health insurance. Another 22 million have inadequate protection,
and that is wrong.

Furthermore, our system contains a built-in brake on the econ-
omy which we want to eliminate. It is called job lock. I think all
of us have had a relative, a friend, someone we know, who has not
been able to take a job that would have meant increased pay for
his or her family because he or she had a child, a spouse, someone
with a preexisting condition, and he or she was locked in.



39

Almost two-fifths of the insurers in this Nation exclude preexist-
ing conditions of new policyholders. Surveys show that nearly one-
third of the workers in this country say they feel locked into their
job because of the fear of losing their health insurance.

A third problem we must resolve is the issue of affordability. Mil-
lions and millions of Americans go without insurance because they
can't afford insurance even if they have a job. Recent estimates in-
dicate that by next year there will be about $25 billion in what we
call uncompensated care.

I know of two hospitals in Texas, two alone that last year had
a total of over $80 million worth of uncompensated care. Because
of this cost-shifting problem, those who have insurance pay the cost
of care for those who do not have coverage, and according to some
studies, that cost-shift drive drives up insurance premiums for the
rest of Americans by around 10 percent.

This Nation pays far too much for health care. We spend about
14 percent of the gross domestic product on health care, but the
state of our health is no better than that of other industrialized na-
tions that spend no more than 10 percent of their GDP on health
care. In fact, we are behind in some areas. The cost of health care
is rising far faster than inflation, and if we don't control it, we will
be devoting nearly 19 percent of the GDP to health care by the
turn of the century, and that is just unsustainable.

It is eating up the pay of working Americans, and if you look at
that chart, you will see that if insurance costs had stayed at the
same share of payroll for the past 20 years, our workers could be
making an extra thousand dollars each a year. Some projections
say if we do nothing, all projected wage increases in the next dec-
ade could go to increasing health care costs. Talk about going back-
ward.

Finally, there are serious inefficiencies in our system. Excess ca-
pacity and waste. We have studies showing that we are losing
about $80 billion a year to fraud and abuse. We could put that
money to better use. As a nation, we spent roughly $45 billion last
year on paperwork. We have more hospital beds than we can fill,
and prices keep rising. It is not a pretty picture.

For our economy to function at its best, we must make this sys-
tem more efficient and more cost-effective. If we do that, we will
make available the resources needed to provide universal coverage.

Mr. Chairman, when you announced these hearings, you said you
wanted to look at what effect the President's program would have
on the economy, and I would like to address that point. What I be-
lieve will happen is that many businesses will see their expenses
for health insurance fall. As everyone is brought into the svstem,
and as we control costs, the administration projects that by tne end
of the decade, business will be spending at least $10 billion less per
year on health services. That money will probably go mostly for
better wages and benefits, but a portion may also be invested in
plant and equipment that will improve productivity, be paid out to
shareholders, or even be used to lower prices.

Each option contributes in a meaningful way to stimulating the
economy. There are also going to be some important benefits for
small businesses. Those who do provide coverage for their employ-
ees, and about two-thirds do that right now, will see their insur-



40

ance administrative costs come down. There is no reason they
should be paying 40 percent for administration. Furthermore, as
free riders throughout the system are ehminated, premiums for
those already providing coverage to their workers will be lowered,
and they will benefit from being part of health alliances that can
negotiate prices for them.

Lastly, getting rid of health-related job-lock and welfare-lock will
add efficiency to the economy over the long term.

In our view, Mr. Chairman, the key to the success of any health
program reform is universal coverage. I recall Lawton Chiles, who
was a colleague of mine in the Senate. What he discovered when
he became Governor of Florida was that he had to modify his ear-
lier views on universal coverage and cost containment. While in the
Senate, he thought you had to control costs first, then extend cov-
erage to everyone. Mter becoming Governor of Florida, he came be-
fore the Senate Finance Committee and testified that he had
changed his mind, that universal coverage addresses the cost shift-
ing and thus is critical to controlling costs.

If I might, I would like to discuss how President Clinton's pro-
gram is structured and how the revenue included in the plan will
be obtained. To avoid major disruptions, the new system will be fi-
nanced primarily like the current system. The key to making this
plan effective is to build on the system of insuring individuals
through their employers.

Most businesses, small and large, already cover their workers.
Nine out of every 10 Americans with private health insurance get
it through work. Just as they do today, employer and individual
health insurance premiums will pay for the bulk of health cov-
erage. In general, employers will pay 80 percent of the average pre-
mium.

Requiring a contribution from the employer minimizes the dis-
ruption to our current system. However, to help ease firms into the
new system, the plan limits to 7.9 percent the percentage of payroll
that would be devoted to health care premiums. Small, low-wage
firms and individuals of modest means would be provided special
discounts, and of course, through the bargaining power of health
alliances premium rates can be lowered.

