Paying for Health Care Reform : The Role of Cost Savings
Congressional research reportAug 19, 1994
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Paying for Health Care Reform :
The Role of Cost Savings
Nonna A. Noto
Specialist in Public Finance
Economics Division
August 19, 1994
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PAYING FOR HEALTH CARE REFORM :
THE ROLE OF COST SAVINGS
SUMMARY
To be financially viable in the long-run, any health care reform plan that
guarantees universal coverage and generous health care benefits must either bring
down average health care costs or be willing to finance ever-growing Government
subsidies on behalf of low-income people and the Medicare population . Improved
insurance coverage can be expected to lead to increased demand for health care
services . The Clinton Administration reform plan proposes to pay for a large
portion of this extended coverage through cost' savings in health care delivery
and insurance administration, instead of increased dollar spending . As a backup
spending control measure, the Administration plan provides for a cap on the rate
at which insurance premiums could increase each year . A controversial issue in
the debate over health care reform is whether or not to include enforceable
spending caps at the outset, or wait and see whether voluntary efficiency gains
can accomplish the desired cost savings before legislatingmandatory cost controls .
According to estimates from several studies of the Clinton plan, savings of
roughly $108 billion to $138 billion per year, or 16 to 20 percent of health care
spending under the corporate and regional alliances, would be needed in the early
years of the reform (1998-2000) in order to provide universal coverage and meet
the lower global spending target envisioned by the Administration. Although
the studies generally agree about the range of aggregate savings needed, they
differ widely on the degree to which the savings can be achieved "voluntarily
through efficiency gains instead of "enforced" through caps on insurance
premiums and reimbursements to providers. The Administration expects that
market reforms and competitive pressures in insurance administration and health
care delivery should reduce private health expenditures enough that the proposed
caps on the rate of growth of premiums would not become binding . But other
analysts do not expect that the savings from managed care and voluntary
reduction in cost-shifting would be sufficient . As a consequence, in order to meet
the global spending caps spelled out in the Administration's proposed Health
Security Act, health plans would have to cut payments to health care providers
and/or cut back services to patients . If, instead, the caps were eased, that would
mean higher premium payments from employers and families and larger
Government subsidies .
The Administration projected that the President's plan would decrease the
Federal deficit by $38 billion in fiscal year 2000 . The Congressional Budget Office
estimated that the plan would increase the deficit by $10 billion. The difference
between the Administration and CBO estimates of $48 billion is relatively small,
however, compared with the difference between those two sources, who both
assumed that the premium caps would hold, and others concerned that they might
not . Estimates of the added increase in the Federal deficit if there were no
spending caps or efficiency gains reach $110 billion or more a year by FY 2000 .
This raises concern about adopting a reform that does not include effective
mechanisms for containing costs .
TABLE OF CONTENTS
WHY THE EMPHASIS ON CONTROLLING COSTS?
3
EXPENDITURES "ABOVE THE BASELINE"
CONSEQUENCES OF NOT ACHIEVING THE SAVINGS
4
5
COST-SAVING MECHANISMS UNDER THE CLINTON PLAN
SPENDING CAPS ON ALLIANCE PREMIUMS
PRE-EMPTION OF THE REIMBURSEMENT WINDFALL
LIMITS ON MEDICARE AND MEDICAID PAYMENTS
6
6
7
7
ESTIMATES OF THE NEEDED COST SAVINGS
CLINTON ADMINISTRATION
LEWIN-VHI
DRI/McGRAW-HILL
IN SUM
8
12
12
13
14
CONCERNS ABOUT THE EFFECT OF SPENDING CONTROLS ON
HEALTH CARE DELIVERY
15
FEDERAL BUDGET EFFECTS WITH AND WITHOUT COST
CONTROLS
16
HIGHER PREMIUM LEVELS
17
NO CAP ON FEDERAL ENTITLEMENT FOR PREMIUM
SUBSIDIES
21
GLOBAL SPENDING CAPS NOT FULLY EFFECTIVE
22
IN SUM
23
APPENDIX A .
SYNOPSES OF REPORTS ESTIMATING COST
SAVINGS
CLINTON ADMINISTRATION
Federal Program Savings
Savings from Market Reform and Competition
LEWIN-VHI
GOLDMAN SACHS
Increased Utilization Due to Expanded Insurance Coverage . . .
Basic Alternatives in Paying for Reform
DRI/McGRAW HILL
25
25
26
28
30
33
33
35
36
APPENDIX B . NATIONAL HEALTH CARE SPENDING UNDER THE
BASELINE AND THE CLINTON PLAN
40
REFERENCES
43
TABLES
1. Aggregate Cost Savings Needed to Meet the Spending
9
Objectives of the Clinton Universal Coverage Plan
.
Estimates
of
Components
of
Cost
Savings
2
11
under the Alliance Plans
3. Effect of the Clinton Health Care Reform on the Federal Deficit : Alternative
Estimates, With and Without Enforced Spending Caps, 1996-2000 . . 19
A.l . Changed Sources and Uses of Federal Funds in the Clinton Health Care
Reform, Fiscal Years 1998 and 2000 (Clinton Administration estimates)27
A.2 . Savings from Market Reforms and Competition (Clinton Administration
29
estimates)
A.3 . Projected Savings Relative to Expenditures (Clinton Administration
29
estimates)
.
Changes
in
Aggregate
National
Health
Care
Spending
under
the
Health
A.4
32
Security Act in 1998 (Lewin-VHI estimates)
A.5 . Increased Demand for Health Care Spending under the Clinton Plan
34
(Goldman Sachs estimates)
A.6 . Increase in Efficiency Needed to Avoid Spending Caps (Goldman Sachs
34
estimates for the year 2000)
A.7 . Consumer Spending for Medical Care Services
(DRI/McGraw-Hill Estimates)
38
A.8 . Estimated Reduction in Nominal Health Care Spending
39
(DRI/McGraw-Hill Spending Cap Simulation)
.
Estimated
Reduction
in
Real
Health
Care
Spending
A.9
39
(DRI/MeGraw-Hill Spending Cap Simulation)
B.I . Estimates by the Administration, the Congressional Budget Office,
41
Lewin-VHIL and DRI/McGraw-Hill
PAYING FOR HEALTH CARE REFORM :
THE ROLE OF COST SAVINGS
Universal health insurance coverage and enhanced benefits can be expected
to increase national demand for health care services . The question is how we
want to pay for that . One way is just to pay more . This would mean greater
aggregate premium payments by employers and individuals and a higher
percentage of the economy devoted to health care . It would also mean higher
taxes - or Government deficits - to subsidize the purchase of insurance by
employers and individuals considered too poor to pay . Another approach is to
reduce the average cost per person of providing health care . This could occur
by lowering the per unit cost of providing particular services (for example,
through efficiency gains in insurance administration and health care delivery or
reduced payments to providers) and by placing some limits on the amount of care
available to individuals . A financially workable health care reform plan is likely
to include all of these elements, to some degree .
The ClintonAdministration's proposal for universal health insurancei would
extend the protection offered by standard health insurance, in terms of both the
number of people and the range of health services covered . At the same time,
the plan would restrain the overall rate of growth of spending on health care .
To accomplish these two seemingly contradictory objectives, the Administration
plan depends heavily upon cost containment mechanisms - if not voluntary, then
enforced . A controversial issue in the debate over health care reform is whether
or not to include enforceable spending caps at the outset, or whether to wait and
see whether voluntary efficiency gains can accomplish the desired cost savings
before legislating mandatory cost controls .
The costs of both the Medicare and Medicaid programs were massively
underestimated when the programs were introduced and seriously in subsequent
years. The Government has tried to control the costs of these two programs by
limiting the fees it will pay to providers for specific services. Nonetheless,
projected increases in the cost of the Medicare and Medicaid programs continue
to threaten deficit reduction after 1999 .' This experience leads to apprehension
about introducing another health care entitlement program without an effective
i The Clinton Administration's proposal was introduced in the first session
of the 103d Congress as the "Health Security Act," under bill numbers H .R. 3600
in the House (by Rep . Gephardt) and S. 1757 (by Sen . Mitchell and others) and
S. 1775 (by Sen . Moynihan) in the Senate .
2 U.S. Congressional Budget Office . The Economic and Budget Outlook :
Washington, January 1994 . p. 26, 28-29.
Fiscal Years 1995-1999.
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mechanism in place for either raising revenues or controlling costs if demand
exceeds the initial projections .
It is noteworthy that there is concern both about what would happen if cost
controls such as those proposed by the Administration didn't work and what
would happen if they did work. Opponents, skeptics, and neutral budget analysts
of the Clinton plan have expressed concern about what will happen i f the controls
did not work - or if there are no such controls in alternative reform measures :
•
Would the premium caps be lifted, raising the mandated costs to
employers and individuals?
•
Would the Government cover the resulting higher pre
subsidy
costs? If so, would it raise taxes, cut other Government programs, or
let the deficit increase?
•
Would the benefit package be scaled back or some limits placed on the
amount of services an individual could expect to receive?
Others are concerned about how health care providers would respond if the
proposed controls were effective :
•
If payments to providers were restricted, would services to patients be
cut back or rationed?
•
If there were controls on drug prices and other reimbursements, would
the pace of private technological development and scientific research
be slowed?
The Nation is likely to face these issues under any health care reform plan
that promises Federal subsidies to foster universal coverage and tries to contain
Notably, these issues will arise even in the absense
health care costs .
comprehensive reform efforts .
The numbers cited in this report refer principally to the Clinton
Administration's health reform plan because the Administration's plan was issued
earliest and in the most detail, and has consequently been subject to the most
empirical analysis by Government and private sector analysts . Nonetheless, the
general themes addressed are relevant to the evaluation of other health care
reform proposals .
This report examines the role of cost savings in achieving the objectives of
health care reform as envisioned in the Clinton plan . The first section of the
report briefly explains why controlling health care costs is central to the financial
viability of the Administration's reform proposal . The second section explains
how the expected increase in demand for health care "above the baseline" under
a universal coverage system such as the Clinton plan means that the needed cost
savings are larger than commonly indicated by simply comparing estimates of
final spending under the reform plan to the baseline projections for the current
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system . The third section outlines the major cost-saving mechanisms under the
Clinton plan, with particular attention to the cap on the rate of increase of
alliance premiums .
The fourth section presents numerical estimates of the cost savings needed
for the Clinton plan to meet its global spending targets . It draws upon estimates
made by the Clinton Administration and two private organizations- Lewin-VHI
and DRI/McGraw-Hill. The fifth section briefly discusses some of the concerns
about what cost controls could mean for the quality and availability of health
care services . The sixth section demonstrates the potential Federal budget
exposure if a plan like the Clinton plan were enacted, guaranteeing health
benefits and premium subsidies, but the projected cost savings were not achieved ;
its draws upon estimates from the Congressional Budget Office in addition to
the three sources already mentioned .
The first appendix contains synopses of studies referred to in the main text,
with emphasis on their method of estimating the cost savings needed to
accomplish the Clinton plan . The second appendix presents the estimates of
national health care spending under the baseline and under the Clinton plan,
according to the different studies .
