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MANDATING EMPLOYEE HEALTH BENEFITS? A NEW LOOK* JACK NEEDLEMAN Vice President Lewin/ICF Washington, D.C.
MIf Y PAPER FOCUSES ON THE ISSUE of creating broad mandates to provide health insurance coverage to employees. During the past year we have seen a number of initiatives to expand coverage -either to a substantial portion of the uninsured or to establish universal health coverage. Among the proposals advanced are: the bill for mandatory employer coverage; the National Leadership Commission for Health Care proposal for universal coverage, building upon the employment-based system of health insurance; and Alan Einthoven's revised version of his consumer choice plan. The Commonwealth of Massachusetts has enacted a program to provide close to universal coverage; Oregon has enacted a tax credit program for small businesses that provide health insurance coverage for the first time. There is now broad-based discussion of the problems of the uninsured and of the importance of expanding access to care. Many efforts at reform or expansion of health insurance have attempted to build upon and to expand the base of employment-based insurance. Seventy-five percent of the employed population and their dependents receive health insurance coverage through employment-based insurance. Employers and insurers have historically argued for the maintenance of that employment-based insurance system. In this paper I want to review several of the strategies proposed to deal with mandating expanded insurance in the country and to analyze the impacts of these programs. These analyses clarify several critical aspects of these issues. One issue that analysis clarifies is why extending coverage to the uninsured has proved so difficult. This, in turn, sets the stage for debate on the mandates. *Presented in a panel, The Present and Future of Employee Health Benefits and Managed Care, as part of the Annual Health Conference, The Changing Agendafor Health Care in America: Balancing Need and Commitment, held by the Committee on Medicine in Society of the New York Academy of Medicine May 9 and 10, 1989. Address for reprint requests: Lewin/ICF, 1090 Vermont Avenue, NW, Washington, D.C., 20005
Bull. N.Y. Acad. Med.
A NEW LOOK A NEW 81 LOOK81
The issue is not whether we can afford to expand access to care. The cost of closing the gap in access between the uninsured and insured is relatively modest. While it is estimated that 37 million people are uninsured, this does not mean that 37 million people do not get health care. Most of those uninsured get much of the health care they need. The uninsured, for example, average 1.9 visits to physicians each year, the insured 2.3 visits. To bring the uninsured up to the level of use of the insured population would require providing less than one-half visit to the physician per person per year. The gaps for hospital care, prescription drugs, and other services are similar. We have estimated that it would require between $14 billion and $25 billion in new services to bring the utilization of the uninsured up to the levels of the insured. These amounts are between 4 and 8% of our current health care spending. They are less than one percent of our gross national product. The country can afford this. The problem is that no program options would finance only the additional services needed by the uninsured, leaving all current financing unchanged. Nor are there insurance options that would provide only new insurance to the 37 million uninsured and leave the insurance of everyone else unchanged. Any program to insure the 37 million uninsured will have major consequences for those currently insured and for those who pay for their insurance. We are therefore debating not only who will pay for new care for the uninsured, but who will pay for the care they currently receive, how financing for those already insured will change, who will bear the costs, and whether the shifts in funding that would result are appropriate and equitable. Table I presents data on the insurance status and sources of insurance of the non-Medicare population. While low income groups are more likely to be uninsured, the uninsured are widely distributed across different incomes. Twenty-three percent of the uninsured have incomes over $30,000, which is approximately the median family income in the United States. Most of the population at each income level is insured. Three sources of insurance are identified on the table: Medicaid, nongroup (insurance individuals purchase for themselves or their families), and group insurance (including CHAMPUS and VA coverage). Medicaid insures 11.8 million individuals in families with incomes below $10,000, approximately poverty level. However, 2.8 million people in the same income category purchase their own insurance and an additional 4.7 million people have group insurance coverage. In the $10,000 to $15,000 income band, two million people receive Medicaid, 1.9 million buy individual insurance, and approximately 8.4 million have employmentVol. 66, No. 1, January-February 1990
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A NEW LOOK
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based or other group insurance. At higher income levels an increasing number of individuals obtain insurance through employment. What are the consequences of these numbers? Any effort to expand insurance for the uninsured will also involve at least three other populations. One is the population of the low income self-insured, the second is higher income Medicaid, and the third is the low income group insured. Proposals that make insurance available on the basis of income will encourage those with nongroup coverage to drop it in favor of the public or employer insurance at lower out-of-pocket cost, and may also lead to shifts in coverage among those low income people currently insured through Medicaid or employer plans. As programs that strive for universal coverage are considered, they will influence insurance coverage for many additional people who purchase nongroup insurance and are also more likely to affect those with employment-based coverage. As a result, mandates, Medicaid expansion, and other initiatives affect not only the 37 million uninsured but as many as 15 million who purchase their own insurance, and potentially a sizable number of those with other coverage. Current out-of-pocket expenses as well as new care will become insured expenses, and their costs will be redistributed to others. Some proposals affect populations one and a half to three times the uninsured population. Because out-of-pocket expenses for care already being received are refinanced, the number of dollars involved in these proposals are two to four times larger. Every proposal redistributes current costs as well as pays for new care, and thus generates debate over the appropriate distribution of costs among government, individuals, and employers, within employers, and between those employers who currently provide health insurance and those who do not. Each proposal presents an answer to the question who should pay. Several approaches have been proposed for mandates. It is important to distinguish among them, because now they operate and their consequences can differ. These are summarized in Table II. TRUE MANDATE
One approach is a true mandate: a legal statement that "Thou shalt provide health insurance." Kennedy-Waxman is a true mandate proposal. It says "Thou shalt provide." The proposal made by President Nixon in 1974 was a mandate. Hawaii enacted a employer mandate in 1974. Einthoven's consumer choice proposal is largely a mandate, although it has several interesting features that merge into the second option. Vol. 66, No. 1, January-February 1990
