Healthy Compromise: Universal Coverage and Managed Competition Under a Cap

This is how the system might work:You would

get your health insurance through a new, regional health insurance purchasing

cooperative. The purchasing cooperative, bargaining on behalf of large blocks

of subscribers, would contract with a variety of private health plans, including

health maintenance organizations (HMOs), preferred provider plans, and one

conventional free-choice-of-provider option. Each plan would have to offer a

standard, mainstream benefit package to every prospective enrollee. Once a year

the purchasing cooperative would ask you to choose among the health plans (or "networks,"

as Bill Clinton calls them) and inform you about their monthly charge and

quality of care, including consumer satisfaction.

Money would flow into the cooperatives from employers and employees, from other

people according to their ability to pay, and from government. Money would flow

out to the health plans according to their enrollment: The purchasing

cooperative would pay each plan a standard rate tied to the plan with the lowest

premium. If you wanted a health plan with a higher premium, you would have to

pay the extra amount. The purchasing cooperative would also adjust the overall

payments to plans in line with the average "risk" of their enrollees

(for example, it would pay more to plans with older subscribers); the rates

charged to enrollees, however, would be the same. Government subsidies

would enable all those who are not employed also to choose a health plan through

the purchasing cooperatives--no one would be excluded. (Medicare, however, would

continue for some time as a separate program.) While responsibility for

appointing the boards of the purchasing cooperatives would belong to the states,

a federal health board would set standards for coverage, monitor outcomes of

treatment, and regulate the flow of funds into the purchasing cooperatives and

out to the health plans.

This is "managed competition" under a spending cap--a proposal for

universal health insurance, quality improvement, and cost containment that cuts

across conventional ideological lines. With the moment of decision about reform

drawing near, there is deepening interest in an approach than can appeal to a

wide coalition. Indeed, the range of support and increased political centrality

of these ideas since early 1992 have been astonishing--an abrupt turn toward a

new policy paradigm that brings together new allies and divides old ones, and

that raises new hopes of breaking the impasse blocking national reform.

Managed competition has conservative appeal because it relies on choice and

competition among private health plans. It has liberal appeal because it calls

for a comprehensive standard of coverage, insurance for all, and community-wide

pooling of risk (everyone would get the same rates). It also creates new

mechanisms to hold health plans accountable for their performance and introduces

a potentially powerful new force--the purchasing cooperatives--to defend

consumer interests. Perhaps most important, health insurance would no longer be

tied to jobs. And in the version I support, the federal government would use the

purchasing cooperatives to cap the growth of health spending.

But there are other versions of managed competition, too, without the same

provisions for universal coverage and global cost controls. Indeed, ever since

September 24, when Clinton endorsed "competition within a budget" and "universal

coverage ... privately provided, publicly guaranteed," managed competition

has attracted varied interpretations as well as growing interest. During the

first presidential debate, when Clinton responded to a question about health

care by immediately referring to his "managed competition plan," I

wondered how many Americans caught what he said. Many people (even experts in

health policy!) are unsure exactly what managed competition means and how it

relates to universal insurance and a national health care budget. And many are

skeptical that universal coverage under any system can be financed without large

tax increases. Clearly, for those who favor this approach, dispelling those

doubts is a top priority.



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THE EMERGING DEBATE

A year ago, managed competition did not even figure in most public discussion

of health care reform. As the news media presented it, the menu of reform had

three major alternatives: a Canadian-style, single-payer system of national

health insurance; Bush's plan to reform the current insurance market and give

tax credits for limited coverage to the poor; and "play-or-pay," the

proposal embraced by the Senate Democratic leadership to require employers to

insure their workers or pay into a public insurance program.

Of these three, only play-or-pay is a live option today. The election deprived

the tax-credit approach of presidential sponsorship, and the single-payer

approach has no prospect of winning it. The decisive obstacle to a single-payer

plan remains fiscal--not just the initial tax increase required for public

financing of a comprehensive program, but the added revenue that would be needed

each year to pay for the bulk of a system now costing over $800 billion a year

and growing 10 percent annually. Even if a single-payer program cut growth

sharply, its annual budgetary demands would likely be enormous. A Clinton

administration with lots of other commitments besides universal health insurance

cannot risk the damage to its overall program.

