A Costly Cure : Who Wins, Loses Under Clinton’s Health Reforms
President Clinton is likely to present business with a staggering price tag of at least $52 billion a year for its role in his massive health reform program, designed to guarantee every American--sick or well, working or jobless--easy access to doctors and hospitals.
His goal is to make dramatic and fundamental changes in the way health care is delivered in America--arguably the most important expansion of government social policy since Medicare was created in 1965 to guarantee medical care to the elderly.
To finance his plans, the President is likely to propose a new payroll levy--perhaps 7% on business and 3% on workers. Thousands of corporate health plans would be converted to a standard package, giving many Americans far fewer choices as virtually all medical services would be provided by networks of doctors and hospitals.
“Health reform will move billions and billions of dollars around in the economy,” says John Sheils of Lewin-VHI, a consulting firm in Fairfax, Va.
Clear-cut winners and losers will emerge among the ranks of businesses and their workers.
Large manufacturers with huge medical bills for their aging work forces and swarms of retirees will save big. Tiny restaurants and other service establishments will find already thin profit margins in peril as they are forced to provide health coverage.
Workers whose sick children now are denied coverage will have the new-found security of health insurance; small businesses no longer will suffer 40% premium increases--as some face now--when an employe is hospitalized with a heart attack.
But 20 million families with good health coverage could find themselves paying at least $1,000 more a year for their insurance, assuming the President settles on a 3% payroll deduction for workers, according to a Lewin study.
The President still is making key decisions, and the detailed plan probably will not be issued until next month at the earliest. But enough is known to peel away the veil of mystery and confusion and describe what the nation’s health care system will look like if--and it’s a big if--the Clinton plan is approved by Congress.
How It Will Work
Every American citizen and all legal immigrants would be issued a health security card guaranteeing coverage at all doctor’s offices, clinics and hospitals.
The basic plan would be similar to the Blue Cross standard health insurance now available to federal workers. It would include full hospital and doctor coverage, with patients paying the first $200 a year in doctor bills and the first $250 for a stay in the hospital. These deductibles could be pegged to income, rising for more affluent workers.
After deductibles, the plan would cover 100% of hospitalization, 75% of most visits to physicians and a variety of preventive care services, including immunizations, well-baby checkups, Pap smears and mammograms.
The plan is likely to include some coverage for prescription drugs, mental health care, and the costs of long-term care at home for persons who need help with the activities of daily living, such as dressing and bathing.
Once a year, each American would enroll in a certified health care plan, with six to eight plans available in major metropolitan areas. The plans in Southern California, for example, could include Kaiser Permanente, Blue Cross, medical networks operated by the Aetna or Prudential insurance companies and other health maintenance organizations, such as FHP.
The networks would be paid a fixed monthly fee for taking care of each member, giving them incentives to pressure doctors and hospitals to hold down costs. Members would get all their care within the network. Those who went outside their network to another doctor or hospital would have to pay the full bill from their own pockets. Some plans might offer extra benefits--such as eyeglasses or cosmetic surgery--but these would be fully paid for by the patient.
In less-populated areas, state government could establish a single health plan for all residents.
Financing
The insurance premiums now paid by businesses and individuals would be scrapped, likely to be replaced by a charge equal to 7% of payroll for business and 3% of salary for workers.
If the final plan has generous benefits for mental health services, prescription drugs and long-term care, the expense of covering American could rise substantially. Administration planners are considering scenarios with charges ranging up to 12% of payroll, but that figure is likely to be politically unacceptable.
With a 7% payroll charge, business, which now spends close to $200 billion a year on health care, would contribute another $52 billion annually--$23 billion a year in additional funds from firms that now provide insurance and $29 billion from companies that don’t, according to an analysis prepared by Lewin.
Clinton Administration officials insist that the new charge won’t be a tax, because the money won’t go to Washington. Instead, the revenues would be funneled to local health alliances that would certify health networks and make the annual payments on behalf of each consumer. The alliances would have representatives from business, labor and government.
White House health planners are debating whether to exempt firms with 1,000 or more workers from the new system, allowing them to continue operating their own health plans. But their workers probably would be allowed to select one of the other health networks in their area. In any event, exemptions would be strongly discouraged, with financial penalties.