WHY THE EMPHASIS ON CONTROLLING COSTS?
One principal objective of the Clinton health care reform effort is to provide
universal coverage . A major reason why people are uninsured is that health
insurance is "unaffordable" for them . That is, the cost of insurance to them or to their employer on their behalf - is considered too high relative to their
income .
There is a concern, and a well-founded one, that more people are likely to
become uninsured in the future if we continue the current system of private
health insurance without some modification . If health care costs keep rising more
rapidly than peoples' incomes, fewer people will find health insurance affordable .
The Clinton proposal pursues at least three approaches to financing
universal coverage :
1.
bring down the average price of health insurance ;
2.
have the Government subsidize the premium price for people considered
too poor to pay;
3.
pay for these subsidies primarily by cost savings elsewhere in the
private and public health care system, and only minimally by levying
new taxes.
Constraining the growth of health care costs is a concern in its own right .
However, controlling costs is especially important to achieving affordable
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ersal coverage . The lower the average cost of health insurance, the more
u
people who can afford insurance without receiving subsidies, and the smaller the
Government subsidies would have to be for those people who do need them .
EXPENDITURES "ABOVE THE BASELINE"
Estimates of national health care expenditures under the Clinton (or other)
reform proposals are commonly compared with a "baseline" that represents what
It is important to
expenditures would be if current policies continued .
understand, however, that these estimates of expenditures under the Clinton
reform plan represent a net calculation of the projected increase in demand for
health care minus the savings expected to result from the various cost control
mechanisms .
By expanding insurance coverage, the Clinton plan is expected to increase
the demand for health care to levels above the baseline . (The Clinton plan would
extend coverage to the uninsured and would improve the benefit package for
many people previously insured, such as by covering preventive care without
copayments, prescription drugs under Medicare, and long-term home and
community-based care for the severely disabled .)
Figure 1 illustrates how the Clinton plan depends on cost savings to pay for
expanded coverage -and more . The middle line represents projected health care
expenditures under the "baseline" of no reform - what is anticipated if the
current health insurance system continues in place . The upper line represents
the Clinton plan of universal coverage without savings or cost controls . These
are the expenditures that would be expected if the demand for health care
increased in response to enhanced insurance benefits, but the expected reductions
in the cost of health care delivery and insurance did not occur . The lower line
represents expenditures under the Administration's plan, assuming that the
projected savings could be achieved or that the proposed cost controls would be
effective .
To keep total spending below the baseline, health care reform must
accomplish savings sufficient to cover not only the difference below the baseline,
but also the difference between the baseline and what spending demand would
be under universal coverage in the absence of cost savings and controls .3
s This is succinctly explained by: Dudley, William . The Clinton Healthcare
Plan: No Free Lunch . Goldman Sachs, U .S . Economic Research . New York,
Goldman, Sachs & Co ., January 1994 . p . 6 . Summarized in Appendix A of this
report .
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FIGURE 1 . National Health Care Spending under the Clinton Plan
With and Without Cost Reductions
Clacton plan without cost reductions
Billions of Dolt=
f
1300
1200
1100
1000 ,
900
800
1995
1996
1997
1998
1999
2000
Source : Based on numbers from DRI/McGraw-Hill . See appendix B of this
report for the numbers and appendix A for a description of the estimation
method .
CONSEQUENCES OF NOT ACHIEVING THE SAVINGS
There are as yet no official published Government estimates of what
aggregate national health care expenditures would be under universal coverage
(as defined under the Clinton plan, or any of the other reform plans) if there were
no efficiency savings or caps on expenditures . This report gathered together what
estimates were available from a variety of independent studies .
Understanding the magnitude of the cost savings needed for the Clinton
plan, or any of the other health care reform plans, to work financially is
important to assessing the degree of change being expected from the health
insurance and health care delivery system . A serious concern is that if the
increased demand for health care services cannot be more than fully offset through
"voluntary" efficiency gains in health care delivery, it would need to be paid for
in other ways . If the proposed spending caps are not enforced under the Clinton
plan or are omitted from other reform plans, this could mean higher premium
payments for employers and families, and larger Government subsidies and
deficits . If the proposed spending caps were enforced, this could mean reduced
payments to providers, the rationing of health care services, and/or scaling back
the benefit promises of the standard insurance package .
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COST-SAVING MECHANISMS UNDER THE CLINTON PLAN
There are two conceptually different sources of expenditure savings under
the Clinton plan . This report refers to one as "redesign" savings and the other
as "enforced" savings . "Redesign" savings include the type of savings the Clinton
Administration expects will occur as a byproduct of reforms and increased
competition in the health care and insurance markets . They include, for example,
the spending reductions expected from an increased reliance on managed care
and more efficient provider behavior, the streamlining of insurance
administration, and the voluntary reduction by providers of the cost-shifting
factor previously added to their prices . These can be thought of as "efficiency
gains" which would help produce the same - or improved - health outcomes
for less money .
"Enforced" savings include the impact of the global spending cap on the rate
of growth of the alliance premiums; limits on contributions on behalf of former
Medicaid recipients ; restraints on the growth of Medicare spending; and the
pre-emption of any reimbursement windfall in the setting of the initial fees and
premiums . These can be referred to as "spending caps" that would in effect limit
the payments to providers for the agreed-upon package of insured health care
services . The "enforced" spending cap mechanisms will now be described briefly .
SPENDING CAPS ON ALLIANCE PREMIUMS
In what is referred to as "global budgeting," under rules set forth in the
Health Security Act, the National Health Board would set the target premium
for a regional alliance for its first year of operation . The Act further spells out
the limit on the rate at which regional alliance (and corporate alliance) premiums
could rise each year thereafter .
In recent years, the rate of inflation in health care costs has been
substantially higher than the overall consumer price index (CPI) . Under the
Administration plan, the permitted rate of increase in the per capita premium
for the standard benefit package would be brought down to the CPI over a
three-year period, between 1996 and 1999 . Several other reform plans have
espoused the goal of reducing the rate of growth of health care spending to the
CPI within a few years . Only a few have included an enforceable cap .
Section 6001 of the Health Security Act defines the permitted "general health
care inflation factor" for the period from 1996 through 2000 as the increase in
the CPI plus specified amounts - 1 .5 percentage points in 1996, 1 .0 percentage
point in 1997, 0 .5 percentage point in 1998, and zero in 1999 and 2000 . After
2000, if the Congress did not specify new inflation factors, the default factor
would be the percentage increase in the CPI combined with the percentage growth
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in real gross domestic product (GDP) per capita during the preceding three
years 4 (This default factor is roughly equal to total growth in nominal GDP .
Its effect would be to hold national health care spending to a constant, rather
than rising, percentage of GDP .)
The Clinton Administration repeatedly stressed the belief that its spending
goals could be met without having to use what it considers "backup" protection
- the cap on the rate of growth of alliance premiums . In contrast, most other
studies o f the plan reviewed in this report conclude that spending demands would
exceed the global budget limits and thereby make the spending caps binding .
According to some estimators, the spending cap on alliance premiums is the largest
source of projected savings under the Clinton plan .
PRE-EMPTION OF THE REIMBURSEMENT WINDFALL
Under the Administration's health alliance system (and other universal
coverage proposals), providers would be paid the full approved fees for all
patients, including people previously uninsured (who had in the past been
provided with "uncompensated care") and those who were previously covered by
Medicaid with its low reimbursement rates . Unless fee levels were reduced by
the amount of the "cost-shifting" component previously charged to full-paying
customers, providers might collect a "reimbursement windfall" of extra income .
Only part of this fee reduction is expected to happen voluntarily on the part of
providers . The Clinton plan provided for setting first-year premium levels so that
any potential windfall would be offset or "pre-empted ."
The ability of health care reform to lower the average private insurance
premium depends importantly on removing the cost-shifting component from
current fee levels . Some of the differences in the estimates of premium levels
reflect differences in analysts' assumptions about the ability to reduce costshifting . Analysts who did not believe that the cost-shifting component would
be fully eliminated tended to have higher estimates of the initial premiums .
LIMITS ON MEDICARE AND MEDICAID PAYMENTS
Savings under Medicare would come primarily from reduced reimbursement
of providers - including hospitals, physicians, and other service providers .
Savings under Medicaid would come from restricting the payments to providers
that would continue to be made under the Medicaid program on behalf of
cash-assistance recipients and by capping the payments to the alliances on behalf
of other Medicaid beneficiaries below previous levels of expenditures .
In 2001 adjustments would also be made to reflect the increase in the
actuarial value of the benefit package that would occur when added benefits were
introduced .
4
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This report does not pursue the examination of proposed savings under the
Federal Medicare and Medicaid programs . It concentrates instead on savings in
health care spending under the domain of the private health insurance alliances .
ESTIMATES OF THE NEEDED COST S VINGS
Numerous studies of the Clinton plan have now been made by Government
and private sector analysts . This section of the report summarizes and compares
the main conclusions of three studies with regard to the size and composition
of cost savings needed for the Clinton plan to meet its objectives . Included are
estimates made by the Clinton Administration and two private organizations Lewin-VHI and DRI/McGraw-Hill . 5 Although the studies generally agree on
the amount of savings needed in the aggregate, they differ considerably about
how much of the savings would come from "redesign" savings versus "enforced"
savings .
Table 1 s mmarizes the findings from three sources with respect to the
aggregate savings in health care expenditures needed to meet the global budget
objective of the Clinton reform plan . The DRI numbers correspond to the
graphical presentation in figure 1 on page 5 .
The first row contains the estimate of what health care spending would be
under the universal coverage proposed by the Clinton plan if there were no cost
savings from either efficiency gains or enforced spending caps . The second row
presents the "baseline" estimate of what health care spending would be if there
were no comprehensive health care reform and current policy continued . The
third row presents the estimate of what spending would be under the Clinton
plan with the cost reductions planned under the terms of the Health Security
Act .
The fourth row is "needed savings," the difference between spending with
and without cost controls . The fifth row presents this measure of needed savings
as a percentage of what expenditures would otherwise be under universal
coverage, according to the reference measure used in that particular study . The
resulting percentage is a rough measure of the degree of savings that would need
to be achieved through "efficiency gains" in order to "voluntarily" meet the global
budget targets set by the Clinton plan .
s The Congressional Budget Office analysis is not included in this section .
For the purposes of its estimates, CBO accepted the Clinton Administration's
assumption that the proposed caps on the rate of increase of the premiums would
be effective . CBO did not separately estimate the magnitude of cost reductions
that would be required in order to meet the caps . CBO did, however, discuss
possible consequences of the premium caps . U .S . Congressional Budget Office .
An Analysis of the Administration's Health Proposal . Washington, February 8,
1994 . p . 70, 74 .
