Mr. Pickle. Then we recognize Mr. Payne.

Mr. Payne. Thank you very much, Mr. Chairman, and thank
you, Mr. Secretary, for testifying before us today. I am very sup-
portive of the basic principles that the administration and the
President has laid out regarding health care reform and really
want very much to work with you and the administration toward
the objective of successful health care reform. I believe that any



82

health care reform package that we report out of this committee
must have a viable financing mechanism that is both equitable and
sustainable, because I don't think we can create a new entitlement
program that we don't know how we are going to pay for in the
long run.

I am extremely concerned, though, about the sustainability and
the fairness of health care reform which is paid for by a tax on to-
bacco which is a single product from a single area of the country
which is grown in rural areas, and particularly because the in-
creases range between some 300 and 10,000 percent, depending on
the product.

I was encouraged when Mrs. Clinton was here that she stated
that the President is sensitive to the economic burdens of tobacco
growers and that the President's door would continue to be open
as we discussed this issue into the future. I will be testifying later
this week about my district and the 5,000 tobacco farmers who are
there and the economic impact of a tax such as the one that is
being proposed on my congressional district and on my State of Vir-
ginia, so I do look forward to continuing to work with this adminis-
tration on fair and sustainable methods of financing.

But today what I would like to do is just ask one question about
another area of health care financing and its impact on small busi-
ness. When Dr. Tyson was here before us she testified that she
could not predict what the impact would be in terms of jobs that
would be created or lost on balance if the administration's health
care reform plan was passed.

There are other organizations that have since come out that have
estimated that an employer mandate would create potentially some
severe economic problems, and have suggested as many as IV2 mil-
lion jobs would be lost if there were employer mandates imposed,
so my question is this: How can we then pass legislation that
would have a substantial part of its health care financing as an
employer mandate if the administration is not able to make some
projections about what might happen in terms of jobs, especially in
light of the fact that there are others who are suggesting we will
lose over 1 million jobs if this particular method of financing is im-
posed?

Secretary Bentsen. Congressman, I don't believe that number at
all. I just don't think that is going to be the case. As I look at what
we are doing, we have a very generous discount program for small
business, especially since the cost of providing health insurance
will be so low; I find it hard to imagine how a firm would wish not
to purchase health insurance for its employees.

The increase in the cost for small business with low wages, as
you know, on an hourly basis would be somewhere between 15
cents and 40 cents an hour. I started out as a small businessman,
and I know most small business people want to provide health in-
surance, and most of them do, and the rest of them just have felt
they can't afford it. But when the cost is about 15 and 40 cents an
hour for low-wage workers in small firms and the employer's com-
petitor has to do the same thing, then I don't think they are put
at a disadvantage. So I find it difficult to believe that many busi-
nesses will significantly reduce their payrolls as a result of enact-
ing this plan.



83

Mr. Payne. Well, Mr. Secretary, I, too, was a small business per-
son before I came to the Congress several years ago, and I do — am
concerned about small businesses. I think there are two things.
One is the lack of any numbers that, from economists within the
administration that might talk about the impact that this might
have and whether anything like that might be forthcoming; and
secondly, the concern about the caps in general and the fact that
while they are there today, what assurances might be that the caps
will remain in place over a longer period of time? I mean, can small
businesses count on those caps being there as they look into the fu-
ture?

Secretary Bentsen. Oh, yes, I think you will see them sustained,
yes.

Mr. Payne. Thank you, Mr. Secretary.

Mr. Pickle. Thank you, Mr. Payne.

Now, Mr. Kopetski, you have persevered with respect to this
panel. You are the last of the line. Before you ask your questions,
though, I want to say to you, Mr. Secretary, we appreciate your
coming. You have been very diligent and stayed with us all this
time and given all the members a chance to question, so we appre-
ciate that.

Now, Mr. Kopetski.

Mr. Kopetski. Thank you, Mr. Chairman. Thank you for saying
perseverance instead of being stubborn.

Welcome, Mr. Secretary. Three quick questions. One has to do
with 1 notice in your written testimony that on page 5 vou ad-
dress the employee or the independent contractor issue and trying
to devise regulations that will prevent abuse or gaming in this
area.

As you well know, this whole area of what is an employee, what
is an independent contractor is fought out in Congress. It is fought
out in every State legislature in this land. The President's plan has
caused a great deal of concern out there with direct sellers and
home builders and probably the trucking industry and everybody
else that has been involved in this kind of issue.

I hope that we can work together in trying to make certain that
we don't create a new layer of regulation and definition, but try to
borrow upon what exists.

Secretary Bentsen. Well, I would certainly agree with you and
have been trying to do just that. What we are talking about is
doing these things in a prospective way to discourage gaming of the
system, since obviously there is an incentive for some to do it, and
that is what we are trying to avoid.

