Federal health care reform: impact on California.

Health care reform is happening now in California, and is on the top of the agenda in Washington. Today's program is most timely since most of you will be directly affected by state and federal health care reform efforts.

FEDERAL PERCEPTION OF HEALTH CARE REFORM, FEDERAL HEALTH CARE REFORM, AND THE IMPACT ON CALIFORNIA

We are facing a sea of change in our health care system. Health care participants (consumers, business people, agents, brokers, providers, insurers) must understand the ramifications of the current thinking in Washington, and possible timing, and then decide what, if anything, you want to do about it -- this IS a democracy.

First, I'll address why there seems to be political momentum for change, then discuss Federal Reform and its possible impact on California.

PUBLIC PERCEPTION OF HEALTH CARE REFORM

Why are politicians beginning to move after 20 years of discussing reform? Recent surveys show that a large majority of Americans believe the health care system should be reformed. They agree that the 37 million uninsured should have access to coverage. It's not clear, however, how much they will be willing to pay in new taxes to expand coverage to all.

Access is the political issue, but business' and consumers' biggest concern is the cost of health care -- the cost of their own health care. (Most are not even aware of the $838 billion national health care tab.) They are concerned with higher insurance premiums, and see provider revenue and malpractice costs as unnecessarily high. American's biggest fear is being wiped out financially due to a catastrophic illness, or losing their insurance coverage if they get sick or lose their jobs.

Ironically, while they support reform, most Americans are satisfied with their own coverage and doctors. They want freedom of choice for physicians, access to current technology, and little or no cost sharing. In a Newsweek poll released three weeks ago, 50% of Americans favor paying additional taxes to reform and expand the U.S. health care system; 47% oppose. But funding new access will cost more money, and require more cost sharing, less choice and longer waits -- indeed, the currently insured may experience a reduction in their access.

FEDERAL HEALTH CARE REFORM

President Clinton's Health Care Reform Goals

The Administration has three goals in its health reform initiative. President Clinton has been clear about these goals since his campaign.

First, the Administration wants to extend coverage to the 37 million uninsured by requiring employers to cover their employees. President Clinton's second goal is really his most important one: lower total health care spending. By the year 2000, health care spending is expected to reach $1.7 trillion -- 18% of the gross national product. His focus on costs is really related to the third goal and bigger issue: reducing the deficit.

During the campaign, President Clinton stated that his plan would reduce costs so significantly that coverage could be expanded without increase to total expenditure. But, three months after the president took office, reality hit -- the job will be tougher than originally thought.

Last fall, Clinton's advisors met with the President-elect in Little Rock. They told him that his health reform goals -- universal coverage with a subsidy for small businesses and individuals -- would cost $30-to-$90 billion to enact. This came as quite a shock. His advisors were so incensed that many of those delivering the message were fired -- though most were "rehabilitated" by our new HHS Secretary, Donna Shalala.

Part of President Clinton's concerns come from the way his health plan cost savings have been calculated or "scored" (a new word we've heard the First Lady using).

One problem is the Congressional Budget Office told Congress that managed competition -- the main tenant of the Administration's proposal -- would "leave national health expenditures at approximately the same level they would reach otherwise."

Even more heavily regulated approaches, like rate setting, also won't result in significant savings. The CBO said that Congressman Pete Stark's proposal to set a limit on national health expenditures and require rate setting would only result in a 5% savings by the year 2000.

Cost containment approaches alone will not fund universal access, in the short term. Not enough money can be squeezed out of the system to expand coverage -- new revenues are required. New revenue sources are limited; new taxes to fund health care expansion will hit business and the middle class the hardest. This is the same middle class that will feel the brunt of the taxes proposed in Clinton's economic package, and the same middle class concerned about the cost of health care -- their own.

This is the central contradiction, but it hasn't slowed down the academics. I'll talk about political ramifications of this later. First, let's review the likely direction of reform.