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TABLE 1 . Aggregate Cost Savings Needed to Meet the Spending
Objectives of the Clinton Universal Coverage Plan
(in $ billions or percent)
Estimating group
(year of reference)
Clinton
(alliance
portion
only)'
(2000)
Clinton
(national
health
expenditures)b
(2000)
LewinVHF
(acute
care
only)
(1998)
DRI/
McGraw
-Hill'
(NIPA)
1,541 .5
1,299.8
(2000)
1. Universal coverage
under Clinton plan
without cost reductions
674
2. Baseline
reform
NA
1,653
1,395 .0
1,200.4
3. Clinton plan with cost
reductions
566
1,597
1,394.4
1,150 .9
4. Cost savings needed
(line 1 - line 3)
108
NA
147.1
148 .9
5. Percent cost savings
needed ( line 4/line 1)
16.0%
NA
9.6%
11.5%
i
out
Notes and sources :
' The Clinton Administration projections include expenditures for services
in the guaranteed benefit package delivered to all those in regional and corporate
alliances . This includes privatized Medicaid acute care . It does not include
Medicare or public health expenditures. Source : See Appendix table A .3.
b See Appendix table B .1.
° The Lewin-VHI numbers include spending for acute care only . They
exclude spending for long-term care, public health, research and construction .
See Appendix table A-4 .
d DRI/McGraw-Hill uses National Income and Product Accounts (NIPA)
definitions of health care spending . The NIPA accounts do not include spending
emanating from Federal, State, or local hospitals, or prescription drugs . The
NIPA health care expenditures are about 80 percent of expenditures under the
HCFA (Health Care Financing Administration) definition of the National Health
Accounts (NHA) . See Appendix table A .7.
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Caution should be used in interpreting and comparing the estimates of
needed cost savings . The Lewin-VHI estimates are for 1998, while the others
are for 2000 ; savings are projected to get cumulatively larger, the longer the
reform is in place . Each study uses different economic assumptions, estimating
methods, and data . Furthermore, each of the studies uses a different definition
of health care expenditures (see notes to table 1) . Their magnitudes vary
substantially, as can be seen by reading across the first row . This affects the
percentage estimates . In particular, the percentage measure of needed savings
is substantially larger when the denominator is smaller .
The base for the Clinton Administration's cost savings estimates (column
1) is spending under the private regional and corporate alliances, including
Medicaid patients who would be enrolled in the alliance system . This alliance
segment represents about 35 percent of total projected national health care
expenditures under the Clinton reform plan .' In contrast, the private sector
estimators of the Clinton plan have looked at measurements of national health
care spending that also encompassed Medicare and other public spending, with
some omissions explained in the notes to table 1 .
Table 2 attempts to standardize the comparison among the studies by
focusing on savings under the regional and corporate health alliances only (the
measure shown for the Clinton Administration estimates in table 1) . Even so,
it is difficult to generalize among the studies . Each study measures different
components and there are large differences in the size of savings attributed to
a particular category . The diversity of the estimates serves as a warning not to
accept as precise the numerical estimates from any single study .
In an effort to calculate a savings percentage with respect to a standardized
base, the concept of "benchmark spending" is created as a point of reference (the
denominator) . Benchmark spending has been defined in table 2 as $566 billion
plus the amount of estimated spending reductions under the alliance plans . As
shown in table 1, $566 billion was the Administration's estimate of spending
under the alliances in 2000, with cost reductions . Thus benchmark spending is
a rough approximation of spending under the alliances with universal coverage
but without cost reductions .
Total spending reductions are the same in table 2 as table 1 for the Clinton
Administration estimates . For Lewin-VHI and DRI/McGraw-Hill, the savings
totals are somewhat lower in table 2 . The Lewin-VHI total cost saving estimates
in table 1 also include $13 .1 billion in net savings for Medicare and an increase
in spending of $3 .5 billion for Medicaid . (See appendix table A .4 .) The DRI total
6 A comparison of two sets of Clinton Administration numbers (columns 1
and 2, line 3) suggest the regional and corporate alliances would account for $566
billion out of $1,597 billion, or 35 percent of total health care expenditures in
2000 . According to CBO's estimates, expenditures through the health alliances
would be $585 billion or 37 percent of $1,583 billion in total national health
expenditures in calendar year 2000 . Calculated from CBO, p . 26 .
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TABLE 2 . Estimates of Components of Cost Savings
under the Alliance Plans
(in billions of dollars)
Estimator
(Year of reference)
Spending under alliances after cost
savings (Administration estimate)
Clinton
Administration
(2000)
LewinVHla
(1998)
DRI/
McGrawHillb
(2000)
$566
$566
$566
Redesign savings
$108
$58 .0
$17.4
Managed care
14 .9
17 .4
Changes in provider behavior
57
Consumer switching to low cost plans
24
Administrative savings
17
6 .7
Elimination of small group market
11
Voluntarily reduced cost shifting
36 .4
Enforced spending caps
0
79.8
107 .6
Alliance premium caps
0
47 .3
107 .6
. . ....Pre-emption
. . . . . ... .... .. . . . . .. .. .. . .of
. . . . . ..cost
.. .. . . . . .. ....shifting
. . . . . . . .. ..... . . . . . . . ... ... . . . . .. .. . . . . . . . . .. .... .. .... .... . .. . ... . . . . . .. . . . . . . . . .. . . . . . . . . . . 32
. . . . . . .5
. . . . . . . . . . . . . ...... . . .. .... . . . .. . . . . . . ....
Total spending reductions under
108
137 .8
125 .0
alliance plans
Benchmark spending for alliances
674
703 .8
691
before cost reduction
-----------------------------------------------------------------------------Spending reductions needed as a
16%
20%
18%
percent of benchmark spending
Percent of savings from redesign
42%
100% -14%
---------------------------------------------------------------------------Percent of savings from enforced caps
0%
58%
86%
Notes : The absence of an entry in the table does not necessarily mean that
the estimators did not include that factor in their model or believed its value to
be zero . It only means that they did not publish an estimate for that factor . For
example, both the Clinton and DRI estimators took the reduction of cost shifting
into account but did not publish an estimate of the magnitude .
The individual items may not sum exactly to totals due to rounding .
Source : For further explanation, see appendix A's discussion of each of these
sources .
CRS-12
cost saving estimates in table 1 also include $24 billion in Medicare savings . (See
appendix A.8.)
The findings on cost savings from the three studies will now be described
briefly . A more detailed explanation of the studies and their estimating methods
is presented in appendix A.
CLINTON ADMINISTRATION
The Clinton Administration expected that market reforms and competitive
pressures would reduce the rate of growth in private health expenditures
sufficiently that the legislated caps on premium growth would not become
binding. The Administration estimated that "redesign" savings of $108 billion
in 2000 would offset the $107 billion in expenditure reductions needed to meet
the premium caps . The $108 billion represents a 16 percent savings relative to
what expenditures under the regional and corporate alliances would otherwise
be. (See appendix tables A .2 and A .3 .)
LEWIN-VHI
Using a microsimulation model, the consulting firm Lewin-VHI made
detailed estimates of specific components of spending increases and decreases
under the Clinton plan . Their estimates suggest that if the proposed
enhancement in private insurance coverage and public health programs were
made, then in 1998 national health care spending would be $147 billion higher
without the anticipated cost savings and spending caps . Overall savings in
national acute care health expenditures of 9 .6 percent would be needed to bring
spending down to the level of the global budget target (table 1).' Spending
reductions associated with the alliances only were $137 .8 billion or roughly 20
percent of the benchmark (table 2) .8
'In another measurement, Lewin-VHI estimated that per capita costs in the
health alliances would be about $201 per person per month in 1998 without the
"enforced" cost controls, and $182 per month with cost controls . Comparing these
two numbers implies that the budget cap would be enforcing a 10 .4 percent
cost-squeeze in 1998 . Lewin-VHI, p . 25-26 . Separate estimates for the four
enrollment classes imply a cost-squeeze of 9 .8 percent as a result of the premium
cap . The savings expected from the "redesign" of the health care system are
incorporated in the premium estimates . Lewin-VHI, Appendix D, table D-17,
p. D-50 .
'The measurement for Lewin-VHI is particularly rough because the starting
point for the benchmark, $566 billion, is a measure of spending in 2000, while
the Lewin spending reduction estimates are for 1998 .
CRS- 1 3
Lewin-VHI did not expect that savings from managed care and streamlined
administration would be sufficient to avoid the spending caps ; out of total
spending reductions under the alliances of $137 .8 billion, $21 .6 billion or 16
percent was estimated to come from such savings . Lewin estimated that the caps
on alliance premiums would save over twice as much - $47 .3 billion or 34
percent of the total spending reductions under the alliance plans .
Note that the Lewin estimates are for calendar 1998, the first year that the
reform plan was expected to be in effect in all States and before managed care
or the premium caps could be expected to have much cumulative savings effect .
Although the other estimators are known to have taken reduced cost-shifting
into account, Lewin-VHI was the only one to publish an estimate of the reduction
in cost-shifting that would need to be accomplished if providers are not to reap
a "reimbursement windfall" from universal coverage . The combined total
reduction in cost-shifting of $68 .9 billion accounted for half of Lewin's total
estimated spending reductions . Of that amount, slightly over half, or $36 .4
billion, was projected to come from a voluntary reduction in cost shifting by
providers . The remaining windfall to be forcibly "preempted" when the initial
levels of the alliance premiums were set in the first year of the plan was
estimated at $32 .5 billion . (See table A .4 and the accompanying discussion in
the appendix.)
Adding the estimated savings from voluntary reduction in cost shifting to
the savings from managed care and administrative streamlining, the total savings
from "redesign" are $58 .0 billion or 42 percent of the total spending reductions
under the alliance plans . Adding the estimated savings from pre-empted costshifting to the savings from the alliance premium caps gives a total of $79 .8
billion in "enforced savings," or 58 percent of the total estimated spending
reductions under the alliance plans .
DRIIMcGRAW-HILL
The economic forecasting firm DRIIMcGraw-Hill (DRI) analyzed the
Administration's reform plan in the context of its quarterly macroeconomic model
of the U .S . economy . For the year 2000, DRI estimated that nominal medical
care expenditures under the full Clinton plan would be $49 .5 billion below the
baseline case of no reform, a reduction of 4 .1 percent. This decrease, however,
reflects the net outcome of an increase in spending of $99.5 billion (above the
baseline) resulting from improved insurance coverage, offset by savings of $149
billion from spending controls . The $149 billion in savings represents 11 .5
percent of spending under the Clinton plan without spending caps, measured
according to the NIPA definition of health expenditures . (See table 1 in the text
and table A .7 in the appendix .) Spending reductions associated with the alliances
only were $125 .0 billion or 18 percent of benchmark spending without spending
reductions (table 2) .
According to the DRI estimates, $17 .4 billion or 14 percent of the $125 billion
in savings under the alliance plans in 2000 would come from managed care . The
CRS- 1 4
remaining $107 .6 billion or 86 percent would come from from the alliance
premium caps . (See table A.8 in the appendix .)
In its modeling, DRI assumed that roughly one-third of the windfall gains
would not be eliminated under the standard State Government reimbursement
guidelines .' However, DRI did not publish an estimate of reduced cost-shifting .