But neither can the new administration risk the damage from the weak cost

controls in the present system or in the kind of approach supported by Bush.

Under current policies, according to the Congressional Budget Office (CBO),

health spending during the 1990s will jump from 18 to 30 percent of federal

outlays (excluding interest). As a proportion of gross national product, health

expenditures hit an estimated 14 percent in 1992, up from 9.1 percent in

1980--an additional one percent of GNP every 35 months. While the

average in industrialized countries is under 8 percent and growing slowly, CBO

projects health care's share of GNP in the United States at 18 percent by

decade's end. Higher costs will put health insurance out of the reach of more

people, cause further problems for businesses now groaning under the burden,

erode increases in real wages produced by economic growth, crowd out other

programs from public budgets--in short, imperil the promise of the Clinton

presidency. So, while its final shape is still uncertain, fundamental reform is

no longer optional, and the new President, the Congress, and even the major

interest groups clearly understand that.

The emergence of managed competition as a leading

framework for health reform under Clinton took many people by surprise,

particularly because it has been identified--wrongly--with free-market views.

While some editorialists have portrayed the current debate as another battle in

the epic struggle of regulators versus marketeers, the truth (I am almost

hesitant to reveal) is that managed competition, even without a global budget,

involves plenty of regulation. It is best conceived, not as a pure market

solution, but as a reconstruction of both market and regulatory institutions,

aimed at enabling consumers to make informed, cost-conscious choices among

alternative health plans with population-based budgets.

The basic concepts have been around for about fifteen years, ever since the

Stanford economist Alain Enthoven first developed a "consumer choice"

option for national health insurance at the request of the Carter

administration. Enthoven subsequently adapted his approach to the

employment-based system and emphasized the need for an active "sponsor"

of consumer choice-- that is, an employer, purchasing group, or public authority

that would "manage" the competition to clarify the true costs of

alternatives and prevent any plan from manipulating the market. Although not all

supporters of managed competition have shared his commitment, Enthoven has

always called for universal coverage and stressed that while advocating

competition in the delivery of care, he favors a "social insurance"

framework for the financing. As in Social Security, participation in universal

health insurance cannot be voluntary.

In recent years, Enthoven has teamed up with Paul Ellwood, the physician who

pioneered the concept of health maintenance organizations, and Lynn Etheredge, a

policy analyst who served in Carter's Office of Management and Budget, to

formulate a broad, managed-competition initiative. Known as the Jackson Hole

proposal (because the group holds meetings at Ellwood's home in Jackson Hole,

Wyoming), the initiative calls for universal coverage through "accountable

health partnerships." These are health plans that would provide a federally

mandated standard benefit package, offer open enrollment and community rating

(that is, equal rates to all), and produce routine data on their quality of

care, including outcomes of treatment. Under the proposal, all employers would

be mandated to provide coverage; employers with fewer than 100 workers would

obtain that coverage through health insurance purchasing cooperatives or HIPCs

(pronounced "hippics" by the hip).

Two other initiatives in the past year have helped put managed competition on

the national agenda. In February 1992, John Garamendi, California's insurance

commissioner, called for a system of regional HIPCs, embracing all employee

groups and individuals, financed by a state payroll tax (an average of 6.75

percent on employers, 1 percent on employees). An innovative feature of the

proposal is that it would merge the health care component of workers'

compensation and auto insurance into one comprehensive health insurance system.

At least two health plans in every region would be available with no

out-of-pocket premium; consumers could pay more for other plans, but within a

cap. By combining managed competition, public financing, and a global budget,

the Garamendi proposal reframed the debate. Garamendi's proposal has the unified

financing of single-payer plans (all the money through one spigot), but it also

has competing delivery systems--hence it is a "single-sponsor"

approach to managed competition.

At the national level, managed competition itself has acquired new sponsors. In

the House of Representatives, the Conservative Democratic Forum (CDF)--a group

of mostly Southern Democrats--introduced a managed competition proposal last

spring that would require states to set up purchasing cooperatives and make the

cooperatives the exclusive channel for all tax-advantaged health insurance for

firms with up to 1,000 employees. The bill generally follows the Jackson Hole

model, except in one crucial respect: It does not require employers to offer

insurance, only to use the purchasing cooperatives if they expect to get full

tax benefits. (The bill does include more than $30 billion in subsidies to

enable those with incomes below 200 percent of the poverty level to enroll.)

