association

Textile Care Allied Trades Association

Thomas Jefferson University Hospital (Philadelphia, PA)

Thornton Gardens Inc. (MaineviUe, OH)

Titusville Area (FL) Chamber of Commerce

Topper Construction, Inc. (Spring Lake, MI)

Traverse City Area (MI) Chamber of Commerce

Tri-Siaie Utility Products, Inc. (Marietta, GA)

Twinsburg (OH) Chamber of Commerce
Unimax Hearing Instruments, Inc.
Union County (NJ) Chamber of Commerce
United Products Formulators & Distributors Association
United Restaurant & Lodging Association
United Telephone-Southeast (Bristol, TN)
United Truck Body Co. Inc. (Duluth, MN)
Utility/Property Abatements (Little Falls, NJ)
Vegas Time Associates. Inc. (Sterling. VA)
Vermont American Corporation (Louisville, KY)
Virginia Chamber of Commerce
Virginia Restaurant Association
Walker Health Insurance Services, Inc. (Santa Ana, CA)
Walker's Diesel Services (Houston, TX)
Wallcoverings Association
Warehouse Distributors Association for Leisure
and Mobile Products

Warren County (PA) Chamber of Commerce
Waste Management Inc.
Water Systems Council
Waterloo (lA) Chamber of Commerce
Water & Sewer Distributors of America
R.E. Watson & Associates, Inc. (Kennedale, TX)
Wauconda OL) Chamber of Commerce
Wausau (WI) Hospital Center
Wellesley (MA) Chamber of Commerce
Western Association of Fastener Distributors
Western Suppliers Association
White County (GA) Chamber of Commerce
Wholesale Beer Distributors of Texas
Wholesale Distributors Association
Wholesale Florists & Rorist Suppliers of America
Wholesale Stationers' Association
Wine & Spirits Wholesalers of America
Wisconsin Restaurant Association
Wisconsin Wholesale Beer Distributors Association
Woodbridge (NJ) Metropolitan Chamber of Commerce
Woodworking Machinery Distributors Association
Woodworking Machinery Importers Association
Workforce Inc. (Lake Orion, MI)

570

Chairman Stark. Let me try this on you. The idea of Medicare
benefits are too generous is not worthy of debate.

Mr. Van Dongen. I am soriy, sir?

Chairman Stark. The idea that Medicare benefits are too gener-
ous doesn't wash. We have an obhgation for 35 milHon people who
are not going to get private insurance from anybody else because
they won't offer it.

If some of these ideas prevailed and we took controls off Medi-
care, remember that since 1983 when we put in the DRG system,
the rate of increase of Medicare spending for its beneficiaries has
gone up at half the rate of private insurance in this country.

If we had not, let's just assume we privatized it. Then there
would have been whatever the concomitant increase in the payroll
tax would have been to fund Medicare because that is how we
make it balance, and that is in the law. Medicare costs go up; you
pay. Some is paid in general revenue, but the heavy part will come
out of payroll t£ixes.

Now, I give you the same opportunity I gave Mr. Knettel. I un-
derstand that if we continue to control Medicare costs as we do
with what you don't like, price controls, and premium caps, by the
way, is also part of Medicare, interestingly enough, for a risk con-
tact, we could take those off, and then we would be subject under
an indemnity plan to pay all the bills, just like everybody else. My
guess is we would start going up at the rate of private insurance
increases, and that is one choice.

The other choice is for us to continue as we are, and then if there
is, in fact, cost-shifting which would only occur if the private side
can't keep the rates as low as we would have to keep them — and
there is a lot of political pressure not to keep them. We just don't
cut doctor's rates or hospital rates around here with a lot of aches.
So I would suggest to you that we just don't blindly cut rates. It
isn't that easy.

Is there any reason that your group, you think, would suggest
that we take our cost containment program off Medicare?

Mr. Van Dongen. That has not been a matter of discussion,
frankly, Mr. Chairman.

Chairman Stark. Think about it, and you let us know because
I think what you are going to find then on the other side — and
again I would like you to think about this and let me know what
your group says — if we don't put some cost containments on the
private side for the providers, then you could be subject to a lot of
cost-shifting, and I am not suggesting that we set the rates, but I
am suggesting that if there isn't a balance on the other side every
time we hold down rates in Medicare, your members are going to
pay for it, particularly if they have a bargained plan.

I wonder if we ignored putting a similar cost containment system
on both sides of that equation, that private industry wouldn't be
back here in a while saying please put cost controls on. I don't
know that, but it makes sense to me that we ought to do it on the
same basis.

Mr. Knettel, I think, agrees with that. He would just pick a dif-
ferent basis than I might.

Mr. Van Dongen. Mr. Chairman, if I could just comment, and
I take your point. I don't purport to be an expert on Medicare, but

571

I do come from an industry where the employers, according to our
statistics in 97 out of 100 cases, provide health care insurance to
their employees and good coverage in the main.

What brings the National Association of Wholesaler Distributors
to the issue is the issue of costs that are exploding in our member
companies. Part of those costs, I believe, result from the provider
community recovering from private employers what they do not
feel

Chairman Stark. Absolutely.

Mr. Van Dongen [continuing]. That they are getting out of the
Federal Government.

Chairman Stark. Absolutely.

Mr. Van Dongen. That having been said, as we have looked at
this whole issue

Chairman Stark. There are only two ways to solve that, Mr. Van
Dongen. Let the public payments go up, which means the tax-
payers have to pay more for Medicare, or put some cost contain-
ment of one kind or another on the private side. I don't know. I
mean, I think a third way

Mr. Van Dongen. I guess, Mr. Chairman, where we might take
a different path is not on whether cost containment is required.
Clearly, in the case at least of the organization I represent, and I
believe this is true for virtually the entire membership, if not the
entire membership of HEAL as a coalition, cost is what brings us
to the issue, and at the end of the day, we take the point and care
very much about the fact that we haven't accomplished from our
parochial perspective very much at all if we don't get our hands
around the cost issue.

Where we would take a different path is that it is our considered
view that we can best accomplish that objective over time through
the utilization of competitive initiatives as opposed to matters that
are imposed by fiat or approaches that are proposed by fiat.

Chairman Stark. I might try to prove that that is not as effec-
tive, but I agree with you that it must be there.

I am just suggesting to you that if the President's plan, for exam-
ple, were to prevail or Cooper was to prevail, we would take the
controls off of Medicare as well. Then I am saying if your idea
doesn't work, you got a double ugly down side. That is all. I want
you to think that one through.

I want to just ask Ms. Bailey very quickly and anybody else who
has a solution. I know that Dr. Simmons has the right solution,
and Ms. Shearer could be the independent referee here, but we
have got a problem. We have 35 billion uninsured, and I could tell
you that 70 percent of those are below two times the poverty, and
that means they don't have enough money to buy much.

I can also tell you that in round figures there is not a plan in
the land, whether it is the President's, whoever appraises it, or
anybody else's where you are going to provide a relatively modest,
much more modest than the President's, health care program with
a lot of copays and a lot of out-of-pocket expenditures for less the
$2,000 a year. I mean, they just don't exist.

So we have a $70 billion a year plan. Two-thirds of that, let's call
it $45 billion a year, give or take, depending on how many you
think might pick up on it. Where do we get the money? Honestly,

572

let everything else along. Let Mr. Van Dongen's members do what
they want. Go join in and bid with whomever they want. If we are
going to meet the President's request, we have got somewhere be-
tween a $40 and $70 billion, I am going to suggest, shortfall. There
will be a lot of savings, but they will go to Mr. Van Dongen's group,
and we won't get the benefits back.

You take your savings in good health and expand the wholesale
business, but my point is we don't get that. We only get the savings
on the private side, and that ain't going to be enough. So I am say-
ing absent any savings in Medicare from Mr. Knettel's new way to
save costs, we are short. Where do we get it?

Ms. Bailey. That is exactly the issue.

Chairman Stark. I will tell you some ideas.

Ms. Bailey. Yes.

Chairman Stark. A point on the corporate tax would raise about
30. A point on the payroll raises about 30. Would you buy into
that? That is what we are facing.

Ms. Bailey. That is right.

Chairman Stark. That is what Reischauer brought to the table.
There isn't a health fairy out there that is going to put this policy
under our pillows, and if I am willing to call it a tax, call it a tax.
It is all right with me. You can call it a premium if you want to.
You can call it a mandated payment. The bottom line is I got to
find, whatever those things are that you call them, $45 or $50 bil-
lion a year. Who has got it? Who wants to volunteer?

Ms. Bailey. That is the issue that we spend a great deal of time
talking about, and I want you to know we share that concern, and
that is the same dollar amount.

Chairman Stark. What is the least objectionable?

Ms. Bailey. Well

Chairman Stark. Come on.

Ms. Bailey. First of all, we have a study that Lewin-VHI did for
us that we would be glad to make available to the committee that
points out the subsidies based on an individual mandate system
are a lot less expensive than an employer mandate because with
an employer mandate, you end up subsidizing companies who don't
need that subsidy. So it is targeted toward need.

We also support a tax cap.

Chairman Stark. Beg your pardon? A tax cap?

Ms. Bailey. A tax cap.

Chairman Stark. That will raise it. That will also raise it about
$30 bilHon.

Ms. Bailey. Then if you add a cigarette tax on top of that, you
are beginning to

Chairman Stark. But the tax cap comes out of Mr. Van Dongen's
constituency. It is a tax cap on the corporations, and we figure ac-
tually about 16 billion out of corporate America on the cap.

Mr. Van Dongen. Mr. Chairman, our testimony specifically ref-
erences the fact that the Coalition does, indeed, support — I re-
peat— support a tax cap. We do not come to that easily, quite obvi-
ously.

Chairman Stark. Yes.

Mr. Van Dongen. We come to that because we think that is per-
haps the most effective device we can think of to cause business

573

and their employees to behave in a more consumerist manner as
they interact with the health care system. We, too, have wrestled,
in other words.

Chairman Stark. They would behave like

Mr. Van Dongen. I am sorry, sir?

Chairman Stark [continuing]. They would behave like anguished
apes on my side of the aisle where the tax cap, unfortunately, is
politically unpopular.

Mr. Van Dongen. I understand that.

Chairman Stark. I am not sure they like the payroll tax any bet-
ter, but I wonder what difference does it make outside of a philo-
sophic concern. If corporation A gets a tax cap or 1 percent — in this
case, a Vi percent on its corporate rate, we are talking $16 billion
there, either one. Outside of the fact that some people feel that you
will make employees feel the difference, but there is a lot of evi-
dence that they won't, that they won't respond. Very rich people
might, but the average person needs what they need, and they
don't figure out in the short run what the advantage and disadvan-
tage is.

My theory is that once you are in for a tax, you are in for a tax,
but I want to find out this. Ms. Bailey was going to get me $45 bil-
lion here, a tax cap.

Ms. Bailey. We talked about a tax cap on both the employer and
the employee because we think it is important that neither be im-
mune to the incentives that we are talking about here.

I guess the other point is that this is exactly the point that we
hoped the public debate would focus on because there is no free
lunch, and there is agreement we need to subsidize.