Now, before I deal with some of the specific revenue issues, there
are four general points I want to make. First, our plan is the only
comprehensive proposal that spells out exactly what benefits will
be provided and how it will be financed. That is the only fiscally
responsible way to do it.

During the development of the plan, the administration con-
sulted with some of the Nation's best actuaries and health care ex-
perts. I feel confident we have approached the difficult and complex
estimating process in a very responsible way.

Second, we have protected both the private sector and the public
sector from cost overruns by insisting on accountability; third, this
plan will be phased in to allow sufficient time to make adjustments
should we find that further modifications are needed; and, fourth,
there are plenty of plans out there, and some have asked me why
we didn't set up a system with just one payer like the Canadian
system.



41

The President decided he didn't want to create a big new govern-
ment program, but rather wanted to biiild on what we have, and
I agree. We have faith in the markets. What we have done should
free insurers from having to resort to practices such as cherry pick-
ing to stay in business.

Our plan clearly spells out the costs to the Federal Government
and how we are going to pay for them. Major costs include dis-
counts to eligible businesses and to individuals, long-term care, and
the new Medicare drug benefit.

Now, funding for these and improvements in coverage will come
largely from slowing the growth in Medicare and Medicaid; a 75-
cent increase in the tax on a pack of cigarettes; an assessment on
large companies that choose to establish corporate alliances; and
increased revenues as compensation shifts from nontaxable health
care benefits to taxable wages.

As to the excise tax on cigarettes, we would raise it from the cur-
rent 24 cents to 99 cents per pack. The administration also pro-
poses to increase the Federal excise tax rates on all other tobacco
products. As members on both sides of the aisle in this committee
have been saying for years, increases in tobacco taxes will promote
better health, not just among adults, but very importantly among
our children. I am particularly concerned about the use of tobacco
products bv adolescents.

The health security plan also contains a 1 percent payroll assess-
ment on large employers who opt to form their own health alli-
ances. That will contribute, among other things, to underwriting
important work in health research from which every American ben-
efits.

Another major revenue source in the package is the tax receipts
that will be resulting therefrom, and that accounts for about $23
billion over the estimating period. As health care costs fall and em-
ployers devote these savings to taxable wages, more personal in-
come and payroll tax revenue will be generated.

Now, there are other tax provisions in the President's health
plan to accomplish many of the goals of this committee. For exam-
ple, the individual income tax health insurance deductions for self-
employed taxpayers will be increased to 100 percent of the cost of
a comprehensive benefit package, and how many of us have urged
that that change in tax law be made? This plan brings that about.

We have tax incentives to encourage doctors, nurses, and other
health professionals to work in rural areas and inner cities, and
furthermore, we propose to modify the current tax treatment of
long-term care expenses and insurance, and we propose basing
Medicare part B premiums on income, with additional premiums
being paid bv single taxpayers with incomes above $90,000 and
married couples with incomes above $115,000.

In conclusion, the administration has offered a bold and com-
prehensive plan to give Americans health security and to take
charge of health care costs. Next year alone, before we fully phase
in our plan, the Nation's health care costs will exceed $1 trillion.
That is $1 out of every $7 in our economy as illustrated by that
chart.

There has been a sea change in public opinion about health care.
Americans recognize that our health care system needs a com-



42

prehensive overhaul. It is clear to me we are going to do something
about it in this Congress. You need only look at the legislative
landscape to figure that out. There are no fewer than a half dozen
plans on the table. And there is quite a bit of similarity among
many of them.

For example, all but one call for some form of competition. Every
plEin gets rid of exclusions for preexisting conditions, every one of-
fers a choice of health plans and providers, several call for the cre-
ation of a National Health Board, and many propose increasing the
deduction for self-employed Americans. So we have a significant
amount of common ground here, but the President's plan is one of
only two that are truly universal and comprehensive.

It provides universal coverage, builds on our existing system of
obtaining insurance, contains a Medicare drug benefit, a long-term
care benefit, cigarette taxes, and a requirement that employers
help pay for health insurance. While it is designed to encourage
managed competition, it also has a budget to ensure its account-
ability under 0MB and CBO scoring rules.

I have been waiting for a long time for a President willing to
take the lead on this issue. The health care problem will cripple
our economy if we don't act, and I am proud to be part of an ad-
ministration willing to seize this opportunity. The President wants
a bipartisan solution to this problem. It is an American issue, not
a partisan issue.

The President and I look forward to working with each of you on
this committee and others in the Congress to enact a comprehen-
sive and lasting reform of our health care system. Thank you.

[The prepared statement follows:]



43



RECORD TESTIMONY OF TREASURY SECRETARY LLOYD BENTSEN

BEFORE THE

HOUSE WAYS AND MEANS COMMITTEE

NOVEMBER 16, 1993

Chairman Rostenkowski, Congressman Archer, members of the
committee: It is a pleasure to have the opportunity to discuss
the President's comprehensive health reform plan with you today.