Mr. Kopetski. Great. The second area is, I represent Oregon
which is mainly a rural area, and the President's plan provides for
tax incentives to get the health care professionals to areas that are
deficient in the numbers of health care professionals. Who will
make the decision and what criteria will be used to decide what
area is health care deficient in numbers of professionals?

Secretary Bentsen. I am advised that HHS has criteria that
they use to define such areas. Again, I share with you the same
concern.

I used to represent a State that has large rural areas, and it was
always a problem to be sure that there was appropriate medical



84

care out in those areas so people could feel secure and continue to
live there.

Mr. KoPETSKl. I appreciate your knowledge and commitment on
this issue. It is very important for most of this country in a lot of
ways.

The third area is on the tobacco taxes and associating myself
with Mr. Payne, I have a great concern about basing something as
important as health care on what I view as a declining revenue
base, that is, a tobacco tax, and the fact that States use this reve-
nue themselves for State programs, not just for the general fund,
but for environmental areas.

Oregon uses it for senior citizen and handicapped transportation
programs. This will shut off — does two things. One, it shuts off the
ability for States ever to raise their own tobacco tax, and because,
as you raise taxes in this area it means it is declining numbers of
users, and therefore it will be less revenue for the States, so it is
sort of the good news is you get health care, but the bad news is
there is no public transportation to the health care clinic.

Secretary Bentsen. Well, let me state that what we have looked
at, we have looked at the behavioral response. We anticipate some
12 to 15 percent reduction in the utilization of cigarettes. It does
not preclude the States from making some modest increase in their
tax.

Mr. KOPETSKI. Well, I think it is politically going to be impossible
for a State to raise a tobacco tax, and in terms of the impact of this
legislation if that was all, maybe that is all right, but the fact is
the Heart Association, Lung Associations and everybody else is tell-
ing people don't smoke. In fact, you ought to quit. If you do, which
is all well and good, but it comes back to the policy issue of basing
funding of health care on a declining revenue base, and I think we
ought to look at something that is more broad-based and more cer-
tain that the revenues will be there.

Secretary Bentsen. Congressman, there is such a direct correla-
tion between smoking and tobacco and health that, obviously, that
is what we wanted to emphasize.

Mr. KOPETSKI. I understand. Mr. Chairman, it is time for lunch.

Mr. Stark [presiding.] Mr. Secretary, thank you very much.

Secretary Bentsen. I may get a contrary point of view from
yours right now.

Mr. Stark. It is my privilege to conclude this testimony. You
have been great to come and reason with us this morning. I know
that we are going to spend a lot more time over the next, we hope
it will only be a few months, but maybe longer as we try and work
this thorny problem out. Thank you very much for your courtesy
and your efforts this morning.

Secretary Bentsen. Thank you very much.

Mr. Stark. Thank you.

We will hear next from a panel comprised of Michael Podhorzer,
the health care campaign director of Citizens Action, and Dr. M.
Edith Rasell, who is a staff economist of the Economic Policy Insti-
tute, and as they find their way to the table, I want to welcome
the witnesses.

I have had a chance to review some of your written testimony.
I think we could get down to some more specifics and I look for-



85

ward to that. Your prepared testimony will be made a part of the
record. If you would like to summarize your written testimony for
the committee or expand on it, please do so in any manner that you
are comfortable.
We will start off with Mr. Podhorzer.

STATEMENT OF MICHAEL PODHORZER, HEALTH CARE
CAMPAIGN DIRECTOR, CITIZEN ACTION

Mr. Podhorzer. Thank you very much, Mr. Chairman, members
of the committee. I want to thank you on behalf of Citizen Action
and our 3 million members nationwide for the opportunity to tes-
tify today. I will just briefly summarize our testimony, and I think
hit the most important elements of it.

We have taken a look at financing for the last several years, and
we basically think that anv proposal that attempts to deal with the
health care crisis should be evaluated in terms of whether its fi-
nancing is fair, efficient, eliminates or adds barriers to people seek-
ing the health care they need, and is built on a revenue source that
is adequate and stable.

Right now in the health care debate there are basically six ways
to finance health care that are being discussed. The largest compo-
nent for most proposals is continuing to rely on premiums. There
is cost sharing, there are excise taxes, there are changes in the cur-
rent tax treatment of health care spending, there are payroll taxes
and there are income taxes.

To summarize, we basically feel that financing health care re-
form, comprehensive health care reform through premiums fails
each of the tests that we have laid out. It is not fair. It is a regres-
sive form of paying for health care as people who are low income
end up paying as much for health care as people who are the rich-
est members of our society. It is not a very efficient way of paying
for health care, as you need an entire bureaucracy that wouldn't
otherwise exist to collect the revenues.