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TABLE II. APPROACHES TO "MANDATING" COVERAGE
Options to mandating coverage: True mandate. "Thou shalt provide." Kennedy-Waxman Nixon Hawaii Einthoven Tax incentive to indifference point. "Pay or Play." National Leadership Commission Massachusetts Tax to finance other coverage. "Contributory tax." American Academy of Pediatrics Related options: Tax credit. "We'll help you do the right thing." Oregon Universal unitary Physicians for a National Health Program Canada
The second approach is not so much a mandate as a tax incentive for employers to provide coverage. In essence, it says pay or play. The tax incentive in these proposals, the level of tax imposed upon employers, approximates the average expenditures that employers would have to make to provide health insurance coverage for their employees. The proposals made by the National Leadership Commission on Health Care, chaired by Paul Rogers, is one example of such a proposal. The plan Massachusetts enacted is a second example. The third approach begins with the concept of a tax incentive but steps back from setting the tax at the level of indifference. Instead, the tax rate is lower. Funds generated by the tax help to finance a default program in which individuals can enroll and for which the premium is subsidized. The American Academy of Pediatrics, with which Lewin/ICF is working, is developing such a proposal to create universal coverage for children and pregnant women. Other approaches are also discussed. One is a tax credit. Oregon has enacted this program; other states are looking at it, and some alternatives replace the employer-based insurance system with universal coverage through a unitary national plan. The Physicians for a National Health Program have proposed such a plan; Canada is frequently pointed to as a model for such an approach. I shall not discuss these two approaches. The true mandate says to employers: "Thou shalt provide health insurance. " The mandate is on employers, since approaches, unless supplemented Bull. N.Y. Acad. Med.
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by other initiatives, also might result in universal coverage. They do, however, substantially reduce the number of uninsured. The employee mandate cuts the rate of insurance in half, to approximately 5% of the population. One consequence of mandates that is not frequently recognized: because they specify a minimum level of benefits and premium sharing, they require that employers upgrade their coverage. Thus, they affect some employers currently offering insurance as well as currently noninsuring employers. All mandates do not have identical impacts. Several dimensions influence their impact and how much redistribution of cost they impose. Most important are the businesses excluded, if any, the employee who must be covered, benefits required and treatment of insurance of employed spouses. Some proposals impose limitations on which employers have to provide coverage. They may be based on the size of the firm, how recently they have entered business, or, in some cases, profit limits. Some proposals exclude employers of fewer than five, others exclude fewer than 10. Some have proposed exclusions for employers in business less than three years. Each exclusion has consequences in terms of how many people get coverage and how large an uncovered population remains. Many of these proposals provide some sort of assistance for small business, either in terms of a premium subsidy or a cap on how much they must spend for health insurance premiums. These reflect the concern that insurance costs of $1,500 to $1,800 per employee are burdensome and we should not expect small businesses fully to meet those costs. These costs represent the coverage of individual and family coverage and employee participation in the premium cost. Another issue is which employees must be provided coverage. Must parttime employees be covered? Those working more than 25 hours? Those working more than 10 hours? Proposals differ. Is the same contribution toward premiums for part-time workers required? Must employers insure seasonal employees? One can appreciate how important these issues are by recalling that employees of retail establishments are among the least likely to be insured. Retail establishments employ many part-time workers and often hire to meet seasonal demands. One of the biggest issues is how to handle the insurance of working spouses. If we require an employer to provide coverage, do we require an individual employed there but currently insured through his spouse to take that coverage or do we give the spouse the option of insurance through the primary employer or remaining with current coverage? Since many employers currently provide coverage above the minimum level of benefits Vol. 66, No. 1, January-February 1990
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required by these mandates, and at best we can assume that those who provide new coverage will provide it at the minimum benefit level, to require the dependent to take his own employer's coverage will degrade insurance coverage for some of the population. There is also the issue of where children obtain their coverage. Some proposals randomly assign them, based upon their parents' birth dates or some other factor, between the two plans. The argument for requiring primary coverage through the employer is one of inter-employer equity. Indeed, among the groups supporting mandates are such large employers as American Airlines and General Motors that provide substantial coverage to dependents, many of whom are employed. These proposals, if they reduce the ability of spouses to reject coverage from their employers, generate substantial reductions in the benefit costs to these large corporations. On the other hand, eliminating spousal waiver of an employer's insurance creates major shifts in insurance coverage. Table III presents data from one of a series of options mandated by Lewin/ ICF for the Congressional Research Service. This option mandated a "tailored" benefit package by employers plus expanded Medicaid. The tailored package was less than the average insurance package in the country and geared to the needs of the younger population disproportionately represented among the uninsured. It included more preventive services for children and less catastrophic protection. So we see an effect of the spousal shifts here. Of the 37.4 million uninsured, 31 million would become newly insured through employers, 2 million through Medicaid. The remaining uninsured would be about 10% of the uninsured population. Among the currently insured 200 million people, 125 million would experience no change under this proposal. However, 26 million would have their existing plans improved. Either benefits or employer premium-sharing would increase to match the minimum requirements of the law. This plan would also limit spousal waiver. Individuals whose employers provide coverage could not waive it to receive coverage through a spouse under this plan. Fifty million people would get new coverage, largely as a result of the elimination of spousal waiver and requirements of children among their parents' coverage. Total change in costs for health care under this plan would be approximately $15 billion (on a base of $316 billion). This is the impact of expanded insurance on health care use. Household out-of-pocket expenses would decrease. Individual insurance would decline by almost 50%; other private sources would decline by about 10%. Medicare costs would decrease because of the primacy of employer-based insurance. Medicaid costs increase beBull. N.Y. Acad. Med.