Chairman Stark. What do you do about the employer who
doesn't give any benefits? What do you do with McDonald's, Mar-
riott, Nordstrom, and the rest of those fair-minded folks who don't
pay any benefits? A tax cap doesn't make any difference to them.
Mr. Van Dongen's buddies all pay and his customers don't, and
they ain't going to buy more

Ms. Bailey. Well, I will let Mr. Van Dongen speak for the small
employer, but it is our understanding that most small employers
want to provide coverage.

Chairman Stark. Let me give you a May 1992 NFIB study, and
they sent it to all the Members of Congress. They tell us about the
people in our districts. NFIB, May 1992, I know this fits indelibly
in my mind. Would you, it says, support being required to provide
health insurance to your employees even if you had to pay none of
the cost? Sixty percent said no.

I know. I said what do you do with those guys, and I suppose
the reason is they don't want government. They don't want to be
told. Whatever their reason, I am going to tell you that our polls,
and the NFIB hasn't been here to testify, they don't want to have
anything to do with it.

Ms. Bailey. If I could say, though, I think that probably is a re-
action to the mandate and general issue of government mandates.
I think part of what has happened is the total lack of faith in the
insurance system as it serves the small employer market today.

Chairman Stark. Or government.

574

Ms. Bailey. That is right, but we know through insurance re-
forms how to restore some of that. That is where we think many
of these small employers who have experienced cherrypicking ana
have suffered at the hands of this will come back into the market
and provide coverage once they have an affordable plan.

Dr. Simmons. Mr. Chairman, we understand the concern about
mandates, but at the same time, some of the proponents of other
approaches rely so much on managed competition. The fact is that
managed competition, as described by the theorists who developed
it, can't work unless you have universal coverage, and they also re-
quire an employer mandate. Now, you can't get there from here.

If you believe in managed competition, then you have got to have
universal coverage, and if you go by what the proponents did, it
has to have an employer mandate. I think that is an important
thing for those who feel that way to grapple with.

Chairman Stark. The middle ground, I suppose, is managed care
which says you can compete if you want or not want. I mean, it
is not quite as onerous, but I don't think that deals with our uni-
versal coverage thing.

We are sort of in the box. Ms. Bailey faced up to it with us. We
are talking $45 or $50 billion a year, and it ain't going to be any
fun. We don't have any volunteers, and, quite frankly, none of us
like to be the leader. I don't want to go down in the 13th Congres-
sional District as the leader of the guy who wants to put x pennies
a gallon on their gas tax or their income tax or anything else, if
I can avoid it, but I don't think avoiding it gets the universal cov-
erage. That is the box I am in.

The cost controls, we all agree. I think the question is which ones
will work. If I can figure out, first of all, where to get the money
for the uninsured or the people who may become uninsured, and
then you will have States opt out. If a State wants to have single
payer, if a State wants to have managed competition, be my guest.
We got a $45, $50 billion a year problem, and we don't have any
volunteers, and that

Mr. Goldberg. Mr. Chairman.

Chainnan Stark. Mr. Goldberg, are you going to pay?

Mr. Goldberg. Pardon me?

Chairman Stark. Are you going to offer to pay?

Mr. Goldberg. Not personally, but I did want to make two
points. One is that, as you know, roughly 84 percent of the unin-
sured are either in the work force or in families that include a
member of the work force.

Chairman Stark. Two-thirds of them are below two times the
poverty. These people are the people who are working for McDon-
ald's.

Mr. Goldberg. The point I wanted to make first is that if we
had an employer mandate, conjoined with an individual mandate,
much of the money that is needed to provide universal coverage
would come through the employers.

Chairman Stark. Oh, you have got no quarrel with me. All right.
I have got a solution. Dr. Simmons is absolutely right. You have
got to have both, basically.

Mr. Goldberg. Second, as to the residual, I just wanted to make
it clear that the members of our Coalition, when they developed

575

their strategy, agreed to and proposed a one percent payroll tax to
be split between employers and employees to cover the remaining
cost.

Chairman Stark. I will tell you how you can do it. I probably
learned this from Dr. Simmons. It gets dangerously close to the old
pay or play. The $2,000 we talked about, it is $1 an hour, 80 cents
on the employer, 20 cents on the employee. You add 90 cents in-
crease to the minimum wage in 1991 and 1992, and nobody went
broke because of it.

Mr. Van Dongen. Our industry pays substantially above mini-
mum wage.

Chairman Stark. I know. So you wouldn't be affected. I am just
saying you treat this mandate, if you don't have insurance for your
employees, you don't pay the buck, if you are one of those people.
If you are Zoe Baird, it is a $1 an hour, 20 cents out of her baby-
sitter, 80 cents out of her husband's pocket, and that is the dollar.
1 hour or 10, you pay, and that will raise some money and be an
employer mandate for those who don't have insurance elsewhere in
some program they choose to purchase. That still leaves us a bit
short, probably another $30 billion short, and that is where your
1 percent payroll tax picks it up a little bit more on the deductibil-
ity than I think you want. We need a half-a-percent and the de-
ductibility. There aren't enough cigarettes in the world to do it.

Mr. Van Dongen. Mr. Chairman, something else that might
make a contribution is to ensure that the Congress does not include
in any health reform package you pass the buy-out for early retir-
ees, which to us makes absolutely zero sense. It is counterintuitive.

Chairman Stark. You are absolutely

Mr. Van Dongen. In a day and age where we are worried about
people living too long

Chairman Stark. It is a gift to the people who need it least.

Mr. Van Dongen. It helps downsize corporate America with folks
that are 55 years of age or over.

Chairman Stark. Great minds go in the same direction, Mr. Van
Dongen.

Mr. Van Dongen. Thank you.

Chairman Stark. There is no question. No, sir. I don't know
where that one came out of the woodwork, but no thanks.

Mr. McCrery. Briefly, Mr. Chairman, Ms. McCaughey testified
on an earlier panel. She made reference to an article that she has
written for the next issue of the New Republic. We have an ad-
vanced copy of that, and she would like to have that included in
the record. So, with unanimous consent, I would request that unan-
imous consent that her article be included in the record, without
objection.

Thank you, Mr. Chairman.

[The article appears after Ms. Caughey's written statement on
page — :]

Mr. McCrery. I thank all of you for coming today. I am sorry
I wasn't here for all of your testimony, but I have seen parts of
your written testimony, and I agree with much of what many of
you have said.

I don't know if you were here earlier. I am in the process of try-
ing to tie up all the loose ends on my health care bill, and it in-

576

eludes some of the things that you have talked about. I have a brief
summary I would like to pass out to you, and if any of you have
comments or suggestions, I will probably take another couple of
weeks before I finish writing it, but it includes many of the incen-
tives that you all have talked about in trying to get control in the
private sector on cost, as well as expanding access to the system
by providing tax credits, refundable t£ix credits to low-income folks
without mandates, without employer mandates.

I am still considering the question of an individual mandates,
but, anyway, I will give this to you, and if you have any comments,
I would appreciate it.

Chairman Stark. Thank you very much.

This hearing is adjourned.

[Whereupon, at 3:50 p.m., the hearing was adjourned.]

[Submissions for the record follow:]

577

Health Insurance Market Reform

Mark A. Hall

Professor of Law and Public Health

Wake Forest University School of Law

Bowman Gray School of Medicine.

Excerpted from Reforming Private Health Insurance, AEI Press: forthcoming 1994.

This statement comments on the health care reform bills considered at the February
10, 1994 hearing by the House Ways and Means Subcommittee on Health. The focus is on
small-group market reforms, community rating, and voluntary purchasing cooperatives.

SmaU-Group Market Reforms

The package of proposals labeled as small group market reform, although complex
and industry driven, for the most part make good sense and have been well received in the
states in which they were first enacted. However, their very limited ambition must be kept
clearly in mind. Guaranteed issue, insurance portability, rate compression, reinsurance,
purchasing cooperatives, and elimination of some mandated benefits are intended to improve
the market for those who previously desired to purchase insurance but were unable to do so.
However, these reforms will make insurance more expensive for many who previously
purchased and so now may not. Moreover, the groups these reforms will hurt somewhat far
outnumber the groups they help a lot. Therefore, we can have no confidence that these
reforms will advance us further toward the twin goals of universal access and cost
containment. At best, they will stabilize the portion of the market they address (usually,
small employers groups) from further decay; at worst, they may increase the number of
uninsured in a market of voluntary purchase.

Small group market reforms are designed to accomplish two important efficiency
objectives. First, they induce insurers to behave more consistently with the fundamental
premises of group insurance by minimizing the degree of individual medical underwriting.
Rather than imposing laborious regulatory oversight of discrete underwriting techniques such
as blacklisting, cherry picking, and churning, the private reinsurance mechanism achieves
this goal through an incentive-based system. The reinsurance mechanism encourages the
industry to assume all risks at the same time that it assesses the industry for the costs of
higher risks passed on to the reinsurance pool. Second, these reforms help to reorient the
industry from competition based on risk selection to competition based on risk management.

Health insurers can best contribute to social welfare, first, by insuring as broadly as
possible, and second by actively managing the risks they insure. Management takes the form
of policing the costs of care through provider controls imposed collectively on behalf of their
subscribers. At the same time, some price variability is desirable since individual
subscribers do control their health risks and attendant costs of treatment to some degree.
Therefore, some degree of risk rating facilitates the use of competitive pressures to manage
health care costs. Some degree of risk segmentation may also be necessary for purely
logistical or pragmatic reasons in order to allow the functioning of a competitive market that
gives consumers a range of choices among insurance options. Small group market reforms
attempt to strike a balance among these competing objectives by guaranteeing open
enroUment and continuity of coverage, allowing limited price variation, but minimizing risk
selection in favor of competition based on efficiency in the delivery of medical care.

Despite these considerable advantages, small group market reforms, as presently
structured, will not achieve the fundamental goals of health care reform to the extent the
industry would hope. In the insurance industry's own words, these reforms are aimed only at
"availability, not affordability," meaning they are only designed to offer insurance to any
willing purchaser at prices that do not far exceed the market average, not to impose rate
regulation or reduce prices across the market. Insurers hope that focusing competitive
pressures on the efficiency of medical care delivery will eventually lower prices, but in the
short term the reforms will have just the opposite effect. These reforms will raise prices
because they make insurance most attractive to the highest risk groups by holding prices to
less than the policy's actuarial value. The excess is assessed against the premiums paid by
all small group purchasers, which will inevitably drive an undetermined number of low risk
purchasers out of the market, thus raising the market average even more.

Moreover, insurance can be said to be accessible to high risk groups only to the
extent that its price does not vary dramatically from the average. However, the rating bands

578

advocated by the industry allow too much variability to make insurance affordable to small
groups of older or unhealthy worken. It is a relatively simple matter to make the rating
restrictions more severe, as several states have done and as some federal bills have proposed,
by moving closer toward community rating. But community rating is difficult to administer
in a voluntary market for the reasons discussed below.

Even if some workable compromise can be found for the rate compression problem,
these reforms as presently constructed will not enhance access to the extent the industry
would hope; indeed, they have the potential to decrease the prevalence of private insurance.
Some highly publicized cases of insurance denial for small employers may involve customers
desperate to purchase at any reasonable price, but this does not appear to characterize the
bulk of the woricing uninsured.

