H E A L T H INSURANCE: THE P R O - C O M P E T I T I O N
ISSUE BRIEF NUMBER IB81046
LUndy, Janet Pernice
E d u c a t i o n a n d Pliblic W e l f a r e D i v i s i o n
Eaucation and Public Welfare Division
THE L I B R A R Y OF C O N G R E S S
CONGRESSIONAL RESEARCH SERVICE
MAJOR I S S U E S S Y S T E M
DATE ORIGINATED 03/18/81
DATE UPDATED 12/06/82
FOR A D D I T I O H A L I N F O R M A T I O N C A L L 287-5700
F o r more t h a n a d e c a d e , C o n g r e s s a n d t h e E x e c u t i v e B r a n c h
stem s p i r a l l i n g h e a l t h c a r e c o s t s through v a r i o u s r e g u l a t o r y a c t i o n s a t
Federal and S t a t e l e v e l s .
care i n d u s t r y
t o provide health
a t t e n t i o n on t h e c a p a c i t y of t h e
O t h e r laws h a v e c r e a t e d p r o g r a m s t o m o n i t o r a n d c o n t r o l t h e u s e o f
wage a n d p r i c e c o n t r o l s
services provided t o individual patients.
w e r e a p p l i e d t o t h e h e a l t h i n d u s t r y i n t h e e a r l y 1 9 7 0 ~a n~d i n
Congress has debated whether t o impose c o n t r o l s over h o s p i t a l spending i n t h e
United S t a t e s .
there are alternatives to
I t h a s been suggested,
r e g u l a t o r y a p p r o a c h e s a n d t h a t i t may b e p o s s i b l e t o i n c r e a s e e f f i c i e n c y a n d
economy i n o u r h e a l t h s y s t e m - b y f o s t e r i n g c o m p e t i t i o n among i n s u r e r s a n d
p r o v i d e r s of h e a l t h s e r v i c e s , sugh as d o c t o r s and
t h i s s o - c a l l e d u p r o - c o m p e t i t i o n v s t r a t e g y recommend
s t e p s be
taken t o achieve such competition.
~ e d e r a l health
laws and programs
t o encourage competing
c o m p e t i n g a l t e r n a t i v e s , e l i m i n a t i n g l e g a l c o n s t r a i n t s cm c o m p e t i t i o n
L e a l t h a r e a , and r e q u i r i n g consumer c o s t - s h a r i n g i n t h e
s e r v ~ c e s . O t h e r p r o p o s a l s h a v e b e e n made
3 p p r ~ ~ Ct ho p u b l i c p r o g r a m s ( s e e CRS I B 8 1 1 7 9 , H e a l t h I n s u r a n c e :
The M e d i c a r e
Voucher P r o p o s a l s ) .
Several l e g i s l a t i v e proposals containing these elements
have been i n t r o d u c e d i n t h e 96th
and .97th Congresses.
A d m i n i s t r a t i o n b e g a n d e v e l o p m e n t o f i t s c o m p e t i t i o n s t r a t e g y i n t h e summer o f
I n 1 9 8 2 , t h e D e p a r t m e n t o f H e a l t h a n d Human S e r v i c e s a p p r o v e d a n u m b e r
of g r a n t s , C o n t r a c t s , a n d w a i v e r s of c u r r e n t r e i m b u r s e m e n t
development of Medicare and Medicaid c o m p e t i t i o n demonstration p r o j e c t s .
(See S e c t i o n 6 of t h i s I s s u e B r i e f . )
B A C K G R O U N D A N D POLICY ANALYSIS
Health care c o s t s i n t h e United S t a t e s continue t o soar,
o n p u b l i c l y f i n a n c e d h e a l t h c a r e p r o g r a m s , o n e m p l o y e r s who p r o v i d e h e a l t h
benefit coverage f o r workers and t h e i r dependents,
a n d on
i n d i v i d u a l s who
care from t h e i r
must pay f o r m e d i c a l
e x p e n d i t u r e s now r e p r e s e n t a l m o s t 1 0 % o f
( S e e CRS I s s u e B r i e f
a c c o u n t f o r more t h a n 1 0 % o f t h e e n t i r e Federal b u d g e t .
IB77066, H e a l t h C a r e E x p e n d i t u r e s a n d P r i c e s . )
I n r e c e n t y e a r s , some o b s e r v e r s o f t h e h e a l t h c a r e s y s t e m
States, including several free-market economists,
suggested t h a t
c a u s e s of runaway i n f l a t i o n i n t h e h e a l t h s e c t o r are t h e p e r v e r s e
t h a t promote o v e r u t i l i z a t i o n of h e a l t h s e r v i c e s and u n n e c e s s a r y spending f o r
Specifically, they cite:
The T h i r d - P a r t y Payment S y s t e m .
Most h e a l t h care
e x p e n d i t u r e s a r e p a i d f o r by t h i r d - p a r t y payment
organizations (commercial h e a l t h i n s u r e r s , Blue Cross and
Blue Shleld organizations, Medicare and Medicaid) that
insulate the consumers of health care from t h e actual costs of
care at the time i t is provided.
aware that most bills will be paid for by some third-party,
have few constraints on the types or quantity of the
services they o r d e r o r provide.
themselves also play a largely passive role i n controlling
Fee-for-Service Payment to Physicians. Most independent
physicians charge for their services on a service-by-service
Under this arrangement, the more services
practitioners r e n d e r , the more compensation they receive.
Physicians determine both the quantity and t h e prices of
the services they render. The consumer plays virtually
n o role in this process.
C o s t Reimbursement for Hospitals. Most third-party
payments t o hospitals are made on the basis o f the
costs to the institutions of providing
patient services. As a result, there are no incentives
t o constrain s p e n d i n g , since lower costs mean lower
revenues; on the other h a n d , more spending means greater
revenues. There i s virtually no price competition among
hospitals and n o shopping around for care by prospective
Physicians usually dictate the necessity of a hospital
admission and w h e r e i t will take place.
Impact of the T a x Laws.
The tax treatment of health
benefits distorts the provision and purchase o f health
insurance by encouraging more coverage than warranted and
thereby increasing the demand for health services.
Most of the public policy responses made i n recent years to rising health
costs h a v e taken the form of economic regulation.
