The Pragmatic Road Toward National Health Insurance

America's health insurance system has few defenders, many critics, and no shortage of proposals for reform. Business and labor, the nation's governors, religious leaders, advocates for children and the elderly, and the public at large share a sense that major changes are necessary and inevitable. Political leaders such as Senate Majority Leader George Mitchell and House Majority Leader Richard Gephardt rank health care reform high among domestic priorities. Even the House Minority Leader, Newt Gingrich, has begun to focus on the shortcomings of our health insurance system. The challenge now is to develop a plan for comprehensive reform that has broad enough support to prevail over well-financed, deeply entrenched groups with an interest in the present system.

Advocates of system-wide reform have focused on two basic approaches. Under a "single-payer" system of national health insurance, such as Canada's national program, the government finances health care, while private physicians and hospitals provide it. The chief alternative is a system of universal coverage with cost controls that builds upon our existing employer-based health insurance by requiring businesses either to provide coverage or to pay the government to insure their employees. Known as "pay-or-play" models, these approaches envisage an expanded public program for current Medicare and Medicaid beneficiaries, the unemployed, and employees of companies that decide to "pay" into the public system instead of "playing" by providing insurance on their own.

Both roads to national health insurance would achieve the goal of universal coverage. Both could achieve the goals of controlling health care costs, reducing financial insecurity, improving the quality of health services, and ultimately better protecting the public's health. We believe, however, that while the Canadian model is preferable as policy, the only politically feasible alternative is the pay-or-play approach that builds on our current employer-provided coverage. This is the model used by Democratic congressional leaders who are pursuing major national health reform. If advocates for reform wish to play a role, they need to address the key issues raised by such an approach.

The Emerging Reform Consensus

Skyrocketing health care costs are creating a crisis of affordability for virtually all sectors of our society. From 1980 to 1990, per-capita health spending in the United States more than doubled, from $1,016 to $2,425, and is expected to more than double again by the decade's end, reaching $5,515.

How this increase affects business is well captured by one pair of statistics. In 1965 health expenses were only 14 percent of net profits; now corporations are spending as much on health benefits as they make in profits. Between 1977 and 1987, employers' average real premiums for health insurance rose 49 percent. Frustrated by the failure of cost controls, business leaders are increasingly willing to abandon their ideological predispositions and accept the need for government involvement in system-wide solutions. According to a recent Gallup poll, 91 percent of chief executive officers of the nation's biggest companies now believe the health care system needs fundamental change or complete rebuilding. Three-quarters are convinced the problems cannot be solved by companies on their own.

If big business is frustrated by its inability to control the costs of insurance, many small businesses are frustrated by their inability to get insurance coverage at all. A small business in one of many red-lined industries, or a firm whose employees are perceived by insurers to be high risks, can find it impossible to obtain insurance at any price. If insurance is available, the premiums for a small group are likely to be high, and to rise rapidly, because of the administrative costs of small-group policies and the rating practices of the insurance industry. Insurers are no longer willing to spread the cost of serving small groups across the wider community they serve.

State and local governments, too, find themselves overwhelmed by the problems of health care finance. As employers, state governments experience the same growth rates for health benefits as all employers face. The states also now must share the costs of federally mandated policy initiatives that have expanded access to health care without systemic reform.

Labor, like business and the states, must now devote increasing energy to worrying about health care. Unions now are struggling just to maintain the health benefits they won previously. Many workers have had to sacrifice wage increases to fund health premium increases; some have been forced to strike to defend their insurance plans. Not surprisingly, health care reform is a top legislative priority for the AFL-CIO, which has launched an unprecedented campaign to educate its rank and file on the issue.

By cutting into their real wages and raising their taxes, the costs of health care are indirectly eroding the standard of living for many Americans. Those with insurance, whether buying it on their own or getting coverage through their job, are paying ever increasing premiums, deductibles, and copayments.

And, of course, millions of Americans remain uninsured. Between 1980 and 1989, according to one estimate, the number of Americans without any health insurance increased from 25 million to 34 million. During the 28-month period ending May 1987, more than one out of every four Americans, or an estimated 63 million people, lacked health insurance for a month or more. Another 20 million non-elderly Americans are underinsuredat risk of spending more than 10 percent of their incomes on health care. If the elderly were included, and costs of long-term care counted, the number would go much higher.

The breadth of interests hurt by America's health cost explosion is producing a surge of political activity across the country. In almost forty states, health care reform coalitions have taken shape. At least sixteen states are formally considering major, state-level health insurance reform. And at the national level, a dozen members of Congress are promoting national health care reform proposals.