IN SUM
There is general agreement among these three studies of the Clinton plan
that a large amount of aggregate savings would need to be achieved in annual
national health care spending in order to avoid the caps on the growth of alliance
premiums specified in the Health Security Act . For the early years of the plan,
1998-2000, the needed savings have been estimated at from $108 billion to $138
billion per year under the alliance portion alone . These numbers suggest that
if the health care delivery system under the corporate and regional alliances could
not achieve "efficiency gains" of approximately 16 to 20 percent within the portion
by the very earliest years of the reform, then in order to meet the global spending
targets set forth in the Clinton plan the cap on the rate of growth of premiums
would need to be enforced .
There is considerable difference among the estimators about the degree to
which the savings under the alliance plans can be achieved "voluntarily" through
efficiency gains, instead of "enforced" through caps on insurance premiums and
reimbursements to providers . The Administration expected that market reforms
and competitive pressures in insurance administration and health care delivery
would reduce private health expenditures sufficiently that the global spending
caps would not become binding . In contrast, the private sector estimators suggest
that of the total needed savings under the alliances, only a minority would come
from "redesign savings" or efficiency gains from managed care and streamlined
insurance administration, while the majority would come from enforced spending
caps (caps on the growth of alliance premiums and the pre-emption of cost
shifting) . 10
DRI's estimate of "redesign" savings from managed care was roughly
comparable to Lewin-VHI's ($17 .4 billion in 2000, compared with $14 .9 billion
in 1998, respectively) . Both were far lower than the Administration's estimates
of $57 billion from changes in provider behavior plus $24 billion from consumers
switching to low cost plans in 2000 . Roughly speaking, the Administration
expected 100 percent of the spending reductions to come from redesign savings ;
Lewin-VHI 42 percent ; and DRIIMcGraw-Hill just 12 percent . (See table 2 .)
s DRI, p . 17 .
to The Administration, CBO, and the private estimators generally agree that
most of the savings under the Medicare program would come from the enforced
spending caps .
CRS- 15
These large estimates of needed savings raise concern about about the
financial implications of adopting a reform plan that guarantees universal
coverage but does not have an identified mechanism for cost containment .
CONCERNS ABOUT THE EFFECT OF SPENDING CONTROLS ON
HEALTH CARE DELIVERY
The Clinton Administration believes that in the present health care system
there is a large amount of expenditure on "unnecessary care" (medical care that
does not cost-effectively contribute to improved health) and expenditures that
are higher than they need be because the medical problem was not addressed at
an earlier or more preventive stage . Consequently, the Administration reasons,
increasing the efficiency and effectiveness of service delivery can reduce total
health care spending without lowering the quality of health care outcomes .
No doubt, some efficiency savings can be made in the health care delivery
system without seriously affecting the nature and quality of care . A key question
is, will these savings be large enough - and soon enough - to meet the Clinton
Administration's proposed global budget target? As explained in the previous
section, the other estimating groups surveyed anticipated that the spending caps
would be triggered . If so, what are the implications?
Economists as a group are skeptical that binding price controls or spending
caps can be imposed on any product or service without having supply fall short
of demand at the controlled price . The question economists would ask is whether
health care providers can be expected to simply accept being paid less for
supplying the same services ." More likely, providers will accept some decrease
in fees but will also adjust their behavior to curtail the quality or quantity of
services they provide in exchange for lower payments .
Currently the Medicare and Medicaid programs reimburse providers at rates
well below the posted prices . But, because Medicare and Medicaid represent only
a part of their business, providers have been able to offset some portion of this
underpayment by refusing to serve some of these patients, increasing the quantity
of services, or by raising the prices charged to their full-paying customers (known
as cost-shifting) . Under the Clinton reform plan, the percentage rate of
reimbursement to Medicare providers would be reduced below current levels . The
Clinton plan would fold many Medicaid recipients into the private alliance plans
but would have the Government pay the alliances less than what previous
Medicaid expenses had been . Thus, the cost-shifting from Medicare and Medicaid
to the rest of the population would continue, at an amplified level .
Under the Clinton plan, controls on payments to insurers or providers would
apply to most of the health care system . There would be few remaining
11 That is, is the supply of health care services really "price-inelastic"? Or
is it more likely to be somewhat "price-elastic"?
CRS-16
customers to whom providers could shift costs . A big question is how providers
would respond .
DRI/MeGraw-Hill pursued the analysis of what the cap on the amount of
money flowing into the alliances might mean . DRI expected that both provider
incomes and utilization would be reduced as a result of the spending caps . By
the year 2000, unit prices of health care services (also referred to as provider
incomes) would be about 4 .7 percent lower than under baseline conditions, and
6.8 percent lower than under the Clinton plan in the absence of caps . 12 In the
aggregate, real health care services would be cut by approximately 5 percent
starting in the years 1998-2000, once the spending controls started to take effect .
Per household, the reduced utilization of services in 1999 and 2000 would be
equivalent to $300 per year measured in 1987 dollars, or $461 in 1994 dollars ."
These estimates cover the population as a whole, including those previously
uninsured . Consequently, for the previously insured portion of the population,
the decrease in services would be even larger .
Sacrifices and tradeoffs are an inevitable part of any effort to reform the
health care system . In this case, paying for expanded insurance coverage by
controlling costs can be expected to lead to changes in the way health services
are delivered, in order to reduce the average amount spent on health care per
person.
FEDERAL BUDGET EFFECTS WITH AND WITHOUT COST
CONTROLS
The preceding discussion focused on measurements of national health care
expenditures . This section focuses on measuring the effect of the health care
reform plan on the Federal deficit . Note that while estimates of health care
spending are typically made on a calendar year basis, estimates of the effect on
the Federal deficit are made on a fiscal year (FY) basis .
The Clinton Administration estimated that its health reform plan would
decrease the Federal deficit - by $37.7 billion in FY 2000, with an extra $13 .0
billion "cushion" to pay for additional premium discounts, if necessary .14 None
of the other studies had as optimistic an estimate of the likely effect on the deficit
and none had any cushion remaining .
The major difference between the Administration and other analysts in their
estimates of the effect of the Clinton reform plan on the Federal deficit arises
12
Calculated by CRS from the unpublished DRI medical price deflator series .
a DRI, p . 4 .
14
See the shaded portions of appendix table A .1 for the Administration's
estimates of the cushion and the effect on the deficit in 1998 and 2000 . The
cushion was approximately 15 percent of the projected premium discounts .
CRS- 17
from the amount of "discounts" or subsidies they estimate the Government would
be obligated to pay on behalf of the employer share of the insurance premium . 16
The Administration's estimates of the net budget cost 16 of these premium
discounts reflected certain assumptions :
•
about the level of the premium needed to cover the guaranteed benefit
package ;
•
that the total amount the Federal Government would spend on
premium discounts each year was a "capped entitlement," limited to the
dollar amounts specified in the Health Security Act ; and,
•
that the global budget limits set forth in the Health Security Act
regarding the annual rate of growth in the private premiums would be
effective if needed but would not have to take effect at all because
savings from market reforms and competition would be sufficient to
bring expenditures below the global limits .
All of these assumptions have been challenged . The other analysts of the
Clinton plan made different assumptions regarding the dollar level of the
premiums, whether the cap on the Federal entitlement for premium discounts
would hold, and whether the global spending caps would hold . These led to
substantial differences in their projections of the effect of the plan on the deficit .
When the Congressional Budget Office released its analysis of the Clinton
health care reform plan in February 1994, considerable attention was given to
the fact that CBO showed the President's plan increasing the Federal deficit
slightly, while the Administration had shown it decreasing the deficit slightly,
over the period 1996 to 2000 . What the numbers summarized in table 3 reveal
is that the difference between the Administration and CBO estimates is relatively
small compared with the difference between those who assumed that the spending
caps would hold and those concerned that they might not .
HIGHER PREMIUM LEVELS
The Clinton plan promises to subsidize the premium payments of employers
once they exceeded a certain percentage of payroll and the family share of
lu For an explanation of the sources of the differences, see CBO, p . xiii and
Table 2-4, p . 36 . Also, see Lewin-VHI, Table ES-3, p . ES-15 or Table 12, p . 56 .
16
Gross discounts are offset by transfers from the Medicare and Medicaid
programs .
CRS- 18
premiums once they exceeded a certain percentage of family income ." As a
consequence, if the estimated level of the premiums rises, so does the estimated
Federal obligation to pay subsidies. Higher average premiums also mean higher
premium payments for employers . This means less potential increase in the
taxable base for income and payroll taxes and consequently lower additional tax
revenues than the Administration had projected . Thus, if premiums rise above
the levels projected by the Clinton Administration, the reform plan is more likely
to increase the Federal deficit - both by raising the Federal Government's
expenditure obligations and reducing its revenues .
All of the other studies concluded that, in order to cover the promised
benefits package, the average health insurance premiums would have to be higher
than the levels suggested by the Clinton Administration in the Fall of 1993, by
15 to 20 percent ." (CBO estimated the premiums would be 15 percent higher 19
and Lewin-VHI 17 percent higher ." DRI/McGraw-Hill, based on outside data,
assumed premiums would be 20 percent higher .")
17
Under the Clinton plan the Government would obligate itself to pay
subsidies or premium "discounts" to the alliances to make up the difference
between the cost of the premium and the capped contribution of certain
employers and individuals . For the 80 percent employer share of the average
premium, the financial liability of all employers participating in the regional
alliances would be limited to 7 .9 percent of their payroll, in the aggregate. For
small employers of low-wage workers, the employer share would be capped at
a much lower percent of payroll, as low as 3 .5 percent . For most early retirees,
the Government would pay all of the employer share . For the family share of
the premium, low income people would be subsidized based on a
percent-of-income cap .
For a more detailed summary description, see U .S. Library of Congress .
Congressional Research Service . Health Care Reform : President Clinton's Health
Security Act . Report No . 93-1011 EPW, by Beth Fuchs and Mark Merlis .
Washington, Nov . 22, 1993 . p. 28-36 . Also, CBO, An Analysis of the
Administration's Health Proposal . p. 11-12 .
18 For those premiums see : The White House Domestic Policy Council . Health
Security: The President's Report to the American People. Washington, October
1993 . p. 112-113 .
19
CBO, An Analysis of the Administration's Health Proposal, p . 30, 36.
20 Lewin-VHI, Inc . The Financial Impact of "The Health Security Act ."
December 9, 1993. Fairfax, Virginia, Lewin VHI, Inc ., 1993 . p. 25.
21
DRI/McGraw-Hill . The Administration's Health Care Reform Plan :
National Macroeconomic Effects . Prepared for : Citizens for a Sound Economy
Foundation . Washington, February 1994 . p. 9.
CRS- 1 9
TABLE 3 . Effect of the Clinton Health Care Reform on the Federal Deficit :
Alternative Estimates, With and Without Enforced Spending Caps,
1996-2000
(change in deficit and CBO baseline deficit, in $ billions)
Source
Administration, with
caps on premiums and
Federal entitlement a
Lewin-VHI, with caps
on premiums and
Federal entitlement'
CBO, with premium
caps'
Fiscal year
1998
1999
1996
-3 .2
1997
2000
1996-2000
6 .9
4 .8
-18 .2
-37 .7
-47 .4
-3 .9
0 .8
11 .1
-5 .3
-14 .4
-11 .7
1 .0
20 .0
32 .0
21 .0
10 .0
84 .0
38 .1
DRI with premium caps d
-2 .1
-3 .6
26 .1
15 .9
1 .2
2 .2
10 .0
58 .5
88 .8
114 .8
274 .2
DRI without premium
caps
-----------------------------------------------------------------------CBO baseline deficit
166
182
180
204
226
958
without health care
reform'
Note : A negative number means decreasing the
means increasing the deficit .
eficit ; a positive number
Sources :
a
U .S . Executive Office of the President . Office of Management and Budget .