Advocates of various
regulatory steps t o control health spending have held that the health care
industry i s inherently anti-competitive a n d have demanded responses, such as:
Planning controls on hospital capacity through
certificate-of-need programs that require prior approval
before hospital expansion can be undertaken.
Utilization controls over hospital services by requiring
hospitals to develop hospital utilization review programs
and by creating a national system of professional standards
review organizations (PSROs) to review the appropriateness
o f hospital c a r e financed by the Medicare and Medicaid
Establishment o f limits o n physician fees under Medicare
a n d Medicaid, a n d by direct controls over f e e s during the
economic stabilization program (of wage and price controls)
during the early 1970s.
Controls over hospital spending through a variety of
means, such a s limits to health reimbursements under
Medicare a n d Medicaid, hospital rate-setting and
budget review programs in various States, tiirect
controls during the economic stabilization program, and
the 3-year effort of the Carter Administration to
impose limits on annuai increases in hospital spending.
These steps, free-market supporters argue, have not only failed to stem
rising health care costs; they have actually helped raise costs to health
What i s needed instead, in their view,
restructllring of the American health system in a direction away from
regulation and toward greater competition.
The advocates of the pro-competition strategy recommend major changes in
employment-based health benefit programs and in the overall tax treatment of
Some also suggest that the principles of competition be
extended to the design of public health care programs a s well.
things, these advocates support legislation that would eiiminate much of the
present regulation in the health industry and rely instead on competitive
forces to produce an economic and efficient health care system.
four principal elements to the pro-competition approach:
Periodic Multiple Choice.
Each consumer of health
services should be offered periodically the opportunity to
enroll in any one of several qualified health care plans.
Fixed Dollar Subsidies Toward Benefit Protection. The
amount of financial help that a consumer might receive toward
the purchase of health plan membership (whether from an
employer, Medicare, Medicaid or under the tax laws)
should be in the form of a fixed dollar amount.
choosing more costly coverage would have to pay the extra
Equal Rules for All Competitors.
There should be .a
uniform set of rules, such a s those governing minimum
benefits, premium-setting practices, etc., for all health
Providers in Competing Economic Units.
other health care providers should be encouraged to join
together in economic units (e.g., health maintenance
organizations o r other groups) that would compete to offer
quality health services a t the most competitive price.
Growth and Costs of Employment-Based Health Benefits
Advocates of the pro-competition
approach would apply the principles
described above to employment-based health benefits, the growth of which has
In 1950, health insurance premiums
been dramatic during the last 3 0 years.
written by commercial health insurers and by Blue Cross and Blue Shield
By 1979, the figure reached
organizations amounted to almost $2 billion.
T h e majority of these premiums are for employment-based
over $66 billion.
Several factors have contributed to this growth:
Wage controls during World War 11. Wage and price
controls were imposed by the Federal Government during
the Second World War in a n effort to control inflation.
However, fringe benefits, including insurance plans, were
excluded from these contrcis.
Expanded benefits, including health insurance,
were offered by many employers as a meacs of attracting
and retaining workers.
The Wagner Act (National Labor
Relations Act of 1935) gave employees the right to
organize unions and bargain collectively with employers
over w a g e s , hours and other conditions of employment.
1 9 4 8 , the National Labor Relations Board ruled that the
term "wages" included items such as pensions a n d insurance
A s a result, health benefits have become an
important part of the collective bargainin9 process.
the growth i c
the result of
Since World War 1 1 , much of
health and other fringe benefits has Seen
the favorable tax treatment accorded such
provided i n a work setting (see 3 below).
D a t a gathered by the U.S.
Chamber of Commerce
benefits a r e not only a significant portion of all employee fringe benefits,
but a l s o among the fastest growing a s well.
For example, all fringe benefits
for workers, measured a s a percent of payroll, rose from
in 1 9 6 7 t o
37.3% in 1 9 8 1 , an increase of about 40%.
costs for insurance
(including hospital, surgical, medical, major medical and a small amount o f
life inscrance) g r e w from 3.2% of payroll
in 1967 to 6.0%
in 1 9 8 1 , a n
increase of 88%.
T h e tremendous increases in the costs of health benefits to employers have
led many of them to adopt various steps to control expenditures for employee
Attempted to lower costs through tighter administrative
controls, such as better claims review, and by
Changed plan design to alter utilization of employee
health services through, f o r example, employee
cost-sharing, second opinions prior to surgery, hospital
Attempted to control the prices charged for empioyee
health services by purchasing certain items in volume or
by negotiating fees and discounts.
Most of these steps, however, have only had a marginal i m p a c t , if any a t
a l l , on rising health benefit costs f o r employers.
Overall, employers seem
to have had little success in controlling provider costs, have often met with
employee resistance to many of the steps, and have addressed
underlying causes of health care inflation.
T a x Preatment of Health Benefits
Advocates o f pro-competition proposals believe
changes a r e
needed i n the current tax treatment of health benefits because present
policies distort decisions about t h e kind and amounts of health
Tax treatment of health i n s u r a n c e , in a
different w a y s , is
favorable to insured individuals.
This tax treatment i n c l u d e s the exclusion
and deduction of premiums f o r employment-based health b e n s f i t s , the medical
expense d e d u c t i o n , and the health insurance premium deduction:
Employer Contributions Excludable From Taxable E m p l o y e e
most important t a x subsidy found
i n the
Internal R e v e n u e Code regarding
i n c o m e taxation
health benefits i s the exclnsion from personal
payments made by a n employer for a health plan (Sec. 1 0 6 of the Code).
so-called "employer exclusion" creates a tax-shelter f o r workers who
part of their c9mpensation i n the form of health benefits
rather than as
wages that would be
s u b ~ e c t to personal
competition a p p r o a c h argue that this tax feature lowers the net cost
non-taxable f r i n g e benefits a n d thereby creates more
o f a demand
benefit than would exist i n the absence of such a n incentive.
The v a l u e of
this tax f e a t u r e increases with rising marginal tax r a t e s , i.e., the benefit
i s greater f o r those in higher brackets than for those in lower brackets.
expenses f o r medical
be deducted from g r o s s personal
Present l a w (Sec. 213 of the Code) permits such deductions to the extent that
they exceed 3% of the adjusted gross income (AGI).