While falling short of universal coverage, the CDF bill would transform health

care by making the purchasing cooperatives the central institutions of health

care finance.

Meanwhile, on the Senate side, support for a comprehensive, universal insurance

program through purchasing cooperatives has come from Democrats with a more

liberal cast, notably Jeff Bingaman, Tom Daschle, Bob Kerrey, and Harris

Wofford. They would allow states and regions to modify the structure to suit

local circumstances. For example, in rural areas where there is no prospect of

effective competition, the purchasing cooperatives might adopt other

arrangements, including a single-payer plan.

Under Majority Leader George Mitchell, Senate Democrats have also been moving

to achieve a consensus between supporters of play-or-pay and advocates of

managed competition. The differences between the two approaches are substantial,

but negotiable. Play-or-pay offers a choice of plans to employers; managed

competition gives the choice to consumers. But if the public program under

pay-or-play is converted into a purchasing cooperative, the gap between the two

narrows. Furthermore, because small businesses cannot buy insurance efficiently

themselves, many play-or-pay advocates are prepared to mandate participation in

the purchasing cooperatives for small and perhaps mid-size firms, while leaving

it optional for larger ones.

This, in fact, is one direction of compromise proposals, but several questions

then arise. First, where should legislation draw the cut-off for mandatory

participation in the purchasing cooperatives--at 100 employees, 1,000 employees,

or some other level? The advocates of play-or-pay have tried to minimize the "pay"

alternative for fear of creating a huge government program; most

managed-competition advocates, by contrast, want the purchasing cooperatives to

become the primary way to arrange for health insurance.

The issue here is not only which is more likely to control costs, but which

allows more freedom. When employers separately adopt managed care, they restrict

their employees' freedom to choose their doctors. That raises a question: Why

should my employer limit my choice of doctor? Through the purchasing

cooperative, on the other hand, consumers will have a wider range of plans to

choose from. In my view, there is a world of difference between a managed care

plan imposed by an employer and a managed care plan offered as a choice by a

purchasing cooperative that has other options; and it is ironic, if not

positively perverse, for the play-or-pay Democrats to favor the employer-based

alternative, which increasingly limits the rights of consumers. (Moreover,

employers that offer choice do not have the capacity to "risk- adjust"

premium payments to plans or to impose other rules and incentives needed to

manage health plan competition appropriately.) So, the more inclusive the

purchasing cooperatives, the better.

Yet if, in the interests of compromise, participation in the purchasing

cooperatives is mandated only for small and mid-size firms, on what terms should

larger firms be able to join? Making participation voluntary inevitably creates

a problem of "adverse selection" (that is, those with higher risks

will take the offer): Employers with higher health costs will join the

purchasing cooperatives and, if they get the same rates as other employers, the

cooperatives will become more costly. The answer here, unfortunately, is that if

some category of employers is permitted to opt out, the purchasing cooperative

must be able to charge a risk-adjusted rate to any employers from that group

that sign up.

Allowing large employers to opt out raises another serious problem. If the

purchasing cooperatives only have partial coverage of the market, they can no

longer impose a global budget. To be sure, if the cooperatives embraced all

firms below 1,000 employees, they would have nearly two thirds of the employed

population and could effectively regulate total spending (although Medicare is a

complicating factor). But the less inclusive the purchasing cooperatives, the

greater is the need to find some other way to set spending limits--most likely

direct controls on hospital revenues and physician fees.

Some reformers believe controls on revenues and rates are inevitable,

especially in states where fee-for-service remains dominant. But such controls

won't necessarily work (consultants stand ready and willing, for a fee, to undo

and subvert them), and it may not be easy for the Clinton administration to

accept controls on one seventh of the economy or to get Congress to adopt them.

Such an effort would require the administration to expend a lot of political

capital; and if controls passed, the federal government would become even more

deeply involved in the "micro-regulation" of health care that Clinton

has said he wants to avoid.