I have a deep personal interest in this topic. I'm sure you
recall we've worked closely over the years when I was chairman of
the Senate Finance Committee on many of these issues.

Reforming the nation's health care system is one of
President Clinton's highest priorities. I think it would be a
good idea to look at why reform is necessary before I take us
through some of the details of the approach we have chosen.

First, there are inefficiencies and inec[uities in our system
that raise health care costs to those who pay the bills. Getting
sick can mean that the cost of your coverage escalates beyond
reason, or that insurers decide to drop a person or even an
entire group from coverage. Our system doesn't engender
security, it fosters insecurity about having health insurance.
That's wrong.

We are the only nation in the industrialized world without
universal coverage. That's wrong. Fifteen percent of all
Americans — 37 million of them, one third of them children —
don't have the security of health insurance. Twenty-two million
more have inadequate protection. That's wrong.

Furthermore, our system contains a built-in brake on the
economy which we want to eliminate. It's called job-lock.
Almost two-fifths of the insurers in this nation exclude pre-
existing conditions of new policyholders. Surveys show that
nearly one-third of the workers in this country say they feel
locked into their job because of health insurance.

We have a relatively mobile work-force, far more mobile than
that of Europe. Eliminating this particular problem could
improve that mobility, free more workers to upgrade their jobs
and improve their standard of living.

A third problem we must resolve is the issue of
affordability. Millions and millions of Americans go without
insurance, many because they can't afford it, even if they do
have a job. Recent estimates indicate that by next year there
will be about $25 billion in what we call "uncompensated care,"
all of it picked up by those who have insurance. I know of two
hospitals in Texas which together had about $80 million in
uncompensated care just last year.

Because of this cost-shifting problem, those who have
insurance pay the cost of care for those who do not have the
coverage. And, according to some studies, that cost-shift drives
up insurance premiums for all Americans more than 10 percent.

This nation also pays far too much for health care. We
spend about 14 percent of our Gross Domestic Product on health
care, and the state of our health is no better than that of other
industrialized nations that spend no more than 10 percent of
their GDP on health care. In fact, we're behind in some areas.



44



We've seen some moderation in the rate of inflation in the
health field of late, but it's still going up three times the
rate of overall consumer price inflation. If we don't get this
issue under control, the percentage of our GDP devoted to health
care costs will be more than 19 percent by the turn of the
century. That's unacceptable.

What this unrelenting increase is doing is eating up the pay
of working Americans. If insurance costs had stayed at the same
share of payroll for the past 20 years, our workers could be
making an extra $1,000 each a year. Some projections show that
if nothing is done, every bit and more of projected wage
increases in the coming decade could be consumed by health care
costs. Talk about going backwards!

Finally, there are serious inefficiencies in our system,
excess capacity, and waste. We've seen studies showing that
we're losing about $80 billion a year to fraud and abuse —
that's about 8 percent of our total spending. We could sure put
that money to better use. We spent more than 5 percent of our
total health budget — or roughly $45 billion last year — on
paperwork. We have more hospital beds than we can fill, and
prices keep going up.

It is not a pretty picture. For our economy to function at
its best, we must make this system more efficient and more cost-
effective. If we do that, we will make available the resources
we need to provide universal coverage.

Mr. Chairman, when you announced these hearings, you said
you wanted to look at what effect President Clinton's program
will have on the economy. I'd like to address that point.

What I think will happen is that many businesses will see
their expenses for health coverage fall. As everyone is brought
into the system, and as we cut costs, we project that by the end
of the decade business will be spending about $10 billion less
per year on health services.

That money will probably go mostly for better wages and
benefits, but a portion may also be invested in plant and
equipment that will improve productivity, be paid out to
shareholders, or even be used to lower prices. Every one of
those options contributes in a meaningful way to stimulating the
economy .

There are also going to be some important benefits for the
small businesses in this nation. Those who do provide coverage
for their employees — and about two thirds do right now — will
see their insurance administrative costs come down. There is no
reason they should be spending up to 40 percent for
administration. Furthermore, as free riders throughout the
system are eliminated, premiums for those already providing
coverage to their workers will be lowered. And they'll benefit
from being part of health alliances that can negotiate prices for
them.

Lastly, and I mentioned this a bit earlier, getting rid of
health-related job lock and welfare lock will add efficiency to
the economy over the long-term.

In our view, Mr. Chairman, the key to the success of any
health reform program is universal coverage. You recall when
Lawton Chiles was chairman of the Budget Committee in the Senate.
He was convinced that it was necessary to control health care
costs before extending coverage to everyone. Lawton left the
Senate and became governor of Florida. Within less than a year
he was back telling the Finance Committee that he had changed his
mind. Having universal coverage ends the cost-shifting, and is
critical to controlling costs.