Drug expenses in
of 1 % of AGI may be counted t o determine whether the 3% threshold is reached.
that t h e
taxpayer h a s
"extraordinary" health care a n d drug expenses that reduce t h e ability to pay
T h e value of this itemized deduction, like a l l deductions, a i s o rises
T h e deduction c a n be taken only by persons
who itemize their
personal tax returns.
Section 2 0 2 of P.L. 97-248, the T a x Equity and Fiscal
Responsibility Act of 1 9 8 2 , a m e n d s this provision by r a i s i n g the floor for
deductible medical expenses from 3% to 5 % of A G I , effective after
In a d d i t i o n , the 1% floor for drag expenditures is eliminated a n d only
drug expenses f o r prescribed drugs or insulin will b e
after Dec. 3 1 , 1983.
Health I n s u r a n c e Premium Deduction.
T h e medical
feature of t h e present tax c o d e contains a provision (also i n Sec. 213) which
allows the i n d i v i d u a l taxpayer t o deduct one-half
of a n y health
premiums paid by a n individual, up to $150 a year.
contributions a r e
paid by a n i n d i v i d u a l to a g r o u p benefits p l a n , if
r e q u i r e d , a n d a n y premiums paid for a plan purchased o n a n individual basis.
Any premiums n o t counted under this test may be included i n the amounts added
up to d e t e r m i n e whether the q'extraordinaryqvexpense (3% of AGI) test
Effective a f t e r Dec. 3 1 , 1 9 8 2 , Section 2 0 2 of P.L.
9 7 - 2 4 8 , the Tax
Equity a n d F i s c a l Responsibility ' ~ c t of
1 9 8 2 , eliminates this deduction.
However, a m o u n t s paid for insurance may be counted toward t h e medical expense
deduction (5% of AGI).
Employer Contributions a s Deductible Business Expenses.
Revenue C o d e p e r m i t s employers t o deduct a s business
e x p e n s e s contributions
to employee health plans regardless of the design or f e a t u r e s of
S o m e of the sponsors of
permit continued employer deductibility of such contributions Only if certain
requirements w e r e met.
T h e a m o u n t of
expenditures," which a r e revenue losses t o the Treasury
provlslon l n the cax code that extends special or selective relief to certain
groups of taxpayers. According to the President's F Y 8 3 Budget P r o p o s a l , FY83
tax expenditures for health will amount to aboct $16.4 billion
employer exclusion a n d an additional $4.2 billion for the medical expense
deduction (including the deduction for health insurance premiums).
addition, the tax subsiCies for health beneflts a l s o result in further losses
to State income taxes and lower Soclal Security
approximately $ 1 0 billion.
As a result, tax subsidies for health benefits
comprise one of the largest Federal programs to f i n a n c e health care.
The Elements of Pro-Competition Proposals
There a r e several elements that can
These elements fall i n t o two broad categories:
Those which make changes in the way i n which employers provide
health benefits to their employees, and
Those which change the tax treatment o f health benefits.
Limit the Employer Contribution to a Maximum Amount.
O n e of the elements
contained i n pro-competition proposals places a l i m i t or c a p on the amount a n
employer could contribute toward the premium c o s t of a health plan.
Contributions in excess of that limit would be included in t h e employee's
gross taxable income. Advocates of such a limit a r g u e that:
Employees would become more cost-conscious in t h e selection
of their health plans if the employer contributions were
Limits on the amount of the employer contribution that is deductible
a s a business expense would decrease the a m o u n t of F e d e r a l subsidy
toward the purchase of private health insurance.
Some problems have been raised about proposals
A national f l a t limit would not take i n t o a c c o u n t the differences
i n the cost of providing benefits in o n e geographic a r e a a s
opposed to another,
A limit would discriminate against employment groups with a high
proportion of older workers or less healthy workers whose
health costs a r e greater,
A limit on the employer's contribution could reduce a n
employer's incentive to be concerned about health care c o s ~ s
U P D A T E - ~ ~ / O ~ /
~f h e i s p r e s e n t l y a c o r a b o v e c h e l i m i t ,
l i m i t might i n c r e a s e t h e p o s s i S i l i t y
some e m p l o y e r s
would d e c r e a s e o r " r o l l - b a c k " e x i s t i n g b e n e f i t s f o r employees
now r e c e i v i n g c o n t r i b u t i o n s g r e a t e r t h a n t h e l i m i t .
R e q u i r e a Choice of P l a n s and an Equal Employer
A n o t h e r e l e m e n t o f p r o - c o m p e t i t i o n p r o p o s a l s i s a r e q u i r e m e n t t h a t the
employer o f f e r a c h o i c e of p l a n s
c o n t r i b u t i o n by t h e e m p l o y e r t o e a c h p l a n o r o p t i o n o f f e r e d .
a single health
t h e i r
I n a d d i t i o n , maRy p r o - c o m p e t i t i o n
i n c e n t i v e s f o r employees t o choose lower c o s t h e a l t h p l a n s o r
i n c e n t i v e s w o u l d t a k e t h e f o r m o f r e b a t e s t o t h e e m p l o y e e s wno
The i n t e n d e d e f f e c t s o f t h e m u l t i p l e c h o i c e
contribution requirement, and t h e r e b a t e a r e t h a t :
E m p l o y e e s s h o u l d h a v e t h e o p p o r t u n i t y t o c h o o s e among v a r i o u s
p l a n s , w i t h a n economic i n c e n t i v e t o choose a lower c o s t plan
T h e s e r e q u i r e m e n t s would p o t e n t i a l l y promote g r e a t e r c o m p e t i t i o n
among i n s u r e r s t o o f f e r t h e m o s t a t t r a c t i v e l o w - c o s t
Health care providers,
sucQ a s d o c t o r s ,
would be e n c o u r a g e d t o
o r g a n i z e themselves i n t o competing economic groups i n o r d e r t o
o f f e r t h e most a t t r a c t i v e low-cost o p t i o n .
Some p r o b l e m s w h i c h h a v e b e e n r a i s e d w i t h t h e
The a d m i n i s t r a t i v e c o s t s ' t o
t h e employer would p r o b a b l y b e
i n c r e a s e d by h a v i n g t o o f f e r more t h a n o n e p l a n o r o p t i o n ,
By r e q u i r i n g a n e m p l o y e r t o o f f e r m o r e t h a n o n e p l a n ,
e f f i c i e n t carriers might be a s s u r e d a market they do n o t
now h a v e .