Several surveys have demonstrated that only a minority, and perhaps a very small
minority, of people lack insurance because they have an uninsurable condition or can obtain
only substandard coverage. The Congressional Office of Technology Assessment questioned
73 commercial insurers in 1988 and found that about three-quarters of all individual and
small group applicants are offered coverage at standard rates. Of the remaining applicants,
15 to 20 percent are offered substandard coverage which usually means a permanent
exclusion of preexisting conditions, but sometimes means standard coverage at rates 50
percent or more higher than the norm for a given age group. Commercial insurers deny only
8 percent of individual applicants." Because applicants who are likely to be turned down
usually apply to more than one company, these figures represent an upper bound of the
number of uninsurable individuals. A lower bound estimate comes from the 1987 National
Medical Expenditure Survey, which questioned individuals, not insurers. According to that
data, only 2.5 percent of those without insurance have been denied standard coverage at
standard rates. ^ This is a level of uninsurable applicants that could easily be absorbed by
the high-risk pools that already exist in 26 states or by the Blue Cross plans that maintain
open enrollment and community rating in 14 states.

For the most part, workers lack insurance because it is too expensive even at average
rates. Some employers may be unwilling to purchase insurance even at prices far below
market averages. HIAA provides some insight into insurance purchasing proclivities via a
questioimaire it administered to a nationally representative stratified sampling of over 3000
employers. Its 1990 employer survey revealed that labor market factors and underlying
costs, not product availability, account for a large portion of firms not offering health
insurance.' Firms without health insurance have nearly three times as many employees
earning less than $10,000 as do firms with insurance (33 percent compared to 12 percent).
Employers also tend not to offer insurance for jobs with high employee turnover. The
turnover rate for uninsured firms is three times the rate for insured firms (39 percent versus
13 percent). When asked their reasons for not purchasing insurance, only 30 percent of
these firms cited unavailability of an acceptable plan as very important, while three quarters
cited expense and over half cited low profits as very important reasons for not offering
insurance. Similar findings are reflected in surveys conducted by the federal government,
the National Federation of Independent Business, Robert Wood Johnson Foundation grantees,
and Catherine McLaughlin and her associates.^

One way to lower these financial barriers is to strip away enough benefits to make
insurance affordable. Based on research showing that state mandated benefit laws add 10-to-
20 percent to the cost of insurance,' 31 states have enacted so-called "bare bones" law that
allow insurers to sell stripped down coverage to previously uninsured purchasers at greatly
reduced prices. However, in most states these efforts have been a dismal failure, and have
produced only a modest response in the best circumstances. The mandated benefits most
subject to criticism ~ such as for acupuncture and chiropractic services - add very little to
the cost of insurance,' and the 10 percent savings produced by paring back most mandates'
is not sufficient to attract a large number of new subscribers. This range of savings is
negated by only a single year of typical inflation. Therefore, insurers have had to reduce
prices by drastically limiting the scope of coverage through very high deductibles and
copayments or very low overall payment limits. Some bare bones policies cover only 20
days of hospitalization or cap benefits at $50,000 annually others impose deductibles as of
$1(XX) or more. This produces an insurance package that is so unattractive few people wish
to purchase it despite its reasonable price. Most bare bones states have sold no more than a
few hundred policies, and in several states only a few dozen or fewer people have purchased

579

these plans. However, in some states that offer a standard package of benefits (Missouri,
Oklahoma, Oregon and Washington), the results have been more encouraging, although still
modest, with policies covering several thousand subscribers.'

The second solution to the affordability problem is to call for various forms of
subsidy that will encourage the purchase of adequate insurance coverage. However, other
real-world tests provide even more discouraging results that suggest that price lowering
effects would have to be extraordinarily large in order to work well in a voluntary market.
A series of demonstration projects sponsored by the Robert Wood Johnson Foundation over
the past three years has shown uninsured small employers to have a frustrating degree of
resistance to buying even highly-subsidized health insurance. Most of the demonstration sites
achieved far less than 10 percent penetration of their target markets of previously uninsured
small groups despite subsidies of one quarter to one half of market value and despite
aggressive marketing efforts and purchasing cooperatives in some of the sites.' One third of
surveyed employers without insurance in Denver and one fourth in Alabama said they would
not contribute any amount toward their employees' health insurance.'" Similar results were
experienced in two pUot projects in New York, where an evaluation found that, "at most, the
proportion of [small, previously uninsured] firms offering insurance increased 3.5 percentage
points" despite a 50 percent subsidy. Moreover, based on survey information, the evaluators
concluded that "nearly 60 percent of small firm owners still would not purchase insurance
even with a 75 percent price subsidy.""

The problems caused by the apparent insensitivity of uninsured employers to
reductions in price are compounded by the high degree of price sensitivity among those who
are presently insured. Price sensitivity among presently-insured small employers is a matter
for considerable concern because the inevitable effect of the small group reforms is to raise
average prices by drawing higher risks into the market. Actuarial simulations of the effect of
various rating bands, performed for HIAA and Blue Cross based on data from existing
insured groups, estimate an average increase in per capita claims ranging from 5 to 25
percent in the first year. '^ The Society of Actuaries projects that guaranteed issue will
result in claims costs increasing from the base year by about 20 percent in first year, 50
percent in second year, 25 percent in third year, and 13 percent in fourth year."

Even if rate compression were not to attract higher risks, however, average market
prices might still go up simply as the result of losing some existing good risks. The purpose
of the rating bands is to compress the differential between existing low and high risk groups.
This necessarily makes insurance more expensive than before for the lowest risks.
Therefore, at the margin, some number of previously insured employers can be expected to
drop coverage. Subscribers are not priced out of the market only at the high end of the price
range. As Mark Pauly has observed, the willingness to pay for insurance varies with one's
expected loss. Therefore, marginal price effects can be felt across the full range of risks.'*

How many lower-risk subscribers will drop coverage due to price increases depends
on the price sensitivity among existing insured employers. Different attempts to measure
price elasticity using dissimilar methodologies have produced widely varying results. "
However, most economists conclude that employers are fairly to highly price sensitive.'*
Using a conservative elasticity estimate of -2, a 10 percent increase in the price of insurance
is likely to result in 20 percent of presently-insured employers dropping coverage.

Of course, disenrolling low-risk groups may be offset by an even greater number of
newly enrolling high-risk groups, but this is unlikely. First, projections show that the
number of "losers" under various rating bands will far outnumber the number of "winners,"
since many average risks must suffer a modest increase in order to lower the price for a few
very bad risks. For instance, under the rating bands that were being considered in several
bills during the 102d Congress, various projections predicted four times as many subscribers
would suffer price increases as would receive price reductions. '^ Moreover, even if
winners and losers were better balanced, the marginal price effects may be markedly
different for currently insured versus currently uninsured employers, such that the former are
more likely to drop coverage than the latter are to add it, for a given level of price
differential. Therefore, the HIAA estimate that the tighter rating bands being proposed may
decrease the level of insurance purchase by 2-to-5 percent is probably realistic."

The most dire projections have not been borne out, however, in the states that first
implemented small group reforms. No dramatic price increases are reported in Connecticut,
North Carolina or Vermont, nor has there been a huge outcry from small employers. Data is

580

insufficient to determine whether the level of insurance has gone up or down, but an eyeball
assessment suggests modest progress. In Connecticut, over 5000 plans have been sold to
previously uninsured small employers during two years under market reform." In North
Carolina, another early state with a full set of reforms, 7300 new plans were issued in the
first year of market reform with 60 percent going to previously uninsured groups. •" And,
in California, where small group reforms took effect in mid- 1993, insurance regulators are
reporting a strong surge of applications for new coverage.^'

In sum, the working uninsured are composed primarily of two groups: high risks
who cannot afford insurance and low risks who cannot afford insurance. Small group
reforms will help only the former and will hinder the latter. It is impossible to predict how
these counteracting effects at the margin will net out over time, but it is quite possible
(although it has not yet happened) that some form of an adverse selection spiral will occur
that results in significantly fewer employers voluntarily purchasing insurance than before,
although those purchasing will be sicker and thus more needy groups. Even if a price spiral
does not result, it is certain that prices will not drop on their own sufficiently to induce most
small employers to purchase voluntarily. Therefore, the only effective means to produce
universal coverage of woiicers by private insurance is to mandate the purchase of insurance
by all employers or individuals.

Community Rating in a Voluntary Market

In a maricet of voluntary purchase, community rating has severe feasibility problems
because it encourages younger, healthier groups and individuals to avoid purchasing
insurance or to self-insure. Refusing to allow insurers to price these better risks accurately
drives them from the risk pool, leaving only higher-than-average risks to support the pool.
Then, when the pool's average community rate increases even further, still more members
dropout, setting up a classic adverse selection spiral that eventually (or quickly) could destroy
the market entirely if not corrected.

As a result of these and other concerns, the states that have adopted pure community
rating so far have experienced trouble with some commercial insurers withdrawing from the
mailcet or failing to offer affordable products to the market, particularly when community
rating is applied to the market for individual insurance. In New York, for instance,
commercial insurers offer no reasonably-priced standard-coverage policies in the individual
market, and in many locations the only real choice for individual subscribers are among
HMOs.*' In New Jersey, Blue Cross is the only insurer offering a range of reasonably-
priced options to the community-rated individual maricet.'' However, both states have an
ample supply of companies competing for the small group market, as does Vermont, which
also employs community rating.

Skeptics of adverse selection sometimes object that there is no hard or even anecdotal
evidence that adverse selection would be a serious problem for health insurance, at least to
the extent of destroying the market. They reason that health insurance, unlike life or
disability income insurance which are discretionary, is too essential an item to be subject to
intensive selection bias.

However, adverse selection problems created by community rating are real. Adverse
selection originally forced Blue Cross to abandon community rating in favor of experience
rating for groups, and it is presently destroying the market for individual and small group
insurance as subscribers select against the Blue Cross community-rated pools. Adverse
selection has made it extremely difficulty for a significant market in private long-term health
care insurance to come into existence, since younger people with little need decline to
purchase, and the premiums are too high for older subscribers to afford.'^

The pronounced effect of adverse selection on ordinary health insurance is borne out
by the experience under the federal law (known as COBRA) that allows employees to pay for
continued group coverage for 18 months after leaving a job. Employers and insurers report
that COBRA continuation coverage produces claims that are one-third to twice as high as for
other group enrollees.'^ This is consistent with reports by insurers in the individual and
small-group market that premiums for medically underwritten coverage, which screens for
adverse selection, are 80-100% less than for guaranteed issue plans."

Adverse selection has also been a significant problem within larger groups that offer a
choice among multiple health plans, each of which carries the same group-community price.
Because presently sick patients place more value on their established physician relationships

581

and on their freedom to select their own specialists, they are more inclined than healthier and
younger patients to select traditional, indemnity fee-for-service plans than HMOs. Sick
patients also tend to select more generous benefits, and those with dental or mental health
problems select insurance that covers those conditions.