Those difficulties argue in favor of a Garamendi-style strategy of

comprehensive budgeting through the purchasing cooperatives, which can "cap

through capitation"--that is, cap growth in spending by limiting the per

capita payments to plans. For example, the new national health board might set a

permissible index for growth in the base payments by purchasing cooperatives to

their plans and a spending target for the added dollars consumers spend for

higher-cost options. If out-of-pocket premiums exceeded the target, it could

trigger a series of measures by federal and state authorities, ranging from

advisory recommendations to strict regulatory controls, or even decertification

of the purchasing cooperative's board, depending on the cause and severity of

the problem.

Of course, channelling all employer-paid insurance through the cooperatives

would be a radical break from employer-provided insurance. While many employers

are ready to give up control of health benefits, others are still

convinced--despite years of failure--that they can hold down costs. Moreover,

although there is much opposition to price controls, there is also a lot of

skepticism among policy experts about whether managed competition can actually

deliver the savings it promises.


SAVINGS FROM MANAGED COMPETITION

The term "managed competition" is easily misunderstood because of its

similarity to "managed care." A managed care plan is a health

insurance plan that attempts to control cost or improve quality through some

selection of providers or regulation of treatment decisions. In its current use,

managed care embraces HMOs and fee-for-service arrangements. (Most people in

managed care today are, in fact, in the latter.)

Managed competition, by contrast, refers to a framework of consumer choice

among alternative health plans, not all of which need be managed care. To be

sure, managed competition would promote managed care, but it would also change

it and, perhaps more important, managed competition would change the environment

in which managed care develops.

The confusion of managed competition and managed care is evident in efforts to

evaluate the future impact of managed competition by estimating the past effects

of managed care. Some forms of managed care--HMOs based on group practice--have

proven economies, but the evidence on other managed care plans is inconclusive

about whether there are real economies (or just less access). Hence, some say,

managed care alone will not adequately control costs--and they may well be

right.

Managed competition's impact on costs, however, derives from several distinct

elements. To be sure, managed competition would require consumers to pay extra

for more expensive health plans. Advocates would also limit the exclusion from

taxable income of employers' health insurance contributions to an amount no

greater than the premium of the low-cost plan. As a result, consumers would have

to use after-tax dollars to purchase plans with higher premiums. That should

make consumers more cost-conscious and more likely to choose a less costly,

managed care alternative.

Furthermore, the purchasing cooperatives will open up HMOs to new enrollees and

alter the incentives facing the health plans. Under the current employment-based

system, millions of potential subscribers to HMOs are effectively bottled up in

employee groups that do not have such options. Even employers that offer

alternative plans today virtually never require the plans to offer the same

benefit package, nor do they limit their contributions to the low-cost plan or

risk-adjust premium payments. Employers' current policies encourage plans to try

to enroll the most favorable risks, to expand benefits rather than cut premiums,

and to keep their premium rates right behind the high-cost options. Managed

competition would drastically alter these incentives, simultaneously focusing

consumer attention on relative prices and measures of performance like

satisfaction and health care outcomes.

But, unlike some other advocates of this approach, I do not see individual

cost- and quality-consciousness as the decisive element. By combining

individuals and employee groups into large purchasing cooperatives, managed

competition creates a powerful, knowledgeable countervailing force on the demand

side of the market. Health care has historically been characterized by strong

providers and weak purchasers. Managed competition equalizes the

relationship--indeed, the purchasing cooperatives will have an unprecedented

capacity to restrain costs.

Moreover, the system will not only concentrate buying power, but also produce a

rapid consolidation of the insurance industry. For while the purchasing

cooperatives increase the array of choices available to most consumers, they

will reduce the total number of health insurance plans operating in a region.

The federal requirements that the plans offer open enrollment and community

rating will make survival difficult for small insurers that have flourished by "cherry-picking"

healthy subscriber groups. In addition, the purchasing cooperatives should

consolidate fee-for-service into a single, competitively bid insurance plan.

Under these policies, a mature market in a metropolitan area will be unlikely to

have more than a dozen plans.

Currently, there are over 1,000 health insurance companies, some of which offer

thousands of different plans. The result is a bureaucratic nightmare, not just

for patients befuddled by complex forms, but for doctors and hospitals that must

deal with myriad different policies and coverage limitations. The purchasing

cooperative will drastically reduce this administrative complexity and thereby

cut paperwork for providers. The same effect will follow from managed

competition's standard benefit package and from the ability of the purchasing

cooperative to impose other standardization requirements facilitating electronic

claims and payment systems.