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TABLE III. IMPACT OF A TYPICAL MANDATED INSURANCE PLAN Example: CRS "tailored" and Medicaid expansion Approach: Tailored benefit package All employers All P/T employees > 10 hours/week Employer premium: Employee 80% Dependents 75% P/T Prorated Employer coverage primary Medicaid expansion Impact on: Uninsured: Total 37.4 million Newly-insured employer 31.3 Newly-insured Medicaid 2.2 Uninsured 3.9 Currently insured: Total 202.1 No change 125.5 Existing plan improved 25.9 Under new coverage 50.7 Changes in health expenditures: Base case: Change: ($ billion) ($ billion) Total 316.2 + 14.7 Household out-of-pocket 86.7 - 7.6 Employer group 92.1 + 28.2 Individual insurance 12.8 - 5.8 Other private sources 11.2 - 1.6 Medicare - 2.1 69.4 Medicaid 25.2 + 7.3 Other government payment - 3.8 18.7 Source: Lewin/ICF Health Benefits Simulation Model One of a series of options modelled for the Congressional Research Service
cause of the expansion. Employer costs would increase by $28 billion on a base of $92 billion. That is a substantial increase. Masked in this aggregate number is a redistribution of costs between currently insuring employers and those that currently do not insure. There is a tremendous redistribution as might be enforced by the size of the population that would have its coverage shifted. PAY OR PLAY
The second approach is what I have called "Pay or Play." Under this tax incentive system, an employer must either provide health insurance coverage or pay a tax. The tax revenues would underwrite a default insurance plan for Vol. 66, No. 1, January-February 1990
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all or some of those not insured. Under most, but not all, proposals, the default would extend coverage to the entire population, thus achieving universal coverage. Whether there is universal coverage depends on how the default is structured. Some plans require insurance. The National Leadership Commission on Health Care, for example, requires that everybody have insurance; those who do not get insurance from an employer have this insurance paid through funds coming from the employer tax plus an income tax surcharge (approximately 2% in some of the options we have analyzed). Under this proposal, everybody gets an insurance card. Under another "Pay or Play" proposal Lewin/ICF analyzed for the Pennsylvania Health Care Cost Containment Council, funds from employers went into a fund to help pay for an individual policy. Premiums would be incomerelated. Individuals would have to make the decision to purchase the coverage, however, and to pay an additional premium. This is a voluntary system, and does not achieve universal coverage. Tax rates depend upon what ceiling is chosen for the payroll base for the tax and the aggregate amount to be raised per person. Massachusetts, for example, wanted to establish a $1,600 per employee tax for those employers not providing health insurance. The payroll base ceiling was set at approximately $14,000. The tax rate was, therefore, approximately 12%. One of the startling things to emerge from analysis of these types of plans is the likely heavy enrollment in the public default plan in contrast to new employer coverage. Analysis suggests that employers who would be required by these plans to provide coverage or to pay a tax will opt for the tax. There are three reasons for this. First, government can create a program with a lower administrative loading than private insurers. A typical administrative loading for a small group policy is 15 to 25% of the costs of medical benefits provided through the insurance. This covers profit, risk, and administrative costs. The cost to government of administering these plans will be about 5 to 6%. This price differential is large enough to influence employer decisions. Second, if the tax rate is set at the average cost of these benefits, a large proportion of employers will be above the average. For them, there is an additional and perhaps substantial price advantage to the public program. And third, many small employers will conclude that future tax increases are more predictable than future premium increases. They will therefore decide to let government worry about how to control costs rather than having to face uncertain premiums in the future. Bull. N.Y. Acad. Med.
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Fourth, it may be easier to write a check to the government to pay the tax than to absorb the administrative obligations of enrolling employees in insurance and keeping track of the changes in insurance status. There is an administrative burden for a small employer in dealing with insurance companies. These are four reasons why employers will opt for the tax rather than provide coverage directly. In both the National Leadership Commission and Pennyslvania simulations, among the uninsured who would receive coverage more would receive it through the default plan than through new employer plans. In the analysis of one variation for the National Leadership Commission, among those currently uninsured, 1.6 million would obtain coverage under existing employer plans (largely part-time workers who would be swept into a plan); 9.7 million would receive coverage under newly-established employer plans; 26.1 million under the default plan (Table IV). The proposal modelled also called for the elimination of Medicaid for acute care. Most of the Medicaid population would become covered under the default plan; a small group of the Medicaid population would come under the employer plans. The proposal modelled here eliminated spousal waiver of coverage and eliminated a spouse's option to select coverage through the other spouse's employer. Spouses would be covered through their own employers' plans or the fund. The impact of this would have been that, of the 26.6 million people currently receiving coverage as dependents, 4.76 million would receive coverage under an existing employer plan, 6.8 million under new employer plans, and 15.1 million through the default plan. As a result of reviewing analyses like this, the National Leadership Commission in its final proposal chose not to eliminate spousal waiver. As we review shifts in coverage to the default plan or new employer plans, keep in mind that the default plan would average a lower level of benefits than available through current employer-based insurance. It may be that some employers would opt to provide dependent coverage to supplement the primary coverage and to provide dependents the level of benefits provided by the employer plan. It is unclear how many employers would opt to do this and we have not tried to model this.