These selection biases have been an ongoing, serious problem within the Federal
Employees Health Benefits program, which is the largest existing multi-option network.
Adverse selection resulted in the high-option (low deductible) fee-for-service plan in one area
attracting risks that were 50 percent higher than the plan's actuarial value based on standard
risks, whereas the low-option (high deductible) version of the same plan attracted risks that
were about 40 percent lower than the plan's value based on standard risks." Another study
found that a different insurer that offered two plans with the same actuarial value attracted
subscribers with 79 percent higher claims to one than to the other.^' As a consequence of
these adverse selection problems, several fee-for-service plans and dozens of HMOs
withdrew from FEHB during the late 1980s. Similar problems have plagued the California
Public Employees Retirement System" as well as large private employers offering multiple
options. In one study, a high-option plan attracted enroUees that were as much as four times
more expensive than those who chose the low-option plan from the same employer.'"

At present, the most successful attempt at community rating in a voluntary market
exists in Rochester, New York, where community rating prevails for about 85 percent of
subscribers." There are several unique aspects of the Rochester market, however. First,
Blue Cross dominates the market with 70 percent of the business, and it offers insurance only
on a community-rated basis. The Blue Cross plan there has an unusual history, having been
started by the business community, which itself is dominated by a few larger employers, the
largest of which is Eastman Kodak. This market configuration allows for a much higher
level of community cooperation and voluntary health planning than has proven possible in
most other locations." Blue Cross has negotiated aggressively for provider discounts,
which keeps smaller insurance competitors from offering more favorable experience-based
rates. Even then, erosion of community rating is setting in as some employers are beginning
to self insure or to demand experience-rated premiums.

As revealing as these examples are, they still illustrate selection against community-
rated plans only when another form of insurance was available. There are no existing
examples of adverse selection when the entire market is community-rated, which would
require those opting out to go entirely without insurance. Nevertheless, we know from
recent market experience that many average-to-good risk individuals and employers are
presently inclined to opt out for reasons relating largely to the price of insurance, not purely
due to their own poverty, in a market that is experience or risk-rated. This tendency can
only be aggravated by community rating, which will produce dramatic price increases for the
youngest (and therefore lower paid) groups and individuals.

In New York state, for instance, community rating prompted a 170 percent price
increase by one large insurer for 30 year old males, and a 30 percent increase even for 45
year old males." For group insurance, projections by Blue Cross, Aetna, and the
American Academy of Actuaries based on existing business indicate that about 10 percent of
small groups (under 25) would experience price increases under community rating of 40
percent or more and about 20 percent of groups would have increases of 20 percent or
more." These lower-risk subscribers would naturally tend to drop out, while higher-risk
subscribers would be drawn into the market, thereby increasing the community rate from its
initial position and so drive away even more low-to-average risks. The net result, according
to projections made by the Council for Affordable Health Insurance, is that pure community
rating for individuals and small employers (under 25) would result in a 25 % increase in the
average market premium and a 22 percent reduction in the total number of people insured."

Much of this effect can be mitigated by allowing community rating by age class,
which produces increases of more than 20 and 40 percent for only 4 and 2 percent
respectively of the existing individual and small-group market." To allow community
rating by age differs little from allowing rating bands centered on age groups. Therefore,
this fallback position concedes the basic argument that some variation in rates according to
individual risk is desirable in a market of voluntary purchase. Whether risk is measured by
age or by health status is largely a matter of detail.

582

Voluntary Purchasing Cooperatives.

One reason the level of uninsurance is so much higher among small employers is the
much higher overhead costs that small group purchasers face. Overhead costs are the portion
of the premium that is not paid out in direct claims. There are three reasons why this
portion is several times higher for smaller groups. First, the per-enroUee cost of marketing a
policy to smaller groups are much higher simply because this one-time cost is spread over
fewer people. These costs are compounded by the administrative expenses incurred in
having to medically underwrite small groups in order to counteract adverse selection.
Second, smaller groups have less bargaining clout than large groups, so there is some
possibility that insurers are able to exact a higher profit margin (although profit margins for
all components of health insurance are quite low). Third, the pure risk premium for small
groups must be higher simply because the risk pool is smaller; therefore, the risk reduction
created by the Law of Large Numbers is not nearly as great.

As a partial solution to many of these diseconomies of scale, several states and a
number of academics have proposed creating purchasing cooperatives for the small group and
individual markets. California, Florida, Mirmesota, North Carolina, Ohio, Texas, and
Washington are leading examples of states that have already taken this step. Voluntary
purchasing cooperatives in another form have existed for a number of years under the name
of Multiple Employer Welfare Arrangements (MEW As). These MEW As have garnered a
tarnished reputation due to the mismanagement, bankruptcy and outright fraud that occurred
in a number of them. However, the current proposals for small group purchasing
cooperatives differ in several crucial respects. MEW As are usually themselves insurers, not
merely marketing services for other insurers. Their mismanagement occurred because many
escaped regulation due to confusion over the applicability of ERISA's preemption of state
regulation of self insurance." More successfiil examples of purchasing cooperatives have
operated in several demonstration cites sponsored by the Robert Wood Johnson Foundation.

Purchasing cooperatives create several decided advantages for both small employers
and insurers. First, the search costs relative to the product costs in shopping for insurance
are considerable for small employers, as are the marketing costs for insurers. Small
employers do not have the size or money to justify hiring benefits managers to perform this
task for them. Studies and demonstrations reveal that insurers have to exert much greater
effort to attract small employers' attention since they are often too busy running the business
to attend to the complexities of selecting health insurance. Purchasing cooperatives help to
create for the small group market the same expertise and economies of scale that exist in the
benefits departments of larger employers.

Second, purchasing cooperatives offer individual employees within small groups the
same (or an even better) menu of choice as is typically given to employees of large firms.
Small employers that do offer insurance usually select only a single option and usually one
that is not managed care (HMO or PPO). Purchasing cooperatives provide employees access
to a much broader range of the market by presenting them a full range of insurance options.

Third, a properly motivated purchasing cooperative can wield considerably greater
market clout, to the bargaining advantage of its members. Finally, depending on the rate
mechanism a purchasing cooperative chooses, it can have the effect of creating a much larger
risk pool, equivalent to that of a larger employer's, which creates an even greater
compression of rates than do the rating bands discussed above, depending on how closely the
rating method approaches community rating. Most purchasing cooperative proposals call for
strict community rating, although others allow age-adjusted rating, or the ftiU breadth of
rating bands proposed by the industry.

The working model of a purchasing cooperative that is most frequently cited is the
Council of Smaller Employers (COSE, pronounced "cozy"), which has operated successftiUy
in Cleveland for two decades under the sponsorship of a local business association. COSE,
which covers almost 150,000 people, has limited premium increases over a five-year period
to about one-third of the trend for other small business in the area, and its administrative
expenses are less than 12 percent of premiums, as compared with an average of 27 percent
for the small group market. COSE offers 12 health plans, 10 of which are provided by Blue
Cross." Initial reports are also very encouraging from California's state-sponsored
purchasing cooperative for small employers, established in mid 1993. The California
cooperative is receiving a strong surge of applications, and it was able to negotiate adjusted

583

community rates six to 23 percent less than the highly competitive rates available from the
California Public Employees Retirement System (CalPERS)."

Other examples of purchasing cooperatives with successful track records come from
the public sector. The Federal Employees Health Benefits (FEHB) program has reached a
ten-year average increase in costs per enroUee of 9 percent a year despite an aging
workforce,*" a figure that compares favorably with the double-digit increases that have
prevailed in the private sector over the past few years. Even more promising, CalPERS held
premium increases to 1.4% in 1993 and to 6.1 % the year before, and it is presently
demanding a 5 % rate rollback."'

Some commercial insurers, particularly smaller ones, are concerned about the effect
that cooperatives are likely to have of narrowing the market for small groups by selecting
only a limited number of plans for inclusion. Insurers are also concerned that, in being
required to deal with employees on an individual rather than a group basis, they will suffer
from biased selection. Changing to a system in which small employers offer a range of
insurers rather than each selecting a single plan will fundamentally change the dynamic and
perhaps the makeup of the small group market. Employers who choose only a single plan
are more likely to select traditional indemnity than a managed care alternative whereas with
purchasing cooperatives, employees may opt for managed care products that typically are
offered only by larger insurers. Also, offering individual employees multiple choice will
greatly increase the amount of plan-switching that occurs during each open enrollment. The
ability of individuals to switch rather than requiring the entire group to select new insurance
means that insurers are more likely than before to lose business on account of minor
differences in costs or benefits.

However, these problems of selection among different insurers and the possibility of
exclusion from the market are not fundamentally different than the manner in which insurers
deal with very large employers at present. Some of these concerns are problems only for the
numerous small insurers who have achieved a market niche by offering only a single type of
coverage; for consumers, these concerns represent an improvement in the market. Other
concerns are legitimate, but the use of risk adjustment techniques should make it possible to
keep these problems in check.

A greater problem is biased selection between the purchasing cooperative and the rest
of the maricet (as distinct from biased selection among insurers within the cooperative). If all
that a purchasing cooperative did were to offer a price advantage due to economies of scale,
then both good and bad risk groups would have equal reasons to shop for insurance at a
cooperative. However, if cooperatives also adopt different rating rules than the rest of the
market, they are certain to attract a disproportionate number of higher risk groups that will
be favored by rate compression. Unless the purchasing cooperative's efficiencies are large
enough to offset its increased risk profile, the resulting increase in rates will drive healthier
groups back into the regular market. This will set off an adverse selection spiral unless the
cooperative is allowed to screen out bad risks or establish different risk pools.

For instance, COSE was forced by the natural effects of adverse selection to create a
separate pool for high-risk groups applying for membership and to turn down 20 percent of
applicants. Thus, it turns out that COSE has been able to maintain its success in holding
down costs partly by refusing high-risk groups. For instance. Kaiser calculated that its
COSE business was 5 percent less risky than its non-COSE small group business.*^ State-
sponsored cooperatives will not have this advantage.

The initial start-up of the California small-group purchasing cooperative has been
more successful despite these concerns because there, the rating method used inside the
cooperative pool allows for age-based risk adjustment and so does not differ as dramatically
from the rating reforms applied to the rest of the market. Moreover, the California pool has
been able to negotiate very advantageous rates that remain attractive to healthy groups despite
the greater compression in its rates.

There are two possible remedies for market selection problems created by purchasing
cooperatives. One is to ^Jply the same rating reforms both inside and outside of the
cooperatives. This places cooperative insurers on more even footing with noncooperative
insurers. This compromise produces the felicitous result that noncooperative insurers will be
forced to compete with the prices established within the cooperative; in other words, the
entire market would feel the effects of the cooperative's economies of scale. It also allows

584

cooperatives to prove themselves by market performance rather than having to force the
entire market into an untested new system.