Require Plans t o
Contain Cost-Sharin.3 F e a t u r e s .
r e q u i r e m e n t s i n h e a l t h i n s u r a n c e p l a n s are d e f i n e d as any
c o v e r e d i n d i v i d u a l s p a y some p o r t i o n
s h a r e of
Patient cost-sharing could include deductibles,
which a r e t h e
d o l l a r amounts t h e p a t i e n t must pay i n i t i a i l y b e f o r e t h e i n s u r e r w i l l assume
p e r c e n t a g e of t h e e l i g i b l e e x p e n s e s f o r which
copayments, o r f l a t d o l l a r amounts r e q u i r e d p e r u n i t of s e r v i c e o r
Severai reasons a r e suggested by ~ro-competition advocates
patient cost-sharing requirements in health insurance plans:
c r i t i c s of
I t is unclear
s i n c e h e must
e s t a b l i s h e s l i m i t s on t h e i n s u r e r ' s
l i a b i l i t y a n d , as a r e s u l t ,
r e q u i r e m e n t s would m o t i v a t e t h e i n s u r e d p e r s o n t o
b e more c a r e f u l a b o u t i n c u r r i n g h e a l t h e x p e n s e s ,
pay a p o r t i o n of h i s medical b i l l s ,
l i m i t s t h e premium c o s t o f
requirenents point out that:
whether economics i s t h e o v e r r i d i n g f a c t o r i n
matters o f h e a l t h c a r e , e v e n more i m p o r t a n t t h a n p s y c h o l o g i c a l ,
personal, and family considerations, o r the other influences
t h a t may a f f e c t how i n d i v i d u a l s s e e k o r u s e m e d i c a l c a r e ,
D e d u c t i b l e s a n d c o i n s u r a n c e c a n b e made l a r g e e n o u g h t o d e t e r
m o s t p e r s o n s f r o m o b t a i n i n g c a r e , b u t some q u e s t i o n w h e t h e r
t h i s s h o u l d b e one of t h e g o a l s f o r h e a l t h i n s u r a n c e ,
P o s t p o n e m e n t o f n e e d e d t r e a t m e n t may l e a d t o c o m p l i c a t i o n s
o r o t h e r c o n d i t i o n s t h a t u l t i m a t e l y r e q u i r e even more
expensive treatment l a t e r on,
Usually t h e choices about type and q u a n t i t y of t h e h e a l t h
s e r v i c e s u s e d a r e d e t e r m i n e d n o t by i n s u r e d p a t i e n t s b u t b y
p h y s i c i a n s a n d o t h e r p r a c t i t i o n e r s who a r e n o t s i g n i f i c a n t l y
i n f l u e n c e d by p a t i e n t c o s t - s h a r i n g r e q u i r e m e n t s .
I n s u r a n c e Premiums.
R e p e a l t h e Tax D e d u c t i o n
i n s u r a n c e premium t a x d e d u c t i o n a l l o w s t a x p a y e r s t o d e d u c t o n e - h a l f o f
h e a l t h i n s u r a n c e premiums, up t o a l i m i t o f $150.
as a n i n c e n t i v e f o r
i n part
There a r e various
i n s u r a n c e premium d e d u c t i o n :
T h e d e d u c t i o n may e n c o u r a g e p e o p l e t o b u y m o r e h e a l t h
further stimulating health care spending,
The d e d u c t i o n p r o v i d e s g r e a t e r b e n e f i t n o t f o r t h e low-income,
b u t f o r upper-income t a x p a y e r s .
This happens because persons
who d o n o t i t e m i z e d e d u c t i o n s , a g r o u p t h a t i n c l u d e s m o s t
Also, t a x savings
low-income p e r s o n s , c a n n o t b e n e f i t from i t .
depend on t a x p a y e r s ' marginal r a t e s , which i n c r e a s e w i t h
r i s i n g t a x a b l e income.
Taxpayers w i t h higher t a x a b l e incomes
s e c e i v e higher subsidies for each doiiar of deduttible expenses.
tax deduction was eliminated, effective after Cec. 3 1 , 1 9 8 2 , by
of H.R. 4 9 6 1 , the Tax Equity and Fiscal ResponsiSility Act of 1982.)
Include Employer Contributions 5 Employee
employer health contributions from
e m p l o y e e s f t a x a b l e income provides a
considerable incentiF?e for employees to bargain f o r , a n d for employers to
offer, more health
pro-competition advocates that the exclusion
thus encourages employees to
purchase more insurance than may be necessary, leading
to inefficiency a n d
excessive cost in the use of
coverage, there is little reason for the employee o r the health c a r e provider
to be cost-conscious about the type o r quantity of health care provided.
The exclusion of employer-provided health contributions is csed a s a means
of "encouraging" employers to offer health plans which
a r e consistent with
the pro-ccmpetition approach. F o r example:
T h e exclusion could be made available only if the
employer-provided health plan meets certain s t a n d a r d s , such a s
cost-sharing requirements, minimum benefits, multiple choice
of plans, or a n equal employer contribution to each,
T h e exclusion could be made availaale only if t h e employer did
not exceed a limit o n the a m o u n t of employer contribution to a
health plan; in other w o r d s , c o n t r i b u t i ~ n s i n excess of the
l i m i t would not be excluded from employee income.
One of the problems with eliminating the exclusion i s that employees could
be penalized for a n employer's failure to comply with a n y plan requirements.
Increase o r Eliminate the Medical
Expense T a x Deduction.
expense tax deduction
allows taxpayers to d e d u c t unreimbursed
T h e deduction
is a tax
expenses exceeding 3 % of adjusted gros's income.
subsidy designed t o cushion the impact of medical c o s t s not covered by health
Raising the deduction level would
r e v e n u e losses from
provision and provide the tax subsidy only to those taxpayers with very large
medical outlays which a r e unreimbursed by insurance.
the deduction could introduce a n element of
taxpayers who can avail themselves o f this tax provision.
(The 3% floor o n
this tax deduction was raised to 5 % , effective after Dec. 3 1 , 1 9 8 2 , by
202 of H.R. 4 9 6 1 , the T a x Equity and Fiscal Responsibility Act of 1982.)
