Clinton Bets Ending Waste Means Savings : Funding: The President is gambling he can find the money to pay for his plan without painful tax hikes. Critics say the proposal is ‘wishful thinking.’

President Clinton’s proposal to finance health care reform is a huge wager, a gamble that there is more than enough waste in the existing medical system to finance quality care for all without the pain of massive tax increases.

“Reform must produce savings in this health care system . . ,” Clinton said Wednesday in his address to Congress. “Rampant medical inflation is eating away at our wages, our savings, our investment capital, our ability to create new jobs in the private sector and this public treasury.”

Administration officials have labored for eight months to make sure its financing scheme can withstand assault. The President himself said the numbers had passed muster not only with his Administration’s own experts but with actuaries from major accounting firms and Fortune 500 companies.

Despite that, the financing may still be the most uncertain feature of the Clinton health care plan.

On paper, it promises $350 billion in new federal spending on health care from 1994 to 2000. The government would provide subsidies to help the poor, the jobless and small businesses pay for health insurance. It would finance prescription drugs and long-term care for the elderly.

At the same time, it would theoretically cut projected spending on Medicare and Medicaid by $238 billion and save $47 billion in other federal programs while adding only $156 billion in revenue, mostly from new “sin” taxes and increased income tax revenue generated by unshackling business from the constraints of today’s health care system.

The bottom line: The Clinton plan would extend health insurance to the 37 million Americans who now have none and to 20 million others whose coverage is meager. It would add new features for the elderly--and still leave the federal debt $91 billion smaller than it otherwise would have been by the year 2000.

Small wonder the financing has aroused such enthusiasm among supporters and skepticism from critics.

“I think the President’s selling the sizzle instead of the steak,” said John Erb of Foster Higgins, a health-benefits consulting firm in Princeton, N.J.

One concern, Erb said, is Clinton’s proposal that the health care costs of large employers must not exceed 7.9% of their payroll costs. “The costs right now are at 11% and will more than likely be 12% to 13% next year,” Erb said.

“The bigger problem,” he said, has to do with the Administration’s estimates of the average cost of insurance premiums nationally--$1,800 for individual policies and $4,200 for family policies. Erb said that the 1992 national average was $2,050 for individuals and $5,300 for families.

A health-benefits actuary who has been consulted by the White House also took issue with some of the Administration’s financial estimates, particularly the projected savings in Medicaid and Medicare.

“It’s wishful thinking,” said the consultant, who asked for anonymity. “The numbers are totally unrealistic.”

However, the numbers were also calculated with a wary political eye on the bare margin by which the President’s tax-and-budget program passed Congress. The message of that episode was clear: There is scant enthusiasm for new taxes.

That is one key reason the plan’s new tax revenues are limited to $105 billion over seven years, a combination of $15 billion from an elevated tobacco tax and a special charge on giant corporations--those with at least 5,000 workers--choosing to remain outside the new system.

Beyond these fairly modest sources of new revenue, the plan balances its books by predicting that its system of managed competition will achieve massive reductions in the soaring cost of health care. In other words, by operating more efficiently, the new system can provide more care while spending less money.

“Freeing the health care providers from these costly and unnecessary paperwork and administrative decisions will save tens of billions of dollars,” Clinton said.

The United States now spends about 14% of its gross domestic product on health care, and the amount has been rising far faster than the rate of inflation for the economy as a whole.

Spent more wisely, the Administration argues, that is more than enough money to pay for universal care with no reduction in quality.

To achieve such savings, money now spent by private businesses and individuals for health insurance would be shifted. Instead of going directly to insurance companies, doctors and hospitals, the funds would go to local health alliances. These giant buying organizations would negotiate with hospitals, doctors and other providers on behalf of consumers.

The hope is that the alliances’ ability to deliver or withhold thousands of patients would give them leverage to force providers to lower their charges.

In addition, the Administration will try to persuade Congress to impose an unprecedented budget cap on two programs with runaway spending: Medicare, which pays the bills for citizens over age 65 and the disabled of all ages, and Medicaid, a welfare program for the poor.

The goal is to trim $124 billion in projected spending from Medicare and $114 billion from Medicaid by the year 2000. The cap would slow the growth in spending to the general inflation rate, a dramatic change from the current cost explosion, where spending is rising twice as fast as the general cost of living.

Skeptics in Congress and the senior citizens lobby say this cannot be done without cutting so deeply into fee schedules that doctors and hospitals would begin to shun Medicare patients.

The Administration says such fears are unwarranted.

It’s a matter of political will rather than economics, argued Leon E. Panetta, director of the Office of Management and Budget and a former chairman of the House Budget Committee.

“Every time we’ve ever dealt with Medicare and Medicaid savings, I have heard all of the expressions of fear: that the hospitals are going to close, that the doctors are going to go out of business, etc., etc. And it hasn’t happened.”

“Normally,” Panetta said, “the cuts in the growth of Medicare are done in the name of deficit reduction,” as in the President’s budget-and-tax program, which will take a $56-billion slice out of future Medicare outlays.

But health care reform offers senior citizens $72 billion to help pay for prescription drugs and $80 billion to get some care at home for the frail or disabled. “And I think that gives us a little better arguing point . . .” to disarm the critics, Panetta said.

The cap on Medicare and Medicaid, which gradually slows spending increases to the basic rate of inflation, would produce $238 billion, according to Administration number-crunchers.

User’s Guide to the Health Plan

The Times will include a special section called “Health Plan: a User’s Guide,” a look at the impact of President Clinton’s reform plan on individuals, families, health providers and businesses. The section also features “Choices,” a board game that takes players through the plan’s various options and how they may influence real-life situations.

Financing Health Reform

The President’s plan draws on new revenue sources, such as sin taxes, as well as a redeployment of existing funds, including savings from Medicare and Medicaid. Here is a simplified look at how the Clinton proposal would work:

All figures in billions Medicare Savings: $124 Sin Taxes: $105 Medicaid Savings: $114 Other Federal Program Savings: $47 Revenue Gains: $51 Former Medicare and Medicaid Recipients Now Covered by Alliance Plans: $259 Long Term Care: $80 Medicare Drug Benefit: $72 Public Health-Administration: $29 Subsidies for low-income firms and workers: $169 Deficit Reduction: $91 Alliance Coverage: $259 * As the growth in overall health care spending slows, so too will the growth in Medicare and Medicaid spending. This will create savings of $238 billion over seven years.

* Sin tax revenues and/or assessments on self-insured corporate alliances will provide start-up funds for reform and will help offset other federal costs. This will add up to $105 billion over seven years.

* Federal tax receipts will increase by $51 billion because employer spending that would otherwise go into tax-advantaged benefits increasingly will go into wages and profits, which are taxable

If the Administration is correct in its estimates, the rate of growth in spending for health care should begin to slow. Chart compares health expenditures as a percent of gross domestic product with and without the reform plan.