Small Business
Most of the 36 million Americans without health insurance are full-time workers and their dependents. Usually, they work for small companies, including firms that might face a financial hardship paying the full 7% health care levy.
For these firms, the charge would be phased in over several years, most likely starting at a level of 1% or 2% of payroll.
Meanwhile, companies with high medical costs would not immediately reap the full financial benefits of going to a system that costs them just 7% of payroll. The government would want them to help ease the pain for small business.
Big industrial companies, such as auto makers, have huge medical outlays--in the range of 18% to 20% of their payroll expenses. Under the Clinton plan, these firms and other high-cost companies would be permitted to gradually reduce their outlays over several years--perhaps to 15%, 10%, and finally 7%. Their higher payments in the interim would provide a temporary subsidy for small business.
Tax Cap
Currently, money spent for health insurance premiums and benefits is tax-deductible for corporations as a business expense. It is a particularly valuable benefit, because health care is not considered income for workers.
The Administration wants to limit deductibility to the value of the basic insurance package; anything in excess of that would be subject to a “luxury” tax. However, the Administration hasn’t identified any services other than cosmetic surgery that would lose their tax deductibility.
Union Contracts
All current union agreements will be “grandfathered,” meaning they will be left untouched by the new system, even if they provide benefits in excess of the basic packaged being developed by the Administration.
Unions could negotiate for employers to pay the worker share of national health insurance--the 3% of salary--and any co-payments and deductibles required under the standard package. Such agreements would not be considered a violation of the tax cap. This Administration promise has assured the support of many labor unions for the Clinton program.
Winners and Losers
If the 7% charge on payroll replaces the current system and every business eventually has to pay the tab, the biggest winners will be heavy industry and big companies with union contracts providing extensive benefits for workers and their spouses.
These firms, particularly in autos and steel, also provide large numbers of retirees with generous health benefits, and they would welcome a chance to shift that burden to the taxpayers through national reform.
American manufacturers also pay $6.4 billion a year to cover the health costs of their workers’ spouses who are employed elsewhere. That sum represents a huge subsidy to companies in services, trade, and finance, which are able to spend less on health care.
Financial relief also would flow to railroads, airlines, utilities and telephone companies, which extend rich benefits to spouses.
Among the automakers and other corporate friends of the Clinton plan, there is an “enormous desire” to push spouses and retirees into a nationally sponsored plan, says Jacque Sokolov, a physician who heads Sokolov Strategic Alliances, a consulting firm in Los Angeles.
“They’re paying a ton of bucks,” said Sokolov, “and they have union contracts that are killing them.”
Health spending by the Big Three domestic automakers and their suppliers adds a staggering $1,100 to the average cost of a vehicle--a cost General Motors, outlining its strategy for contract talks with the United Auto Workers, declared Friday it could no longer bare. In stark contrast, health costs tag just $500 onto the price of a car made in a Japanese plant in the United States, where the workers are younger and retirees are few.
Ford has struggled to save money, implementing reforms that have slowed its rate of health care inflation to 8% annually for the past four years. That was less than the national average of 10% in 1992 and far below the 14% medical inflation rate last year for major businesses reported in a survey by A. Foster Higgins Co., a benefits consulting firm.
But Ford’s ability to control costs is hampered, because the company serves as a safety valve for others in the economy trying to restrain health care spending. For example, the schools in Dearborn, Mich., pay a bonus of $600 to any worker who gets insurance from a spouse’s employer--prompting many teachers and administrators to shift their family’s medical bills to Ford.
Controlling health care spending is a “national problem that needs a national solution,” says Robert Ozment, Ford’s director of corporate and employe insurance.
However, Clinton’s reform program, while offering financial relief to Ford and other industrial giants, stirs apprehension in the service, food and retail industries, where health care bills will soar.
Consider Bill Daniel, who owns Luby’s cafeteria in Wichita Falls, Tex. (not connected with the chain of the same name), where menu prices have been frozen for three years.
He spends $70 a month to pay half the health insurance premiums for each of his 70 workers, an amount equal to about 3% of payroll--less than half of what would be mandated under the Clinton plan.
Can he afford more? “I guess we could do it and stay in business, but it would cut severely into our profit margins,” Daniel says. His restaurant serves 1,500 people a day, with an average check of $4.71.