T a x Credit.
Convert the Medical Expense Tax Deduction to
element sometimes included in considerations about c h a n g i n g incentives under
the tax l a w s which a f f e c t health benefits would c h a n g e the medical
Reasons given for the change:
deduction to a tax credit.
It would then be possible for a l l taxpayers to receive the
s a m e rate of subsidy for each dollar contribution to a health plan,
regardless o f their income,
S i n c e the tax subsidy would be fixed and would not vary with
the price of the health insurance option chosen, it should
encourage employees to purchase less expensive health p l a n s ,
T h e subsidy would be available to a l l taxpayers, not just
t h o s e who itemize their deductions.
Problems anC Concerns
A number of questions have been raised in
elements of the pro-competition proposals:
The principle behind a d v e r s e selection is that people
who obtain insurance or increase their coverage a r e generally those who w a n t
or need i t the most, usually those who represent a greater-than-average
probability of risk.
Though a d v e r s e selection is a problem i n any insurance
scheme, i t may be particularly
troublesome if individuals a r e not o n l y
permitted to choose among plans or plan options but a r e also strongly
encouraged to d o so by means of certain incentives, 'such a s cash rebates.
employees a r e offered a choice between a low-cost o p t i o n , which might contain
more patient cost-sharing
o r f e w e r benefits, and a m o r e costly, m o r e
comprehensive plan with little or n o patient cost-sharing, those employees
who expected f e w medical expenses i n the near f u t u r e could b e expected
pick the low-cost plan.
Those employees who expected substantial medical
expenses might be expected to join o r , if given t h e opportunity to c h a n g e
their enrollment, might switch to t h e more comprehensive plan
medical n e e d s were taken care of.
If all the high medical r i s k s shifted t o
the more comprehensive p l a n s , the c o s t s of the comprehensive plan-s would
soar, a n d the benefits o f spreading risk among a l l members of a group with
varying l e v e l s of health care needs would diminish.
D e s i r e f o r Insurance. Will people choose t o have less health insurance
coverage? Experience under the F e d e r a l Employees Health B e n e f i t s Program a n d
other programs indicates that most people seem to have a preference for m o r e
comprehensive, low-deductible coverage.
Will rebates o r other types o f
incentives change people's ideas a b o u t how much insurance c o v e r a g e they think
Incentive Not t o Insure Adequately.
Will offering i n c e n t i v e s , such a s
cash r e b a t e s , t o choose low-cost insurance options encourage certain persons
to purchase less health benefits coverage than they o r their dependents might
For a competitive market to w o r k , i t i s necessary t h a t
buyers of health c a r e be reasonably well-informed a b o u t t h e alternatives they
are considering i n order to make intelligent choices f o r themselves.
care and health insurance a r e very complex f i e l d s , very difficult for t h e
average person to understand fully.
What must be d o n e to m a k e i t easier f o r
the a v e r a g e health c a r e consumer to understand his purchase o f health c a r e
services o r health insurance? What would be the c o s t to the system of a n y
changes o r education process that might be necessary?
D o health c a r e
consumers want to become better informed and shop around f o r health care a n d
pro-coKpetltlon a p p r o a c h e s , or would zosts merely be snlfted = o another part
of the health care system? For example, would
up paying a
greater portion of their health bills?
provrders of health care to shoulder m o r e of such costs?
Pressure o n Providers of Health Care to Lower Prices.
important question is whether by changing insurance incentives, i t follows
that provider pricing behavior can be
health plans, will patients then shop around
for the hospital or doctor
charging the least expensive prices?
generate enough o r the right kind of market pressure on
the prices of health care services? Would
a n incentive for providers
lower prices lead to any decreases in the quality of care?
Recent Administration Activity
In 1982, the Department of Health and Human Services awarded a number
grants, contracts, and waivers of Medicare
development of Medicare and Medicaid demonstration projects in the a r e a o f
competition. Contracts and/or waivers were awarded in October
1 9 8 2 to 2 1
organizations f o r the development of Medicare competitive health care systems
in 24 cities a c r o s s the country.
The demonstration projects were designed to
encourage competition among
~ 3 m p e t e for
recipients a choice of alternative health
attractive benefits a t reduced
Included in the projects a r e a broker model, where the broker will perform
enrollment and marketing
activities for a l l the
beneficiaries in a county, and preferred provider
panels o f providers
schedules, usually a t a discount.
Grants were awarded in August,
1 9 8 2 , f o r the development of Medicaid
competitive health care systems in Florida, Minnesota, Missouri, New J e r s e y ,
and New York.
T h e projects a r e designed
t o measure potential
savings i n
enrollees rather than
health costs b y paying a f e e i n advance f o r Medicaid
the traditional fee-for-service payments.
S o m e o f the concepts to be
consumer choice models, where beneficiaries will be offered various
choices of prepaid health care options; competitive bidding to determine
most cost effective providers
vouchers for the purchase of health insurance; and c a s e management, where
primary care physicians will be given responsibility for the management of a
T h e major
S. 1 3 9 (Hatch)
(Identical to S. 1 5 9 0 introduced by Sen. Schweiker
Comprehensive Health Care Reform Act.
the exclusion of employer health plan
contributions from employee taxable
income and the deduction o f employer health plan
contributions as business
expenses unless the employer meets
the requirements of
Copayment Option. Requires employers to offer their empioyees, if such plans
are available, a t least o n e group health benefit plan for inpatient
services having a n a n n u a l copayment for hospital services of a t least
which would be paid by employees.
Specifies that the
apply when the employee a n d his family incurred, during a calendar y e z r ,
out-of-pocket medical expenses which exceed
the f a m i l y ' s combined
that if employees a r e represented
bargaining or other employee
representative, the offer of
option plan must first be made to such representative a n d , if a c c e p t e d , would
then be made t o employees.
Employer Contribution and
Requires employers who pay for group health benefit plans for their employees
to make the same payment per enrolled
employee toward each
regardless of the a c t u a l premium cost of a plan.
If the employer's
is more than the premiur eost of = h e health plan selected
specifies that t h e employee would receive the excess amount i n cash o r other
benefits from the employer.
P r o v i d e s that this excess amount would
considered taxable income to the employee.