It continues to leave barriers to people receiving the care they
need, and with the exception potentially of the President's plan, the
other premium-based plans are going to be extremely sensitive to
economic conditions and will in bad times leave many people unin-
sured. I think that the cost sharing as a way to finance health care
is a poor idea. Most of the time proponents of cost-sharing talk
about it in terms of cutting utilization, but the fact is that almost
every cost sharing proposal is in effect a sick tax and basically puts
the penalty for paying more of the health care costs in this country
on those who end up being sickest.

Even in plans like the President's that attempt to deal with this
element of cost sharing by putting a stop loss in, the fact is that
that stop loss is regressive. Again, for a family making $24,000 or
$240,000, the limit is $3,000 as to what they can pay out of pocket.
It also is unclear what the health rationale for having cost sharing
for utilization when you are applying cost sharing to things like
treatments recommended by physicians.

In some cases the bills recognize this by saying that there is no
cost sharing for preventive care, but it is hard to understand the
difference between making the argument there and not for the



86

medication that a doctor who decides that a patient is hypertensive
prescribes.

We feel that excise taxes are likewise an unfair mechanism for
raising money for health care because they, too, are regressive. The
changes in tax treatment that have been proposed in terms of tax-
ing employer benefits past a certain barebones level seem ex-
tremely regressive given that for the most part most of those bene-
fits were won at the expense of future wage gains. The rest of my
remarks are in the testimony.

[The prepared statement follows:]



87



Testimony of

Michael Podhorzer

Health Care Campaign Director for Citizen Action

before the

Committee on Ways and Means

U. S. House of Representatives

November 16, 1993



Mr. Chairman and members of the Committee, I want to thank you on behalf of Citizen
Action and our three million members for this opportunity to testify today. I am
particularly appreciative for the ability to share with you our views on health care
financing, which is both the major cause of today's health csu-e crisis and the fundamental
key to successful reform.

The current U.S. health care financing system can best be described as fragmented,
inefficient, regressive, uncontrolled and increasingly unaffordable. This Committee is
all too well aware of the problems created by this financing system: cost-shifting from
public to private payers and from private payers to other private payers; the growth in
the number of uninsured and inadequately insured due to the inability to afford cost
increases; the overburdening of government, business and family budgets; and an
increase in individual cost-sharing. Clearly, this non-system is no foundation upon which
to build an efficient, effective and universal system where health care is a right for all
Americans.

President Clinton has drawn the bottom line: a health care system in which all Americans
have access to comprehensive benefits and enforceable cost controls. That being said,
Citizen Action believes that much can be done to President Clinton's plan to ensure that
these goals are met and that we create a health care system that is financed progressively,
based on ability to pay.

Citizen Action has been and remains a strong supporter of H.R. 1200, the American
Health Security Act. While the specific mechanisms in this bill are being revised to
replace revenues lost due to passage of the budget bill, the financing principles of H.R.
1200 are sound and essential to a well-functioning health care system. In my testimony,
I would like to outline those principles and discuss how other proposals do, or do not,
meet them.

Before doing so, however, I want to express Citizen Action's strong opposition to
recently-made proposals, such as the Penny-Kasich bill and entitlement caps, which could
make health care reform impossible to enact. Our members and the American public
have been encouraged over the past several years by findings that comprehensive reform
can be financed by curbing inefficient health care spending. Proponents of measures to
put reduced spending to uses besides health care reform must tell the American public
that targeted revenues are no longer available and that, therefore, long-awaited health
care reform will be even more long-awaited. Or, they must develop an alternative means
of financing universal access to care at least as comprehensive as the President has
proposed. Citizen Action urges this Committee to put health care savings to their
appropriate use ~ reform of the health care system.

Citizen Action believes that health care financing mechanisms should be evaluated by
four criteria:

• Fairness. By fairness, we mean that payments must be based on ability to pay.
Those who can afford to pay more should pay more than those who cannot.
Furthermore, the cost of access to care should not depend on employment,
health status or place of residence.

• Efficiency. Other things being equal, health care financing should be simple
and cost as little as possible to implement. Furthermore, health care financing
should do as little as possible to distort other decisions in the economy.



• Remove barriers that keep patients from getting the best care. How we pay
for health care affects who gets care, what care they get, and the general level
of quality of care available to them.

• Adequacy and Stability of Funding. The sources of funding should be as
stable as possible to ensure certainty of adequate funding for health care now,
and in the future.

The major health care reform approaches being considered by Congress now employ
some combination of six basic financing mechanisms: premiums, cost sharing, excise
taxes, changes in the tax treatment of employer provided health benefits, payroll taxes,
and income taxes. We will analyze each of these approaches in terms of our criteria in
turn.



I. Premiums. All of the major health care reform approaches besides HR 1200 continue
to rely premiums as the primary source of financing. Unfortunately, premiums are the
most regressive way to finance health care. Premiums violate the principle of fairness
in several ways.