Two Choices

For most progressive policy analysts, the Canadian system offers an extremely appealing model for reform. The system is simple in design and highly popular in Canada; it delivers services efficiently and has a proven record meeting the needs of a nation similar to ours.

The advantages of the Canadian system are by now well known: universal coverage at a cost to the society significantly lower than that of America's more fragmented and partial system. When receiving care, Canadians simply present their national health insurance cards to doctors, who bill their provincial governments; the provinces fund hospitals directly under set budgets. Canada's federal government, drawing on general revenues, pays about half the cost of services; the provinces pay the other half, the exact source of revenue varying from one province to another. Each province is responsible for defining the exact terms of its insurance plan. But because federal law requires a comprehensive minimum benefit package and bars the provinces from allowing any extra billing by providers, Canadians do not face significant out-of-pocket costs for health care.

To keep control of expenditures, provincial governments in Canada negotiate budgets with hospitals and fee schedules with organizations representing physicians. The system sharply cuts administrative overhead. With only one payer of health care in each province, rather than America's 1,500 insurance companies, administrative costs as a percentage of health care spending are half in Canada what they are in the United States.

In contrast to the Canadian model, a pay-or-play approach would guarantee all Americans health insurance with a specified benefit package through their employers or a publicly administered program. Employers could buy either private insurance that met federal specifications, which would include limits on the employees' share of costs, or pay for their employees' coverage through the public program.

Thus far, two pay-or-play plans have received the most attention: legislation enacted but not yet implemented in Massachusetts and a proposal advanced by the U.S. Bipartisan Commission on Comprehensive Health Care, known as the Pepper Commission. Neither plan, however, included sufficient systemic reforms designed to contain costs. Unfortunately, the two constituencies most active in support of cost controls -- business and labor -- were not strongly represented in the Massachusetts and Pepper Commission debates, while the representatives of hospitals and doctors played a very active role. In principle, however, effective cost containment is not incompatible with the pay-or-play approach. Indeed, as business and labor participate more actively, future pay-or-play approaches will inevitably contain stronger, comprehensive measures to restrain costs.

A pay-or-play system can achieve as much savings in provider payments as a Canadian-style program. To do so, government or a public-private body would set prices applicable for all payers, including private insurance companies and the government. This approach, known as all-payer regulation, would keep prices in line with overall inflation and prevent hospitals, doctors, and other providers from shifting costs from one payer to another. Federal regulations would also prevent cost-shifting to individuals by prohibiting providers from charging patients more than the set rate. And the program would introduce regulatory measures to ensure that providers did not inflate the volume of services to make up for lower prices.

Two of the major alternatives for controlling costs involve "expenditure targets" and "global budgeting." Under both approaches, the federal government would apportion a national health budget among the states, setting targets or ceilings for expenditures. If expenditure targets were set, the states would establish reimbursement rates for providers designed to keep expenditures within the predetermined target. If the target were exceeded in any year, rates would be held down in the subsequent year to make up for that excess, a system similar to that used by some Canadian provinces for dealing with physician costs. If such a process targeted health inflation at two percentage points below the rate currently projected for this decade, an estimated $246 billion would be saved in the year 2000, even after universal coverage was guaranteed through the pay-or-play system.

Alternatively, costs could be constrained, probably more effectively, through the use of negotiated global budgets with providers, similar to the method that Canada uses to control hospital costs and that some Canadian provinces use to set limits on physician expenditures. Under this approach, the federal government and the states would negotiate fixed ceilings on total expenditures, and the prices paid to providers would vary depending on the total fund available and the total volume of services provided. This method of cost containment can be carried out under either a pay-or-play program with all-payer rate regulation or a Canadian-style, single-payer system. The German health care system, with multiple payers, expenditure targets set at the federal level, and global budgets for physicians established at the state level, had the best record in the 1980s of keeping health spending parallel to increases in national income.

Since the pay-or-play model allows for multiple payers, it is less likely to achieve the same level of administrative savings as the Canadian approach. But significant administrative economies would be achieved if pay-or-play incorporated a variety of insurance reforms.

Much of the administrative overhead of hospitals and physician offices stems from the need to fill out hundreds of different claims forms from different companies. Insurance firms incur major costs, particularly for small groups, as a result of their attempts to screen out risky individuals through health examinations and to establish premiums for each group based on its prior health experience (so-called "experience rating"). If national reform required uniform payment rates and billing procedures, it would cut administrative burdens for doctors and hospitals. And if national reform required insurers to offer policies to all groups and to offer them the same price, insurers' administrative costs would decline as well.