Prohibits employers from lowering
the amount of
their payments per
employee for health plans
effective date of the b i l l , except to comply with
the requirement that
employers pay for a health benefic plan no more than the premium cost of
most costly health plan offered by the employer i n which a t least 1 0 % of his
employees are enrolled.
Multiple Choice of Health Plans. Requires employers
having a t least 2 0 0 full-time employees to offer a choice to employees
o f not
less than three qualified health p l a n s , offered by different carriers, to the
extent that such plans
a r e available.
Prohibits the exclusion of
deduction, for employers with
5 0 or more
contributions to health plans which dc
coverage o f d e p e n d e n t s , and
coverage continuity a s described
Requires health benefit plans to pay f o r medical
tne covered employee and f a m i l y , without a n y cost sharing, when the employee
and family have incurred i n a calendar year
which exceed 20% of the family's combined earnings.
a s s o c i a t i o n s , corporations, partnerships
non-governaental organizations which provide, pay f o r , or reimburse health
services, including health plans
enter into arrangements in each State where they
provide catastrophic insurance a n d preventive c a r e coverage to individuals in
the State who a r e not eligible for (a) group health benefit
qualified catastro2his and preventive coverage and (b) government programs of
P r o h i b i t s any carrier failing to meet these reqcirements
participating i n a n y health benefits program paid
f o r with
Establishes catastrophic benefits under
Prohibits the exclusion of health plan contributions and the employer
deduction, f o r employers with
5 0 o r more
contributions to health plans which d o not include certain preventive
1 3 9 was introduced Jan. 1 5 , 1 9 8 1 ; referred to Committee o n Finance.
H.R. 8 5 0 (Gephardt/Stockman)
(Identical to H.R.
National Health C a r e Reform
Requires the Secretary. (of Health and Human
establish actuarial categories (an aged a n d disabled
category, a n d other
categories based o n a g e , s e x , marital s t a t u s , and
ro divide the cguntry i n t o
healthcare a r e a s (urbanized and nonurbanized).
Entitles a l l U.S. residents who a r e either citizens or lawful resident aliens
to a healthcare contribution.
several forms: (1) for employees whose employers pay amounts
premiums o f qualified health plans, a n exclusion
from income subject to
Federal tax e q u a l t o the amounts paid by the employers; (2) for individuals
who purchase qualified health p l a n s , a refundable tax credit equal
individuals, a voucher
amount paid f o r premiums; (3) f o r aged o r disabled
t o purchase
t h e Medicare program; a n d
(4) for certain
individuals, a voucher enabling such individuals to purchase qualified health
plans (if the individual's State has elected not
Excludes employer health plan
contributions from g r o s s
employee i n c o m e only i f certain conditions a r e met, including:
has determined, before the e ~ p l o y e e ' s selection of a qualified
without regard t o t h e health plan selected or the premium of such plan,
maximum a m o u n t o f contribution the employer will make toward the premium of a
health plan selected by a n employee; the employer agrees to pay each employee
an amount equal to any amount by which the premium
enrolled i n by t h e employee is less than the maximum payment amount agreed to
by the employer (rebate), up to a limit of $ 5 0 0 increased o r decreased
changes in the G N P deflator; and continuity of coverage requirements.
limit o n t h e maximum amount a n employer may
equal to t h e l a r g e r of (1) in 1984-1986, t h e Federal healthcare
for a g e d i n d i v i d u a l s , a n 8 in 1 9 8 7 or later, the weighted average cf premiums
of qualified plans f o r similar actuarial categories an8 healthcare a r e a s ,
increased o r decreased by changes in the G N P deflator; (2) the amounts paid
on behalf o f t h e employee by the employer f o r medical o r hospital costs which
were excluded from gross employee income durihg 1 9 8 0 ; o r (3) the amounts paid
by the employer o n behalf of the employee f o r medical o r hospital costs under
1 , i981.
terms of a c o l l e c t i v e bargaining agreement agreed to before Jan.
Qualification of Plans. Requires the Secretary to certify health plans
qualified i f they meet t6e following requirements:
c a r e services; membership
by written agreement with
enrollee; enrollment o f local residents only; periodic open
enrollment of s p o u s e a n d dependents of a n enrolled individual; establishment
of annual premiums i n each healthcare a r e a , for each . a c t u a r i a l c a t e g o r y ,
including a n y copayment amounts n o t to exceed $2,900 (changed i n subsequent
years accordiag to the percentage increase or decrease in the Gross National
Product deflator), except for low-income
vouchers, w h o
cannot be charged f o r any out-of-pocket expenditures; reporting
e n r o l l m e n t , changes
in coverage, and financial information;
preparation a n d distribution of detailed brochures describing
and other plan information; and the plan a g r e e s to permit members
to r e f u s e
the provision of a health care service by a person designated by the plan
provide that s e r v i c e , and permits health personnel t o r e f u s e to deliver
modality o f health c a r e service f o r professional, ethical, o r moral
Other Health P l a n Provisions.
Establishes the rights of qualified plans a n d
health c a r e deliverers.
Establishes the actions for which a qualified
d i s q u a l i f i e d , such a s reduction of
the limits of the legislation,
Requires the Secretary
to prepare and distribute
pamphlets describing the qualified plans i n each health
c a r e area.
Authorizes individuals to a c t a s healthcare a g e n t s
25 or less eligible individuals.
for eligible i n d i v i d u a l s , o r groups of
Prohibits F e d e r a l payments
t o States under
Compensation) o r I V (Aid to Families with
Welfare Services) of the Social Security Act unless the S t a t e makes payments
only to individuals who are members of qualified plans.
Income for the Aged, BlinC and
under title XVI
Disabled) anf! the Food Stamp Act of 1 9 7 7 o n l y if the individual is a member
of a qualified plan.
Repeals authorization f o r the Federal Employees Health
Benefits P r o g r a m , requiring the Federal Government to make
specified amounts toward the premium cost o f a health plan chosen by the
employee. Plan Administrative Provisions.
the Secretary to
permit Federal guarantees of policies of i n s u r a n c e or reinsurance issued to
qualified plans o r self-insurance programs o f qualified plans.
within the Treasury Department a Health Benefits Assurance Corporation to
provide financial certification and r e v i e w of qualified plans and to
establish a protective f u n e , composed of per capita contributions from a l l
qualified plans, to a s s u r e the provision o f health services to members of
that are unable to m e e t
their financial obligations.