Besides cutting overhead for providers, the purchasing cooperatives will reduce

the administrative costs of insurance itself. A large proportion of insurance

premiums now goes to insurance administration, particularly for small groups--40

cents of every premium dollar for the individually insured and groups with fewer

than five workers; 25 cents of every premium dollar paid by firms with 25 to 49

workers. That amount falls to below 5 cents for the largest firms. With their

large economies of scale, the cooperatives will sharply cut overhead in the

small-group market.

Like other plans for universal coverage, managed competition generates other

savings, too. Today, many on welfare are reluctant to take the low-wage jobs

available to them because they have no health insurance benefits; one study from

the National Bureau of Economic Research estimates a one-fourth reduction in

welfare caseloads from universal health coverage. In recent surveys, three out

of ten adults say someone in their household has not moved jobs because a

pre-existing medical condition might jeopardize health coverage at a new firm.

By eliminating such restrictions, universal insurance encourages job mobility

and greater productivity.

I mention these indirect as well as direct benefits of universal coverage in

part because there is a tendency to think only of the costs of covering the

uninsured and, therefore, to believe that postponing reform saves money. But

delay also means prolonging the inefficiencies of the current system and its

harm to the economy. A complete accounting of reform would, I believe, show the

balance to be strongly positive.


FINANCING UNIVERSAL COVERAGE

But, surely, even if reform produces broad economic benefits, won't it demand

large increases in government spending on health care? The answer, I believe, is

not necessarily--not in relation to the more than $800 billion in current

national health expenditures. How much a new program adds to that spending

depends in part on whether we are able to recapture the savings from reform and

apply them to expanded coverage.

One advantage of managed competition is that it does not require the federal

government to raise most of the revenue for health care. Reform, after all,

should not try to make health insurance free; it should make it affordable. The

purchasing cooperatives can set a community-rated premium for their region; the

role of the federal government (and the states) can then be limited to

subsidizing the participation of low-income people and low-wage employers. The

cost of these subsidies can be offset by other measures, such as changes in the

tax treatment of employer premium contributions.

Consider the following possibility. Employers would pay a minimum of 75 percent

of the purchasing cooperative's standard premium (based on the low-cost plan),

up to a limit of 7 percent of payroll. Employees would pay the remaining 25

percent of the premium, up to a limit of 2 percent of family income. The self-

employed, unemployed, and others outside the labor force would pay little or

nothing if their incomes were below poverty, but otherwise they would be

responsible for paying the premium up to 9 percent of their income over the

poverty line. (Today the poverty line is about $14,000 a year for a family of

four. Hence a family with $20,000 in income but no employer contribution would

pay 9 percent on $6,000, or $540, which works out to $45 a month.) Part-time

workers would be treated as self-employed, except that employers would have to

pay a 7 percent payroll tax on part-time wages to avoid creating any bias toward

part-time work.

Lewin-VHI, a consulting firm that has provided major national organizations

with estimates of the costs of health care reform proposals, has estimated that

if we were to cap premium obligations as I've described, new government revenues

required for universal coverage would be approximately $53 billion in 1993.

(This assumes a somewhat broader benefit package than a federally qualified HMO,

no deductible, and a $10 copay on physician visits; the required subsidies would

fall to $42 billion with the less generous package in the Senate leadership's

play-or-pay proposal.) Of this amount, however, $13 billion would consist of

payments to hospitals for services to the uninsured that are now covered by

shifting the costs to privately insured patients; $25.7 billion would consist of

higher reimbursement rates for services now being given to Medicaid

beneficiaries.

Remember also that the purchasing cooperatives will cut overhead for providers

and insurers. (Lewin-VHI puts the savings to insurers at $11.2 billion.) Thus,

absent other measures, providers and insurers would reap windfall gains from

reform. Competition should force providers and insurers to return those

windfalls to consumers. But Congress could justifiably recapture some of those

savings through taxes on providers and insurance transactions and apply them to

coverage of the uninsured. Along with the limit on the tax exclusion of

employers' contributions--worth between $10 billion and $25 billion, depending

on where it is set--the package as a whole can be constructed to impose minimal

demands on the federal budget.