Although a pay-or-play system with cost controls is inherently more complex than a Canadian-style system and produces less administrative economy, this approach has the political advantage of requiring far less money to be raised in new taxes, thereby making it easier to enact. The political obstacles hindering either approach are very formidable, but the barriers are considerably higher for the Canadian approach.

Obstacles to Reform

Historically, major social reforms have required presidential leadership for enactment. President Roosevelt proposed and fought for the enactment of Social Security. Presidents John F. Kennedy and Lyndon B. Johnson provided effective leadership for the passage of Medicare and Medicaid. No such helpful leadership can be expected from the current occupant of the White House.

George Bush is politically and ideologically opposed to health care reform. As several of his appointees have admitted, the president wants to keep the issue of health care out of the 1992 election. Ideologically, he is opposed to any approach to health care that relies on government. His spokesman in this area, Secretary of Health and Human Services Louis Sullivan, has explicitly rejected comprehensive approaches to reform in favor of greater individual responsibility for health care costs. Administration health care proposals have been limited to paltry initiatives for the poor, rhetoric about competition, and the control of malpractice liability insurance costs -- the side of the issue that most affects physicians.

Those with financial interests in the current system are clearly committed to resisting any change that potentially jeopardizes their incomes. These groups fall into three categories: direct providers of care, such as doctors and hospitals; the insurance industry, which would no longer be able to sell health insurance under a Canadian approach; and employers who do not currently provide health insurance and do not wish to bear the cost in the future.

The greatest fear of the American Medical Association (AMA) and the American Hospital Association (AHA) is government regulation of health care prices. Physicians and hospitals have done well financially under our current private system. Average physician incomes -- $140,000 in 1989 -- increased 7.1 percent per year between 1981 and 1988, compared to average earnings increases of 4.1 percent. Recently, providers have been treated less generously by Medicare, but they have been able to make up for those losses by shifting additional costs to other payers. Comprehensive reform would block this gambit.

To divert attention from cost containment, both the AMA and AHA have launched public relations efforts in support of universal coverage, in part through new proposals requiring employers to provide insurance. Mandating additional coverage, of course, would mean additional revenue for providers. But they have been unwilling to couple employer mandates with meaningful cost containment. Since it is not feasible to cover the uninsured without system-wide cost controls, the providers' gestures in favor of universal coverage achieve little more than public relations rhetoric and political stalemate.

Theoretically, the small business community should at least be divided over health care reform. Small businesses that provide insurance, like large corporations, have an interest in keeping down health costs. In fact, the interest of small business in health reform should be even greater than that of big business. Since they are not large enough to self-insure or to negotiate discounts with providers, small firms are totally at the mercy of the private insurers and have been subjected to arbitrary and exclusionary practices. To date, however, organizations representing small business have remained united in their view that small businesses must retain the right not to offer insurance. As a result, the only significant part played by small business has been to oppose universal health coverage.

Additional Barriers to the Canadian Approach

If health care reform requires transferring private insurance costs to the government, it faces major, probably insuperable difficulties. First and foremost, it requires additional taxation amounting to hundreds of billions of dollars per year. In an era of fiscal frugality and pledges of "no new taxes," it strains political credulity that even the more liberal members of Congress would vote for new taxes of such a magnitude. During the fight over the federal budget in 1990, Congress sought to cut the deficit by $500 billion over five years. Of that amount, only $150 billion, or $30 billion per year, was gained through new taxes. Even though this budget package had the support of the president, it passed narrowly largely because of House members' reluctance to vote for taxes immediately before an election.

The controversial $30 billion annual tax rise in the 1990 budget would be dwarfed by the new taxes needed to enact Canadian-style health care reform. Counting out-of-pocket expenses as well as health insurance premiums, the private sector is currently spending approximately $450 billion on health care. A Canadian-style system would require raising those amounts as new federal taxes. Although a Canadian-style system could achieve significant savings in overall health care costs and administration, the $450 billion estimate is conservative because it fails to include the additional costs in real dollars that would be added during the years intervening between now and total overhaul of our health financing system. Such a $450 billion tax increase would increase total federal taxation by more than 40 percent. Well-financed opponents of health care reform would have a public relations field day denouncing this unprecedented tax increase throughout the media. According to public opinion surveys, the public is unwilling to pay more than a modest tax increase for a universal health plan. Hence, even the most ardent and liberal supporters of health care reform -- Senators Kennedy, Jay Rockefeller and Donald Riegle; Senate Majority Leader Mitchell; House Majority Leader Gephardt; Congressmen Henry Waxman and "Pete" Starkhave indicated that the Canadian solution is politically impractical.