Budget of the United States Government for Fiscal Year 1995 . Washington, U.S .
Govt. Print . Off., February 7, 1994 . p . 190 .
' Lewin-VHI, Inc .
The Financial Impact of "The Health Security Act ."
December 9, 1993 . Fairfax, Virginia, Lewin-VHI, Inc ., 1993 . p . 45 .
'U .S . Congressional Budget Office . An Analysis of the Administration's
Health Proposal . Washington, February 8, 1994 . p . 29 .
The Administration's Health Care Reform Plan:
National Macroeconomic Effects . Prepared for : Citizens for a Sound Economy
d
DRI/McGraw-Hill .
Foundation . Washington, February 1994 . Appendix C, p . 3-4 .
U .S . Congressional Budget Office . The Economic and Budget Outlook :
Fiscal Years 1995-1999 . Washington, January 1994 . p . 29 .
e
CRS-20
Starting with 17 percent higher premiums than the Clinton Administration,
Lewin-VHI estimated that net Federal subsidy payments would be $37 billion
higher ($153 billion in subsidies rather than the $116 billion estimated by the
Administration), measured cumulatively over the 1996 to 2000 period ." Also,
because employer spending on health care would increase, taxable wages would
decrease, and Federal tax revenues would be lower - all in the opposite direction
from what the Administration projected. For the 1996-2000 period, Lewin-VHI
estimated that tax revenues would decrease by $18 billion ; in contrast, the
Administration had projected a $23 billion increase in tax revenue from an
expanded taxable base of employee wages . The net difference is $41 billion less
in revenue under the Lewin-VHI estimates .
Added together, the $37 billion in higher subsidies and $41 billion in lower
revenues mean a differential effect on the Federal budget of $78 billion over the
five-year period, relative to the Administration estimates23 This uses up the
$45 billion cushion allowed by the Administration . In addition, it uses up $23
billion of the ($58 billion in) deficit reduction hoped for by the Administration ."
The Congressional Budget Office estimated that, instead of the deficit
decreasing by $37 .7 billion as the Administration had estimated, the Clinton
reform plan would increase the deficit by $10 .0 billion in 2000, a difference of
$47.7 billion . Approximately $15 billion of this difference can be attributed to
the 15 percent higher level of premiums assumed by CBO 25
The additional cost to the Federal Treasury (and in parallel fashion to
private payers) would be even larger if premiums are higher than assumed by
these studies . Premiums could be higher if the health reform plan adopted
promises a more generous package of benefits or if it does not reduce cost-shifting
to the degree envisioned in the Clinton plan .
22
The subsidy does not increase by as much as the premiums because some
individuals and employers would be below the percent-of-income and percent-ofpayroll caps needed to qualify for a subsidy ; they would pay the increased
premium on their own, without Federal subsidy .
2a
Lewin-VHI, p. ES-15 or p . 56.
24 The Lewin-VHI study makes its comparisons to Administration estimates
presented in testimony to the Senate Finance Committee by Alice Rivlin, Deputy
Director of the Office of Management and Budget, Nov . 4, 1993. The
Administration's estimate of deficit reduction was subsequently revised
downward .
25
CBO, An Analysis o f the Administration's Health Proposal, p . 36-37, 38-39.
CRS-2 1
NO CAP ON FEDERAL ENTITLEMENT FOR PREMIUM SUBSIDIES
Section 9102 of the Health Security Act describes as a "capped entitlement ."
the system of Federal payments to regional alliances (to make up for premium
discounts on behalf of low-income families and small, low-wage employers and
for administrative expenses) . The Act specifies the dollar amount that can be
spent on those alliance payments for fiscal years 1996-2000, and provides an
indexing formula for subsequent years 26
The Congressional Budget Office expressed the belief that the caps on
payments to the alliances would not be legally binding . CBO felt that the section
9102 limitation did not diminish the Federal Government's responsibilities under
the Administration's reform proposal : other provisions of the Health Security
Act would still oblige the Government both to make subsidy payments on behalf
of employers and families and to ensure health coverage for all eligible people . 7
Furthermore, the proposed legislation contains no provisions for limiting those
entitlements in the face of a funding gap, other than providing for expedited
congressional consideration of the matter ." The Act does not offer any
substantive guidelines for how to deal with a shortfall ." (Similar questions
should be asked about the likely effectiveness of other proposals to the limit the
Government's obligation to subsidize health insurance, once the promise is made
to guarantee coverage .)
26
According to section 9102(e) of the Act, the maximum total Federal
payments to the alliances would be limited to $10 .3 billion in FY96, $28 .3 billion
in FY97, $75 .6 billion in FY98, $78 .9 billion in FY99, and $81 .0 billion in FY2000 .
For fiscal years after 2000, the limit would be the previous year's limit inflated
by the increase in the CPI multiplied together with the average annual percentage
change in the population for the previous three years and the average annual
increase in real GDP per capita for the previous three years . This is equivalent
to the growth rate in nominal GDP .
27 CBO points out, "Because the Congress has the constitutional right to make
and change its own rules, however, procedural mechanisms cannot guarantee that
an issue will be considered . If the Congress took no action, the courts might be
asked to decide which portion of the legislation took precedence-payments to
the alliances to ensure coverage of the specified benefits or the limits on federal
U.S. Congressional Budget Office .
An Analysis of the
payments ."
.
8,
1994 . p. 24.
Administration's Health Proposal . Washington, Feb
28 Ibid .
29 The Health Security Act provides that when the Secretary of Health and
Human Services anticipates that the capped amount is likely to be insufficient
for a fiscal year, the Secretary is to notify the President, the Congress, and the
regional alliances . The President has 30 days to submit to Congress a report
containing specific legislative recommendations for actions to eliminate the
The Congress is to give these recommendations "expedited
shortfall .
consideration ."
C
-22
The Health Security Act provided for $274 .1 billion n subsidies over the 5
years FY1996-2000, comfortably exceeding the Fall 1993 Administration
projection of $116 billion and the Lewin-VHI estimate of $153 billion in needed
subsidies . Consequently, it did not matter for the Administration's or
Lewin-VIII's estimates that they had accepted the entitlement cap .
CBO estimated that, without the cap on entitlements, Federal subsidy
payments owed to the regional alliances would be $82 billion in 1998,$108 billion
in 2000, and $173 billion in 2004.3° Those estimates exceed the capped Federal
alliance payments specified in the Health Security Act31 - by $27 billion in
FY2000 alone, and $56.9 billion over the FY1996-2000 period . CBO concluded
that the cap on the entitlement was unlikely to be enforceable, as did
DRI/McGraw-Hill .
GLOBAL SPENDING CAPS NOT FULLY EFFECTIVE
Like the Administration and Lewin-VHI, CBO assumed that the global
spending caps would be effective . The DRI/McGraw-Hill estimators challenged
that assumption .
In practice, the concept of the caps not being effective means that because
the consequences of enforcing the spending caps would be so unpopular - with
consumers and/or providers - the Congress would relax them, permitting an
increase in private alliance premiums and Federal premium subsidies (as well
as Medicare and Medicaid spending) .
DRI estimated the effect on the deficit assuming that the global spending
cap was effective and, alternately, assuming that the cap was not effective but
that all other major elements of the Clinton plan were adopted . With the
spending cap, DRI estimated that the deficit would increase by $1 .2 billion in
2000 ; without the spending cap, the deficit would increase by $114 .8 billion, a
difference of $113 .6 billion.
Lewin-VHI made an alternate estimate of the effects on the Federal budget
assuming that premiums would be allowed to grow at a rate 1 .5 percentage point
higher than permitted under the Health Security Act . They note that this
represents a midpoint between the rate of growth allowed under the Act and the
currently projected rate of growth in health spending . 32
s° U .S. Congressional Budget Office . An Analysis of the Administration's
Health Proposal . p . 33.
si See footnote 7 on p . 8.
32
KPMG Peat Marwick conducted estimates of the Clinton plan assuming
that the spending caps would be 50 percent effective, which is comparable to this
Lewin-VHI assumption . Peat Marwick also estimated the impact on national
(continued. ..)
CRS- 23
Lewin-VHI estimated that, cumulatively over the period 1996-2000, with
a 1.5 percentage point higher rate of increase in the premium, the Federal deficit
would increase by $17.4 billion, rather than decreasing by $24 .6 billion, as they
estimated under the terms of the Health Security Act . This $42 billion swing
in the projected effect on the deficit is made up of three components : an increase
in new Federal program expenditures of $22 .9 billion, a decrease in savings to
current programs of $6 .2 billion, and a decrease in tax revenues of $12 .9 billion,
all measured over a 5 -year period ."
Other proposals have been more lenient than the Clinton plan in their goals
of reducing the rate of growth of health care spending . This suggests a
substantially larger Federal deficit effect, unless the subsidy promises are
significantly cut back .
IN SUM
These estimates of the change in the Federal deficit as a result of the Clinton
health care reform plan range from the Administration's projection of the deficit
decreasing by $38 billion in FY 2000, to the DRI estimate of the deficit increasing
by $115 billion in the absence of efficiency gains or cost controls . This is a range
of discrepancy of $153 billion for a single year . The CBO baseline estimate of
the total Federal deficit without health care reform is $226 billion for FY 2000 .
Part of the difference between the Administration's and other estimates of
the effect on the deficit is attributable to the higher premium estimates by all
the other analysts . The effect of higher premiums is compounded by rejecting
the assumption (made by the Administration and Lewin-VHI) that the proposed
cap on the Federal obligation to pay premium subsidies would be enforceable .
By far the largest part of the difference, however, is attributable to the
projection by some private researchers that health care demand will exceed the
global spending targets and that the proposed spending caps will not prove
effective. Estimates of the added effect on the deficit if the spending caps are
32( . . .continued)
health expenditures and Federal subsidy costs assuming that the premium caps
were effective at the rates of 25, 50, and 75 percent . They did not publish
estimates for 0 and 100 percent effectiveness, however . Consequently, their
estimates could not be compared directly with those from the other studies
included in this report. Relative to the studies reported here, the Peat Marwick
analysis suggests much larger increases in national health care spending and the
Federal deficit if the spending controls are not effective .
See: KPMG Peat Marwick . Analysis of H.R. 3600, The Health Security Act
of 1993 . March 28, 1994 . Also, the Technical Appendix . Washington, April 7,
1994 .
33 Lewin-VHI,
p. 54-55 .
CRS-24
not fully effective run as high as $110 billion a year or more by FY 2000 . This
raises concern about adopting a reform that does not include effective mechanisms
for containing costs .