A second method for reducing selection problems is to make the cooperative the
exclusive source for insurance purchase in the small group (or individual) market. That is,
small employers, if they wish to purchase insurance, must do so through the cooperative.
Naturally, this will escalate insurers' concerns over market exclusion. However, if
purchasing cooperatives are not exclusive, then insurers will be allowed to continue the
duplicative marketing efforts that contribute to the higher costs that cooperatives are intended
to eliminate. Furthermore, nonexclusive purchasing cooperatives already exist in almost
every state (in the form of MEW As) by virtue of natural market forces and voluntary
cooperation among employers.^' If cooperatives are not made the exclusive source of
insurance, it is not clear that authorizing legislation creates any innovation beyond what the
market is already capable of producing on its own operating under the guaranteed issue and
rating rules discussed above. The only real effect of nonexclusive purchasing cooperative
legislation is to extend those reforms to MEW As.

Selection problems will manifest themselves in yet another way: at the borders of the
regulated market. Restricting the cooperative to small groups creates border-policing
problems. For instance, large employers with older or sicker workforces who are already
purchasing insurance on their own will have an incentive to break their workforces into
artiiicially smaller groups so that the riskier workers can be sent to the community-rated
pool. This can be done simply by redefining corporate subsidiaries in a gerrymandered
fashion. Obviously, this creates a selection problem and is unfair to the small group pool
since the healthy component of the larger employer market does not contribute to the pool.
Therefore, this strategy will have to be monitored.

Notes

1. U.S. Congressional Office of Technology Assessment, Medical Testing and Health Insurance, Aug. 1988.

2. Karen Beauregard, Persons Denied Private Health Insurance Due to Poor Health, (Rockville, MD: Agency
for Health Care Policy and Research Pub. No. 92-0016, Dec. 1991).

3. C. Lippert, E. Wicks, Critical distinctions: how firms that offer health benefits differ from those that
do not. Washington, D.C.:HIAA, 1991 (based on HIAA 1990 employer survey).

4. Stephen H. Long and M. Susan Marquis, 'Gaps in Employer Coverage: Lack of Supply or Lack of
Demand?" Health Affairs, vol. 12 (Supp. 1993), pp. 282-293; Charles P. Hall and John M. Kuder, "Small
Business and Health Care — Results of a Survey," The National Federation of Independent Business (NFIB)
Foundation, 1990; Catherine G. McLaughlin and Wendy K. Zellers, 'The Shortcomings of Voluntarism in the
Small-Group Insurance Market," Health ^airs, vol. II, no. 2 (summer 1992), pp. 28-40; Catherine G.
McLaughlin, 'The Dilemma of Affordability-Health Insurance for Small Businesses," in Robert B. Helms, ed.
American Health Policy: Critical Issues for Reform (Washington, D.C.: American Enterprise Institute, 1993),
pp. 152-66; W. David Helms, Anne K. Gauthier, and Daniel M. Campion, 'Mending the Flaws in the Small-
Group Market,' Health Affairs, vol. 11, no. 2 (summer 1992), pp. 7-27.

5. Gail A. Jensen, 'Regulating the Content of Health Plans,' in Robert B. Helms, ed. American Health
Policy: Critical Issues for Reform (Washington, D.C.: American Enterprise Institute, 1993), pp. 167-93.

6. U.S. Government Accounting Office, 'Access to Health Insurance: State Efforts to Assist Small
Businesses," GAO/HRD 92-90 (May 1992), p. 32.

7. It is not possible to eliminate all mandates since some — such as guaranteed renewability and continuity of
coverage laws and requiring family policies to cover newborns despite their preeusting congenital defects — are
highly desirable and promote the goal of increased coverage.

8. See Generally, Families USA, 'No Sale: The Failure of Barebones Insurance,' July 1993; Susan Laudicina,
"Impact of State Basic Benefit Laws on the Uninsured," (Washington, D.C.: Blue Cross and Blue Shield
Association, Dec. 1992); PaUicia A. Butler, "Flesh or Bones? Early Experience of State Limited Benefit Health
Insurance Laws," (Portland MN: National Academy for State Health Policy. Aug. 1992).

9. W. David Helms, Anne K. Gauthier, and Daniel M. Campion, "Mending the Flaws in the Small-Group
Marlcet," Health Affairs, vol. II, no. 2 (summer 1992), pp. 7-27.

585

10. U.S. House of Representatives, Committee on Ways and Means, Subcommittee on Health. Private health
insurance: options for refonn. Washington, D.C.: U.S. Govt. Printing Office, Sept. 20. 1990 (Comm. Print
101-33) (referencing remarks of Judith Glazner (Colorado) and Hugh Davis (Alabama) at a seminar entitled
"Health Insurance for the Uninsured: Strategies and Policy Options for a Public/Private Partnership,"
Washington, D.C., May 31, 1990). However, another opinion survey found that a price reduction of 50
percent would induce half of small firms now without insurance to purchase. Jennifer N. Edwards, Robert J.
Blendon, Robert Leitman. Ellen Morrison, Ian Morrison, and Humphrey Taylor, "Small Business and the
National Health Care Reform Debate," Health Affairs, vol. 1 1, no. 1 (Spring 1992), pp. 164-173.

11. However, these findings were likely biased by severe restrictions in eligibility for the program. For
instance, the firm owners were precluded from participating and from requiring employees to pay any portion of
the premium. K. Thorpe, A. Hendricks, D. Gamick, K. Donelan, and J. Newhouse, "Reducing the Number of
Uninsured by Subsidizing Employment-Based Health Insurance," Journal of the American Medical Association,
vol. 267 (1992), pp. 945-48.

12. P. Anthony Hammond, "H.R. 3626 and its Effects on the Small-Employer Market," Health Insurance
Association of America, June 1992.

13. Society of Actuaries, "Variation by Duration in Small Group Medical Insurance Claims," Sept. 5, 1991.

14. Mark Pauly, "Fairness and Feasibility in National Health Care Systems," Health Economics, vol. 1 (1992),
pp. 93-103.

15. For instance, it is known that workers will switch plans to avoid relatively minor costs, reflecting a high
level of price sensitivity. On the other hand, deep discounts in the cost of insurance do not induce many
presently-insured employers to add coverage. This perceived difference, if it is real, may reflect one of the
following phenomena: (1) workers are more price sensitive than employers; (2) insured workforces are more
price sensitive than uninsured ones; (3) price sensitivity varies widely and these two observations come firom
opposite ends of the spectrum.

16. See Michael A. Morrissey, Price Sensitivity in Health Care: Implications for Health Care Policy
(Washington, D.C.: The NFIB Foundation, 1992), pp. 37-53.

17. Mark A. Hall, 'The Political Economics of Health Insurance Market Reform," Health Affairs, vol. 11, no.
2 (summer 1992), pp. 108-124.

18. P. Anthony Hammond, H.R. 3626 and its Effects on the Small-Employer Market, Health Insurance
Association of America, June 1992.

19. Connecticut Small Employer Health Reinsurance Pool, "Market Place Report," May 1993. The report
gives no data about the number of employers dropping coverage, so it is not yet possible to determine the effect
on overall level of coverage.

20. Personal communication with Allen Feezor, Chief Deputy Commissioner of Insurance. However, there is
no information on the rate of disenroUment during the same period.

21. BNA Health Care DaUy, July 7, 1993.

22. The individual policies offered by the otUy two commercial insurers participating either are extremely
expensive (50-100 percent more than other plans) or have very high deductibles ($2500-35000). Blue Cross
offers reasonably-priced fee-for-service options to individuals in some but not all parts of the state.

23. BNA Health Care Daily, Aug. 5, 1993.

24. Mark Pauly, "The Rational Nonpurchase of Long-Tenn-Care Insurance," Journal of Political Economy.
vol. 98 (Feb. 1990), pp. 153-68.

25. Gail A. Jensen, "Regulating the Content of Health Plans," in Robert B. Helms, ed. American Health
Policy: Critical Issues for Reform (Washington, D.C.: American Enterprise Institute, 1993), pp. 181, 188.

26. Testimony presented to the NAIC Health Care Insurance Access Working Group, Sept. 16, 1991, in
Pittsburgh PA; U.S. Government Accounting Office, Access to Health Insurance: State Efforts to Assist Small
Businesses, GAO/HRD 92-90 (May 1992), p. 24.

27. Although the risk -neutral value of the high-option plan was only 42 percent greater than the low-option
plan, the actual costs (measured by experience-based premiums charged) for subscribers in the high-option plan
were 264 percent higher. Institute of Medicine, Employment and Health Benefits: A Connection at Risk,
Marilyn J. Field and Harold T. Shapiro, eds. (Washington, D.C.: National Academy Press, 1993), p. 176.

586

28. Ibid. See also, M. Susan Marquis, 'Adverse Selection With a Multiple Choice Among Health Insurance
Plans: A Simulation Analysis," Journal of Health Economics, vol. 11 (1992), pp. 129-151.

29. Harold Luft, et al., 'Adverse Selection in a Large Multiple-Option Health Benefits Program,' 6 Advances
in Health Economics and Health Services Research, in R. Scheffler and L. Rossiter, eds., vol. 6 (Greenwich
CT: JAI Press 1985), pp. 197-229.

30. R.P. Ellis, "The Effect of Prior- Year Health Expenditures on Health Coverage Plan Choice," Advances in
Health Economics and Health Services Research, R. Scheffler and L. Rossiter, eds., vol. 6 (Greenwich CT: JAI
Press 1985).

31. U.S. General Accounting Office, 'Rochester's Community Approach Yields Better Access, Lower Costs,'
Jan. 1993; William J. Hall and Paul F. Griner, 'Cost-Effective Health Care: The Rochester Experience,'
Health Affairs, vol. 12, no. 1 (Spring 1993), pp. 58-69.

32. Compare the experience described by Larry Brown and Catherine McLaughlin in 'Constraining Costs at
the Commimity Level: A Critique," Health Affairs (Winter 1990), pp. 5-28.

33. Heniy Gilgoff, "Dialing in Desperation: Coming Change in Insurance Law Sparks Panic,' Newsday,
March 12, 1993. However, these increases also reflect underlying increases in the cost of care.

34. American Academy of Actuaries, 'An Analysis of Mandated Community Rating,' March 1993; William R.
Jones, Charles T. Doe, and Jonathan M. Topodas, 'Pure Community Rating: A Quick Fix to Avoid,' Journal
of American Health Policy, Jan/Feb. 1993, pp. 29-33 (representing AETNA). See also Kenneth E. Thorpe,
'Expanding Employment-Based Health Insurance: Is Small Group Reform the Answer?' Inquiry, vol. 29
(Summer 1992), pp. 128-136 (with move to community rating, 35 percent of groups would have price increases
of 30 percent or more).

35. Victoria C. Craig, Mark Litow, and Greg Scandlen, Mandatory Community Rating: 'The Most Dangerous
Cure for Health Care Woes' (Alexandria VA: Council for Affordable Health Insurance, July 1993). Although
this source, which represents small insurers, has a clear financial stake against commimity rating, its projections
appear to be based on reasonable and documented assumptions about price increases and price sensitivity.
However, the study is not explicit about its price elasticity assumptions, and it does not elaborate on how
sensitive the findings are to these assumptions.

36. American Academy of Actuaries, note 48.

37. U.S. Government Accounting Office, States Need More Department of Labor Help to Regulate Multiple
En^loyer Welfare Arrangements (GAO/HRD 92-40, March 1992).