In defense of the massive rise in taxes, adherents of Canadian-style reform argue that the additional taxes are not new expenditures; they merely replace somewhat higher private sector health care costs. This argument is correct. But this does not mean that everyone would experience no new costs. With over $450 billion to reallocate, any apportionment of the resulting new financing burdens and benefits would result in many losers as well as winners. Many people with good health care coverage now could easily end up paying sizeable new taxes with no additional health benefits and no guarantee of compensating wage increases.

The net losers would add to the political opposition of Canadian-style reform. But just as significantly, vast numbers of the net winners -- especially once barraged by heavily-financed media campaigns of the insurance industry, the AMA, and others -- would not believe that their large, new tax burdens made them better off than they are today. Most national health insurance systems were put in place in other countries before private health insurance was widespread. As shown by the recent taxpayer revolt against the Catastrophic Health Care legislation, it is hard to convince the privately insured that they are better off paying such large increased taxes for coverage through a governmental program. An immediate taxpayer revolt against comprehensive health care reform would probably be inevitable.

National opinion surveys reveal public ambivalence, at best, about a government-run health insurance program. Studies by Robert Blendon show that among Americans who favor system-wide reform, there is deep division about the choice of a government, single-payer system over a public-private financing mix. According to a recent survey by the Robert Wood Johnson Foundation, an overwhelming majority of top U.S. executives are unwilling even to consider the creation of a completely government-financed health care system. Alternatively, a majority are willing to consider employer mandates and all-payer rate-setting.

While many business leaders are now willing to concede that the private sector alone cannot solve our health care crisis, they are, with very few exceptions, opposed to ceding control to the government. A growing number in large corporations are prepared to support a pay-or-play approach if it includes meaningful cost controls. But these same potential allies for comprehensive reform find a Canadian-style approach ideologically, or otherwise, repugnant.

The insurance industry clearly cannot accept a Canadian-style program, which at most would give them a minor role in financial administration. Since the industry is among the most powerful lobbies in Washington and one of the largest contributors to election campaigns, its opposition to such a program is no minor matter. The industry is not, however, directly threatened by reform that preserves employer-provided private insurance. Although the insurers would strongly resist regulation, they are unlikely to fight with the same fervor as if their very existence were at stake.

Will Holding Out for the Best Hold Up the Possible?

The Canadian model has much promise for this country. But in the history of social reform, advocates for change have missed many opportunities for constructive progress by holding out for an "ideal" solution. Near the end of the Nixon administration in 1974, both Republicans and Democrats were backing national health insurance plans. President Nixon had introduced a proposal that required employers to provide health insurance. Senator Edward Kennedy teamed up with Wilbur Mills, chairman of the House Ways and Means Committee, to offer a considerably more comprehensive plan. Progress was scuttled, however, when organized labor opposed the Kennedy-Mills compromise in the expectation that the post-Watergate elections would produce a veto-proof majority for national health insurance. The Democrats did pick up many more House and Senate seats in 1974, but this did not translate into the necessary increased support for national health insurance; nor did winning the presidency in 1976.

Will history repeat itself? It is too early to tell. But because some reformers will accept nothing less than the Canadian model, advocates of change have so far been unable to unite behind an approach that can win congressional approval. As a result, George Bush and the special interests have been able to keep comprehensive health care reform off the Congressional agenda.

Holding out for the Canadian approach leaves the key pay-or-play policy issues in the hands of the provider and insurance lobbies. Those crucial issues include the presence or absence of effective cost containment measures, the scope of mandated benefits, and the details of private insurance reform. Disengagement on these issues by the advocates of comprehensive reform could weaken the legislation that ultimately passes.

The magnitude of the current crisis creates a historic opportunity to assemble a broad-based coalition for comprehensive reform. Only if the constituencies for reform unite will the Democratic party be capable of taking the issue into the 1992 elections and putting President Bush in the position where he has to respond with an initiative. This is the dynamic that can put health care reform at the top of the agenda for the next Congress.

Despite the appeal of the Canadian system, a plan based on a pay-or-play system has the best chance to win the broadest support and overcome the most difficult obstacles. By building upon our current system, pay-or-play is more ideologically acceptable. It does not require vast tax increases. It already has a base of support among business, labor, and consumer groups and in Congress. It can be designed to include significant subsidies for small, low-wage businesses, thereby potentially dividing their opposition. And it maintains a role for private insurance, thereby preventing a full-scale attack by insurers.

