THE WHITE HOUSE
Office of the Press Secretary
The Costs of Failing to Reform Health Care
Laura D'Andrea Tyson Chair, Council of Economic Advisers October 6, 1993
I. Effects on Individuals
Our health care system is costly and does not provide security to people. If a person loses a job, changes jobs, or gets sick, there is no guarantee of health coverage.
ii. Employer-paid premiums ($3,163).
iii. Employer-paid workers' compensation, disability insurance, and industrial insurance to their workers ($246). iv. Payroll taxes to pay for Medicare ($926). v. Other taxes, fees, and payments (Medicare and Medicaid predominantly) paid to the Federal government ($654). vi. Taxes, fees, and payments (Medicaid and state employees predominantly) to state and local governments ($569).
If we do not have health care reform soon, health care spending per working American will rise to $12,386 by the year 2000, or 25 percent of compensation.
B. The current insurance system does not provide true security.
i. Insurers focus on risk selection rather than pooling groups of people. * Almost 40 percent of insurers exclude pre-existing conditions from their coverage of newly insured people. * Insurers also price by the experience of the group. This means that people cannot get one of the most important types of insurance coverage they want: the right not to have to pay more if they get sick. * Insurers "red line" or refuse to cover specific industries that they find to be hazardous, including many small businesses. ii. The number of people who are uninsured is high and rising. * Three-quarters of the uninsured are in working families. Thirty- two percent of the uninsured are in families with at least one full- time year-round worker.
C. Fear of losing coverage causes people to keep jobs they would like to leave or to stay on welfare.
i. Up to 30 percent of employees report that they are afraid to leave their job for fear of losing continuous health insurance coverage. This reduction in mobility, or "job lock," can be a major impediment to the efficiency of the economy. ii. One of the most important reasons people do not leave AFDC is the fear of losing health care coverage for themselves and their children. This "welfare lock" traps people into public programs and raises government costs. iii. Health insurance creates a substantial barrier to many people choosing to become self-employed or to start a small firm. Self-employed people face higher administrative costs than people in large firms for health insurance coverage. In addition, because groups are experience rated, even self-employed people in good health risk having high premiums in future years if they become sick.
D. Currently insured people are paying for the costs incurred by the uninsured.
II. The Total Costs of Health Care are High and Rising.
ii. The United States spends as much on health care as it does on fuel oil, electricity, natural gas, other household operations, oil and gasoline, transportation (including all new and used car purchases), furniture, and other household equipment combined. iii. Over forty percent of the growth of real per capita GDP between 1993 and 1996 will be accounted for by health care spending. While some of this growth is warranted, this unusually high rate crowds out other items of consumption. iv. Health care cost growth will continue to outpace growth in other segments of the economy. * Federal Medicaid growth is expected to be over 16 percent in 1994, and to decline to only 12 percent in the rest of the decade. Medicare growth will be between 9 and 11 percent and private health care costs will grow at between 7 and 8 percent for the rest of the decade. Growth in the rest of the economy is expected to be between 4 and 6 percent.
B. The high cost of health care is driven by several market failures.
There are numerous instances where the current system encourages wasteful and inefficient medical practices.
i. There is a lack of price competition in the market for insurance, because many individuals do not have a choice of health care plans. * Only 29 percent of companies with fewer than 500 employees offer any choice of plans. ii. Administrative costs in health insurance are extremely high, in part because there is little or no coordination across insurers in the forms they require or their reimbursement systems. * Over 5 percent of health care expenditures ($45 billion in 1992) went for administrative expenses. This exceeds the total amount spent on all public health service programs.
D. The health care system has a great deal of waste. The current system of reimbursement encourages providers to over-utilize tests and procedures.
i. Research suggests that up to one-half of some procedures that are performed may be either inappropriate or unnecessary. For example, it is estimated that the United States spent $1 billion on unnecessary Cesarean sections in 1987 alone. ii. Fraud and abuse may account for about 10 percent of U.S. health care costs.
III. The Cost to Business
ii. Real workers' compensation per employee has more than doubled since 1970, rising from $149 (in $1987) in 1970 to $326 in 1992. Health care costs are the fastest growing component of workers' compensation.
B. Small firms are particularly hurt by the current system, because many do not have access to affordable health care.
i. Small firms face administrative loads of up to 40 percent, compared to about 5 percent in large firms with 10,000 or more employees. ii. Because of experience rating, many small firms must pay exorbitant amounts for insurance or are unable to get insurance at all. iii. Small firms often cannot afford to provide any choice of health care plan to their employees.
C. There is cost shifting from government health care programs and people who are privately insured to the uninsured.
IV. The cost to the Government
Our health care system is a growing burden on the government and leads to increased deficits.