REFORM CONCEPTS

Three basic elements appear to be the framework of his package:

1. Managed Competition

This theory says that restructuring and regulating the private market, using managed care, will bring down costs.

2. Global Budgets (Long-Term)

To achieve savings over the long term, in addition to managed competition, the Administration plans to establish a cap on annual expenditures.

3. Price Controls (Short-Term)

The Clinton staff have been told that neither managed competition, nor global budgets will produce immediate savings. They are now discussing a most controversial measure: price controls.

That global budgets and price controls contradict a competitive managed care market is a notion that seems to be lost in Washington -- or at least until Mr. Magaziner's comments yesterday.

This is the 2nd greatest contradiction.

How is all of this supposed to work?

"MANAGED COMPETITION"

The President has borrowed heavily from Professor Alain Enthoven's "managed competition" theory to restructure the market. The theory recommends the following:

Health Plan Purchasing Cooperatives (HPPCs)

On the purchasing side, Health Plan Purchasing Cooperatives -- HPPCs -- a new level of bureaucracy. All individuals and small employers would purchase health insurance through a HPPC.

An HPPC could only certify plans that provide a standard benefit within a certain price range.

The theory is that individuals and small employers would then have the same advantages as large employers -- negotiating power, information, and lower administration costs.

This is an odd theory, since most large groups pay more for health coverage than small groups.

Accountable Carriers

On the supply side, "Accountable Carriers" would be certified to meet price and benefit guidelines.

These would include only large, effective managed care carriers with networks of providers.

Large employers will probably be allowed to purchase directly from these carriers.

Cap On Deductibility

Cost increases would be stemmed by establishing a limit on the employer-tax deduction for health benefits.

This would be a new tax burden for both employers and employees. Mrs. Clinton has said that a new employee tax is too politically dangerous for the President to propose.

However, an employer may be limited to a deduction only for the lowest cost health plan offered by the regional HPPC.

Standard Benefits

The theory also calls for having carriers compete on price, not benefit design.

Within the last week, the Health Care Task Force told reporters two different things:

1) They are seriously looking at the Federal HMO Act benefit package, and

2) they also want to include costly benefits such as long-term care, mental health benefits, and prescription drugs.

This sounds like some very expensive new benefits in the works.

National Regulatory Board

A final element is a National Regulatory Board similar to the SEC. It would establish and regulate regional HPPCs, set the benefit design and establish standards for Accountable Carriers.

TODAY'S DELIVERY STRUCTURE (GRAPHIC):

I want to describe graphically how managed competition would change the current system: Today, health plans have many functions, and are accountable for cost management such as negotiating payment rates with providers. Agents and brokers provide distribution and consumer advocacy services.

"MANAGED COMPETITION" DELIVERY STRUCTURE (GRAPHIC)

Here's the new system.

It certainly appears more complex and regulated than the current system: HPPCs would negotiate with and offer only accountable plans that provide a standard benefit within a certain price range.

If "exclusive" HPPCs are enacted -- the only marketing vehicle allowed -- your own national organization (the Association of Health Insurance Agents/National Agent Life Underwriters AHIA/NALU) points out:

"It would end consumer choice, and...would end small group insurance as we know it."

This is a very paternalistic, regulatory process based on the assumption that consumers and small business people are too stupid to make their own decisions -- this is not our experience.

REFORM CONCEPTS, CONTINUED: GLOBAL BUDGETS

In theory, managed competition will produce cost savings over the long haul. However, some of the President's advisors fear market restructuring isn't enough -- that we need a stronger regulatory approach.

The concept of "global budgets" was borrowed from other countries' budget methods.

"Global budgets" could be implemented in several ways:

Expenditure Targets

National voluntary health care expenditure limits would be established, presumably tied to some indicator such as inflation.

More onerous regulations would be the "stick" that would kick in if voluntary efforts failed.

Technology Constraints 

New technology accounts for a big piece of the growth in health care costs. One purpose of global budgets is to slow the growth in hi-tech developments and to control utilization.