According to the Pepper Commission, the federal price tag for this kind of system is an estimated $24-$30 billion per year for acute care, plus approximately $44 billion if long-term care were added. The governmental costs are so vastly lower than under the Canadian model because most health insurance would still be financed by employers and much of the cost of new coverage would be borne by employers not now providing coverage.

The new federal funds could be raised largely from excess Social Security reserves. In 1996 the Social Security trust fund will have reserves sufficient to pay eighteen months of benefits, a reserve level deemed sufficient even by conservative Social Security actuaries. Yet, in that year, $56 billion in reserves above the eighteen-month payout level will be collected. This extra reserve is roughly equivalent to 1 percent of payroll taxes for employers and employees. If this 1 percent in payroll taxes were shifted to health care, universal health insurance on a pay-or-play model could mostly be financed without adding new taxes. (Such a shift in Social Security financing, however, would require increased payroll taxes beginning around 2010 to help finance benefits for baby boomers.)

The National Leadership Coalition for Health Care Reform provides an example of the breadth of support possible for such a pay-or-play system. In the past year, the coalition has been discussing a pay-or-play approach to universal access with cost controls. This is a coalition of some of the largest corporations (including Chrysler, Ford, ARCO, General Electric, Xerox, Eastman Kodak, and AT&T), labor unions, consumer groups, and some health professionals (the American College of Physicians, the American Academy of Pediatrics, and the American Nurses Association). Former Presidents Jimmy Carter and Gerald Ford serve as the coalition's honorary co-chairs. Former Iowa Governor Robert Ray and former Florida Congressman Paul Rogers co-chair the coalition.

Although the coalition has not yet adopted a plan, it has focused on a pay-or-play approach designed to achieve universal access with meaningful cost containment. Once a plan is agreed to, the coalition plans to promote it in a major public education campaign. The coalition ultimately could become the nucleus of a broad campaign for comprehensive health care reform.

From Pay-or-Play to National Health Insurance

Two key design features of a pay-or-play system can lead the nation toward national health insurance. To be sure, private insurers will vigorously oppose these features, but it is important for reform advocates to use the opportunity to move the system as far in their desired direction as possible.

The first key design feature is the incentive that is established for paying or playing. Employers will decide whether or not to participate in the public program based on the cost of private insurance ("playing") compared with the cost of paying the government for employee coverage. The lower the cost of "paying," the larger the public program will be. If the public program gains a greater market share and uses that market share to achieve further economies of scale, the public program will grow even faster.

Setting the cost for "paying" is, therefore, an important policy decision. If set to encourage use of the public program, the country will be farther down the road toward a national health insurance system. A relatively low "pay" level would have the further possibility of reducing small business opposition to health reform by making the "pay" option considerably cheaper than current private insurance costs. Conversely, a high "pay" level would engender greater small business opposition and would retard the movement to national health insurance. Increased participation in the public program will, of course, require increased taxpayer support. Increasing taxpayer support over time for comprehensive health care will be easier to achieve than transferring the full cost of national health insurance to the treasury in one fell swoop.

The second key design feature of a pay-or-play system that could lead toward national health insurance involves private insurance reform. In recent years, insurance companies have competed not by managing care, reducing administrative overhead, or achieving other efficiencies. Rather, the insurance industry increasingly has tried to hold down costs by red-lining risky persons, such as those with pre-existing medical conditions and workers in hazardous occupations.

The road toward national health insurance will be smoother and shorter if private and public insurance can compete on an even footing. Private insurance companies must not be allowed to deny coverage to higher risk people, to charge more expensive premiums for such people, or to market selectively to healthier groups. If they are allowed to continue these invidious practices, the public program would have to absorb the costliest cases and, hence, could not compete with the private sector.

Many large insurers already see that their future lies in managed care and have little interest in the traditional insurance market. This kind of reform would most likely result in the departure of small insurers from the health insurance business; the remaining large insurers would probably compete on the basis of then-managed care plans, which rely on efforts to monitor the use of health care services and direct subscribers and providers toward less costly choices. If insurers cannot offer attractive managed care plans, private insurance will not be able to compete successfully with the public plan that employers will have available.

Placed on an even footing, the public sector could offer health care very competitively. Through administrative economies of scale, with no profits, agents' fees, or advertising, the public sector could offer comparable health care coverage at lower prices. As more people chose the public program, the country would travel further toward national health insurance.

A play-or-pay system with cost controls offers an important opportunity to guarantee every American comprehensive health benefits, to establish uniform rates for all payers, and to bring costs under control. And, if this pay-or-play system were designed to let the public program grow, the role of private insurance would diminish. This is the politically achievable road toward national health insurance.