CRS-25
APPENDIX A. SYNOPSES OF REPORTS ESTIMATING COST
SAVINGS
This appendix describes four of the studies of the Clinton health care reform
plan referred to in the main text . Special attention is given to their method of
estimating the cost savings that need to be accomplished to meet the spending
goals of the Clinton plan . The emphasis is on private sector savings more than
savings under Government programs .
The Administration, in the Federal Budget for Fiscal Year 1995, projects the
savings in Federal programs anticipated as sources of funding for the health care
reform, in addition to new tax revenues. This is the most publicly available
measurement of the Clinton plan . A Clinton Administration briefing handout
explains how the needed savings in private sector programs can be achieved
without resorting to premium caps.
The Lewin-VHI study addresses changes expected in both Government and
private health care spending. It identifies and includes numerical estimates of
parts of the health care system where increased spending can be expected, as well
as offsetting areas where reduced spending can be expected, including both
voluntary and enforced savings .
The Goldman Sachs report is included because it provides a broad overview
of the basic issues . It explains the main components of expected increases in
health care utilization, provides aggregate estimates of the efficiency gains needed
to avoid the spending caps, and lays out the major policy alternatives if the
desired cost savings are not achieved .
DRI/McGraw-Hill measures the effects of the health care reform in both
"nominal" and "real" dollar terms . They estimate the savings attributable to
managed care, Medicare spending caps, and private sector spending caps . They
then allocate the total nominal savings between cuts in prices and cuts in real
services . They estimate the effect on the Federal deficit with and without
spending caps .
Not included is the CBO study which focused on the e ect of the reform plan
on the Federal budget .
CLINTON ADMINISTRATION
The Clinton Administration provided separate estimates of savings for
Government-financed health care programs and for the private alliance system .
The two sources cannot simply be added together . The President's Budget for
Fiscal Year 1995 contains estimates of savings under Government health
CRS-26
programs as part of its "sources of funds" to pay for the health care reform 34
A handout distributed at one of the White House briefings on the reform plan
presents estimates ofthe savings that the Administration anticipates from market
reform and competition in the private health care system 35
Federal Program Savings
Table A .1 presents the Clinton Administration's estimates of the effect of
the reform plan on the Federal budget . For simplicity of discussion, detailed line
items have been aggregated into a few broad categories, under sources and uses
of funds. 36,37 Estimates are presented for fiscal years 1998 and 2000 .
(Calendar year 1998 is the first year the program is expected to be implemented
in all States.)
Approximately half of the $74 .7 billion in sources of funds for 1998 is
expected to come from cost savings in Federal health care programs, and the other
half from increased tax revenues . On the uses of funds side, approximately half
would go to new Federal health care programs . The other half would subsidize
alliance insurance premiums and reduce the deficit with what is left over .
The Administration proposes a substantial curtailment in the rate of growth
In addition, the
of Federal spending on Medicare 3 S and Medicaid .
Administration expects to realize savings in Federal health programs for the
Department of Veterans Affairs, the Defense Department, Federal Employees
34 U.S . Executive Office of the President . Office of Management and Budget .
Budget of the United States Government for Fiscal Year 1995 . Washington, U.S.
Govt . Print . Off., February 7, 1994 . Section 4, `Reforming the Nation's health
care system to provide health security for all Americans,' p . 188-190 .
35
U .S . President, 1993- (Clinton) . Using Resources More Efficiently:
Anticipated Savings from Health Reform . White House briefing handout .
Washington, February 1994 .
as Underlying the net summary figures reported in this table are offsetting
transfers of payments from other Federal programs, payments required from the
States, and payments required from beneficiaries . For more detailed budgetary
estimates, see Clinton Administration . Distributional Analysis . Chart II-F, p .
16 . Also: Clinton Administration . Description of Proposed Financing Sources.
Nov. 2, 1993 . Reproduced in Bureau of National Affairs . Daily Tax Report, no .
212, Nov . 4, 1993 . p. L-4 to L-5 . Also: Lewin-VHI, Inc . The Financial Impact
of "The Health Security Act." December 9, 1993 . Fairfax, Virginia, Lewin-VHI,
Inc., 1993 . Table 6, p . 39.
s7 For a concise description of the sources and uses of Federal funds under
the Health Security Act, see Lewin-VHI, p . ES-4 to ES-6 .
3a Thirteen percent of the Medicare savings would be financed by increased
payments from beneficiaries .
CRS-2 7
Health Benefits program, and the Public Health Service, as well as Medicaid in part by shifting enrollees to the alliance plans that are subject to various
spending controls .
The contribution ofprogram savings to sources offunds is expected to grow
over time - from 51 percent in 1998 to 61 percent in 2000 . The Administration
expects the cumulative effect of the cost controls to generate considerably more
savings on Federal program expenditures ($79 .2 billion in 2000 compared with
$38 .4 billion in 1998) and more revenues from a broadened taxable base
(contributing $13 .7 billion in 2000, compared with $4 .4 billion in 1998) . On the
uses of funds side, although total discounts paid out are expected to increase by
$20 billion, the net cost of premium discounts is projected to fall slightly (from
$31 .4 billion to $28 .8 billion), largely as a result of increased offsets from the
Medicaid program . The biggest projected increase in the use of funds is for deficit
reduction . For 1998, the Administration projects that their health reform plan
would increase the deficit by $4 .8 billion ; for 2000, it would reduce the deficit by
$37 .7 billion . The cushion for discounts is also projected to rise slightly, from
$10 .4 billion in 1998 to $13 .0 billion in 2000 .
TABLE A .l . Changed Sources and Uses of Federal Funds in the Clinton Health
Care Reform, Fiscal Years 1998 and 2000
(Clinton Administration estimates)
(in $ billions)
Sources of Funds
1998
2000 Uses of Funds
1998 2000
SAVINGS
38 .4
79.2 NEW PROGRAMS
36 .1 47 .6
Medicare savings
22 .1
39 .2
Medicaid savings
9 .2
27 .1
Other Federal program savings
6 .9
10.9
Reduced debt service from
deficit reduction
0 .2
2.0
Medicare drug benefits
Long-term care
15.0 17.2
Public health/
administration/miscellaneous
8 .9
NEW REVENUES
36 .2
50 .6 INSURANCE SUBSIDIES
Tobacco tax
Corporate assessment
11 .1
10 .9 Tax deduction for self-employed
Other revenue effects
20.0
5 .1
74 .7
10 .3
.6
5 .2 Net cost of premium discounts (subsid
34 .5 Cushion for discounts
DEFICIT REDUCTION
TOTAL SOURCES
12.2 20 .1
129.8 TOTAL USES
(4 .8)
37 .7
74 .7 129 .8
Source : U.S . Executive Office of the President . Office of Management and Budget .
Budget of the United States Government for Fiscal Year 1995. Washington, U .S . Govt .
Print . Off., February 7, 1994 . Format adapted from Chart 4-1, p . 188 . Numbers for
1998 from Tables 4-2 and 4-3, p . 189-190 . Columns may not add to totals due to
rounding.
C S-28
Savings from Market Reform and Competition
The Clinton Administration expects that insurance and health care market
reforms and competitive pressures will reduce the rate o f growth in private health
expenditures sufficiently that the legislated caps on premium growth would not
become binding . All together, the savings detailed in table A .2 total $108 billion
in 2000 ; 39 the Administration estimates that $107 billion in savings would be
needed in order to meet the expenditure budget under the premium caps set forth
in the Health Security Act ." (See the last line of table A .2 .)
Relative to expenditures for universal coverage under the regional and
corporate alliances before these savings, estimated at $674 billion in 2000, $108
billion represents savings of 16 percent. In earlier years of the reform, savings
would be lower . For 1998, the estimated savings is 11 .1 percent of baseline
expenditures . (See the last line of table A .3 .)
The Administration expects savings from the high administrative costs now
associated with non-group and small group insurance policies to amount to
approximately $11 billion per year in 2000 . As a result of the single claims form
and standardized benefits, universal coverage, and better coordination between
providers and health plans, they expect that the administrative costs facing
hospitals and physicians' offices can be reduced by about $17 billion in 2000 .
This encompasses a reduction of 0 .7 percent of total hospital expenditures and
3 .4 percent of total physician expenditures . The Administration also expects that
when consumers have a choice among plans, information with which to compare
standardized plans, and a price incentive, they will choose lower-cost plans, for
a savings of $24 billion in 2000, or 3 .6 percent of baseline expenditures .
The largest source of anticipated savings is from changes in provider
behavior toward using more cost-effective practice patterns and reducing
The Administration suggests that
expensive, unnecessary procedures .
productivity improvements of 1 .75 percent per year are reasonable, and would
reduce expenditures by 9 percent at the end of 5 years . They estimate savings
of $57 billion in 2000 from more efficient provider behavior .
Table 2 in the text compares the Administration estimates of components
of cost savings to the estimates made by Lewin-VHI and DRI/McGraw-Hill .
as These savings estimates do not include potential savings from malpractice
reform, workers compensation reform, reductions in fraud and abuse, and other
proposed reforms .
40 This refers to the private sector and Medicaid savings assumed by premium
caps and does not include savings in the Medicare program .
CRS-2 9
TABLE A .2 . Savings from Market Reforms and Competition
(Clinton Administration estimates)
(in $ billions)
Source of Savings
1996
1997
1998
1999
2000
Elimination of small
group market
1
3
9
10
11
Streamlined
administration in
hospital and physician
offices
3
6
10
15
17
Consumer switching
to lower cost plans
1
4
14
22
24
Change in provider
behavior
8
18
29
42
57
Total savings from
health reform
14
31
63
89
108
Expenditure
reductions needed to
meet premium caps
13
28
50
77
107
TABLE A .3 . Projected Savings Relative to Expenditures
(Clinton Administration estimates)
(in $ billions and percent)
1996
1997
1998
1999
2000
Total savings from
health reform
14
3
63
89
108
Clinton plan
expenditures before
savingsa
482
534
570
620
674
Savings as a percent
of expenditures before
savings
2 .9%
5 .9%
11
.1%
14 .4%
16 .0%
a Projected expenditures for services in the guaranteed benefit package
delivered to all those in regional and corporate alliances, including new
expenditures to insure the uninsured and improved coverage for the
underinsured . (Does not include Medicare or public health expenditures .)
Source for tables A .2 and A .3 : U .S . President, 1993- (Clinton) . Using
Resources More Efficiently: Anticipated Savings from Health Reform . White
House briefing handout . Washington, February 1994 . Tables on last two pages .
Percentages calculated by CRS .
CRS-30
LEWIN-VII
The consulting firm Lewin-VHI used its Health Benefits Simulation Model
(HBSM), a micro-simulation model of health expenditures ." The model is based
upon detailed data regarding actual insurance coverage of individuals, patterns
of health care utilization, and health care expenditures by sources of payments
for U.S. households .
Their published estimates focus on 1998, the first year that the plan is
proposed to be in full operation. Lewin-VHI estimates that in 1998 aggregate
national health care expenditures would be essentially equal under the Clinton
plan ($1,394 .4 billion) compared with continuation of current policy ($1,395 .0
billion under the baseline) 41,43 The near-equivalence in total spending before
and after reform masks an increase in spending of approximately $147 billion
that Lewin-VHI projects to be offset by an equal amount of spending reductions
under the Clinton reform plan .
