hearings on the financing provisions of the Health Security Act and
other health reform proposals.
The full committee will move on to consider other aspects of the
Health Security Act in additional hearings in December.
Welcome, gentlemen, to the committee. If you will be kind
enough to identify yourself for the record and then proceed with
your testimony, the committee is ready to take your testimony.
Why don't we begin with Mr. Smith.
STATEMENT OF RICHARD I. SMITH, DIRECTOR, HEALTH CARE
POLICY, ASSOCIATION OF PRIVATE PENSION AND WELFARE
PLANS
Mr. Smith. Thank you, Mr. Chairman, I am Richard Smith, di-
rector of health care policy of the Association of Private Pension
and Welfare Plans. APPWP represents the broad spectrum of busi-
nesses sponsoring health and retirement plans and firms providing
services to employee benefit plans.
As the first national business group to develop a comprehensive
health care reform proposal that specifically describes how all
Americans will obtain health protection, APPWP commends Presi-
dent Clinton for putting the prestige of his office behind the efforts
to reform the Nation's health care system.
(411)
76-304 0-94-14
412
This morning I will discuss mandated employment-based health
coverage and certain aspects of the revenue projections included in
the President's reform plan. The time has arrived to achieve uni-
versal insurance coverage in the United States. APPWP supports
a carefiilly designed employer mandate as the most effective way
to achieve universal coverage at an affordable cost.
We believe that a reformed employment-based system, that is, a
system in which employers are active purchasers of health benefits,
not just payers for benefits, offers the best prospect of holding
down costs over time, while improving quality. Our proposal in-
cludes several tools to hold down costs in addition to maintaining
employers' role as purchasers.
For instance, APPWP supports capping the amount of employer-
paid health benefits that could be excluded from employee income.
The cap would be related to the cost of an efficient health plan, not
just to benefit levels. In the administration proposal, the tax cap
is related only to benefit levels. APPWP also supports spending tar-
gets that serve as a benchmark for the success of aggressive, mar-
ket-driven programs and the need for additional cost containment
in the future.
The Health Security Act would create an employer-financed
health system but would dismantle the employment-based system.
The act would eliminate virtually all employers from their role in
purchasing health benefits.
The employer's purchasing role would be taken over by regional
alliances, operated directly or indirectly by State governments.
Eliminating employers from their role in purchasing nealth bene-
fits and turning this role over to States is the act's fundamental
flaw and is likely to result in increased health costs. Employers are
driving the ongoing revolution in the organization of health care
delivery systems and the health care market. There is increasing
evidence that these employer-led efforts are beginning to pay on.
The administration cites examples of employer-sponsored health
plans that have achieved positive results in arguing that its pro-
posal for regional alliances is built on proven models. The adminis-
tration is correct to point out that these employer-sponsored plans
have achieved positive results, but these plans work well because
employers are involved as active purchasers of health benefits.
Next, I will turn to a few items included in the administration's
revenue projections. I wish to emphasize that while we have seen
the revenue projections, we have not seen the all-important as-
sumptions upon which the projections are based. Therefore, it is
possible that the administration's numbers account for some of the
questions I will raise.
Much of the revenue the administration is counting on to fund
the health plan may not materialize. The administration projects
it will collect $24 billion of revenue from a 1 percent assessment
on the payrolls of large firms which choose to buy health coverage
for their workers rather than join regional alliances. APPWFs
members include many of the firms which would have the option
of forming corporate alliances.
The predominant view among these firms is that the Health Se-
curity Act's rules, as currently drafted, are so dramatically stacked
against corporate alliances that few would be formed. Since few, if
413
any, firms would form corporate alliances, the 1 percent of payroll
assessment would generate much less than $24 billion of new reve-
nue.
Page 3 of my written statement provides a partial list of the
many rules that would make it virtually impossible for a large firm
to operate a corporate alliance. The assessment appears to be in-
tended to force large firms into regional alliances rather than to
create a level playing field between regional and corporate alli-
ances.
In fact, large firms would have to pay the assessment before a
playing field is even created. They would be assessed beginning in
1996 unless they make an irrevocable election to join regional alli-
ances. Yet many States will not have formed regional alliances by
1996.
I would add that the assessment is not the equivalent of the por-
tion of regional alliance premiums earmarked to support academic
health centers and graduate medical education. Only 1.5 percent of
regional alliance premiums are earmarked for these purposes, 1.5
percent of premiums is a small fraction of a 1 percent assessment
on payroll.
Some speculate that the assessment is intended to compensate
for increased costs within regional alliances, resulting from the pos-
sibility that a disproportionate share of large employers joining re-
gional alliances will have above average costs. However, large em-
ployers joining regional alliances will pay premiums wholly based
on their own experience for 4 years, meaning that they will not in-
crease the alliance's community rates for 4 years. Their premiums
would be partially based on their own experience for the next 3
years.