But the typical Texas restaurant serving 300 to 500 people a day “literally could not afford that kind of expense,” according to Daniel. “It could put them out of business.”
Lingering Doubts
Among companies that could expect to save money under Clinton’s blueprint, there still remains great concern about the impact of standardizing care with a single, national package of benefits.
Employers want to be deeply involved in the design and operation of the health plans covering their workers, says Ellen Goldstein, health policy director for the Assn. of Private Pension and Welfare Plans, which represents major firms offering comparatively generous health benefits.
Many firms “have invested a lot of resources” in controlling health costs, Goldstein says, “and they feel they can do a pretty good job without dumping employes into a government-run pool.”
Many executives also have a deep suspicion about government promises: a 7% of payroll charge for health care looks good to a corporate manager who spends 10% or more, but that figure may rise sharply in the years ahead.
At the Health Action Council of Northeast Ohio, whose corporate members provide health coverage for 380,000 persons, executive director Patrick J. Casey polled the board members about a 7% charge.
Because the companies all spend more than 7% of payroll on health care, the executives said the new system “would be an absolute windfall,” according to Casey. But the members refused to back the plan, because they fear it would not bring meaningful cost control.
Paying the Nation’s Medical Bills
Between insurance premiums and contributions toward Medicare, employers today are spending more than $220 billion a year; just 25 years ago, the figure was barely $10 billion.
1991:
Employer share of Medicare: $35.4
Employer spending for private insurance: $188.1
Source: Employee Benefit Research Institute
That has driven up health-care costs to almost 7% of the labor costs of U.S. business--more than triple the portion of total compensation they represented in the late 1960s.
1991:
Health care as share of total compensation: 6.6%
Source: Lewin-VHI
The 7% figure becomes a benchmark for determining the impact on business of the pending Clinton Administration health plan. If--an many expect--the plan if financed by a 7% payroll tax, firms whose spending is above the national average--notably heavy industries with older work forces and many retirees--would feel the least pain, or actually save. Companies that do not now provide insurance would face substantial new costs.
Firms with Health Insurance
Industry: Finance
Current health spending: $13.4 billion
Added health spending with a 7% payroll tax: $2.6 billion
Added Cost per worker per year: $489
*
Industry: Wholesale and Retail Trade
Current health spending: $21.0 billion
Added health spending with a 7% payroll tax: $5.8 billion
Added Cost per worker per year: $421
*
Industry: Construction
Current health spending: $9.1 billion
Added health spending with a 7% payroll tax: $1.6 billion
Added Cost per worker per year: $386
*
Industry: State and Local Govt.
Current health spending: $34.1 billion
Added health spending with a 7% payroll tax: $5.2 billion
Added Cost per worker per year: $310
*
Industry: Services
Current health spending: $35.3 billion
Added health spending with a 7% payroll tax: $4.1 billion
Added Cost per worker per year: $226
*
Industry: Manufacturing
Current health spending: $45.6 billion
Added health spending with a 7% payroll tax: $3.7 billion
Added Cost per worker per year: $198
*
Industry: Federal Govt.
Current health spending: $12.5 billion
Added health spending with a 7% payroll tax: ($1.5 billion)*
Added Cost per worker per year: ($372)
* The federal government now spends more than 7%, so it would have a net saving under this scenario.
Firms without Health Insurance
Industry: Finance
Health spending with a 7% payroll tax: $2.5 billion
Cost per worker per year: $2,320
*
Industry: Manufacturing
Health spending with a 7% payroll tax: $4.3 billion
Cost per worker per year: $1,665
*
Industry: Construction
Health spending with a 7% payroll tax: $3.9 billion
Cost per worker per year: $1,525
*
Industry: Services
Health spending with a 7% payroll tax: $8.2 billion
Cost per worker per year: $1,280
*
Industry: Wholesale and Retail Trade
Health spending with a 7% payroll tax: $6.9 billion
Cost per worker per year: $1,116
The bottom line: To absorb those who now are uninsured, estimates are that the Clinton plan would boost business spending on health care by more than 25%.
Current Health Spending by Business: $197.7 billion
Business Health Spending under Clinton plan*:
Firms that Now Provide Insurance: $220.7 billion
Firms that Now Do Not Provide Insurance: $29.5 billion
* Assumes a 7% payroll levy
Source: Lewin-VHI
