An Introduction to the Clinton Health Plan

WILLIAM A. NISKANEN*

This plan summarizes the Clinton health plan as an introduction to the subsequent panel discussion by Mark Pauly and George Fisher. The Clinton plan is described in terms of five characteristics: universal, standardized, community-rated, managed, and expensive. The plan would also have some complex effects on the labor market. (JEL H8)

For four months, I have been trying to find a distinguished health economist to defend the Clinton health plan, I must now acknowledge, without success. I did finally have an agreement with Ken Thorp, who is the senior health economist in the Department of HHS, to defend the plan, but he called me yesterday to say that the President wanted him in New Mexico, so he is off there. Ross Perot may have a similar problem in trying to find a good economist to defend his position on NAFTA and trade issues. So, the way we are going to organize the discussion this afternoon is that I will summarize the key characteristics of the Clinton plan, to the extent that we know them. I have been a vocal and persistent critic of the Clinton plan, but I will try to summarize this plan with as few editorial comments as possible, and then we will have a discussion of the plan by Mark Pauly and George Fisher.

The Clinton plan is characterized by the following five adjectives: universal, standardized, community-rated, managed, and expensive. Let me go over the dimensions of each of these five characteristics.

Universal

Everybody in the U.S., all citizens and all legal residents, would have federally guaranteed health insurance coverage. The 0nly people who would not be formally covered would be illegal aliens; they would be guaranteed emergency care, but they would not have to buy a plan. Guaranteed coverage also means required coverage; it is both a guarantee and a mandate, in the sense that everybody is required to have coverage. The immediate effect of that, of course, is that it extends coverage from the 86 percent or so of the population that now has it to 100 percent, or nearly 100 percent of the population, an additional 30-some million people who at any given time do not have health insurance.

Standardized

Everybody would have the same standard benefits coverage. That coverage would be somewhat broader than is the average coverage for the American population. The President has accurately described it as similar to that provided by most Fortune 500 companies, but specifically it includes some types of coverage that are not in a lot of plans, such as care and coverage for various preventive services, mental health care, and

*CATO Institute. Vice President of the Atlantic Economic Society 1992-93.

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drug and alcohol rehabilitation. The President's proposal also provides assured coverage, mostly federally financed, for people who retire before they are eligible for Medicare. For Medicare, it extends coverage to include prescription drugs and community- or home- based, long-term care. So, the coverage is broadened in two dimensions: in terms of the number of people covered and in terms of the range of services covered. The implications of this standardized coverage are several-fold. One is that you are not allowed to buy a plan with less coverage; that means that for everybody, there will be some types of services covered by the plan that you would never think of using yourself or, even if you thought of using, would never think of buying insurance for. So, for most people, there will be some elements of the plan that you would not buy on your own. And the other side of it, for some people there will be some things that you might want to have in your plan that will not be in it. This one-size-fits-all standardized benefit package will be too large in some dimensions for most of us and too small in some dimensions for some of us. When you have a standardized benefit package that is politically defined, the pattern in the past was to broaden the range of coverage in this standardized benefit package. A lot of the pressure for that comes from the provider group themselves, who are left out of the standard benefit package. If it does not cover chiropractic care, they want in it; if it does not cover oriental medicines-acupuncture, whatever-they want in it. The effect of that pressure typically has been to broaden the standard benefit package, with the main pressure not so much coming from the patients but from the providers of these specialized services that may not be included in the standard benefits package.

Community Rated That is a term of art within the health policy community. What it will mean to you is

that everybody in the same plan will pay the same premium, regardless of the expected cost you would impose on the plan. That is the equivalent of folding alcoholics and teenage boys into the premium pool on which your auto insurance is based. At least by law, there would not be any sorting out of people by risk group. Among the effects of that are that most people will pay a higher premium, because a disproportionate amount of expected medical care is from a minority of the population in any given region. As a consequence, the majority of people will pay a higher premium than would be the case if they had the opportunity to choose a plan that was more specific to their particular risk pool.

Managed The Federal government in this plan substantially restructures the provision of medical

care in the U.S., creating what would be a monopoly health alliance in each region. And the health alliance then is the monopoly purchasing agent for health plans. Everybody is required to buy their health plan through this monopoly health alliance in each region. The presumed premise of that is market power, the idea somehow that if there is a monopoly buyer and dispersed sellers, that monopoly buyers are going to be able to buy these plans at a cheaper price then would otherwise be the case. There would be at least one of these per state and in big states like California probably several. Each health alliance must offer at least three plans: an HMO plan, a PPO plan, and a fee-for-service plan. But it is important to remember that all three of these plans must cover the same services. They are different ways of buying the same coverage but they do not differ by coverage. It is like going into a hospital, when the hospital says we are going to give you the same

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medical treatment as everybody else but you have the choice in one situation of not having your own doctor and being in a double room; and another plan saying you do not have your own doctor but you can have a single room, that is more expensive; and the third plan is you can choose your own doctor and you have a single room and that is even more expensive. But the medical services that would be provided by these plans are identical and that they differ in terms of more or less expensive ways of providing the same coverage. The health alliances in fact are allowed to rule out any fee-for-service plans if the premiums on those plans are more than 20 percent higher than the average premiums in that particular region. Mrs. Clinton has regularly been asked in her testimony and community meetings, "Can I choose my own doctor?" and she has been quite honest about it in saying, "Yes, I think." What that means is that the overall health plan provides for fee-for-service plans, except that it provides for conditions in which the health alliance may rule out any fee-for-service plans. It also allows state government to choose a single- payer system, and in effect provides a system much more like the Canadian system, which is run by the provinces.

