Health Plan: All Signs of Federal Entitlement : Government: Universal access creates new class of beneficiaries, with guaranteed benefits. Costs underestimated, critics say. Officials propose caps.

As he was settling into his new job last winter, Leon E. Panetta, director of the White House Office of Management and Budget, was asked a question that clearly troubled him.

Wouldn’t President Clinton’s proposal to extend universal health care coverage to all Americans create a new federal entitlement program? Like Medicare, welfare, bank deposit insurance and unemployment benefits before it, wouldn’t universal access to health care quickly be transformed into a mandatory--and almost limitless--financial commitment?

Panetta sighed. In his former role as chairman of the House Budget Committee, Panetta had railed about the exploding costs of entitlements and how they were threatening to devour the federal budget. Finally, he answered: “I hope not. I’m going to try to make sure that doesn’t happen.”

Yet the centerpiece of the health care legislation that the Clinton Administration sent to Capitol Hill this week appears to be just what Panetta feared. Under the Clinton plan, the government would have to meet the costs of extending health insurance to the 37 million Americans who are not now covered.

Indeed, universal access to health care has all the hallmarks of a federal entitlement: it creates a new class of eligible beneficiaries and guarantees access to specific benefits. In this case, the beneficiary group will include every American.

In response to criticism that they have underestimated the potential costs of the universal coverage entitlement, Administration officials have now decided to try to impose new limits on the costs of the program.

They have altered the plan by capping the funding for subsidies designed to help low-income workers and small businesses pay for their health insurance. And the Administration has cut back on other costly elements of the plan as well, most notably long-term care for the elderly.

“The President didn’t want this plan to go on auto-pilot and allow the country to avoid the tough questions,” said one Administration health care expert. “He put in the caps because he didn’t want people to say, 10 or 15 years from now, that he blew the budget by creating this new monster.”

In addition to the new caps, the White House has built into its plan a 15% funding reserve--a $45-billion margin of error in case the subsidies it is offering to finance health insurance for low-income workers and small businesses turn out to cost much more than anticipated.

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Administration officials say confidently that they have planned for the worst. Ultimately, they argue, “managed competition,” the framework for the new plan, would ratchet down health care inflation and reduce the federal deficit by bringing cost controls to Medicare and Medicaid. In fact, Clinton argues that his plan would reduce the federal deficit by a total of $58 billion between 1994 and the end of the century.

“It’s simply far-fetched to think that the ceilings represented by that capped entitlement would be breached and that we’d have to face a situation in dealing with that,” noted Deputy Treasury Secretary Roger Altman. The caps are merely there “to ensure that in the event that managed competition does not produce savings at the rate we’ve projected, then backup mechanisms can be invoked.”

Administration officials now refer to the health care plan as a “capped entitlement.”

In effect, Administration officials are saying, the spending caps would create a trigger mechanism to force lawmakers to recognize when costs are running out of control. It then would be up to the White House and Congress to reconsider whether to scale back the scope of the health care benefit package or to find a new way to pay for it. Or perhaps to cut spending elsewhere in the federal budget to make up the difference.

“If we hit the caps, that will be a way to tell us that we need to look at this, that our costs are running too high and that we need to fix it,” another Administration official noted Thursday.

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The proposal to cap funding for the plan clearly was an effort to appeal to critics who have charged that its costs could be uncontrollable. But the proposal has not appeased either liberals or conservatives in Congress.

Liberals now are complaining that the caps inevitably will erode the promise of universal access and hurt the nation’s poorest, who will be depending on federal subsidies.

“I think the promise of universal access is less credible when subsidies for low-income workers, small businesses and retirees are limited,” said Rep. Henry A. Waxman, (D-Los Angeles), chairman of the health and environment subcommittee of the House Energy and Commerce Committee.

“My concern is if you have to count on Congress and the President agreeing to further legislation to come up with more funding if the caps are broken, then universal access is not an absolute guarantee, especially for low-income people,” Waxman said. “When it comes time to vote for more subsidies for the poor, a lot of members will say forget it.”

Conservatives charged that the caps will do little to limit federal liability if the Administration’s cost estimates prove to be too low. After all, they noted, the original cost estimates of almost every entitlement program has been exceedingly optimistic. For instance, no one in the federal government had any idea in 1965 that the brand new Medicare program would become a massive burden to the U.S. Treasury. But once the entitlement is on the books, the government has little choice but to come up with more money.

“An entitlement program is one in which there is no limitation on the funding,” said Sen. John H. Chafee of Rhode Island, a leading Republican voice on health care issues. “Anybody who’s entitled to it gets it regardless of whether there’s money, regardless of the cost. The Clinton plan embarks on new entitlement programs without proper calculation of the potential costs.”

Added Sen. Robert F. Bennett (R-Utah): “Both Medicare and Medicaid have so exceeded (original cost forecasts) that it’s almost laughable to go back and look at what was told the Congress and what actually happened.”

The Administration argues that it is much better at forecasting health care costs than the government was in 1965. Yet outside health care experts still are warning that, if the caps are broken, something would have to give. And they are saying that the most likely source of money to cover the subsidies for universal access will be the new premiums that will be paid by corporations and employees.

Currently, those premiums are set at 7.9% for large employers and 1.9% for workers. Further, the White House said this week that workers will not have to pay more than 3.9% of their wages for health care, including both premiums and out of pocket expenses. But the pressures to increase those rates to pay for subsidies could quickly build. That would transform the premium into something very different--a payroll tax.

“This is still an entitlement program,” noted Karen Davis, a health expert at the Commonwealth Fund in New York. “The elements that go into the total cost--what the benefits are, how many people are to be covered and what health care providers will be paid--are not capped. So the pressures will be there to find more money if the Administration is wrong on its estimates. And one way to do that is to raise the premiums.”