Table A.4 rearranges the information presented in the Lewin-VHI study to
emphasize three broad categories of tradeoff under the Clinton plan . The first
is the tradeoff between the increased utilization of health care services due to
expanded insurance coverage (+ $64 .0 billion), and the spending restraint
mechanisms embedded in the plan (-$71 .5 billion) . The net effect is an estimated
$7.5 billion savings . Managed care accounts for $14 .9 billion of the savings,
offsetting 23 percent of the increased utilization of $64 billion . The alliance
premium caps contribute approximately three times more savings-$47 .3 billion
or 74 percent of the increased utilization .
The second tradeoff is recouping the reimbursement windfall that providers
might otherwise collect once they were being paid by the health care alliances
for people previously uninsured (uncompensated care) or covered by low Medicaid
reimbursement rates (+ $68 .9 billion). This would be accomplished by
eliminating the cost-shifting component in the fees that had previously been
charged to "paying customers" (- $68.9 billion) . Only part of this is expected to
occur voluntarily on the part of providers ($36 .4 billion). The remainder ($32 .5
billion) would be recouped by setting the reimbursement rates and initial
premium levels so that any potential windfall is completely offset . The net effect
on health care expenditures is, therefore, assumed to be zero .
" Lewin-VHI, Inc . The Financial Impact of "The Health Security Act ."
December 9, 1993 . Fairfax, Virginia, Lewin-VHI, Inc ., 1993 .
42 The Lewin-VHI aggregate of $1,395 billion measures acute care spending,
not national health spending ; it includes Medicare but excludes spending on
nursing homes .
43
The Administration had estimated that in 1998 expenditures under the
Clinton plan would be $15 billion above the baseline of no reform .
CRS-31
The third is a tradeoff between increased administrative costs on the part
of the Federal Government and the States to manage the newly created system
of health care alliances (+ $13 .6 billion), versus a decrease in the administrative
costs borne by health insurers and providers, mostly as a result of the
standardization of the health insurance system (- $6 .7 billion). The net effect
is an estimated increase in administrative costs of $6 .9 billion .
The projected net increase in administrative costs (+$6 .9 billion) largely
offsets the net savings from spending controls (-$7 .5 billion), leaving an overall
net savings of $0 .6 billion under the Clinton plan in 1998 . For later years
Lewin-VHI projects the cost controls would bring aggregate spending significantly
below the baseline . (See appendix B of this report, page 40 .)
CRS- 3 2
TABLE A .4 . Changes in Aggregate National Health Care Spending under the
Health Security Act in 1998 (Lewin-VHI estimates)
(in $ billions)
Baseline National Health Expenditures
1,395 .0
INCREASED SPENDING
NET
CHANGE
REDUCED SPENDING
Increased Utilization
64 .0
Spending Restraints
(71 .5)
(7 .5)
Redesign :
Previously uninsured
Expanded coverage for
already insured
41
.6
Long-term care
Public health activities
(including WIC)
11 .6
Enhanced Provider Reimbursement
68.9
5 .4
5.4
23 .2
TOTAL INCREASE
Spending caps
Medicare spending
limits
Alliance premium
caps
Medicaid (net of offsets)
Recovery of Improved
Reimbursement
Redesign :
Reduction in cost
shifting
(56 .6)
(13 .1)
(47.3)
+3.8
(68.9)
0
(36 .4)
Enforced:
45 .7
Increased Federal and State
Administrative Costs
State alliance
Alliance administration
Guarantee fund reserve
accumulation
(14 .9)
Enforced:
Uncompensated care
savings
Increased reimbursement
for Medicaid
beneficiaries
Federal operations
Program administration
Medical education
Veterans hospitals
Managed care
13.6
4 .7
1.7
1.3
1.7
Pre-emption of reimbursement
windfall
Reduced Private
Administrative Costs
Redesign :
Insurer administration (includes
newly insured)
Provider administrative savings
(32 .5)
(6 .7)
+6 .9
(4 .8)
(1 .9)
8 .9
5.0
3.9
146.5
Redesign :
Enforced :
TOTAL REDUCTIONS
National Health Expenditures under Clinton Reform Plan
(58 .0)
(89 .1)
(147 .1)
NET
CHANGE
(0.6)
1,394 .4
Source : Adapted from : Lewin-VHI . The Financial Impact of "The Health Security Act ."
Executive Summary, p . ES-3 ; table ES-l, p . ES-4 ; and Appendix A, table A-l, p . A-3 .
CRS-3 3
GOLDMAN SACHS
Increased Utilization Due to Expanded Insurance Coverage
William Dudley, an economist at Goldman Sachs, the international
investment firm, 44 expects that the expansion of insurance coverage promised
under the Clinton plan would significantly increase the demand for health care
services, as the out-of-pocket costs of obtaining certain kinds of care is reduced
for many people . His estimates are based on rough, aggregate calculations, as
explained below . He estimates that by 2000, relative to total spending on those
health care services within the purview of the Clinton plan, personal health care
spending would increase by 11 .0 percent, made up of the following components,
summarized in table A.5 :
•
Universal coveraae . Previously uninsured people could now seek health
care knowing that insurance would pay most of their bill . Based on
the assumption that demand from the uninsured would increase about
75 percent, Dudley estimates that this would increase aggregate
personal health care spending by 4 .6 percent .
•
Improved benefits . Even people previously covered by insurance would
find that their new insurance now fully covered certain preventive care
and reduced their per visit or per prescription out-of-pocket
copayments . Assuming that demand from this group increases by about
6 percent, this adds 2 .7 percent to health care spending .
•
Expansion of benefits .
Medicare beneficiaries would now have
insurance coverage for prescription drugs . New services for home and
community-based long-term care would be available to the elderly and
disabled, regardless of a person's income . Assuming that demand for
prescription drugs in the Medicare population would increase about 15
percent and that demand for long-term care at home would double, this
adds another 2 .7 percent to health care spending .
•
Improved access for Medicaid recipients . Medicaid recipients would now
have the same level of insurance purchasing power as other patients
seeking health care . Assuming that the demand for health care services
among Medicaid recipients increases by 5 percent, this adds 1 percent
to personal health care spending .
Dudley uses as abase for his percentage calculation the Lewin-VHI estimates
of health care spending under the Clinton plan . (Lewin-VHI assumed that initial
premiums would be 17 percent higher than the Clinton Administration had
estimated, but accepted the Administration's limits on the growth rate of
premiums and Medicare and Medicaid spending .) Nonetheless, Dudley's rough
Dudley, William . The Clinton Healthcare Plan : No Free Lunch . Goldman
Sachs, U .S . Economic Research . NewYork, Goldman, Sachs & Co ., January 1994 .
44
CRS-34
estimate of increased utilization is substantially higher than Lewin-VHI's ($143
billion for Dudley in 2000, versus $64 billion for Lewin-VHI in 1998) .
TABLE A.5. Increased Demand for Health Care Spending
under the Clinton Plan
(Goldman Sachs estimates)
Percent increase in
total personal health
Source of increase demand
care spending'
4.6
Universal coverage
Improved benefits
2 .7
2.7
Expansion of benefits
Improved access for Medicaid recipients
1.0
11
Total
.0
'Excludes nursing home and dental expenditures, which Dudley concludes would
not be significantly affected by the Clinton plan .
Source : Dudley, William . The Clinton Healthcare Plan : No Free Lunch . Goldman
Sachs, U .S . Economic Research . NewYork, Goldman, Sachs & Co ., January 1994 .
p. 2.
For the year 2000, Lewin-VHI estimated that national health care
expenditures under the Clinton reform would be 3 .5 percent lower than the CBO
baseline . Dudley estimates that roughly 20 percent of national health care
expenditures would not be affected by the Clinton plan (e .g., most dental care
and nursing home care) . Consequently, to achieve overall savings of 3 .5 percent
would call for savings of 4 to 5 percent on the other 80 percent of expenditures
that are under the purview of the Clinton plan .
TABLE A.6 . Increase in Efficiency Needed to Avoid Spending Caps
(Goldman Sachs estimates for the year 2000)
Percent change in spending
To cover
to be offset
11.0
Increased demand from improved insurance
coverage
Lower aggregate spending target
4.0
Total
15.0
Dudley thus concludes that to meet the lower spending goal of the Clinton
plan without having to enforce the global budget caps, there would need to be
efficiency gains of 15 percent . That is, efficiency gains would need to compensate
for both the 11 percent increase in utilization above the baseline and the 4
percent reduction in aggregate spendingbelow the baseline . (See table A .6 above .)
CRS- 3 5
Basic Alternatives in Paying for Reform
Dudley sees two main ways to reconcile increased demand for health care
services with lower aggregate expenditures : increased efficiency and/or rigorously
enforced spending caps4 5 Dudley points out that 2000 would be only the third
year that the Clinton plan would be in full effect . He concludes that it is
unreasonable to expect efficiency gains as large as 15 percent to occur so quickly,
and perhaps not even in the longer run . Consequently, he expects that the global
budget caps would become binding . Enforcing the spending caps could take the
form of rationing health care services to patients (including reduced quality or
timeliness of service) or cutting the incomes of health care providers . If instead,
the caps are eased, that would mean higher private premiums and Government
subsidies .
Dudley is concerned about what would happen to the Federal deficit if the
global caps were not effective in controlling expenditures or were overturned
because they were not politically viable in the face of the sacrifices required . He
estimates that the Government is at risk for about 80 percent of any cost
overruns, because of the Clinton plan's caps on the contributions required from
employers and families and the promised premium subsidies . Dudley reached
the same conclusion later issued by the Congressional Budget Office that the
capped entitlement limit on the subsidy payments would probably not be feasible
in practice .
Dudley lays out three alternative parameters for financing the promises of
the Clinton plan : accomplish efficiency gains of 15 percent by the year 2000,
enforce the budget caps rigorously by cutting health care services and/or health
care providers' income, or see the Federal budget deficit worsen dramatically .
He starts from the Lewin-VHI estimates that health care spending under the
Clinton plan would be $1,573 .8 billion and that the Federal deficit would decrease
by $14 .4 billion for the year 2000, assuming the spending caps were 100 percent
effective .
Dudley calculates a matrix of 20 estimates of the effect on the deficit,
assuming efficiency gains ranging from 0 to 15 percent, and spending cap
effectiveness ranging from 0 to 100 percent . In the "worst case," if there were
no efficiency gains and the spending caps had no effect, Dudley estimates that
total health care expenditures would be $188 .9 billion higher than the Lewin-VHI
baseline . If the Government paid 80 percent of these higher costs, Federal outlays
would increase by $151 .1 billion . If none of this were offset by increased tax
revenue, the deficit in the year 2000 would increase by $136 .7 billion, rather than
decrease by $14 .4 billion as projected by Lewin-VHI . 46
45
Increased efficiency - providing the same service at lower cost - could
take the form of reducing the unit costs of a particular service (including savings
in administrative costs) or eliminating unnecessary medical procedures that do
not improve patient outcomes .
46
Dudley, The Clinton Healthcare Plan, table 4, p . 8 .