These technology and pharmaceutical developments are expensive, but have made ours one of the best health care systems in the world.

PRICE CONTROLS

But, President Clinton only have 3 years until re-election to prove that his reform will save money. Clinton advisors have determined that immediate savings are necessary, possibly in the guise of price controls.

Vice President Al Gore sent the strongest signal yet earlier this week when he indicated that "the White House intends to impose short-term price controls on doctors, hospitals, and other private sector medical providers as part of national health care reform."

Price controls can take several forms, and might be imposed in different combinations:

Wage and Price Freeze 

Wages and prices for all health care serves could be frozen, despite the poor experience with these during the Nixon Administration in the '70s.

Premium Caps

Another price control approach would limit total premium increases, leaving carriers to drive tough bargains with providers or face financial problems.

Provider Rate Setting

Another possible approach would impose Medicare-like rates on all providers for all services.

Those of you who are providers know the statistics: Medicare rates pay only 86 cents of one dollar of costs today.

These are some pretty dramatic -- and draconian -- proposals. Once Congress and the public begin to understand them, certain political realities will come into play.

POLITICAL REALITIES OF HEALTH REFORM

First, let's look at the Clinton election and see what it means.

Mandate for Change: Clinton's Approach

Although President Clinton was elected because he symbolized change, he won with only 43% of the vote. This is not exactly a "voter mandate."

As you know, "the devil is in the detail:" when voters begin to appreciate the changes (and sacrifices) his proposals will require, we may see some political backlash.

When the proposal is sent to Congress, we may see opposition to some provisions from many fronts.

Hillary Clinton's Task Force

Appointing the First Lady's Task Force has been a unique way of developing major health reform; one questioned by some as secretive and nonrepresentative.

A court ruled recently that hearings of the entire task force must be public, but staff deliberations to advise the President may be held in private.

The task force includes most cabinet members (who are not health experts, with the exception of Lloyd Bentsen) and some 500 government and private sector "advisors." Most are academics and, as Stuart Altman recently said, "not the most brilliant members of our intelligencia."

The task force finally offered "special interests" three minutes apiece at a marathon hearing in D.C. on Monday to offer their perspectives on reform.

I think a small cadre of close advisors will actually draft the bill -- under the President's personal direction. I doubt that this has begun in earnest yet, primarily due to the First Lady's father's illness.

Health Reform "Campaign"

While the task force toils, Mrs. Clinton and others have begun to try to rally public support.

President Clinton's political advisors realize that in order to pass his proposal, it is politically critical to get the support of the middle class.

The Administration is planning a full-scale campaign to sell the proposal to the 85% of the middle class Americans with insurance. The message will be security and quality, not the reality of new costs.

National Public Radio reported this month that there will be "town hall meetings" scheduled across the country. The Democratic National Committee (DNC) is gearing up a "force of volunteer foot soldiers" to go door to door this spring and summer.

Interest Groups/Congress

Interest groups and Congress have been out of the process thus far. You can expect they will engage once the proposal is introduced.

Besides this week's hearing, we've also seen:

Two weeks ago, over 1000 doctors went to Washington to deliver two days of protest against price controls.

Agent/broker associations will be arguing that a HPPC cannot be exclusive because they would eliminate the consumer's freedom of choice, and the agents' role as representatives of the consumer.

The AFL-CIO and its labor groups will be arguing to stop taxation of employer-paid benefits.

The Democrats in Congress support the President for the time being, but that support could lessen if constituents complain. Republican Members are already drafting an alternative bill with more flexibility and less regulation.

Fast or Slow Track?

Health care reform is already on fast track. The question really is, should it be a "fast track," or on an "incredibly fast track?" The "slow" track means reform will be debated this year, but not enacted till sometime early next year.

The "fast" track would use this year's budget reconciliation bill as a vehicle for price controls or the whole package.