As an aside, I note that large firms' ineligibility for public sub-
sidies until between 5 and 8 years after they join regional alliances
means that the cost of subsidies might increase after the years in-
cluded in the administration's spending and revenue estimates.
Mr. Chairman, if I might, I have 1 more minute of comments.
Chairman ROSTENKOWSKI. You have time.
Mr. Smith. Thank you.
The assessment's cost to a specific employer does not appear to
bear any relationship to a specific cost which the administration
might claim is avoided by that employer. An employer's work force
that has a worse risk profile than the regional alliance might re-
main outside the pool because it can do a better job of controlling
costs. That employer would be required to pay the assessment,
even though the regional alliance premiums would increase if the
employer joined regional alliances.
Next the administration expects to collect $30 billion by eliminat-
ing health benefits from cafeteria plans, which allow workers to
pay their share of health costs in pretax dollars. Little or none of
this revenue will be raised unless the administration's estimate in-
cludes an offset for the revenue which would be forgone through a
Health Security Act provision which allows workers to receive more
than the minimum required employer premium subsidy on a tax-
free basis. This provision encourages employees to bargain for high
premium subsidies as part of their overall compensation.
414
Finally, the administration projects that income tax revenue will
increase as dollars shift from tax-free health benefits to taxable
wages. It is not clear whether this includes offsets for the likeli-
hood that workers will negotiate for more than the minimum
health benefit employers would be required to provide. Unionized
workers may be particularly likely to bargain for an increased
health benefit. Workers willing to strike in the past over introduc-
tion of a minimal employee sharing of health costs are unlikely to
willingly accept a much higher level of financial responsibility as-
signed to them under the administration plan.
Note that in these situations employers costs would not be
capped at 7.9 percent of payroll. Mr. Chairman, this concludes my
remarks.
[The prepared statement follows:]
415
STATEMENT OF RICHARD I. SMITH, DIRECTOR OF HEALTH CARE
POLICY, ASSOCIATION OF PRIVATE PENSION AND WELFARE PLANS
I. Introduction
Mr. Chairman, members of the Committee, I am Richard Smith, Director, Health Care Policy
of the Association of Private Pension and Welfare Plans (APPWP). I appreciate the
opportunity to offer comments on the financing provisions of the Health Security Act proposed
by President Clinton.
APPWP is the national association of firms and individuals concerned about federal legislation
and regulation affecting employee health and pension benefits. The APPWP's members
include Fortune 500 companies, banks, insurers, and consulting, accounting, actuarial and
investment firms.
APPWP is the first national organization of employers to endorse a requirement that employers
offer health benefits to their employees and pay most of the premium. We have also endorsed
measures that would contain costs by promoting the development of more efficient health care
delivery systems and encouraging consumers to choose between competing health plans on the
basis of cost and quality. Finally, APPWP has endorsed setting expenditure targets to serve as
a benchmark for the success of aggressive, market-driven programs and the need for additional
cost containment steps in the future.
This morning, I will address four of the areas identified in the Committee's list of questions for
this hearing: (1) the cap on the exclusion of employer-paid premiums from employee income,
(2) the cap on employer premium payments as a percent of payroll, (3) the "assessment" on
firms choosing to form a corporate alliance, and (4) the status of health insurance as a benefit
of employment.
n. Tax Cap
The President's proposal includes two provisions affecting the value of employer-paid health
benefits that is excludable from employee income. First, beginning in 2003, employer-paid
health benefits in addition to the benefits included in the comprehensive package would be
taxable income to employees. Second, beginning in 1997, employees could not use "cafeteria
plans" to pay their share of health costs on a pretax basis.
A. Cap on the Exclusion of Employer- Paid Premiums from Employee Income
APPWP supports a cap on the exclusion of employer-paid premiums from employee income.
However, we believe that the cap should relate to a health plan's efficiency, not just a specified
level of benefits. Two health plans with identical benefits may charge different premiums,
based on differing levels of efficiency in administering and providing health services. Workers
choosing between health plans will have a much reduced financial incentive to enroll in an
efficient plan, unless the cap is designed so that employer-paid premiums are excluded from
employee income only up to the premium charged by a benchmark efficient plan.
Ironically, because the President's proposal links the cap to benefits but not health plan
efficiency, an employee with low cost coverage could be taxed while an employee with high
cost coverage would not be taxed. For instance. Employee A selects an efficient health plan to
provide the comprehensive benefit package plus an employer-paid supplemental health benefit.
Employee B selects an inefficient health plan which charges more than the combined cost of
Employee A's comprehensive and supplemental coverage. Employee A would be taxed on the
value of the supplemental coverage, while Employee B would not be taxed.