CRS- 36
DRI/McGRAW HILL
The economic forecasting firm DRI/MicGraw-Hill analyzed the
Administration's reform plan in the context of its quarterly macroeconomic model
of the U .S. economy ." DRI developed a five-stage simulation to examine the
differential effect of adding separate layers of the Administration's plan . DRI
measured the effects of each stage on numerous macroeconomic variables,
including national output (GDP), employment, inflation, interest rates, as well
as on the Federal deficit and both nominal and real spending for medical care
services ."
DRI based its analysis on the September 22, 1993, version of the Clinton
plan . The forecasting period was (calendar years) 1994 to 2000 . DRI uses
National Income and Product Accounts (NIPA) definitions of health care
spending, not National Health Accounts . Based on outside data, DRI assumed
that the initial premiums are approximately 20 percent higher than the
Administration's estimate .49'5° DRI did not accept the cap on the Federal
obligation to pay premium subsidies .
Starting from a baseline of no reform, DRI first modeled universal coverage,
assuming Federal deficit financing of the increased utilization . Second, they
added the employer mandate, including the requirement for employers and
families to pay premiums, offset by Government subsidies for some . Third, they
added the corporate assessment on companies that formed their own alliances .
Fourth, they included the other tax changes in the Clinton plan, including the
tobacco tax, the limits on flexible spending accounts (cafeteria plans), and the
changes in medical expense deductions . Fifth, and finally, they modeled the effect
of the spending caps - in which they include caps on the rate of growth of
alliance premiums and Medicare, and the shift to managed care . This CRS report
focuses on the differences found between DRI's fourth simulation, which measure
the effects of all major elements of the Clinton plan without the spending caps
(table A .7, line 2), and the fifth simulation, which incorporates the spending
controls (table A .7, line 3) .
47 DRIIMcGraw-Hill .
The Administration's Health Care Reform Plan :
National Macroeconomic Effects . Prepared for : Citizens for a Sound Economy
Foundation . Washington, February 1994 .
48 DRI also estimated the employment effects for individual industry sectors .
49 DRI, p. 9 .
5° DRI assumed that employers would pass the mandated premiums forward
in higher product prices (rather than shifting them backward to their workers
in the form of lower cash wages or other benefits) . They note that subsequent
estimates they have made suggest that employers will shift half the premiums
forward in higher prices and half back in lower wages . DRI, Appendix F, p . 2 .
CRS- 3 7
DRI measured the costs to the economy if the Administration's plan was
adopted without spending caps and the added demand had to be financed through
employer-paid premiums, the corporate assessment, and the other proposed taxes .
Without cost controls and with higher payments required to cover health care,
output (real GDP) and employment would be lower, and the inflation rate and
Federal deficit would be higher . a 1 (See table 3 in the text .)
DRI believes that the caps would become binding and that "enforced" health
care spending reductions would be necessary if the cost containment objectives
of the Clinton plan were to be met . DRI assumes that both provider incomes
(prices paid for medical services) and utilization (quantity of medical services
provided) would be reduced . DRI allocated between these two components based
on historical relationships between prices and utilization . Of the $149 billion
projected reduction in nominal spending in 2000 as a result of spending caps, DRI
attributed $84 billion (56 .4 percent) to a lower medical price rate and $65 billion
(43 .6 percent) to a lower delivery of medical services ."
DRI found that, despite the expansion of the insured population under the
Administration's health care plan, the level of health care services (as measured
by real consumer spending for medical care services) is virtually unchanged
relative to the baseline of no reform . (Table A .9, line 3 compared with line 1 .)
This implies that consumption of health care services by those who were already
insured must drop to accommodate expanded care for others ."
51
DRI . Table 1 .2, p . 2 .
52
DRI, Appendix F, p . 4 .
53
DRI, p . 2 .
CRS- 3 8
TABLE A .7 . Consumer Spending for Medical Care Services
(DRI/McGraw-Hill Estimates)
(in billions of current or nominal dollars)
1996
1997
1998
1999
2000
Total spending
1 . DRI Baseline
883 .4
959 .2
1,034.2
1,115 .0
1,200 .4
2 . Clinton plan without
spending caps (all taxes,
sim . 4)
888 .9
983 .9
1,110 .8
1,203 .0
1,299 .8
3 . Clinton plan with spending
caps (sim . 5)
887 .0
978 .0
1,029 .9
1,084 .0
1,150 .9
Differences in spending
4 . Increase in spending under
the Clinton plan without
controls relative to the baseline
(line 2 - line 1)
5 .5
24 .7
76 .6
88 .0
99 .4
5 . Decrease in spending under
the Clinton plan with versus
without controls
(line 3 - line 2)
-1 .9
-5 .9
-80 .9
-119 .0
-148 .9
6 . Spending under the Clinton
plan with controls relative to
the baseline
(line 3 - line 1)
3 .6
18 .8
-4 .3
-31 .0
-49 .5
7. Savings from spending
controls as a percent of Clinton
plan without caps
(line 5/line 2)
0 .2%
0 .6%
7 .3%
9.9%
11 .5%
Source : DRI, Appendix D, p . 1 . Simulation results for Additional Taxes
(simulation 4) and for Spending Caps (simulation 5) .
CRS-39
TABLE A .8 . Estimated Reduction in Nominal Health Care Spending
(DRI/McGraw-Hill Spending Cap Simulation)
(in $ billions)
1996
1997
1998
1999
2000
Managed care
0 .0
0 .0
14 .9
16 .1
17 .4
Medicare spending caps
2 .0
6 .0
13 .0
18 .0
24 .0
Private sector spending caps
0 .0
0 .0
53 .1
84 .9
107 .6
Total Spending Reductions
2 .0
6 .0
81 .0
119 .0
149 .0
Source : DRI, Table 2 .6, p . 20 ; p . 21 .
TABLE A .9 . Estimated Reduction in Real Health Care Spending
(DRI/McGraw-Hill Spending Cap Simulation)
(in billions of 1987 dollars or percentage)
996
1 . DRI real baseline
997
998
1999
2000
544 .2
562 .2
579 .1
597 .2
613 .6
629 .1
2 . Real spending under
Clinton plan without
spending caps
525 .9
555 .9
3 . Real spending under
Clinton plan with spending
caps
527 .6
560 .9
583 .2
597 .7
+5 .0
-30 .4
-31 .4
-5 .0%
-5 .0%
4 . Change in real spending
as a result of caps
e 2 - line 3)
5 . Change in real spending
as a % of health care
spending before caps
(line 4 / line 2)
+0 .3%
+0 .9%
-4 .2%
Source : DRI, Table 2 .6, p . 20 ; p . 21 ; unpublished baseline numbers .
CRS- 40
APPENDIX B . NATIONAL HEALTH CARE SPENDING UNDER THE
BASELINE AND THE CLINTON PLAN
The Administration estimated that from 1995 until 1998 (the year when the
plan is first intended to be in effect in all States) total national health care
expenditures would be slightly higher than under the current system ; by the year
1999 and thereafter, expenditures would be lower than the baseline . Although
other estimators cited in this report may agree on this general pattern, they differ
over which year the crossover of the baseline would occur. For example,
Lewin-VHI and DRI show the crossover occurring one year earlier, by 1998, and
CBO one year later, by 2000 .
It is also worth noting that aggregate national health care expenditures are
projected to be substantially higher in 2000 than in 1994 whether or not the plan
envisioned in the Health Security Act takes effect . The Clinton reform plan
promises only to restrain the rate of growth of total health expenditures, not to
lower them absolutely .
CRS- 41
TABLE B .1 . Estimates by the Administration, the Congressional Budget Office, Lewin-VHI, and DRI/McGraw-Hill
(in $ billions, calendar years)
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Administration
Baseline
982
1069
1168
1275
1392
1517
1653
Clinton plan
1072
1179
1290
1407
1492
1597
Difference
3
11
15
15
-25
-56
CBO
Baseline
982
1069
1163
1263
1372
1488
1613
1748
1894
2052
2220
Clinton plan
-1176
1285
1411
1489
1583
1700
1820
1942
2070
Difference
13
22
39
1
-30
-48
-74
-110
-150
Lewin-VHI
Baseline
998
1.098
1185
1288
1395
1510
1631
Clinton plan
998
1098
1206
1316
1394
1477
1574
Difference
0
0
21
28
-1
-33
-57
DRI/McGraw-Hill
Nominal baseline
812
883
959
1034
1115
1.200
Clinton plan with caps
887
978
1030
1084
1151
Difference
4
19
-4
-31
-49
Clinton plan without caps
889
984
1111
1203
1300
Difference
5
25
77
88
99
(continued)
CRS- 42
TABLE B1 . Estimates by the Administration, the Congressional Budget Office, Lewin-VHI, and DRI/McGraw-Hill-continued
Sources :
Clinton Administration . The Health Security Act : A Financial and Distributional Analysis . December 1993 . Chart I-A, p . 3 .
Chart I-B, p . 4 .
U.S . Congressional Budget Office . An Analysis of the Administration's Health Proposal . Washington, Feb . 8, 1994 . Table 2-1,
p . 26 .
Lewin-VHI, Inc . The Financial Impact of "The Health Security Act ." December 9, 1993 . Fairfax, Virginia, Lewin-VIII, Inc ., 1993.
Table 6, p. 39 .
DRI/McGraw-Hill . The Administration's Health Care Reform Plan : National Macroeconomic Effects . Prepared for: Citizens
for a Sound Economy Foundation . Washington, February 1994 . Appendix D, p . 1, simulation results for Additional Taxes and
Spending Caps . Unpublished baseline numbers .
CRS- 4 3
REFERENCES
DRI/McGraw-Hill . The administration's health care reform plan : national
macroeconomic effects . Prepared for : Citizens for a Sound Economy
Foundation . Washington, February 1994 .
Dudley, William . The Clinton healthcare plan : No free lunch. Goldman Sachs,
U .S . Economic Research . New York, Goldman, Sachs & Co ., January 1994 .
KPMG Peat Marwick . Policy Economics Group . Analysis of H .R . 3600, The
Health Security Act of 1993 . Prepared for The Congressional Institute, Inc .
Washington, March 28, 1994 .
Analysis of H.R. 3600, The Health Security Act of 1993, Technical Appendix .
Prepared for The Congressional Institute, Inc . Washington, April 7, 1994 .
Lewin-VHI, Inc. The financial impact of "The Health Security Act ." December
9, 1993 . Fairfax, Virginia, Lewin-VHI, Inc ., 1993 .
U .S . Congressional Budget Office . An analysis of the Administration's health
proposal . Washington, February 8, 1994 .
U .S . President, 1993- (Clinton) . The Health Security Act : A financial and
distributional analysis . Briefing handout . Washington, December 1993 .
Using resources more efficiently : Anticipated savings from health reform .
White House briefing handout . Washington, February 1994 .
U .S . Executive Office of the President . Office of Management and Budget .
Budget of the United States Government for Fiscal Year 1995 . Washington,
U .S . Govt . Print . Off., February 7, 1994 . Section 4, "Reforming the Nation's
health care system to provide health security for all Americans," p . 177-93 .
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.