38. U.S. Government Accounting Office, Access to Health Insurance: State Efforts to Assist Small Businesses,
GAO/HRD 92-90 (May 1992); National Health Policy Fomm, 'Multiple Employer Purchasing Groups (METs,
MEW As, HINs, HIPCs): The Challenge of Meshing ERISA Standards with Health Insurance Reform,' Issue
Brief No. 604 (Washington, D.C., 1992).

39. BNA Health Law Reporter, May 27, 1993, p. 684.

40. Walton Francis, A Health Care Program Rim by the Federal Government that Works, The American
Enterprise, vol. 4, oo. 4 (July/Aug 1993), pp. 50-61.

41. BNA Health Care Policy Report, March 8, 1993, p. 21. See also Roger Feldman and Bryan Dowd, 'The
Effectiveness of Managed Competition: Results from a Natural Experiment, ' conference paper presented at,
American Enterprise Institute, Health Care Expenditure Controls: Political and Economic Issues, April 21-22,
1993 (reporting results firom the program for Minnesota state employees).

42. U.S. Government Accounting Office, Access to Health Insurance: Slate Efforts to Assist Small Businesses,
GAO/HRD 92-90 (May 1992), p. 54; National Health Policy Forum, "Multiple Employer Purchasing Groups
(METs, MEW As, HINs, WPCs): The Challenge of Meshing ERISA Standards with Health Insurance Reform,"
Issue Brief No. 604 (Washington, D.C., 1992).

43. U.S. Government Accounting Office, "Access to Health Insurance: State Efforts to Assist Small
Businesses," GAO/HRD 92-90 (May 1992), p. 52.

587

TESTIMONY OF R. GLENN HUBBARD

PROFESSOR OF ECONOMICS AND FINANCE. COLUMBIA UNIVERSITY

BEFORE THE

HEALTH SUBCOMMITTEE. COMMITTEE ON WAYS AND MEANS

UNITED STATES HOUSE OF REPRESENTATIVES

Mr. Chairman and Members of the Subcommittee:

It is a pleasure to appear before you today to discuss economic issues relating to reform of the
nation's health care system.

The coming months (or even years) will witness a significant debate over "health care reform."
While numerous intellectual foundations for reform have been discussed in academic and public
policy circles for at least a decade, the current debate will likely center on the Health Security
Act (H.R. 3600/S. 1757) unveiled by President Clinton last fall, and competing plans offered by
both Republicans and Democrats (including for example the Managed Competition Act, "Cooper-
Grandy Plan". H.R. 3222/S. 1579; and Health Equity and Access Reform Today Act, "HEART,"
S.1770).

To evaluate these plans, we need to remind ourselves what the central issues are. The problem
is not a substandard quality of health care: U.S. physicians treat patients using the most
advanced technology and drug ther^y available in the world, and the United States is the
preeminent center of medical research. In part as a consequence of these advantages, we are
enjoying both longer and healthier lives than did cur predecessors.

The central problems for discussion are access and cost. First, more than 35 million Americans
are estimated to have no health insurance, requiring them to seek acute care in emergency rooms.
Second, the growth in medical costs is unsustainable. Medical expenditures are now more than
12% of GDP, up from about 5% in 1960. At this rate of growth in age-adjusted medical
expenditures (adjusting also for changes in the average age of the population), medical costs
would account for about one-fourth of GDP by 2030.

588

More narrowly put, the debate over health care reform is generally one over reforms of the
market for health insurance. "Acxess" and "cost" concerns in the health insurance market are
not unrelated: Individuals, with some exceptions, are uninsured because the cost of health
insurance exceeds the value they place on insurance coverage. There has been a sea change in
the role of health insurance in fmancing medical care in the United States over the past
generation. While the majority of medical expenses were paid directly by consumers in 1960,
30 years later, consumers' direct contributions had dropped to 23 percent, with the balance paid
by private and public insurance. The incentives offered by insurance ~ and government policy
toward insurance ~ are, in many ways, at the debate's center stage.

I suspect that many (if not most) of us would build on the many successes of the current health
insurance system and slate our "access" and "cost" concerns as follows. The health insurance
system should be privately organized, provide some choice to consumers, be accessible to most
citizens at a reasonable cost, and offer broad pooling of health risk based on social insurance
principles (that is, health status per se should not affect an individual's or family's health
insurance costs). For a number of reasons relating both to the economics of medical care and
the economics of insurance, this outcome is unlikely to prevail in a purely private market. Some
form of government intervention will be required. How much intervention is the question that
illuminates differences among alternatives.

Expanding Access

A lack of health insurance and a lack of medical care are not the same thing. (Some estimates
suggest that the uninsured receive about one-half of the medical care they would receive if they
were insured.) Why might individuals choose not to purchase health insurance? First, very low-
income individuals value and additional dollar of money income very highly for the purchase of
a range of necessities, making health insurance unattractive, given the availability of
uncompensated care. Second some individuals - particularly the young ~ may believe
themselves to be very healthy and/or simply not perceive the risky consequences of their action.
Finally, some individuals fmd insurance too costly, deciding to self-insure because the premiums
charged are high relative to those charged to similarly situated individuals.

To ensure that all Americans purchase health insurance requires the imposition of an individual
mandate, the first intervention I shall mention. Simply put, all individuals and families must
purchase at least some basic reference package of benefits. Such a mandate is an integral part
of the HEART proposal of Senators Chafee and Dole.

It is important that the mandate be placed at the individual, rather than the employer, level. This
observation stems directly from the simple notion that the total amount of compensation that an
employer can pay an employee depends on that employee's productivity. That is, in the long
run, the profits of anonymous shareholders will not finance the mandat«l benefits. As long as
employer-mandated benefits do not affect productivity, the employee's wages and other non-

589

health compensation must fall. The Administration's rather generous mandated benefit would
be paid for by a hidden tax on benefit recipients.'

Placing the mandate on the individual rather than the employer also avoids the problem of
potential job losses for individuals whose wages are sufficiently near the minimum wage that they
cannot fall to offset the purchase of health insurance. With an individual mandate, it is important
to provide a tax credit to very low-income individuals sufficient to purchase a basic plan; the
credit could be phased out gradually as income rises.

It is also important that the basic package cover a minimum set of benefits rather than a generous
set to avoid over-consumption of medical services and ensure that, at the margin, consumers pay
the full cost if they choose to buy extra insurance. How could this be accomplished? Currently,
the federal tax subsidy for employer-provided health insurance is open-ended, conferring
relatively larger subsidies for the generous plans of higher-income workers. Numerous empirical
studies have documented the demand-enhancing aspect of this favorable tax treatment of health
insurance.^ To remedy this tax bias, the actuarial value of a basic benefits package could
continue to be nontaxed for individuals: actuarial values in excess of this level could be
considered taxable income. Such an approach does not eliminate individuals' choice, but does
require them to face the full cost of very generous plans at the margin. This modification of
existing law, while improving incentives, generates revenue to finance the provision of health
insurance tax credits.^ (I return to the subject of "financing" below.)

Accepting for illustration broad parameters of President Clinton's proposal, let's assume that
individuals will be required to purchase insurance on their own or via their employers through

'Recent studies by Jonathan Gruber of M.I.T. and Alan Kreuger of Princeton University
have documented that mandates reduce other compensation roughly one for one.

^ Research by Martin Feldstein and by Feldstein and Bernard Friedman in the 1970s are the
seminal contributions to the literature on the loss in economic efficiency of failing to tax
employer-provided health insurance. Recently, Jonathan Gniber and James Poterba of M.I.T.
found that, in response to the partial income tax deduction for health insurance costs to self-
employed workers, under the Tax Reform Act of 1986, increased the demand for insurance
coverage.

^ The Administration's proposal would tax in the distant future (ten years after enactment)
employees on health benefits not part of the basic benefits package. The Cooper-Grandy plan
would limit employer deductions to the cost of the lowest-price "accountable health plan" in each
region. The HEART proposal follows a similar (though less binding) limit on deductibility of
employer health contributions, but employer-paid health insurance premiums in excess of the "tax
cap" will be taxable to the employee.

590

health alliances that bargain with insurers/ To ensure that consumers face appropriate
incentives in their utilization of medical services, insurance plans should offer managed care
options and traditional fee-for-services plans (but with high deductibles and copayments). The
Administration proposal's lack serious cost sharing in its so-called "high cost sharing" plan is
lamentable in this respect.

How can reform make sure that individuals' access is not restricted by health status? A sensible
approach (the second intervention I shall mention) is that insurers would not be permitted to
discriminate based on preexisting conditions/ To avoid losses for plans with sicker than
average enrollees and gains for plans with healthier than average enroUees, health risk adjusters
would be used. (The plans with healthier than average enrollees would pay contributions to a
health risk pool, while those with sicker than average enrollees would receive transfers from the
pool.) The operation of health risk pools significantly reduces the scope for insurers' "cream
skimming" of favorable risks present in the current system.*

* The Administration proposal would allow employers with more than SOOO employees to
form corporate alliances. Given the experimental nature of alliances and the success of the
current system for large employers, a better strategy might be allow employers with more than
1(X) workers to purchase insurance on their own or self-insure, as in the Cooper-Grandy and
HEART proposals.

* The Administration, Cooper-Grandy, and HEART proposals each offer restrictions in this
vein.

' Health risk adjustment schemes are not as rigid as they might appear at first glance. It
is possible to vary transfers according to a number of additional variables, including gender,
geographic location, industry or occupational categories, or health habits (e.g., smoking). The
important underlying premise is that adjustments do not depend on health status.

Two logistical issues complicate implementation of the health risk pooling proposal-design
of individual health status adjustment factors and mechanisms for scheduler payments to insurers.

Each year, members of the pool's population would be divided into one of a number of
mutually exclusive health status categories. Categorization could be implemented using
diagnostic information already collected by health insurance plans on inpatient and outpatient
claims. Indeed, applied research by public health specialists, statisticians, and economists has
already produced methods for predicting health care costs based on the health characteristics of
the covered population. Leading examples include the Ambulatory Care Group system developed
at Johns Hopkins University and the Diagnostic Cost Group developed at Boston University. The
Department of Health and Human Services could fund technical and implementation research to
develop workable health status adjustment systems for use by the states.

Second, payments to and from the risk pool could be prospective or retrospective.
Prospective payments would be based on the health status adjustment factor determined before

591

Two features of a good health risk adjustment system are important. First, risk pool payments
should equal the difference between the expected average expenditures of the groups and the
average of all individuals in the pool.^ Since payments reflect average not actual expenditures,
insurers face incentives to control costs. (This is different from "community rating," in which
all individuals would pay shares of the cost of actual expenditures, with no incentive to control
costs.) Second, premiums should vary with age. Since average health care expenses rise with
age, individuals should have an incentive to Hnance those average expenses. If premiums do not
vary with age, we further our already significant fiscal intergenerational redistribution from the
young to the elderly. The Administration proposal discusses health risk adjustment, but provides
few details. The limited discussion, suggests that the plan will fail to age-adjust insurance
premiums.