This is not to say there would be no new costs to anyone: Both employers who do

not offer health benefits and individuals who now have no coverage would be

required to pay for health insurance. The value of the tax exclusion of

employer-paid premiums would fall. Small insurers would leave the market. But

premiums would go down for employers who now pay more than 7 percent of payroll

and for the individually insured who pay more than 9 percent of over-poverty

income. While currently uninsured small employers will undoubtedly resist a

mandate, many other employers stand to gain from a 7 (or even 8) percent limit

and from federal controls over the rate of spending growth. Properly

constructed, a managed-competition program will enjoy a lot of business support.


MAKING THE SYSTEM PROGRESSIVE

Yet there are dangers. Some proposals for reform being described today as

managed competition are actually proposals for managed care with no management

of competition. Typically, these proposals do not call for an independent body

like the purchasing cooperative to conduct the enrollment process, negotiate and

enforce the contracts, risk-adjust payments to plans, or inform consumers and

serve as their advocate. Yet without these (and other) protections, health plans

will sign up the healthy and shun the sick, and the market, far from producing

more efficient care, will generate less care for those who need it most.

Consumer and labor organizations, as well as many others, ought to find such

proposals unacceptable. But rather than oppose managed competition altogether,

they could help make it serve progressive purposes. In addition to global caps

and universal coverage, they should insist on a strong consumer-oriented role

for the purchasing cooperatives, including a special emphasis on their

responsibility for assuring care to the most vulnerable populations. In their

contracts with health plans, for example, the cooperatives may need to include

requirements that they establish clinics or affiliate with providers in

low-income areas. For poverty-level enrollees in the purchasing cooperatives,

the price differentials among plans should be reduced to enable them to choose

alternatives beyond the low-cost plan. In addition to its general surveys of

consumer opinion, the purchasing cooperative should specifically survey people

who switch plans to identify sources of dissatisfaction as well as patients with

chronic and high-cost conditions to determine whether they are being adequately

served. The results should be published to help consumers choose plans and

should be used to force plans to improve their performance and to guide future

contract negotiations. The purchasing cooperatives themselves should be

evaluated for their performance in responding to consumer complaints and making

sure consumers, particularly the poor, have access to the services that they are

entitled to receive.

Another key issue for consumer groups should be the standard benefit package.

If health plans can vary the benefit package, they will avoid including benefits

that are known to attract higher-than-average cost subscribers. This is

particularly a problem for mental health services and treatment for alcoholism

and drug dependency. A major complaint about managed care today is inadequate

mental health coverage. Those inadequacies arise not just because plans resist

paying for mental health services, but because they know that good mental health

coverage will attract bad health risks. (People who use mental health services

use other medical services more, too.) The only way to avoid this problem is to

make sure that all health plans are required to maintain the same level of

coverage and are evaluated for their quality of service.

Some policy makers talk about a "basic" or "minimum"

package as a standard. But what plan will provide extra coverage of services

known to attract high-cost groups? Comprehensiveness of coverage is essential to

achieve comprehensiveness of cost control; genuine cost containment comes not

from excluding benefits and cost-shifting back to patients, but from requiring

health plans to produce services more efficiently. To be sure, by "comprehensive"

I don't mean covering everything, but the package must be a mainstream standard,

acceptable to the great majority, not a step down for those currently insured.

As consumer and labor groups recognize, the transition to a universal system

cannot happen overnight, but they should resist any effort to postpone

committing the nation to a schedule for introducing universal coverage. Concern

about rising costs has so intensified that some who otherwise would support

universal coverage now say, "Cost containment first, expanded coverage

later." That has been the refrain for the past twenty years. But if not

universal coverage now, when?

Of course, a universal insurance program that merely expands the present system

will add to costs. But a universal program can also provide the institutional

mechanisms and--perhaps more important--the moral foundation to bring spending

under control. This is partly a matter of moral and political psychology.

Relieving the public insecurity about health coverage is essential to gaining

the confidence and support necessary for reforms not all of which can be

entirely popular. Everyone recognizes cost containment is essential;
nonetheless, it will win few friends and, at the end of the day, little applause. The friends to be won with universal coverage, on the other hand, are many--and their commitment is passionate. Spending control, therefore, lies on the other side of the gate of universal insurance. And, unexpectedly, managed competition under a cap is emerging as the most likely way to get us there.



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