Authorizes the Secretary to make payments t o healthcare
that have furnished basic health care s e r v i c e s to individuals who a r e not
qualified plan members and have not been a b l e to collect payment f o r such
Arbitration and Criminal ~ e n a l f i e s . Establishes procedures
arbitration of claims.
Establishes a United States Health Court and Health
C o u r t o f Appeals to have jurisdicti0.n over a l l civil claims and disputes
arising under this legislation. Specifies criminal penalties for violations
under this legislation.
Authorizes the Secretary
to make Grants o r contracts to compensate entities that a r e n o t educational
institctions for n o t more than 70% of the d i r e c t cost of providing graduate
medical education a n d training for health c a r e professionals.
S t a t e a n d local l a w s , regulations and administration a c t i o n s which interfere
with the implementation o f this legislation. Authorizes such sums a s may be
necessary to carry out this legislation.
Amends the I n t e r n a l Revenue C o d e to
eliminate the eeauction for health insurance premiums.
maintenance of effort by States which elect t o have healthcare contributions
made to their low-income population i n l i e u o f Medicaid
of Existing Laws.
Repeals the following provisions of t h e Social Security
Act: Professional Standards Review Organization (title 2 1 , part B);
reporting (section 1121); capital expenditure limitations
hospital utilization review plans and hospital by-laws with respect to Staff
or physicians under t h e Medicare program (section 1861(e), paragraphs (3) and
(6), and section 1 8 6 1 ( k ) ) ; Medicare customary charge limitations
1 8 1 4 (b) (1) ) ; and Medicare
reimbursement to health facilities
(section 1 8 6 1 (v) (1)(A) )
following provisions o f the Public Health
organizations (title X I I I , other than s e c t i o n 1308(e));
(title XV); and health resources developemnt (title X V I , other than
1602(d) and 1622).
Provides that if more t h a n 50% of persons eligible for
choose to receive a healthcare voucher i n s t e a d ,
authorizing the Medicare program would be repealed.
general, provides that this legislation w o u l d be effective o n o r afte?
8 5 0 was introduced Jan. 1 6 , 1 9 8 1 ; referred to Committees o n Ways and
Means, Energy and Commerce, the Judiciary, a n d Post Office and Civil Service.
S. 4 3 3 (Durenberger, Boren, Heinz)
96th Congress. )
(Identical to S. 1968 introduced i n the
Health Incentives Reform Act of 1981.
Employer Contributions to Health
Benefit Plans. Amen&s the Internal Revenue C o d e to provide that any employer
contributions to a n employee health 3 r d e n t a l benefit plan which exceed the
l ~ m l t a t i o n s established by this iegislation would be inclnded i n the
employee's g r o s s income. Specifies that the limitations .in 1 9 8 2 a r e the
following a m o u n t s , increassd or decreased in subsequent years by percentage
changes i n t h e medical care component of the Consumer Price Index:
$ 5 0 for
employee o n l y coverage, $100 for employee and s p o u s e , $125 for employee and
family, and amounts to be determined by the Secretary (of Health a n d Human
Services) f o r self-insured employers.
Amends the Internal Revenue Code to
provide that if an employer fails to comply with any requirements of the
legislation, any contribution the employer makes toward a n employee health
plan would be non-qualified and included i n the employee's gross income.
Multiple C h o i c e of Plan Options. Requires that a n y employer having more than
1 0 0 employees covered under a health benefit plan a t any time during a
calendar y e a r must provide that such plan includes at least three opcions,
each offered by a separate carrier, which meet requirements pertaining to
continuity of coverage, coverage f o r employee's f a m i l y , minimum benefits, ar~d
catastrophic expense protection.
Equal Contribution Requirements.
that if a n employer offers more than one health benefit plan o p t i o n , the
anount of the employer's contribution could not depend o n which option a n
Requires that, if the contribution amount selected by such
employer exceeds the cost of the option chosen by the employee, the employer
must contribute the difference to the employee i n the form of cash
employee so wishes) or other compensation o r benefit
Provides that, i n order for
Continuity of Coverage.
contribution to be qualified, the contribution must be to a plan or plan
optior that provides: (1) continued group coverage for 3 0 days in t h e event
o f d e a t h , separation from employment .or divorce, with the e m ~ l o y e rcontinuing
h i s contribution during that period; (2) continued group coverage for a n
additional 1 8 0 days if the employee pays the premium rate; and
(3) for the
r i g h t of t h e employee to convert during the 30-day or 180-day period to a n
individual health benefit plan or option which
contains specified minimum
benefits a n d catastrophic expense protection, without regard to prior medical
condition o r proof of insurability.
Coverage for Employee's
Provides t h a t , i n order for an employer's contribution to be qualified, the
contribution must be to a plan or plan option that covers a n employee's
spouse and qualified children a n d allows such children to convert to a n
individual plan o r option without regard t o prior medical condition o r proof
o f insurability.
Provides that, in order fo-r
employer's contribution to be qualified, t h e contribution must be to a plan
o r plan option which a t least provides coverage for the s a m e types of
services covered by title X V I I I of the Social Security Act
without regard to Medicare's requirements for deductibles, copayments, a n d
provision o f covered services by particular
Catastrophic Expense Protection. Provides that, in order for an employer's
contribution to be qualified, the contribution must be to a plan or plan
option that provides for payment of 1 0 0 % of the cost of minimum
provided t o a covered individual during a catastrophic benefit period.
Defines a catastrophic benefit period a s beginning when a n individual and his
family incurs out-of-pocket expenses for minimum benefits in excess o f $3,500
a n d ending a t the end of that calendar year. Effective Date.
Jan. 1 , 1984.
Special R u l e f o r Employment Taxes.
Specifies that employer contributions to
health plans that exceed the limitations a n d to health plans that do not meet
the qualifications specified i n this legislation would be included i n the
g r o s s income of the employee a n d would be treated a s paid in cash to the
employee, not a s paid under a health plan of the employer. Provides that the
r e b a t e , if paid in cash, would not be subject to Social Security, Railroad
Retirement, a n d Federal Unemployment taxes, but would be subject t o personal
C o ~ r d i n a ~ e dAdministration.