CONTRIBUTORY TAX PROPOSALS In "pay or play" plans we see a lot of paying and only limited playing. In contributory tax proposals, in which the tax rate is set lower than the amount it would cost to provide health insurance, fewer employers will provide insurance. The precise number is difficult to predict. Some employers, conVol. 66, No. 1, January-February 1990
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fronting a tax equal to only part of the cost of insurance, may find this an additional employee morale incentive sufficient to provide insurance coverage. There is little basis for judging how many will do so. In contributory tax proposals, the default plan plays an even larger role than in pay or play approaches. There are also the issues of identifying other revenues and the costs of the insurance not met by the employer tax. It is possible to achieve universal coverage under such a contributory tax proposal. It depends upon the premium structure facing the individual and extent to which enrollment is voluntary. TAX CREDITS
We have not tried to address a tax credit system in our analysis. There is not a lot of experience with which to back such models. The coverage impact is likely to be spotty and marginal. Tax credits apply general revenues to a narrow group of employers, usually those who have in the past decided not to offer coverage. Employers in similar circumstances who have provided coverage often receive no benefit from these programs. If we are to invest new general revenues in expanding access to health care, either through insurance or through services, one might ask whether this is the most appropriate and most equitable application of these funds.
CONCLUSIONS Mandates or tax incentives have a tremendous capacity to expand coverage, potentially to the point of universal coverage, but they can substantially disrupt the current insurance market, and may create substantial burdens for some businesses. One question to ask is whether there are ways to reduce the disruptions and burdens imposed by these proposals. One topic meriting extensive discussion is spousal waiver. As we look at the spousal waiver, we see two conflicting goals at work. One is the goal to expand coverage with a minimum of disruption. The other is to address what Alan Einthoven and others have called the problem of the free rider employers. How one comes down on this issue is a matter of relative priorities. A high concern about equity in financing may raise elimination of spousal waiver as a major issue. Those who put a heavy premium on expanding coverage may be willing to retain spousal waiver. Political considerations also enter into this issue. Many people who are trying to expand coverage are looking at coalitions with large business to help to create political pressure for change. Large businesses share much less Bull. N.Y. Acad. Med.
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interest in pressing for expanded coverage unless they can get some dependents off their coverage, at least as primary insureds. On the other hand, small businesses will be active lobbyists on the spousal waiver issue and will even more actively oppose a bill that eliminates spousal waiver. So it is partly a matter of priorities and values, partly a matter of counting the votes and determining how a successful coalition can be formed. Another conclusion that emerges in this analysis is that the burden on business, especially small business, is likely to be more predictable and perhaps even lower in a tax incentive system with a publicly organized default system of insurance than under a mandate. This is one of the advantages to pay or play. I believe that because of this, there will be greater interest in the play or pay systems and a movement toward that kind of model rather than a Kennedy-Waxman "Thou Shalt" mandate. Pay or play is simply too disruptive to small businesses. I would also hope that this analysis provides some comfort for those interested in pursuing a universal unitary system. Once we are debating covering the 15% of the population that is uninsured and shifting insurance coverage for a quarter to a third of those already insured, it does not become unreasonable to say, "We are affecting nearly half the population with these proposals; why not the other half?" This analysis adds credibility to those proposing universal unitary systems, particularly given the argument that many have made, that the additional funds needed to close the access gap can be obtained by reducing administrative costs associated with multipleemployer, multiple-insurer plans. The analysis also provides comfort for those who argue against any substantial expansion of insurance and for improving access at the margin. It forces us to ask whether we can achieve adequate access by expanding Medicaid and by expanding direct funding of services. After all, it must be argued, the current level of 1.9 visits to the physician per person per year among the uninsured is now being funded. Maybe new funds should be applied to direct services: to community health centers and networks of physicians so that they can expand their charity care and raise the 1.9 visits to the 2.3 of the insured. In this type of service strategy, funding would only be required for new care. Theoretically, such an approach might achieve sufficient access, but real and substantial practical problems are significant obstacles to this approach. Where will we get the funds to expand services? Deborah Chollet noted earlier that businesses feel that they can no longer afford to provide these benefits; individuals cannot afford to purchase their care or they would alVol. 66, No. 1, January-February 1990
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ready be doing it; government does not seem inclined to raise taxes to provide these services. If funds are raised initially, we can also ask what will assure stability in the funds over the long term. Beyond the issue of obtaining funds, there are real problems in a service expansion system dealing with the onus of receiving charity. People do not want to be charity cases. They want to feel entitled, and an insurance card does that. Still other issues involve outreach to difficult-to-reach populations, achieving continuity of care, and quality assurance. In our work with Pennsylvania we built a substantial service component strategy into the proposal we developed. I believe that it is possible to improve access by expanding direct service funding, but it requires work and it requires seriousness in the commitment to substantial funding to expand services. Furthermore, even marginal expansion of insurance, such as a broadened Medicaid program, confronts us with issues of refinancing and redistributing the financing of existing insurance. Among the populations with incomes under $10,000, approximately the poverty level for a family of four, 2.8 million have nongroup coverage and 4.7 million have group coverage. Will government pick up the costs of insurance for those with group coverage, for those purchasing their own insurance? As we think about expanding insurance coverage, at the margin or more extensively, we keep returning to the same issue. It is not whether we can afford the cost of increased access or needed services not currently being provided by the health care system. The answer to that question is yes, this country can afford that additional care. The issue to which we keep returning is more mundane and familiar. It is: who will pay? What will be the distribution of financing among government, individuals, and employers? And within employers, between the large and small employers. This is the issue with which we are dealing when we debate whether to create mandates to provide coverage.
Bull. N.Y. Acad. Med.