45



If I might, I*d like now to discuss how President Clinton's
prograun is structured and how the revenue will be obtained.

To avoid major disruptions, the new system will be financed
primarily like the current system. The key to making this plan
effective is to build on the system of insuring individuals
through their employers. Most businesses, small and large,
already cover their workers. Nine of every 10 Americans with
private health insurance get it through work. Just as they do
today, employer and individual health insurance premiums will pay
for the bulk of health coverage.

In general, employers will be required to pay 80 percent of
the average premium. Requiring a contribution from the employer
minimizes the disruption to our current system. However, to help
ease firms into the new system, the plan limits to 7.9 percent
the percentage of payroll that would be devoted to health care
premiums. Small low-wage firms and individuals of modest means
would be provided special discoxints. And, through the bargaining
power of health alliances, premium rates can be lowered.

Before I deal with some of the specific revenue issues,
there are four general points I want to make.

First, our plan is the only comprehensive proposal that
spells out exactly what benefits will be provided and how it will
be financed. This is the only fiscally responsible thing to do.
During the development of the plan, the administration consulted
with the nation's best actuaries and health care experts. I feel
confident we have approached a difficult and complex estimating
process in a very responsible way.

Second, we have protected both the private sector and the
public sector from cost overruns by insisting on accountability.

Third, this plan will be phased in, which allows sufficient
time to make adjustments should we find that modifications are
needed.

And fourth, there are plenty of plans out there, and some
people have asked me why we didn't set up a system with just one
payer, like the Canadian system. The President decided from the
early days that he didn't want to create a big, new government
program, but rather wanted to build on what we have. I agree
with him. We have faith in the markets. What we've done should
free our insurers from having to resort to practices such as
cherry-picking to stay in business. A market-based approach will
encourage them to compete on the basis of quality and price,
without competitors skimming off only the healthy population, the
cream of the insurance business.

Our plan clearly spells out the costs to the federal
government and how we are going to pay for them, including
discounts to eligible businesses and individuals, long term care
and the new Medicare drug benefit. Funding for these, and for
program improvements will come largely from slowing the growth in
Medicare and Medicaid, a 75-cent increase in the tax on a pack of
cigarettes, an assessment on large companies that choose to
establish corporate alliances, and increased revenues as
compensation shifts from non-taxable health care benefits to
taxable wages.

Now, as to some specific revenue items in the bill. Our
proposal contains a number of provisions that have been of
particular interest to this committee over the years.



46



As you know, the plan includes a proposal to increase the
tax on tobacco products. Specifically, the excise tax on
cigarettes would be increased by 75 cents per pack — raising the
federal tax from the current level of 24 cents to just under a
dollar a pack. The administration also proposes to increase the
federal excise tax rates on all other tobacco products.

As members on both sides of the aisle in this committee have
been saying for years, increases in tobacco taxes will promote
better health — not just among adults, but very importantly
among our children. I am particularly concerned about the use of
tobacco products by adolescents.

Although we know it will promote better health, I want to
elaborate briefly on this point. This is an entirely appropriate
way to finance health care for several reasons.

First, tobacco consumption is the leading preventable cause
of death and disease in the United States. As members of this
committee know, it accounts for about half a million deaths a
year and billions of dollars in health care costs.

Second, since the President's health care plan does not
generally allow differential health insurance premiums for
smokers and non-smokers, the fact of the matter is that non-
smokers will bear some of the increased health costs of smokers.
This proposal helps make up for that.

Studies by the Department of Health and Human Services, as
well as the Canadian experience, demonstrate that raising tobacco
taxes can successfully discourage the use of tobacco products by
the young. This is particularly true for the proposed increase
in taxes on smokeless tobacco. Studies have shown that nearly 2
percent of male high school students use this type of tobacco,
and it presently is taxed at a disproportionately low rate in
comparison to cigarettes.

The health security plan also contains a 1 percent payroll
assessment on large employers who opt to form their own health
alliances. That will contribute, among other things, to
underwriting important work in health research from which every
American benefits.

Another major revenue source in the package is the tax
receipts that will result. This accounts for about $23 billion
over the estimating period. Let me explain. Increased
competition, greater cost-consciousness on the part of both
consumers and providers, and other cost containment measures will
lower health insurance costs. Standard revenue estimating rules
assume that as tax-preferred employer health care costs go down,
more worker compensation will come in the form of taxable wages.
That will generate more income and payroll taxes, despite the
increased number of workers covered.

There are other tax provisions in the President's health
plan that will accomplish many of the goals of this committee.

For example, the individual income tax health insurance
deductions for self-employed taxpayers will be increased to 100