Requires the Secretary of the
Treasury to coordinate with the Secretary of Health and Human Services in
determining whether health plans or options meet the requiremencs of this
legislation related to minimum benefits and catastrophic expense protection.
4 3 3 was introduced Feb. 5 , 1 9 8 1 ; referred to Committee on Finance.
Committee o n Ways a n d Means.
to restructure the financing of private health insurance.
Hearings, 9 6 t h Congress, 2d session. Feb. 2 5 , 1980.
Washington, U.S. Govt. Print. Off., 1980.
"Serial no. 96-79"
P r o p o s a l s to stimulate Competition in the financing and
delivery o f health care.
H e a r i n g s , 97th Congress, 1 s t
Sept. 30, Oct. 1 , a n d Oct. 2 , 1981. Washington,
U.S. Govt. Print. Off., 1981. 749 p.
"Serial no. 97-24"
Senate. Committee on Finance.
stimulate health care competition. Hearings, 96th Congress,
Mar. 18-19, 1980. Washington, U.S. Govt. Print.
4 6 2 p.
REPORTS AND CONGRESSIONAL DOCUMENTS
C O n g r e S ~ i O n a l B u d g e t Office.
care costs through market forces. Washington, U.S. Govt.
Print. Off., May 1982. 6 7 p.
House. Committee o n Ways a n d Means.
of proposals t o stimulate competition in the financing and
delivery o f health care. Washington, U.S. Govt. Print. Off.,
Sept. 2 4 , 1981. 1 2 p.
At head of title: Committee print.
Summary o f testimony received on proposals t o stimulate
competition i n the financing and delivery of health care.
Washington, U.S. Govt. Print. Off., Nov. 1 2 , 1981. 1 0 0 p.
At head of title:
J o i n t Committee on Taxation.
proposals t o restructure t h e incentives f o r coverage under
employer health plans. Washington, U.S. Govt. Print. Off.,
Feb. 2 2 , 1980.
At head of title: J o i n t committee print.
Description o f S. 1968 a n d other proposals t o restructure
the incentives for coverage under employer health plans.
Washington, U.S. Govt. Print. Off., Mar. 1 5 , 1980.
1 9 p.
At head of title: J o i n t committee print.
CHRONOLOGY OF EVENTS
Committee on Ways and Means tentatively approved a
voluntary Medicare voucher system (Sec. 1 1 2 of H.R.
6 8 7 8 ) which was later deleted by House-Senate
conferees during the conference on H.R. 4 9 6 1 , the Tax
Equity and Fiscal Responsibility Act of 1982.
Representatives Gradison a n d Gephardt introduced
H.R. 4666 (the Voluntary Medicare Option Act).
09/30-10/02/81 -- Hearings held by House Ways and Means Committee
on pro-competition proposals.
Senator Durenberger introduced S. 4 3 3 (identical to
S. 1968 introduced i n 9 6 t h Congress).
Representatives Gephardt a n d Stockman introduced H.R.
8 5 0 (identical to H.R. 7 5 2 7 i n 9 6 t h Congress).
Senator Hatch introduced S. 1 3 9 (identical to S. 1 5 9 0
i n 9 6 t h Congrsss).
Representative Jones (Oklahoma) introduced H.R.
Representatives Gephardt a n d Stockman introduced H.R.
Hearings held by Senate F i n a n c e Committee.
Hearings helC by House W a y s a n d Heans Committee.
Representative Martin introduced H.R.
Senator Durenberger introduced S. 1968.
Senator Kennedy introduced S. 1 7 2 0 (sane bill, H.R.
introduced by Representative Waxman).
07/26 7 9
Senator Schweiker introduced S. 1590.
Representative Ullman introduced H.R.
Carter Administration bill (H.R. 5 4 0 0 / ~ . 1812)
introduced by Representative Range1 and ,Senator
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Arras, John D.
Health care vouchers a n d the rhetoric o f equity.
The Hastings Center report, v. 1 1 , no. 4 , August 1981: 29-39.
P r i c e competition i n
Association of American Medical Colleges.
the health care market place.
"Issues for teaching hospitals."
Washington, March 1981. 1 8 p.
Bliss, Donald T. Energing deregulation in health legislation.
Ripon f o r u m , v. 1 6 , Mar./Apr. 1980: 5-10.
Blue C r o s s a n d Blue Shield Associations.
A third party payers
perspective -- Medicare vouchers Sept. 2 8 , 1981. 14 p.
Competition and consumer choice.
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3 1 p.
Chamber of Commerce of the United States.
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Enthoven, Alain C.
Health plzn: the only practical solution to
the soaring cost of medical care.
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1 9 6 p.
G e l m a n , Judith 2 .
Competition and health pianning.
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1 8 9 p.
Health Insurance Association of America.
Competition in the
health care system
a n evaluation of the pro-competition
Washington, Health Insurance Institute, March 1981.
Drawing the lines for the d e b a t e on competition.
Iglehart, J o h n K.
New England journal of medicine, v. 3 0 5 , no. 5 , July 3 0 , 1981:
Milbank Memorial Fund quarterly.
Health and society.
Special i s s u e
o n competition and regulation in health c a r e markets.
v. 5 9 ,
no. 2 , Spring 1981: 1-297.
American medical news, Apr.
2 4 , 1981: 4.
!;ational health insurance: what n o w , what l a t e r , what never?
P a U l Y , Mark V., ed.
Washington, American Enterprise
Institute for Public Policy Research, 1980.
3 8 1 p.
S. 1 3 9
T h e Comprehensive Health Care Reform Act.
Congressional record [daily ed.] v. 1 2 7 ,
o f Orrin G. Hatch.
Jan. 1 5 , 1981: S179-S182.
Health Incentives Reform Act of 1981.
In remarks o f
S. 4 3 3
Congressional record [ d a i l y ed.] v. 1 2 7 ,
Feb. 5 , 1991: ,51096-S1098.
Congressional Budget Office.
Tax subsidies f o r medical
care: current policies and possible alternatives.
U.S. Govt. Print. Off., Jan. 1980.
6 2 p.
Containing medical care costs through market forces.
6 7 p;
W a s h i n g t o n , U.S. Govt. Print. Off., May 1982.
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