POLITICAL REALITIES OF HEALTH REFORM

Complex Policy Issues Not Well Understood

It is one thing to seize the opportunity, and President Clinton is doing exactly that.

However, if Congress and the president could enact an incredibly complex health care reform bill that only 50 people in D.C. really understand, we will probably see big implementation problems and the type of unintended consequences that flowed from Medicare.

My recommendation is to slow down, take some time to understand the issues.

Once Impact Know, Strong Reactions Will Occur

I think the strongest reaction will occur when the middle class realizes that they may pay more and get less.

According to Senator John Chafee (R-RI), "many Americans will see health premiums go up, benefit packages go down, and provider choice limited. So far, politicians have told the public they can have it all."

When the public figures that out, the message will be sent to Washington.

Two years ago the public didn't understand the Medicare Catastrophic Act. When seniors realized their premiums would go up, they brought enough pressure to bear on Congress that the legislation was repealed.

What Does it Mean to ME?

This is the key question and we don't know the answer yet. For consumers: they may pay more money, in many cases receive fewer benefits and services, have less choice, and may have to wait for services. Agents may see their roles dramatically changed, depending on the design of the regional purchasing cooperative. Insurers will find far less flexibility, and gain lower margins. Providers, under rate setting, will see lower incomes. All these new realities could have a dramatic effect on the direction of reform.

FEDERAL HEALTH CARE REFORM: IMPACT ON CA

IMPACT ON CALIFORNIA: WHAT MAKES CALIFORNIA DIFFERENT?

First, we need to understand: what makes California different from other states? California has unique problems, and some excellent models that work. Reform must accommodate these differences.

High Acceptance of Managed Care

More Californians are insured and enrolled in managed care programs -- HMOs and PPOs -- than in any other state: 33% of the California population are enrolled in HMOs, compared with 15% nationally. And managed care premium rate increases in California were considerably less in 1992 than fee-for-service premiums.

Our population will not see the same shock, if reform requires use of managed care.

Diverse Demographics 

California also has different needs than other states. We have experienced a tremendous change in racial, ethnic, and cultural composition in the last 20 years.

For example, in the last 10 years, we have seen a 127% increase in Asians, a 69% increase in Latinos, and a 21% increase in African-Americans.

These groups often are underserved. For example, over 40% of Latinos lack insurance.

Reform must be designed to take account of these special populations.

High Percentage of Population and GNP 

Today, 12% of the national population lives in California. California's population was among the fastest growing of any state, a 23% increase. Of the 10 fastest growing cities in the U.S., six were in California.

In 1989, (latest available California data), California's Gross State Product was almost 13% of the national GNP.

Reliance on Small Business

California's economy relies on small business for most of its growth.

Reform must continue to nurture this critical part of our economy.

High Costs and Uninsured Rates

Californians are less likely than the average American to have employment-based health coverage due to the prevalence of small firms: of the 6 million who are uninsured, 87% are employed or dependents of employed persons. Half of all uninsured workers are employed by small firms.

We also have more employment in part-time work, the service industry, seasonal employment and other low margin industries that typically do not offer health benefits. We have higher labor, housing and related costs, and our average health care costs are higher than other states. However, the cost of managed care plans, particularly HMOs, increased at a much lower rate.

WHAT WORKS NOW IN CALIFORNIA?

So in light of our unique qualities, what reform efforts will work?

AB 1672

Much of your conference today focuses on AB 1672, California's carrier reform legislation that takes effect in July. It will work in California, because it addresses our unique models and problems.

Pooling Arrangements that Work

AB 1672 will require carriers to create effective purchasing pools. In addition, the law allows a voluntary government-run pool. This unique design will provide an opportunity to see how government and carrier pools will compete to reduce costs and increase access.

MRMIP -- The Major Risk Medical Insurance Program provides state-subsidized health coverage to more than 13,000 high risk individuals.

AIM -- Access for Infants and Mother program provides state subsidized health coverage for nearly 6,000 working poor uninsured mothers and more than 2,000 infants.