B. Revenue Projections Related to Elimination of Health From Cafeteria Plans
The Administration projects that excluding health insurance from cafeteria plans will raise $30
billion between 1997 and 2000. Unless this projection includes an offset for the revenue which
would be foregone through a Health Security Act provision which allows workers to receive
more than the minimum required employer premium subsidy on a tax-free basis, little or none
of this $30 billion will be raised. Unfortunately, the Administration has yet to specify the
assumptions used to make this and other revenue projections.
416
Under the Health Security Act, employer-paid premium subsidies above the required minimum
(and employer-paid supplemental benefits until the year 2003) continue to be excluded from
employees' taxable income. Employers who pay for workers' share of premiums must make
the same contribution for all employees, and provide a cash rebate to an employee if the
contribution exceeds the total premium of the health plan selected by the employee. It appears
that the rebate would be taxable income to the employee. Pursuant to a collective bargaining
agreement, employers could make additional premium contributions available without offering
an equal contribution and rebates to all workers.
Overall, this structure encourages employees to bargain for a high premium subsidy as part of
their overall compensation. Employees using it to pay premiums would receive tax-free
benefits while those electing a rebate would not be in a different position than at present.
in. Cap on Employer Premium Payments as a Percent of Payroll
The Health Security Act would cap some employers' minimum required contribution to
premiums at 7.9% of payroll. Small, low-wage employers would be eligible for lower caps.
It is important to clarify certain features of the "cap" as it relates to the Administration's
revenue projections.
The cap covers only the minimum premium contribution employers are required to make under
the Health Security Act. For two reasons, some employers are likely to contribute more than
the minimum, resulting in expenditures over 7.9% of payroll. First, as already discussed, the
tax status of employer-paid health benefits gives employees an incentive to seek more than the
minimum employer payment as part of their compensation.
Second, some employers would realize savings by moving into community-rated coverage
organized through regional alliances and receiving other public subsidies. Their workers may
expect to obtain a share of these savings through employer payment of the worker's share of
premiums. This may be particularly likely where the workforce is unionized. It is unlikely
that workers willing to strike over the introduction of minimal employee sharing of health plan
costs would willingly accept a much higher level of employee financial responsibility (i.e.,
costs in excess of the minimum employer contribution under the Administration plan) simply
because a health reform bill is passed.'
The Administration apparently assumes that some portion of the savings it projects employers
will realize from health reform will be shifted to taxable wages or dividends, thereby
generating new revenue. Putting aside for the moment the question of whether such savings
would be realized, the taxable portion of any such savings would be reduced to the extent they
are paid out as tax-free health benefits rather than taxable wages. At this time, we do not
know whether the Administration's revenue projections assume that all employers would pay
premiums only up to the capped amount, or whether an allowance has been made for employer
contributions in excess of the cap.
One federal spending implication of the "cap's" design should be considered. The 7.9% cap
would not apply to large employers (5,000 or more full-time employees) for the first four years
after they choose to join a regional alliance. The cap would be phased-in during a large
employer's fifth through eighth years in the alliance. As a result, government spending on
subsidies to employers could rise shortly after the conclusion of the time period considered in
the Administration's financing projections.
Additional employer-paid premium subsidies would reduce
cost-conscious choice of health plan, thereby increasing both the
average weighted premium which serves as a benchmark for
employers' minimum required premium contribution and the tax
expenditure on health benefits.
417
rv. "Assessment" on Finns Forming a Corporate Alliance
The Health Security Act would levy a 1 % of payroll "assessment" on large firms which choose
to form a corporate alliance rather than join a regional alliance. The Administration projects
that this "assessment" will generate $24 billion of new revenue between 1996 and 2000. We
believe that little, if any, of this revenue will materialize. Additionally, APPWP strongly
opposes the "assessment" because it is highly inequitable.
A. The "Assessment" Will Not Raise the Projected Revenue
We do not know what proportion of large employers the Administration assumes would form
corporate alliances, and therefore pay the 1% of payroll "assessment." However, numerous
provisions of the Health Security Act discourage large employers from forming corporate
alliances.
APPWP's members include many of the firms which would have the option of forming
corporate alliances. The predominant view among these firms is that the Health Security Act's
rules, as currently drafted, are so dramatically stacked against corporate alliances that few
would be formed. Since few, if any, firms would form corporate alliances, the 1 % of payroll
"assessment" will generate much less than $24 billion of new revenue.
A partial list of the reasons few, if any, large employers would form corporate alliances
includes the following items:
• The 1 % payroll tax substantially increases corporate alliance costs in relation to regional
alliance costs.
• Employers outside of regional alliances would represent, at most, a few percent of the
market. Since regional alliances would control the vast majority of the market, corporate
alliances would lack the leverage needed to negotiate cost-saving and quality-improvement
initiatives that require health plans to change the way they do business. Large employers also
would be exposed to cost-shifting by regional alliances and Medicare.