MANDATING EMPLOYEE HEALTH BENEFITS? A NEW LOOK* JACK NEEDLEMAN Vice President Lewin/ICF Washington, D.C.
MIf Y PAPER FOCUSES ON THE ISSUE of creating broad mandates to provide health insurance coverage to employees. During the past year we have seen a number of initiatives to expand coverage -either to a substantial portion of the uninsured or to establish universal health coverage. Among the proposals advanced are: the bill for mandatory employer coverage; the National Leadership Commission for Health Care proposal for universal coverage, building upon the employment-based system of health insurance; and Alan Einthoven's revised version of his consumer choice plan. The Commonwealth of Massachusetts has enacted a program to provide close to universal coverage; Oregon has enacted a tax credit program for small businesses that provide health insurance coverage for the first time. There is now broad-based discussion of the problems of the uninsured and of the importance of expanding access to care. Many efforts at reform or expansion of health insurance have attempted to build upon and to expand the base of employment-based insurance. Seventy-five percent of the employed population and their dependents receive health insurance coverage through employment-based insurance. Employers and insurers have historically argued for the maintenance of that employment-based insurance system. In this paper I want to review several of the strategies proposed to deal with mandating expanded insurance in the country and to analyze the impacts of these programs. These analyses clarify several critical aspects of these issues. One issue that analysis clarifies is why extending coverage to the uninsured has proved so difficult. This, in turn, sets the stage for debate on the mandates. *Presented in a panel, The Present and Future of Employee Health Benefits and Managed Care, as part of the Annual Health Conference, The Changing Agendafor Health Care in America: Balancing Need and Commitment, held by the Committee on Medicine in Society of the New York Academy of Medicine May 9 and 10, 1989. Address for reprint requests: Lewin/ICF, 1090 Vermont Avenue, NW, Washington, D.C., 20005
Bull. N.Y. Acad. Med.
A NEW LOOK A NEW 81 LOOK81
The issue is not whether we can afford to expand access to care. The cost of closing the gap in access between the uninsured and insured is relatively modest. While it is estimated that 37 million people are uninsured, this does not mean that 37 million people do not get health care. Most of those uninsured get much of the health care they need. The uninsured, for example, average 1.9 visits to physicians each year, the insured 2.3 visits. To bring the uninsured up to the level of use of the insured population would require providing less than one-half visit to the physician per person per year. The gaps for hospital care, prescription drugs, and other services are similar. We have estimated that it would require between $14 billion and $25 billion in new services to bring the utilization of the uninsured up to the levels of the insured. These amounts are between 4 and 8% of our current health care spending. They are less than one percent of our gross national product. The country can afford this. The problem is that no program options would finance only the additional services needed by the uninsured, leaving all current financing unchanged. Nor are there insurance options that would provide only new insurance to the 37 million uninsured and leave the insurance of everyone else unchanged. Any program to insure the 37 million uninsured will have major consequences for those currently insured and for those who pay for their insurance. We are therefore debating not only who will pay for new care for the uninsured, but who will pay for the care they currently receive, how financing for those already insured will change, who will bear the costs, and whether the shifts in funding that would result are appropriate and equitable. Table I presents data on the insurance status and sources of insurance of the non-Medicare population. While low income groups are more likely to be uninsured, the uninsured are widely distributed across different incomes. Twenty-three percent of the uninsured have incomes over $30,000, which is approximately the median family income in the United States. Most of the population at each income level is insured. Three sources of insurance are identified on the table: Medicaid, nongroup (insurance individuals purchase for themselves or their families), and group insurance (including CHAMPUS and VA coverage). Medicaid insures 11.8 million individuals in families with incomes below $10,000, approximately poverty level. However, 2.8 million people in the same income category purchase their own insurance and an additional 4.7 million people have group insurance coverage. In the $10,000 to $15,000 income band, two million people receive Medicaid, 1.9 million buy individual insurance, and approximately 8.4 million have employmentVol. 66, No. 1, January-February 1990
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A NEW LOOK
83I
based or other group insurance. At higher income levels an increasing number of individuals obtain insurance through employment. What are the consequences of these numbers? Any effort to expand insurance for the uninsured will also involve at least three other populations. One is the population of the low income self-insured, the second is higher income Medicaid, and the third is the low income group insured. Proposals that make insurance available on the basis of income will encourage those with nongroup coverage to drop it in favor of the public or employer insurance at lower out-of-pocket cost, and may also lead to shifts in coverage among those low income people currently insured through Medicaid or employer plans. As programs that strive for universal coverage are considered, they will influence insurance coverage for many additional people who purchase nongroup insurance and are also more likely to affect those with employment-based coverage. As a result, mandates, Medicaid expansion, and other initiatives affect not only the 37 million uninsured but as many as 15 million who purchase their own insurance, and potentially a sizable number of those with other coverage. Current out-of-pocket expenses as well as new care will become insured expenses, and their costs will be redistributed to others. Some proposals affect populations one and a half to three times the uninsured population. Because out-of-pocket expenses for care already being received are refinanced, the number of dollars involved in these proposals are two to four times larger. Every proposal redistributes current costs as well as pays for new care, and thus generates debate over the appropriate distribution of costs among government, individuals, and employers, within employers, and between those employers who currently provide health insurance and those who do not. Each proposal presents an answer to the question who should pay. Several approaches have been proposed for mandates. It is important to distinguish among them, because now they operate and their consequences can differ. These are summarized in Table II. TRUE MANDATE
One approach is a true mandate: a legal statement that "Thou shalt provide health insurance." Kennedy-Waxman is a true mandate proposal. It says "Thou shalt provide." The proposal made by President Nixon in 1974 was a mandate. Hawaii enacted a employer mandate in 1974. Einthoven's consumer choice proposal is largely a mandate, although it has several interesting features that merge into the second option. Vol. 66, No. 1, January-February 1990