California encourages flexibility using managed competition principles for its state subsidized programs.

- Enrollees may participate in an HMO or PPO, and have a choice of plans offering different benefit packages. Program guidelines define comprehensive categories of benefits, but allow flexibility in covered services and cost sharing arrangements.

- MRMIP's health plans can assume full underwriting risk, or provide administrative services only. AIM carriers can customize their risk-sharing relationship.

The point is, California already has purchasing pools in place that work. They should be encouraged to grow, not stymied by inflexible federal reform.

MediCal Managed Care

California has already embarked on an ambitious statewide program to enroll 2.5 million MediCal recipients into managed care programs.

This offers another example of how underserved populations can be served by managed care.

CalPERS

CalPERS has been touted in Washington as a "model HPPC." While it is not a model for the nation -- none exist -- it is a successful program which provides state and local employees with affordable choices of health coverage.

However, remember that it has recently contained price increases by decreasing benefits, not by reducing administrative costs or by bargaining aggressively.

WHAT WON'T WORK IN CALIFORNIA?

Let's talk about the federal reform proposals and what won't work here in California.

Proposals that Stall Job Creation

We need to sustain our small business industry.

Health reform must be careful for two reasons:

1) Capping spending will stop job growth in our state's top industry for job creation -- health care, and

2) an employer mandate could unduly burden small businesses, causing them not to hire, not to increase wages, or in some cases, to close their doors.

GLOBAL BUDGET/PRICE CONTROLS

Global Budgets

I am concerned about the result of global budgets on the long-term quality of care.

It could lead to "rationing" high tech services which are currently commonplace. An ultimate effect would be a loss of jobs in one of the country's strongest industries -- health care.

Price Controls

More imposing, however, is the notion of price controls. They didn't work in the 1970s, and they won't work now.

Price controls are a mistake for many reasons, including:

- They "freeze" in current problems in the system, not allowing carrier innovation.

- They do nothing about volume; providers can simply order more services.

- They contradict managed care (and managed competition) principles that use negotiated discounts and reward higher quality providers.

- And, they create distortions in an already troubled market place.

INFLEXIBLE BENEFIT DESIGN

The "standard benefit package" is a real concern, especially if the Administration wants to include long-term care, mental health benefits, and prescription drugs.

If the package is too rich, a majority in our California business environment will not be able to afford it.

INFLEXIBLE HPPC DESIGN

The definition of President Clinton's Health Plan Purchasing Cooperative is critical to California.

Last week we heard that the President is willing to leave the design of the HPPCs up to the Governors. This is good news.

ONE "MANAGED COMPETITION" MODEL THAT WILL WORK

Here is one more flexible approach that would use HPPCs, in a way, I once heard Alan Katz describe:

"Americans don't want government to 'play the game,' but rather 'serve as the umpire.'"

In this formulation, HPPCs make sure everyone plays by the rules, but are not involved in the actual purchase of insurance.

TAKE HOME MESSAGE: CALIFORNIA'S VOICE IN THE DEBATE

After all these details and proposals, what should you all take home with you today?

California Has Unique Concerns

While we need health care reform, California is a unique state, with unique needs and concerns.

We actually have seen reform this year that will help address our special concerns -- AB 1672.

Federal reform must not unnecessarily harm what works or impose ideas that won't work in California.

Support State Flexibility in Design

We've heard that, as a former governor himself, President Clinton will allow states to customize some portions of their reform efforts.

If President Clinton does give flexibility to the Governors, then we have an opportunity in California to find our own answers.

It won't be easy. We have a lot of work to do to help shape our own answers.

Educate Public and Lawmakers About Agents Role as Consumers' Representatives

Your most important job is to be sure your role as the publics' advocate is understood. I recommend all of you -- agents, small businesses, providers, carriers and consumers -- let your voice be known in this critical debate.

SHAPE THE FUTURE

This is our time to influence the shape of health care reform -- and our industry's future.