Another access question relates to how individuals will be able to maintain insurance coverage
if they change jobs. The Clinton proposal (along with most reform proposals in the public
debate) would guarantee individuals' access to health insurance if they move or change jobs.
Individuals becoming unemployed would be eligible for taxpayer subsidies to purchase insurance.

Controlling Costs

Expanding access to health insurance without addressing underlying causes of spiraling
health insurance (and health care) costs is not likely to be a viable strategy for "comprehensive"
reform. The crux of the problem is this: The mix of medical care services provided is not

the service period for each enroUee, while retrospective payments would be based on the health
status adjustment factor determined during the service period. There are advantages and
disadvantages associated with each; the important point is that both payment mechanisms are
based on expected, not actual expenditures.

An example illustrating the operation of the health risk pool is instructive. Suppose that
an eligible individual in one of the risk pools wants to purchase a reference benefit package at
the premium charged. The premium would be paid to the insurer, though the amount ultimately
received by the issuing insurer would be subject to a health status adjustment. Each eligible
individual in the pool would be assigned to a health status category each year. Health status
categories would be assigned a weight ha^ on expected health care costs relative to the average
for the covered population in the pool. The insurer in the example would compute an average
weight for all individuals in the pool covered under its policies. If that average weight is less
than the statewide average, the insurer would be required to make a contribution to the pool; if
the insurer had an average weight exceeding the statewide average, it would receive a net transfer
from the pool.

^ In equilibrium, though premiums would not be regulated, premiums for coverage would
be independent of health status.

592

necessarily that which fully infonned consumers would purchase, and such services are not
produced at minimum cost. Economists have generally focused attention on problems in
insurance markets. This argument incorporates aspects of moral hazard (i.e. that insurance for
fee-for-service medical care with low cost sharing engenders excess demand for medical services)
and the distortion of the perceived price of health insurance (owing to the favorable tax treatment
under both the income and payroll taxes.)

This is not to say that relatively efficient forms of health insurance coverage are not possible in
the marketplace. Options with "managed care" (in which the health plan purchases a package
of health care through, say, a health maintenance organization at a lower cost than fee-for-service
medicine) or fee-for-serVice coverage with deductibles and copayments are available. Three
factors in the market for health insurance have probably reduced the demand for such alternative,
however. These factors include: the tax subsidies mentioned above; limited consumer
information about the quality of services of health-care providers, forcing "price" to be taken as
a measure of quality; and opportunities for favorable risk selection by insurers in the
marketplace.

Two "cost" issues loom large in the debate over health insurance reform, the cost discussed
above of extending access to the currently uninsured and reducing the growth of medical costs.
The former can be financed gradually by reducing the current tax subsidy to employer-provided
insurance, raising other taxes (as in the 'sin tax" increases in the Administration's proposal), and
redirecting current federal contributions for uncompensated care (so-called "disproportionate
share payments"). The Administration's proposal aims to finance access and achieve control of
the second cost issue by trimming the growth in federal contributions to public insurance
programs and by what amounts to regulatory price controls; much less restrictive options are
presented in the Cooper-Grandy and HEART proposals.

The bulk of the financing of the Administration's plan comes from savings in Medicare and
Medicaid programs. Wishing inflation in the costs of these programs were lower is, of course,
not the same as suggesting specific micro incentives to accomplish the goal. As an astonishing
point of reference, the plan initially assumes that, by 1996, the rate of growth of federal
Medicare and Medicaid spending will be cut by one-third; put more radically, the rate of growth
of Medicare and Medicaid spending above general inflation and population growth will be cut
in half. If, in practice, cost inflation falls by much less, providers would have to shift the cost
of caring for Medicare and Medicaid patients by increasing charges to private (generally insured)
patients.

This pattern is sadly familiar, but with a new twist. As private insurance premiums rise,
premium caps in the Administration's proposal would bind. Macro-level budgets and caps do
not provide micro incentives. There is simply no reason to believe that this enforced macro cost
containment would be borne by the infamous "waste, fraud, and abuse." Indeed, there is
significant reason to believe that this aspect of the proposal would discourage innovation and
provider expenditures with long-term payoffs.

593

Determininy Government's Role

I mentioned at the outset that, at least under my interpretation of what most of us seek from
reform of health insurance markets, some government intervention will be necessary. Much of
the regulation of insurance market reforms can build on existing state-level regulation.
Additional federal involvement would come in the form of tax policy changes and the design of
basic benefits packages for managed care and fee-for-service options. It is possible to construct
a National Benefits Commission to determine benefits packages, though care must be taken to
avoid "regulatory capture' by provider groups.

President Clinton's National Health Care Board offers breathtakingly sweeping intervention and
government-directed micro-management of the health care industry. In addition to determining
the composition of basic benefits packages, the National Health Board would set national health
spending targets, establish baseline budgets for health alliances, and decide upon the
"reasonableness" of drug prices. The Board would have presidentially appointed members like
the Federal Reserve Board. Its independence from the political process would be far less than
the Fed's, however, since the term of the National Health Board's chairman would match that
of the President; the chairman, moreover, would serve at the President's pleasure. The Board
would also be empowered to create a new federal staff.

In addition to the creation of the National Health Board, the Administration's proposal places the
Secretary of Health and Human Services in charge of initiatives to set targets for the number of
physicians to be trained in primary care and specialties. This heavy-handed intervention ignores
the natural increase in the reward to primary care physicians as hodth insurance becomes more
widely available, and fails to use effective monetary incentives for prospective physicians.

President Clinton has succeeded in reinvigorating the national debate over health care reform.
His own plan, while containing many good ideas (medical malpractice reform, for example),
suffers from its emphasis on regulation and macro controls rather than micro incentives. Indeed,
it is hard to escape the conclusion that the proposal is intended to increase government regulation
of the health care industry as much as it is to reform health insurance markets. Before the
legislative process begins the long march of compromise with competing reform ideas,
participants should try to answer two simple questions: What are the goals of the plan? Is a
given plan the most efficient way to achieve those goals? As I reached the end of the
Administration Working Group's treatise, I at least would not guess the answers for that plan.
The HEART and Cocper-Grxndy proposals provide better starting points for debate.

Concluding Remarks

I have proposed only a very brief review of economic issues surrounding debate over "access"
and "cost containment" aspects of health care reform. Let me close with four observations

594

regarding the future debate of the President's plan and competing proposals:

1) There is no free lunch. In the short run (and possibly in the long run), significantly expanded
access to health insurance is likely to be costly. Insuring the currently uninsured is expensive,
though the cost would be reduced by scaling back current federal payments for uncompensated
care. Moreover, to the extent that the risk pooling proposal with health status adjustments
increases the number of individuals with coverage, average premiums paid by those currently
covered may well rise.

In the course of the debate over the President's proposal, mandates for health insurance coverage
for individuals should be considered very seriously. A mandate for individual coverage - e.g. ,
requiring some basic benefit plan - offers an advantage of broadening the pool of enrollees for
sharing risk. However, to be realistic, such a mandate would have to be accompanied by more
complete provision of health insurance tax credits to low-income individuals. In addition, to
avoid regulation of premiums charged by insurers, funding for such tax credits may have to
increase more rapidly in the short run than envisioned in most proposals.

2) Some regulation cannot be avoided. Proposals to expand access to health insurance in the
small group market at a reasonable cost necessarily involve regulatory intervention. Absent such
intervention, favorable risk selection by insurers is unlikely to end. Regulation should seek to
promote the basic social insurance principles I discussed earlier, and should not attempt to set
premiums.

3) At some point, the open-ended tax subsidy for employer provided health insurance will have
to be examined. The current subsidy encourages consumption of medical services and is
distributionally inequitable, conferring no benefits to low-income workers without insurance and
considerable benefits to affluent employees. Addressing this issue will nonetheless be difficult;
a tax cap set a value other than zero will involve significant definitional questions.

4) Information collection and dissemination will be important components of comprehensive
reform in the search-intensive health care market. Attention should be focused on direct
dissemination to individuals and on group purchasing arrangements (to communicate information
to small employers) as suggested in all of the major proposals.

595

INTERACT

The Institute tor Interactive Management

February 25, 1994

The Honorable Fortney (Pete) Stark
Chairman, Subcommittee on Health
Committee on Ways and Means
U.S. House of Representatives
1114 Longworth House Office Building
Washington DC 20515

Dear Chairman Stark:

Thank you for the opportunity to submit testimony for your hearing on "Alternative
Health Care Plans." I am appreciative of your leadership on the health refonn issue and
share your commitment to coverage for all Americans and to a restructuring of the
delivery system to improve efficiency and control costs.

If an "overhaul" of the current system does occur, there will be an extended
discussion about various approaches, from single payer to voluntary, and features of a
national plan.

In that respect, I am enclosing a copy of a health care reform plan developed by
a consortium under the leadership of the Institute for Interactive Management
(INTERACT), of which I am chairman, based on systems analysis principles. The
Institute is a management consulting and policy group based in Philadelphia,
Pennsylvania. It developed the proposal using interactive techniques in conjunction
with a number of health care policy experts, providers and employers.

By way of background, INTERACTS charter was an unusual one: to disregard
existing financial and professional interests and design an optimal system from the
ground up. This design would provide universal coverage and be based on incentives
which would change patient and provider behavior to more efficiently use resources.
Thus the proposal is as free from self-interest as any you are likely to encounter.

It incorporates centralized federal revenue collection function up front, with
governmental control of total ultimate system expenditures through the issuance of
individual vouchers on a capitated basis. But there is no regulation of institutional
budgets or provider rates as is proposed in some models. Indeed, system resources
are subsequently distributed on a free-market basis.

Uniquely, there is a modified capitation feature, with the voucher capitation
payment varying according to the health status of the individual. This removes the
incentive for providers to turn down sick individuals, and at the same time allows small
provider groups, even individual practitioners, to survive without large-scale pooling, if
they so desire.

596

A key point is that the risk of overuse of the system and overpayment for other
providers' services is placed on the primary care provider. He or she becomes the
system's resource manager -- a mini-HMO if you will - backed up to stop-loss
insurance. We feel this approach and the other incentives of the plan would lead most
practitioners to aggregate in integrated health systems or other organizations.

Finally, the design incorporates a wellness component which is separately
funded from the basic remedial care program. We feel patient behavioral change is
essential to decreasing the demands we place on the health care system and thus to
long term cost control. Participation in wellness activities is encouraged through a tax
break for the individual.

While we feel the plan as set forth is organic and well-integrated, we also feel
that many of the ideas embodied in it, particularly the incentive structure, could be
usefully adapted to other plans to strengthen their impact.

Attached is a summary of the INTERACT plan. The plan is currently being
drafted by the House legislative counsel and will be furnished to the Ways and Means
Committee for inclusion in this hearing report when completed. I sincerely hope that the
INTERACT plan will be a useful addition to the debate.

Again, thank you for the opportunity to participate in the "Alternative Health Care
Plan" hearing.

Shjcerely,

Russell L. Ackoff 0^

Chairman of the Board
INTERACT

597
INTERACT Plan Overview

The INTERACT Healthcare Reform Plan is built around a set of incentives crafted to
produce wise use of health care resources. Some of its features are similar to plans
already advanced in the healthcare reform debate. Others are original.