Now, what is the basis for the claims by the administration that the plan would contribute to controlling cost? The plan does have one important discipline, but only one frankly, and the important discipline is that the patient pays the full incremental costs of more expensive plans that provide the same coverage. The way that it works is that an employer is obligated to pay 80 percent of the average premium of plans in the region. If the patient buys the average plan, then he pays the other 20 percent. But if he buys something for which the premium is less than the average plan, the full incremental difference of buying the lower cost plan accrues to the patient. That would typically be the HMO plan. The employer is allowed to pay the whole amount, but he is only required to pay 80 percent of the average premium in the area, but where the employer only pays 80 percent of the average premium, then the patient pays the full incremental cost of different ways of buying the same coverage. So, if you choose a fee-for-service plan, you pay that full increment. If you choose an HMO, you will get the savings between that and the average premium in the area. That is about the only area in which the incentives of the patients themselves are improved by the plan. In other areas the incentives are reduced.

The fact that everybody pays the same premium, of course, substantially reduces the financial incentive to maintain healthy life styles. It does not eliminate your incentives, because health is still a valued attribute, but it substantially reduces the financial incentives to maintain healthy life styles, because people with very different life styles will pay the same premium for the same coverage. Our use of the health care system is a function of whether we have good genes, whether we have good health habits or bad habits, plus our decision about how and when to use the health care system given that problems develop. But a substantial amount of the differences in the use of the health care system are quite clearly behavioral and not genetic, and to that extent, the financial incentives to maintain healthy life styles and not overburden the system are substantially reduced. So, you do have this one competitive element among the different plans that is a useful element of competition, but the Clinton plan relies very heavily on three kinds of controls. Success in controlling prices and expenditures will depend critically on whether these controls are likely to be effective.

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One has been called global budgeting. The Clinton plan, for the first time in American history, puts the federal government in a position of establishing a budget for the sum of government plus private expenditures for a particular good or service, in this case medical care. A national health board appointed by the President sets a global budget for health expenditures in the United States and then they parcel out this budget among the health alliances, at least one per state. These budgets are for backup tests of whether the health alliances are doing their own job. They are not absolute limits anymore than the budgets to the agency in the federal government are absolute limits because they usually figure out a way to get around them when they get in trouble.

Second, the federal government maintains the authority to disapprove or approve premium increases on the plans. If the premium increases come in at a higher rate that is inconsistent with the budget that has been assigned that health alliance, that health alliance then has the authority to assess the providers a proportionate expost tax that would be sufficient to offset the excess premiums.

The federal government also maintains review authority but not a final clearance authority on new drugs, the authority to review new drug pricing and to say good or bad things about new drug prices. It does not specifically authorize the federal government to set the prices on the launching of new drugs. Finally, for fee-for-service plans, the alliances will set a fee schedule for physicians and for hospitals. And, it will be illegal for the provider to charge more than that amount. There is an absolute prohibition on balance billing. One may not mix money coming from the plan with money that you pay the provider yourself, maybe to get better service or to the provider you really want. It is illegal for the provider to charge more than the allowed fee and the patient is not liable for any charges in excess of the fees established by the local health alliance.

Expensive The direct cost of the new services that are authorized will be over $100 billion a year,

the numbers are still being refined. There are quite a few new services covered and an additional 37 million people. You have got more preventive care coverage, you have got mental health coverage, more prescription drug coverage, and more long-term care coverage. There is a huge windfall to the big auto and steel companies to take their liability for the health insurance of the people who retire early from these companies off their books. In other words, it is a windfall to the auto and steel companies of literally billions of dollars. That liability then becomes the liability of the taxpayers, because the plan provides for the federal government to pay 80 percent of the premiums for people who retire after the age of 55 before they are eligible for Medicare at age 65. So, the direct costs of the plan are quite high, in the over $100 billion a year range. But I want to warn you that most of the numbers you are going to hear from most people are correctly described, as Senator Moynihan suggested, as fantasy, because the indirect effects of this plan operating through prices and through wages can swamp any direct effects of the plan. Now the Clinton administration relies in their marketing of the plan on the premise that the plan will substantially reduce the rate of inflation in medical care. That is the basis for what they allege to be very large savings in the existing federal plans like Medicare and Medicaid. But, what the Clinton plan is doing, of course, is substantially broadening the demand for medical care and then for the most part trying to

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control the effects on prices and expenditures by various kinds of controls, rather than by improving the incentives of providers and patients.

The President was most articulate on the evening of September 22, but for the most part, what he did was describe what he called the principles on which he based the plan and the benefits of the plan. But he did not describe the cost with any detail and who will pay for them and how. There will be a mandate that all employers finance at least 80 percent of the average premium for plans offered in that region, subject to two kinds of limits. Employer financing will be subject to a limit for all firms of 7.9 percent of payroll and, for firms less than 50 employees, a limit of 3.5-7.9 percent of payroll, depending upon the average salary in that firm. That has some interesting implications for the labor market that you will want to think through. It will make it cheaper to hire people in small firms than in big firms. Second, it will be cheaper to hire people in a firm where the average salaries are low than where the average salaries are high. It will make it easier, for example, for a high skilled person to get a job in a company where average skills are low and it will make it more expensive for a low skilled person to get a job in a company where average skills are high. The special rules for part-time work would also increase the relative price of part-time labor. I encourage those of you who are labor economists to analyze these provisions carefully.