THE WHITE HOUSE

Office of the Press Secretary

The Costs of Failing to Reform Health Care

by

                             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.

1. Health care spending per working American will be over $7,000 in 1994. This total includes (Chart 1):
2. Out-of-pocket spending and the worker's share of the insurance premium ($1,864 in 1994).

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.

• Current estimates suggest that about $25 billion of uncompensated care is paid for by the insured. It is estimated that, in 1994, there will be about $217 billion of business and household spending on health insurance. Providing health insurance for all Americans will allow for savings that exceed 10 percent of existing insurance spending.

II. The Total Costs of Health Care are High and Rising.

1. Current and Projected Health Care Costs
2. In 1992, the United States devoted 14 percent of GDP to health care. In 1980, the share was 9 percent. No other country in the world spends more than 10 percent of GDP on health care. Without health care reform, it is estimated that health care spending will consume 18 percent of GDP in the United States by the year 2000.

        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

1. Businesses pay for health care through premium contributions and other programs such as workers compensation.
2. Real business spending on health care has risen from $774 per employee (in $1992) in 1970 to $2,345 in 1992, a 200 percent increase.

        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.

• Currently, Medicaid pays providers at about 82 percent of costs, and Medicare pays at 88 percent of costs. The uninsured pay at 20 percent of costs. The resulting cost shifting ($26 billion of hospital costs alone) results in higher premiums in the private sector (Chart 2).

IV. The cost to the Government

Our health care system is a growing burden on the government and leads to increased deficits.

1. Governments are responsible for 44 percent of health care spending.
   • At the Federal level, most of this spending is for Medicare and Medicaid. State and local spending is predominantly for Medicaid, and for health care for state and local government workers. B. Rising health costs crowd out other government spending and contribute to the deficit.
2. Health care spending accounts for 17 percent of Federal spending. Under current projections, that share is expected to rise to over 20 percent in the next five years. As health care continues to consume a larger share of the budget, Federal spending on education, training, employment and social services will actually decline as a share of total Federal spending over this period. The rate of return to many government investments -- such as education -- is very high.
3. Health care will absorb much of government spending in the next several years.
   • Almost two-thirds of the growth in federal spending between 1993 and 1996 will be accounted for by health care spending. V. The Cost to Families
     1. The bottom line for workers is that they ultimately pay for most of health care spending, either out-of-pocket or indirectly, through higher taxes and lower wages.
   • Empirical research suggests that the dominant response of businesses to higher health insurance costs has been to lower the wages they pay their employees. Similarly, the taxes required to pay for government health spending are born to some extent by workers in the form of lower wages. One of the reasons that real wages have barely grown for the past 20 years is the increased costs of health care for businesses. B. Without reform, wages of American workers will continue to lag.
   • If employer contributions to health insurance remained constant at their 1992 share of compensation through the rest of the decade, and employers passed all of these savings on to workers, real wages per worker would be $655 higher in 2000 than they are otherwise projected to be. If they had remained at their 1975 share, real wages would have been $1,034 higher in 1992 than they actually were (Chart 3).