Financing Reform

Many steps proposed to improve access can be expected to add significant new financial burdens for employers, governments, and some individuals (e.g., those who moved from low-risk insurance pools to average-risk pools). Whether the nation will accept such burdens and how they will be distributed are clearly political decisions. As this report is being drafted, it is not clear that policymakers will feel they have sufficient popular support for the increased taxes that the committee expects will be necessary to protect more individuals against the financial consequences of ill health. Certainly, financing policies will be influenced by many considerations other than the equity, efficiency, and similar arguments identified in summary form by the committee. Again, this discussion does not constitute an IOM proposal for financing health care reform but rather is an attempt to identify issues and options.

Broad options for financing improved access for the uninsured and underinsured include:

  • reducing expenditures on current health programs and services,

  • increasing the productivity of the health care system,

  • shifting resources from other areas of public spending, and

  • increasing revenues from income, payroll, or other taxes or from individual insurance premium contributions.

These options are not necessarily mutually exclusive, and a combination of them is likely to be necessary. For instance, reductions in wasteful and excessive administrative spending could be expected to



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Assessing Health Care Reform Financing Reform Many steps proposed to improve access can be expected to add significant new financial burdens for employers, governments, and some individuals (e.g., those who moved from low-risk insurance pools to average-risk pools). Whether the nation will accept such burdens and how they will be distributed are clearly political decisions. As this report is being drafted, it is not clear that policymakers will feel they have sufficient popular support for the increased taxes that the committee expects will be necessary to protect more individuals against the financial consequences of ill health. Certainly, financing policies will be influenced by many considerations other than the equity, efficiency, and similar arguments identified in summary form by the committee. Again, this discussion does not constitute an IOM proposal for financing health care reform but rather is an attempt to identify issues and options. Broad options for financing improved access for the uninsured and underinsured include: reducing expenditures on current health programs and services, increasing the productivity of the health care system, shifting resources from other areas of public spending, and increasing revenues from income, payroll, or other taxes or from individual insurance premium contributions. These options are not necessarily mutually exclusive, and a combination of them is likely to be necessary. For instance, reductions in wasteful and excessive administrative spending could be expected to

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Assessing Health Care Reform increase productivity as practitioners, managers, and others spend less time on paperwork and more time on patients. To cite another example, if some of the employer contribution to health insurance were treated as taxable individual income (as recommended earlier in this report), tax revenues would increase, although estimates of this increase vary depending on the assumptions about employer and employee responses. One desired effect of the change in tax policy is to reduce demand for generous health coverage, which would be expected, in turn, to reduce health services utilization and expenditures. The stronger this response, however, the less revenue might be expected from the tax cap, although that decrease would be offset to the extent that employers matched reduced health spending with higher wages as some economists would predict.3 In principle, the first step—cutting spending—may be achieved in many ways. The committee believes, however, that it is unrealistic to expect such good performance in reducing spending that all the costs of extending coverage could be offset, particularly in the short run. Given the great expansion in the share of national resources consumed by health care spending, it is also both unwise and unrealistic to argue that the nation can continue to draw resources away from other social objectives to the same degree it has in the past. As a consequence, health care reform is likely to further burden financing arrangements that, in their current form, are often inequitable, inefficient, and poorly measured. For example, uncompensated care and underpayments by some public and private purchasers encourage crisis-oriented medical care, not prevention or timely therapeutic care, and they undermine the institutions that serve poor and vulnerable groups. Moreover, they increase costs for individuals and groups that lack the 3   Tax caps are sometimes loosely grouped with several other kinds of financing strategies under the concept of means testing, whereby access to benefits is confined to certain categories of individuals (e.g., single mothers and their children) of limited means (i.e., income and assets). Medicaid is a classic example of a means-tested program. Although some have proposed that access to Medicare benefits should also be means-tested, more common—but still controversial—are proposals to link the beneficiary's share of the Part B premium (about 25 percent of the total) to income or to treat some of the government contribution to the Part B premium as taxable income.

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Assessing Health Care Reform political and economic leverage to protect themselves (IOM, 1993b). Many employers point out that their coverage of spouses subsidizes employers that do not offer coverage, and that cost-shifting associated with uncompensated care adds to this subsidy. To cite another example, the disparity in tax treatment of premiums for employed and self-employed individuals is inequitable and penalizes the self-employed. It may thereby promote overinsurance by the former and underinsurance by the latter. Reform proposals should move the health care system toward more broad-based, efficient, equitable, and ''observable'' financing arrangements. They should be grounded in realistic estimates of expected expenditures and revenues and their distribution across population groups. Ad hoc efforts to compensate for overly optimistic forecasts tend to undermine program credibility and disrupt program stability. Likewise, inadequate recognition of how a proposal may affect different groups can create a "backlash," although the committee also recognizes that clarity about how burdens and benefits may be redistributed can compromise a proposal's chance of passage. The committee suggests that the projections of revenues and expenditures be subjected to review and audit by independent, nongovernmental sources. To aid assessments of reform proposals, the committee recommends that proposals for health care reform should explicitly: Describe anticipated sources of financing (e.g., income taxes, payroll taxes, "sin" taxes, or a "tax cap" on employer-paid health benefits that can be excluded from personal income tax). The description should include estimates of revenues expected from each source (for multiple years) and the distribution of the financing burden across different income and other relevant groups. Identify the expected level, distribution, and timing of savings expected from administrative reforms, cost containment strategies, infrastructure changes, and other provisions. Estimate the level and distribution of public and private expenditures (including tax expenditures) needed to implement the reform proposal over a period of several years.

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Assessing Health Care Reform State the assumptions, models, data, and similar elements used in developing the above estimates. Describe financing not only for health care services but also for basic elements of the health care infrastructure including public health, research, education, and capital investments. Just as steps to increase access will add some costs so will certain steps to strengthen the infrastructure for the health care delivery system. Some of these steps, for example, improvements in our knowledge about the impact of medical services and our spending for these services, may increase short-term costs but provide the basis for longer term savings. Others may only improve the quality of care, thereby providing better value without actually reducing costs. In the next section we discuss infrastructure issues that should be covered by proposals for health care reform.

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Assessing Health Care Reform FINANCING REFORM Key Statements Reform proposals should move the health care system toward more broad-based, efficient, equitable, and "observable" financing arrangements. They should be grounded in realistic estimates of expected expenditures and revenues and their distribution across population groups. Proposals for health care reform should explicitly: describe anticipated sources of financing. identify the expected level, distribution, and timing of savings expected from administrative reforms, cost containment strategies, infrastructure changes, and other provisions. estimate the level and distribution of public and private expenditures (including tax expenditures) needed to implement the reform proposal over a period of several years. state the assumptions, models, data, and similar elements used in developing the above estimates. describe financing not only for health care services but also for basic elements of the health care infrastructure including public health, research, education, and capital investments. Projections of revenues and expenditures should be subjected to review and audit by independent, nongovernment sources.

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