• The purchasing power of an employer forming a corporate alliance would be further diluted
by the requirement that it offer at least three health plans. Moreover, a corporate alliance
would be constrained from selecting three highly efficient plans, since it would be required to
offer at least one fee-for-service plan. Additionally, states could require corporate alliance
health plans to include specified providers, regardless of the quality or efficiency of services
rendered by those providers.
• Public subsidies available to employers joining regional alliances would not be available to
employers forming corporate alliances.
• Corporate alliance employers would have to pay for additional premium subsidies to low
wage workers, while government would pay for similar subsidies provided to low income
persons covered through regional alliances.
• Employers forming corporate alliances would face new liabilities for denying claims. State
agencies would have a key role in deciding these claims, creating additional difficulties for
multistate employers.
• An employer could be required to close down its corporate alliance and join regional
alliances if its corporate alliance marginally exceeds its permitted rate of increase in two of
three years. Even small annual cost fluctuations wholly unrelated to how well a corporate
alliance manages costs could force a corporate alliance to shut down. Moreover, the employer
could be forced to join regional alliances even if its costs and rate of increase are lower than
regional alliances' costs and rate of increase.
An employer's investment in a corporate alliance also could be lost if the number of full-time
workers covered by its health plans drops below 4,800 because one or more states choose to
418
form a single payer system. The 4,800 full-time workers in non-single payer states would be
forced to join regional alliances. (Note that the rules governing eligibility to form and maintain
a corporate alliance could distort firms' business concerning matters such as hiring, acquisition
and sale of business units, and plant location.)
B. The "Assessment" is Inequitable
The "assessment" appears to be intended to force large firms into regional alliances, rather than
to create a level playing field between regional and corporate alliances.
First, large firms with the option of forming a corporate alliance would be subject to the
"assessment" beginning in 1996 unless they make an irrevocable election to join regional
alliances. Yet many states will not have formed their regional alliances by 1996. We can not
conceive of a rationale that justifies "assessing" large employers before they have the
opportunity to examine regional alliances' structure, and before there is any playing field
which could be leveled between regional and corporate alliances.
Second, some discussions of the "assessment" indicate that is intended to be the equivalent of
the portion of regional alliance premiums earmarked to support academic health centers and
graduate medical education. Yet only 1.5% of regional alliance premiums are earmarked for
these purposes. One and a half percent of premiums is a small fraction of a 1 % "assessment"
on payroll.^
Third, employers' premium contributions are capped as a percentage of payroll in regional
alliances but are not capped in corporate alliances. Therefore, the costs of any programs
funded by both an add-on to regional alliance premiums and the "assessment" on corporate
alliance employers would fall more heavily on corporate alliance employers. Additionally,
employees bear a portion of the cost of any programs paid for by marking up premiums.
Employers bear the full cost of the corporate alliance "assessments."
Fourth, there is some speculation that the "assessment" is intended to compensate for increased
community rates within regional alliances resulting from the possibility that a disproportionate
share of large employers joining regional alliances will have above average health costs.
Revenue generated by the "assessment" does not appear to be earmarked to an across-the-board
reduction in regional alliances' community rates. Moreover, large employers joining regional
alliances will pay premiums that are wholly based on their own experience for four years,
meaning that their presence in the regional alliance will not increase the alliance's community
rates for four years. Their premiums would be partially based on experience for the next three
years.
Fifth, there is some speculation that the "assessment" is intended to spread Medicaid cost-
shifting across a broad base. However, under the Health Security Act, premiums paid by
employers in regional alliances and by Medicaid are set according to separate formulas.
Finally, we suspect that the conveniently round number of 1% is arbitrary. The cost which the
"assessment" would impose on a specific employer does not appear to bear any relationship to
any specific cost which the Administration might claim is "avoided" by that employer. For
instance, an employer whose workforce has a worse risk profile than the regional alliance
might remain outside of the regional alliance because it can do a better job of managing costs
than the regional alliance. That employer would be required to pay the assessment, even
though regional alliance premiums would increase if the employer joined the regional alliance.
^ The justification for any assessment for these purposes
is open to question. The argument that the market will not
recognize the value of efficiently operated academic health
centers and graduate medical education is overstated. The wisdom
of creating pools of money that could be used to reinforce the
behavior of institutions whose conduct has played a key role in
driving costs up is questionable.
419
V. Health Insurance as a Benefit of Elmployment
A. Employer Mandate
Clearly, the time has arrived to achieve universal insurance coverage in the United States.
APPWP supports a carefully designed employer mandate as the most effective way to achieve
universal coverage at an affordable cost. We believe that a reformed employment-based
system - i.e., a system in which employers are active purchasers of health benefits, not just
payers for benefits-offers the best prospect of holding costs down over time, while improving