♦Covered Popnlgtipn: All legal residents of the United States are covered,
including Medicare and Medicaid populations.

•Mandate: Individual — individuals receive a comprehensive voucher from the
government. (Employers participate through a tax based on hazards of job or site,
similar to workmen's compensation.)

♦Revenge Collectiop/Disbufsanent: Revenues flow to the national level, and are
returned to the system through vouchers to each individual. Different revenue
sources are possible, individual tax is suggested.

♦Services Covered: All medically necessary plus preventive care. Dental, optical,
auditory, long-term care, basic funeral are desirable, future resources permitting.
Final decision on which services are or are not covered is made annually at the
community level. No restriction on development of insurance to provide uncovered
procedures outside of system.

♦Provisi(Hi of Services/Risk: Primary care providers in the system accept the
voucher amount and agree to provide aU necessary medical services covered in the
community. The voucher is a type of capitated payment, but is based on an
actuarial calculation of the individual's need for services during the coming year:
vouchers for those with cancer or diabetes will be worth much more than vouchers
for healthy young people (modification for regional cost differences is allowed).

♦Thus, while the primary care provider accepts the risk of paying for all
covered medical services, that risk is decreased by the variation in voucher
value. Backup stop-loss insurance to protect against financial ruin is required
of all primary care providers.

•The primary care provider is best able to be the system's "prudent purchaser",
and under this model, has a strong incentive to do so.

•Provision of Services/Delivery: The primary care provider contracts or joins with
hospitals, laboratories, specialists, rehab facilities, etc. to serve his or her patients.
Economic and practical incentives are expected to lead most primary care providers
to aggregate into some kind of group practice or integrated health system, in which
voucher income is pooled.

♦Protection Again-st Underseirvicing! The incentive for primary care providers to
underserve is reduced by the required stop-loss insurance. Further:

♦Organized community practice review coupled with an unparalleled data
system and practice standards will reduce intentional underservicing.

598

•Also, a second opinion is available, with the provider paying if the second
opinion differs, while the patient pays if the second opinion agrees with the
primary care provider.

•Finally, a yearly bonus is paid to the primary care provider if the individual
reenrolls with him: i.e. an incentive to keep the patient not only healthy, but
satisfied.

•Patient Choice: Provider participation in the system is voluntary, and outside
services remain available. The patient may choose any primary care provider in the
system (regardless of location), subject to patient load limits, and may change by
right once a year. If a particular specialist is desired, the patient must enroll with a
primary care provider in the same integrated health system or group practice or
having a referral agreement with the speciaUst (affiliation arrangements are made
pubUc each year in advance of the date by which patients must select primary care
providers). Services outside the system remain available, but the individual is not
relieved of his contribution (premium or tax), and must pay for outside services
from his or her own pocket.

'Infonnation System: A secure national network of local databases administered by
community boards undergixds the system, furnishing central authorities with the
health status data necessary to calculate the actuarial value of individual vouchers,
and to monitor payment patterns for fraud purposes. Through the system, local
boards are able to compare practice patterns against standards and assess the need
for local remedial or educational programs.

»We-llnes.i Pmgram: A unique feature of tlie plan is that it incorporates a separate
wellness program. A wellness voucher is generated, usable only for wellness
activities at programs/facilities certified eligible by the community board.
Examples: smoking cessation and exercise/cardiovascular fitness programs. The
voucher is funded by a separate budget for wellness, to prevent invasion to pay for
acute care services (historically a problem for HMO's).

♦Commanity Focus: Oversight for the delivery system, and key decisions on
covered services, provider certification, attracting providers to underserved areas,
etc., are vested in community boards rather than in the federal government.
Separately funded, these boards have the general responsibility to promote the
health of those receiving their care in the community, ensure quality of services,
monitor practice patterns, and administer the local health care database.

CcHiclusi(Hi:

In comparative terms, the INTERACT plan has a central revenue collection and
distribution feature, channeling voucher funds from individual patients to primary care
providers. It incorporates an inherent self-limiting budget mechanism, producing at
least as great a level of savings as single-payer systems. However, it avoids the
rate-setting/price-control mechanisms of most single-payer models.

599

Its large-scale cost controls work in two ways. At the national level, the "budget"
matches the aggregate value of all vouchers issued with the aggregate value of revenues
from all sources. At the locaJ level, the benefit package is adjusted by the community
board to reflect local priorities, within the total amount of money flowing into the
community from all vouchers.

The plan thus allows for competition and price movement among providers of various
medical services and products, with the primary care provider being the prudent
purchaser.

The capitation feature invokes the efficiency and savings of managed care, while the
variability of the voucher amount by health status removes any incentive to refuse care
to those who are ill or who are thought normally to be "bad risks". The variable value of
the voucher, coupled with stop-loss insurance, also permits smaller groups of providers
to "pool" than is normally feasible.

The individual mandate and general requirement that primary care providers accept
anyone presenting a voucher remove concerns about portability, availability, and
pre-existing conditions.

In short, the INTERACT plan features an unusually flexible, community based,
approach to cost savings and universal coverage without detailed governmental
regulation. Its wellness program is unique among plans currently under
discussion. The principles and incentives on which the proposal is built deserve to
be seriously considered both in their own right, and as an "idealized" guide to the
assessment of other plans.

INTERACT Plan Overview:

600

WRITTEN STATEMENT OF PAUL HOUGHLAND, JR., EXECUTIVE DIRECTOR,
OPTICIANS ASSOCIATION OF AMERICA ON HEALTH CARE REFORM
LEGISLATIVE PROPOSALS

SUBMITTED TO THE SUBCOMMITTEE ON HEALTH, COMMITTEE ON WAYS AND
MEANS, FEBRUARY 28, 1994

The Opticians Association of America is pleased to have this
opportunity to present its views on health care reform
legislation to the members of the House Ways and Means Committee.

OAA represents approximately 40,000 dispensing opticians
throughout the United States. Our membership consists of both
individual and firm members. Individual members may work for
another optician, an ophthalmologist, an optometrist, or one of
the large chains which dispenses eyewear. Firm members are small
businessmen who own their own independent optical firms and
compete with medical doctors (ophthalmologists) , optometrists, and
the chain stores in dispensing eyewear, both spectacles and
contact lenses. The principal issues examined in this statement
reflect the concerns of the small, independent firm owner, the
heart and soul of our association.

Because we represent independent small businesses, we believe
that freedom is the paramount issue. Allowing consumers freedom
to shop for eye glasses and contact lenses at stores of their
choice is a cardinal tenet of the optician's credo and must be
recognized in the final health care reform legislative package.

OAA's Board of Directors has adopted three principal objectives
with regard to any health care reform plan adopted by Congress .
First, any health care plan which includes vision services must
recognize opticians as providers AND at the same time contain
strong anti-self referral provisions similar to the prohibitions
included in HR 345 introduced by Ways and Means Health
Subcommittee Chairman Stark and cosponsored by Representative
Levin, a member of the Ways and Means Health Subcommittee.

We are very pleased that significant portions of HR 345 were
included in the Omnibus Budget Reconciliation Act of 1993, and
strongly support the inclusion of strong anti -referral language
in health care reform legislation. With respect to vision care we
strongly support extending and improving the ban on self-
referrals to prohibit both ophthalmologists and optometrists from
making referrals to health care providers with which they have a
financial relationship.

Maintaining a level playing field within the vision care field
requires the passage of strong language banning self -referrals .
We encourage every member of this committee to support the
extension of the Stark anti-referral language as the best way
to assure the preservation of the kind of competition which will
lead to the lowest cost for vision care services to consumers.

Second, any alliances, voluntary or mandatory, must recognize
opticians as providers. We recognize that the mandatory alliances
found in HR 3600, the Health Security Act, the Administration's
health care reform proposal do not command much support in the
Health Subcommittee, and we accept that fact. In fairness to the
interests of our members, however, we must retain a pragmatic
approach to this matter. If the alliances, in either voluntary or
mandatory form, remain in the legislation being considered by
this committee, we insist upon the inclusion of opticians as
providers within these alliances.

Finally, we support the preemption of anti-competitive state laws
with regard to allied health prof essionals (opticians) . Our
objective here is keeping health care costs to the consumer as
low as possible. Studies have shown that where competition with
regard to spectacles and contact lenses does not exist, prices
for these commodities increase, sometimes sharply.

601

We recognize much merit in HR 1200, the American Health Security-
Act of 1993, sponsored by the Honorable Jim McDermott of
Washington, a member of this subcommittee, and HR 2610, the
Mediplan Act of 1993, introduced by the Honorable Fortney Stark,
chairman of the Ways and Means Health Subcommittee, particularly
the extensive benefits provided in both plans and the
universality of coverage.

However, we prefer an approach which would provide generous
benefits, including vision care and universal coverage, while
preserving the existing structure of private insurance. We
believe significant health care reform can be achieved within a
system that relies upon private health insurance sold by private
companies competing within the free enterprise system. OAA will
back health care reform bills that encourage small businesses to
stay in business, and our association will strongly oppose plans
which, in our judgment, cripple the entrepreneurial spirit.

We are very supportive of the concept of small business pooling
of health insurance purchases. OAA members who are firm owners
would benefit greatly from plans to enlarge the purchasing pool
for health insurance premium purposes .

As a representative of small businesses, the OAA strongly
supports paperwork reduction and standardization of forms used by
private health care providers and commercial carriers. It is high
time that health care providers spend their time delivering
health services not filling out complicated, duplicative forms.

While the Opticians Association of America recognizes the
motivation of those who would streamline the provision of health
services by amending the antitrust laws, it wishes to urge
extreme caution in crafting these modifications. Antitrust
exemptions designed to help hospitals and clinics in rural areas
share expensive equipment must be written in very precise
legislative language.

Unfortunately, opticians have suffered from anti-competitive
practices, sometimes sanctioned by legislation, in many states.
For example, opticians are excluded from providing vision care
services within health maintenance organizations in some states.
Other states prohibit opticians from fitting contact lenses
despite evidence cited by a Federal Trade Commission study which
found no significant difference in quality between opticians,
ophthalmologists, and optometrists in the fitting of contact
lenses. Therefore the OAA approaches any modification of existing
antitrust law with great trepidation.

Finally, the Opticians Association of America objects to the
inclusion of an entire subtitle in HR 3600 which would change the
status of independent contractors not only for health care
purposes but also for employment tax purposes. Section 7301 would
permit the Internal Revenue Service to issue regulations on
"employment status." Section 7302 would increase penalties on
businesses who fail to issue accurate Form 1099' s. Section 7303
would amend Section 530 of the Revenue Act of 1978 concerning
safe harbor provisions. The issues raised by the independent
contractor subtitle would do serious damage to productive
business arrangements which opticians currently have with certain
other vision care providers. Many OAA firm members hire
optometrists, contact lens technicians, and other providers in
which the independent contractor status is the key element of the
relationship. Approval of these IRS proposals would have a
serious impact on these relationships. Therefore the OAA strongly
opposes these provisions.

81-665(608)

BOSTON PUBLIC LIBRARY

3 9999 05983 472 9

ISBN 0-16-046315-7

9 780

60"463150'

90000

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