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TABLE II. APPROACHES TO "MANDATING" COVERAGE
Options to mandating coverage: True mandate. "Thou shalt provide." Kennedy-Waxman Nixon Hawaii Einthoven Tax incentive to indifference point. "Pay or Play." National Leadership Commission Massachusetts Tax to finance other coverage. "Contributory tax." American Academy of Pediatrics Related options: Tax credit. "We'll help you do the right thing." Oregon Universal unitary Physicians for a National Health Program Canada
The second approach is not so much a mandate as a tax incentive for employers to provide coverage. In essence, it says pay or play. The tax incentive in these proposals, the level of tax imposed upon employers, approximates the average expenditures that employers would have to make to provide health insurance coverage for their employees. The proposals made by the National Leadership Commission on Health Care, chaired by Paul Rogers, is one example of such a proposal. The plan Massachusetts enacted is a second example. The third approach begins with the concept of a tax incentive but steps back from setting the tax at the level of indifference. Instead, the tax rate is lower. Funds generated by the tax help to finance a default program in which individuals can enroll and for which the premium is subsidized. The American Academy of Pediatrics, with which Lewin/ICF is working, is developing such a proposal to create universal coverage for children and pregnant women. Other approaches are also discussed. One is a tax credit. Oregon has enacted this program; other states are looking at it, and some alternatives replace the employer-based insurance system with universal coverage through a unitary national plan. The Physicians for a National Health Program have proposed such a plan; Canada is frequently pointed to as a model for such an approach. I shall not discuss these two approaches. The true mandate says to employers: "Thou shalt provide health insurance. " The mandate is on employers, since approaches, unless supplemented Bull. N.Y. Acad. Med.
A NEW LOOK LOOK
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85
by other initiatives, also might result in universal coverage. They do, however, substantially reduce the number of uninsured. The employee mandate cuts the rate of insurance in half, to approximately 5% of the population. One consequence of mandates that is not frequently recognized: because they specify a minimum level of benefits and premium sharing, they require that employers upgrade their coverage. Thus, they affect some employers currently offering insurance as well as currently noninsuring employers. All mandates do not have identical impacts. Several dimensions influence their impact and how much redistribution of cost they impose. Most important are the businesses excluded, if any, the employee who must be covered, benefits required and treatment of insurance of employed spouses. Some proposals impose limitations on which employers have to provide coverage. They may be based on the size of the firm, how recently they have entered business, or, in some cases, profit limits. Some proposals exclude employers of fewer than five, others exclude fewer than 10. Some have proposed exclusions for employers in business less than three years. Each exclusion has consequences in terms of how many people get coverage and how large an uncovered population remains. Many of these proposals provide some sort of assistance for small business, either in terms of a premium subsidy or a cap on how much they must spend for health insurance premiums. These reflect the concern that insurance costs of $1,500 to $1,800 per employee are burdensome and we should not expect small businesses fully to meet those costs. These costs represent the coverage of individual and family coverage and employee participation in the premium cost. Another issue is which employees must be provided coverage. Must parttime employees be covered? Those working more than 25 hours? Those working more than 10 hours? Proposals differ. Is the same contribution toward premiums for part-time workers required? Must employers insure seasonal employees? One can appreciate how important these issues are by recalling that employees of retail establishments are among the least likely to be insured. Retail establishments employ many part-time workers and often hire to meet seasonal demands. One of the biggest issues is how to handle the insurance of working spouses. If we require an employer to provide coverage, do we require an individual employed there but currently insured through his spouse to take that coverage or do we give the spouse the option of insurance through the primary employer or remaining with current coverage? Since many employers currently provide coverage above the minimum level of benefits Vol. 66, No. 1, January-February 1990
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required by these mandates, and at best we can assume that those who provide new coverage will provide it at the minimum benefit level, to require the dependent to take his own employer's coverage will degrade insurance coverage for some of the population. There is also the issue of where children obtain their coverage. Some proposals randomly assign them, based upon their parents' birth dates or some other factor, between the two plans. The argument for requiring primary coverage through the employer is one of inter-employer equity. Indeed, among the groups supporting mandates are such large employers as American Airlines and General Motors that provide substantial coverage to dependents, many of whom are employed. These proposals, if they reduce the ability of spouses to reject coverage from their employers, generate substantial reductions in the benefit costs to these large corporations. On the other hand, eliminating spousal waiver of an employer's insurance creates major shifts in insurance coverage. Table III presents data from one of a series of options mandated by Lewin/ ICF for the Congressional Research Service. This option mandated a "tailored" benefit package by employers plus expanded Medicaid. The tailored package was less than the average insurance package in the country and geared to the needs of the younger population disproportionately represented among the uninsured. It included more preventive services for children and less catastrophic protection. So we see an effect of the spousal shifts here. Of the 37.4 million uninsured, 31 million would become newly insured through employers, 2 million through Medicaid. The remaining uninsured would be about 10% of the uninsured population. Among the currently insured 200 million people, 125 million would experience no change under this proposal. However, 26 million would have their existing plans improved. Either benefits or employer premium-sharing would increase to match the minimum requirements of the law. This plan would also limit spousal waiver. Individuals whose employers provide coverage could not waive it to receive coverage through a spouse under this plan. Fifty million people would get new coverage, largely as a result of the elimination of spousal waiver and requirements of children among their parents' coverage. Total change in costs for health care under this plan would be approximately $15 billion (on a base of $316 billion). This is the impact of expanded insurance on health care use. Household out-of-pocket expenses would decrease. Individual insurance would decline by almost 50%; other private sources would decline by about 10%. Medicare costs would decrease because of the primacy of employer-based insurance. Medicaid costs increase beBull. N.Y. Acad. Med.