First, insurance costs the same amount whether you make $15,000 or $150,000. If the
cost of an average policy is $4,000, the family making $15,000 pays 27 percent of their
income for health insurance while the family making $150,000 pays less than 3 percent
of their income. Most of the plans attempt to soften this fundamental injustice by
providing some level of subsidies to the poor and near poor. Even where such subsidies
are adequately funded, the essential elements of a head tax remain for those families not
poor enough to qualify for subsidies, and for top earners in the subsidized categories who
would receive only a small subsidy. Consider this example. A family of four making
$29,000 makes more than twice the current level of poverty. For them, the $4,000
premium would amount to 14 percent of their income. The Clinton plan provides the
greatest assurance of subsidy for the poor of the competing premium based plans,
although the entitlement cap should be cause for considerable anxiety. The other
premium plans offer less generous subsidies, and do not go as far to make sure they are
fully funded.

Second, premium based plans that do not mandate a comprehensive benefit package are
very likely to impose a kind of sick tax. To the extent that healthy people are allowed
and encouraged to purchase bare bones policies, those who need more comprehensive
benefits will pay more. In 1987, the 50 percent of Americans who needed health care
the least accounted for only 3 percent of all health care spending, while the ten percent
who needed the most health care accounted for 72 percent of health spending. Of the
premium based plans, the Clinton plan is really the only one that attempts to avoid this
injustice. The Clinton plan accomplishes this by mandating a comprehensive benefit
package and cost sharing arrangements that limit the ability of insurance companies to
offer policies that attract only healthy individuals. At the other extreme are proposals
that seek to reduce the number of Americans who are uninsured through incentives like
medical IRAs to buy catastrophic bare bones policies. These policies will siphon off
healthy individuals. Under an individual mandate, low income individuals and families
might only be able to afford these policies.

Third, the premium based financing systems in all of the major bills perpetuate some,
or most forms of discrimination built into the current system. All of the premium based
plans except the President's perpetuate the link between employment and access to health
insurance. By leaving to the employer most, if not all, of the decisions about their
employees' choices, these proposals continue one of the least popular aspects of the
current health care system ~ the probability that if you lose your job, or if you change
your job, your health insurance options will change. The Clinton plan nearly eliminates
this problem by providing most people in the same health alliance region the same choice
of plans, at least up to the weighted average premium.



All of the premium based plans will do little to address the fundamentally unequal access
to health care based on place of residence. To a great extent, under the Clinton plan,
the quality of health care available to you is a function of the resources available to the
health alliances. This creates three concerns. First, we are concerned that the special
targeted programs in the President's bill do not go far enough to ensure the infusion of
resources into medically underserved areas. Second, we are concerned that not enough
is done to cushion the impact of declining regional economic conditions. When a health
alliance region is economically hard hit, revenues to the health alliance could fall
precipitously as workers are laid off. And third, we are concerned that businesses and
workers in low-wage regions, and regions with high unemployment, will face higher
premiums than those in more prosperous areas of the country. It must be noted, however,
that the President's targeted programs and limited nationally distributed subsidies go
much further to attenuate these regional injustices than any of the other premium based
plans.

Premiums also violate the principle of efficiency in several ways. First, they are, by
definition, more costly to collect than taxes. Whether through health alliances or
traditional insurance companies, a free-standing enormous bureaucracy is required.
There is a substantial body of evidence shows that privately financed health systems are
far more costly to administer than public ones. For example, a Citizens Fund analysis
of data submitted by the commercial insurance industry in 1991, found that it cost
commercial insurers 36.4 cents to deliver a dollar of benefits. This compares with 2.1
cents for Medicare and 0.9 cents for the Canadian national system.

Second, all of the premium based systems distort economic decision making and invite
gaming of the system. Premium based systems discourage the employment of low wage
workers since, as discussed above, they are essentially head taxes on each worker hired
whether the worker adds $20,000 value to the company or $200,000. The premium
based plans also distort hiring practices by making it more costly to hire those with
families than those without. All of the premium based systems except for the
Administration's will continue job lock to a certain extent. This would be true even if
the preexisting condition problem were solved since the decision about what health care
choices are available to you will still be made by your employer. All of the premium
based systems will invite some form of economically wasteful gaming. For example, the
President's plan invites companies to spin off their low wage jobs to qualify for
subsidies. Perversely, in the first few years of the plan, private employers receive
greater protection than public employers. Thus, in certain instances that government will
be subsidizing the health care provided private school teachers but not the health
insurance of public school teachers.

Many of the premium based proposals do little, if anything, to provide health care
consumers with the proper incentives. Proposals with an individual mandate and without
a comprehensive benefit package may, at best, increase the number of people who are
technically insured. But since they will only be able to afford catastrophic bare bones
packages, with high deductibles, they will still be discouraged from seeking primary and