A NEW LOOK LOOK A NEW
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TABLE III. IMPACT OF A TYPICAL MANDATED INSURANCE PLAN Example: CRS "tailored" and Medicaid expansion Approach: Tailored benefit package All employers All P/T employees > 10 hours/week Employer premium: Employee 80% Dependents 75% P/T Prorated Employer coverage primary Medicaid expansion Impact on: Uninsured: Total 37.4 million Newly-insured employer 31.3 Newly-insured Medicaid 2.2 Uninsured 3.9 Currently insured: Total 202.1 No change 125.5 Existing plan improved 25.9 Under new coverage 50.7 Changes in health expenditures: Base case: Change: ($ billion) ($ billion) Total 316.2 + 14.7 Household out-of-pocket 86.7 - 7.6 Employer group 92.1 + 28.2 Individual insurance 12.8 - 5.8 Other private sources 11.2 - 1.6 Medicare - 2.1 69.4 Medicaid 25.2 + 7.3 Other government payment - 3.8 18.7 Source: Lewin/ICF Health Benefits Simulation Model One of a series of options modelled for the Congressional Research Service
cause of the expansion. Employer costs would increase by $28 billion on a base of $92 billion. That is a substantial increase. Masked in this aggregate number is a redistribution of costs between currently insuring employers and those that currently do not insure. There is a tremendous redistribution as might be enforced by the size of the population that would have its coverage shifted. PAY OR PLAY
The second approach is what I have called "Pay or Play." Under this tax incentive system, an employer must either provide health insurance coverage or pay a tax. The tax revenues would underwrite a default insurance plan for Vol. 66, No. 1, January-February 1990
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all or some of those not insured. Under most, but not all, proposals, the default would extend coverage to the entire population, thus achieving universal coverage. Whether there is universal coverage depends on how the default is structured. Some plans require insurance. The National Leadership Commission on Health Care, for example, requires that everybody have insurance; those who do not get insurance from an employer have this insurance paid through funds coming from the employer tax plus an income tax surcharge (approximately 2% in some of the options we have analyzed). Under this proposal, everybody gets an insurance card. Under another "Pay or Play" proposal Lewin/ICF analyzed for the Pennsylvania Health Care Cost Containment Council, funds from employers went into a fund to help pay for an individual policy. Premiums would be incomerelated. Individuals would have to make the decision to purchase the coverage, however, and to pay an additional premium. This is a voluntary system, and does not achieve universal coverage. Tax rates depend upon what ceiling is chosen for the payroll base for the tax and the aggregate amount to be raised per person. Massachusetts, for example, wanted to establish a $1,600 per employee tax for those employers not providing health insurance. The payroll base ceiling was set at approximately $14,000. The tax rate was, therefore, approximately 12%. One of the startling things to emerge from analysis of these types of plans is the likely heavy enrollment in the public default plan in contrast to new employer coverage. Analysis suggests that employers who would be required by these plans to provide coverage or to pay a tax will opt for the tax. There are three reasons for this. First, government can create a program with a lower administrative loading than private insurers. A typical administrative loading for a small group policy is 15 to 25% of the costs of medical benefits provided through the insurance. This covers profit, risk, and administrative costs. The cost to government of administering these plans will be about 5 to 6%. This price differential is large enough to influence employer decisions. Second, if the tax rate is set at the average cost of these benefits, a large proportion of employers will be above the average. For them, there is an additional and perhaps substantial price advantage to the public program. And third, many small employers will conclude that future tax increases are more predictable than future premium increases. They will therefore decide to let government worry about how to control costs rather than having to face uncertain premiums in the future. Bull. N.Y. Acad. Med.
A NEW LOOK LOOK
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Fourth, it may be easier to write a check to the government to pay the tax than to absorb the administrative obligations of enrolling employees in insurance and keeping track of the changes in insurance status. There is an administrative burden for a small employer in dealing with insurance companies. These are four reasons why employers will opt for the tax rather than provide coverage directly. In both the National Leadership Commission and Pennyslvania simulations, among the uninsured who would receive coverage more would receive it through the default plan than through new employer plans. In the analysis of one variation for the National Leadership Commission, among those currently uninsured, 1.6 million would obtain coverage under existing employer plans (largely part-time workers who would be swept into a plan); 9.7 million would receive coverage under newly-established employer plans; 26.1 million under the default plan (Table IV). The proposal modelled also called for the elimination of Medicaid for acute care. Most of the Medicaid population would become covered under the default plan; a small group of the Medicaid population would come under the employer plans. The proposal modelled here eliminated spousal waiver of coverage and eliminated a spouse's option to select coverage through the other spouse's employer. Spouses would be covered through their own employers' plans or the fund. The impact of this would have been that, of the 26.6 million people currently receiving coverage as dependents, 4.76 million would receive coverage under an existing employer plan, 6.8 million under new employer plans, and 15.1 million through the default plan. As a result of reviewing analyses like this, the National Leadership Commission in its final proposal chose not to eliminate spousal waiver. As we review shifts in coverage to the default plan or new employer plans, keep in mind that the default plan would average a lower level of benefits than available through current employer-based insurance. It may be that some employers would opt to provide dependent coverage to supplement the primary coverage and to provide dependents the level of benefits provided by the employer plan. It is unclear how many employers would opt to do this and we have not tried to model this.
CONTRIBUTORY TAX PROPOSALS In "pay or play" plans we see a lot of paying and only limited playing. In contributory tax proposals, in which the tax rate is set lower than the amount it would cost to provide health insurance, fewer employers will provide insurance. The precise number is difficult to predict. Some employers, conVol. 66, No. 1, January-February 1990
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fronting a tax equal to only part of the cost of insurance, may find this an additional employee morale incentive sufficient to provide insurance coverage. There is little basis for judging how many will do so. In contributory tax proposals, the default plan plays an even larger role than in pay or play approaches. There are also the issues of identifying other revenues and the costs of the insurance not met by the employer tax. It is possible to achieve universal coverage under such a contributory tax proposal. It depends upon the premium structure facing the individual and extent to which enrollment is voluntary. TAX CREDITS
We have not tried to address a tax credit system in our analysis. There is not a lot of experience with which to back such models. The coverage impact is likely to be spotty and marginal. Tax credits apply general revenues to a narrow group of employers, usually those who have in the past decided not to offer coverage. Employers in similar circumstances who have provided coverage often receive no benefit from these programs. If we are to invest new general revenues in expanding access to health care, either through insurance or through services, one might ask whether this is the most appropriate and most equitable application of these funds.
CONCLUSIONS Mandates or tax incentives have a tremendous capacity to expand coverage, potentially to the point of universal coverage, but they can substantially disrupt the current insurance market, and may create substantial burdens for some businesses. One question to ask is whether there are ways to reduce the disruptions and burdens imposed by these proposals. One topic meriting extensive discussion is spousal waiver. As we look at the spousal waiver, we see two conflicting goals at work. One is the goal to expand coverage with a minimum of disruption. The other is to address what Alan Einthoven and others have called the problem of the free rider employers. How one comes down on this issue is a matter of relative priorities. A high concern about equity in financing may raise elimination of spousal waiver as a major issue. Those who put a heavy premium on expanding coverage may be willing to retain spousal waiver. Political considerations also enter into this issue. Many people who are trying to expand coverage are looking at coalitions with large business to help to create political pressure for change. Large businesses share much less Bull. N.Y. Acad. Med.
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A NEW LOOK
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interest in pressing for expanded coverage unless they can get some dependents off their coverage, at least as primary insureds. On the other hand, small businesses will be active lobbyists on the spousal waiver issue and will even more actively oppose a bill that eliminates spousal waiver. So it is partly a matter of priorities and values, partly a matter of counting the votes and determining how a successful coalition can be formed. Another conclusion that emerges in this analysis is that the burden on business, especially small business, is likely to be more predictable and perhaps even lower in a tax incentive system with a publicly organized default system of insurance than under a mandate. This is one of the advantages to pay or play. I believe that because of this, there will be greater interest in the play or pay systems and a movement toward that kind of model rather than a Kennedy-Waxman "Thou Shalt" mandate. Pay or play is simply too disruptive to small businesses. I would also hope that this analysis provides some comfort for those interested in pursuing a universal unitary system. Once we are debating covering the 15% of the population that is uninsured and shifting insurance coverage for a quarter to a third of those already insured, it does not become unreasonable to say, "We are affecting nearly half the population with these proposals; why not the other half?" This analysis adds credibility to those proposing universal unitary systems, particularly given the argument that many have made, that the additional funds needed to close the access gap can be obtained by reducing administrative costs associated with multipleemployer, multiple-insurer plans. The analysis also provides comfort for those who argue against any substantial expansion of insurance and for improving access at the margin. It forces us to ask whether we can achieve adequate access by expanding Medicaid and by expanding direct funding of services. After all, it must be argued, the current level of 1.9 visits to the physician per person per year among the uninsured is now being funded. Maybe new funds should be applied to direct services: to community health centers and networks of physicians so that they can expand their charity care and raise the 1.9 visits to the 2.3 of the insured. In this type of service strategy, funding would only be required for new care. Theoretically, such an approach might achieve sufficient access, but real and substantial practical problems are significant obstacles to this approach. Where will we get the funds to expand services? Deborah Chollet noted earlier that businesses feel that they can no longer afford to provide these benefits; individuals cannot afford to purchase their care or they would alVol. 66, No. 1, January-February 1990
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ready be doing it; government does not seem inclined to raise taxes to provide these services. If funds are raised initially, we can also ask what will assure stability in the funds over the long term. Beyond the issue of obtaining funds, there are real problems in a service expansion system dealing with the onus of receiving charity. People do not want to be charity cases. They want to feel entitled, and an insurance card does that. Still other issues involve outreach to difficult-to-reach populations, achieving continuity of care, and quality assurance. In our work with Pennsylvania we built a substantial service component strategy into the proposal we developed. I believe that it is possible to improve access by expanding direct service funding, but it requires work and it requires seriousness in the commitment to substantial funding to expand services. Furthermore, even marginal expansion of insurance, such as a broadened Medicaid program, confronts us with issues of refinancing and redistributing the financing of existing insurance. Among the populations with incomes under $10,000, approximately the poverty level for a family of four, 2.8 million have nongroup coverage and 4.7 million have group coverage. Will government pick up the costs of insurance for those with group coverage, for those purchasing their own insurance? As we think about expanding insurance coverage, at the margin or more extensively, we keep returning to the same issue. It is not whether we can afford the cost of increased access or needed services not currently being provided by the health care system. The answer to that question is yes, this country can afford that additional care. The issue to which we keep returning is more mundane and familiar. It is: who will pay? What will be the distribution of financing among government, individuals, and employers? And within employers, between the large and small employers. This is the issue with which we are dealing when we debate whether to create mandates to provide coverage.
Bull. N.Y. Acad. Med.
