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793 September 28,1990 THE PEPPER COMMISSION% MISGUIDED SOLUTION 3'0 AMERICA'S HEZALTH .CARE PROBIXMS INTRODUCTION The U.S. Bipartisan Commission on Comprehensive Health Care, named the Pepper Commi ssion after its congressional sponsor and first chairman the late Florida Democrat Claude Pepper, released its final report this week.' While this final version contains some additions and modifications, its basic recommendations are the same as those whi c h received widespread criticism when outlined in the Commission's preliminary report issued this March.These recommendations show the Commission.to be out of touch with the real problems of the United States health care system, and impractical in its sugg ested solutions.

The Pepper Commission was charged with finding ways to provide-unin sured Americans with insurance coverage and access to health services, and to improve the financing of long-term care. A majority of Commission mem bers recommended five s teps to-achieve those goals 1) Require employers to provide health insurance or pay a new payroll 2) Establish a federally-mandated basic minimum package of health tax to pay for government-provided insurance benefits for all insurance policies 1 A Call f o r Action: The Pepper Commission, US. Bipartisan Commission on Comprehensive Health Care Final Report, September 1990 3) Introduce a redesigned and expanded public assistance program similar to Medicaid for all lower income Americans and families lack ing e mployer-provided insurance 4) Place substantial new restrictions on how health insurers write policies and conduct business 5) Create a new federal entitlement program to pay for most of the long- term care costs.of.middle-income and affluent retirees, wh ose assets or income currently make them ineligible for public assistance through Medicaid.

The recommendations in the Commissions final report also come with an even higher price tag than the staggering $66.2 billion per year projected in its March prelim inary report.The Commission now estimates that its recom mendations will cost taxpayers $68.8 billion per year when fully implemented.

Complying with the proposed changes would impose additional net costs of 14.7 billion per year on American businesses.

When the &inmission issued its preliminary recommendations, it was roundly criticized both by its own dissenting members and by many in Con gress including liberal Democrats as well as conservative Republicans for failing to specify how the federal govern m ent would finance the enormous cost of its proposals. In its final report, the Commission again ducks the ques tion by failing to recommend any financing methods. All it does is list a vir tual cornucopia of tax increases, inviting Congress to chose which to enact.

There are several reasons why Congress should d iscard the Commissions report and look elsewhere for answers First, the costs of the proposed solutions are unacceptably high. Moreover the tab could hardly have been presented at a worse time. The Commission calls for $68 billion a year in new federal sp e nding and taxes just when con gressional and Administration budget negotiators are desperately seeking ways to close the huge budget deficit. Furthermore, it is irresponsible for the Commission to propose massive new government spending and taxes onerous n ew regulations on business, and a sharp increase in worker payroll taxes at a time when the U.S. economy totters on the brink of recession. Even without an economic downturn, the Commission admits that the payroll taxes it proposes could cost 50,000 jobs. The Hoover Institutions John Cogan, the only economist on the Commission and a labor specialist, maintains the los ses would be far in excess of that, reaching as high as 1.4 million jobs. tion L. in health care costs. Indeed, they would use new tgt reven ues to throw more.fue1 on the fire.

Third, the Commissions expensive recommendations would create a health system that would be politically and economically unstable. Rather than offering a lasting solution to the problems of health care financing, the Com missions proposals would ignite new problems requiring new solutions.

Ultimately, mounting problems would force Congress into either accepting Second, the proposed changes would do nothing to curb the present escala 2 true market-oriented reforms or creating a fully nationalized health care sys tem.

Predictable Prescription. Regrettably, the Pepper Commission is yet another report that concludes with Congress's predictable prescription of more federal spending, taxes, and regulation. While the problems in America's health care system are indeed real and serious, simply throwing more money at them will not make them go away. A true solution must focus on changing the'basic underlying incentive-structure that governs the decisions of health care consumers, providers, and insurers. Needed are new incentives that discourage, rather than encourage, over-pricing, over-con sumption, over-prescribing of marginally useful procedures, and waste and in efficiency in the purchase and delivery of medical services.

Rath er than trying to extend the employer-provided health insurance sys tem to all Americans, Congress needs to recognize that it is this system, and particularly the misguided tax policies and regulations governing it, that generates the perverse incentives a nd resulting problems. Congress thus should enact reforms in health care tax policy that put health care dollars and decision-making power back in the hands of consumers. Reforms also must provide direct subsidies to Americans with low incomes or high med ical costs to increase their purchasing power in the medical marketplace and thus enable them to buy the care and insurance they need?

Creating a system that encourages consumers to purchase medical care and health insurance directly, while allowing them t o pocket any resulting savings would generate powerful and positive incentives. All parties concerned con sumers, providers, and insurers would be directly rewarded for seeking or providing quality health care at reasonable prices.

Encouraging Private Ins urance. In the area of long-term care, Congress must realize that its job is not to protect the assets of affluent retirees by im posing new taxes on working Americans to fund the cost of their care. Asset protection is a job for private insurance. Congre ss can'and should enact tax reforms making it easier for Americans to use such private mechanisms to protect themselves against the potential costs of long-term care.

Congress must undertake reforms that replace the current perverse incen tives in the health care system with positive incentives to encourage economi cal use of health care services and assure help for those who need it most.

Only then will all Americans have access to affordable health care. The Pep per Commission does nothig to advance that day 2 See Stuart M. Butler and Edmund F. Haislmaier, e A National Health System forAmerica (Washington D.C.:The Heritage Foundation, 1989 and Stuart M. Butler UsingTax Credits to Create an Affordable National Health System Heritage Foundation Buckpunder N o. 777, July 20,1990 3 THE COMMISSIONS RECOMMENDATIONS The Pepper Commission recommends a package of steps to provide in surance and access to medical care for all Americans.These steps would have a major impact on business, insurers, and taxpayers. In ad d ition, it recom mends a sweeping new long-term care entitlement program 1 Mandated Employer-Paid Coverage Employers would be required to provide health insurance coverage for all their workers, and for non-working dependents of those workers. Firms could d o this either by purchasing private insurance themselves or by paying a 7 per cent payroll tax to fund a new federal government plan which would provide the insurance. Employers would be required to pay at least 80 percent of the cost of either private in s urance premiums or the public plan, and workers could not be required to pay more than 20 percent. Initially, this play or pay mandate would only apply to employers with 100 workers or more. During the first several years of the new system, however, small er employers would be encouraged by various incentives to purchase similar coverage for their workers. Smaller employers would only become subject to the same mandate if these incentives did not work.

Health insurance for low-income individuals would be fu rther subsidized with the subsidies varying according to income. Individuals and families with incomes below the federal poverty threshold would pay no premiums, nor could they be charged deductibles or coinsurance for covered services. Coin surance is th e percentage of the bill which the patient pays in addition to any ipitial deductible. Individuals and families with incomes between 100 and 200 percent of the poverty threshold would pay a share of the premiums, deduct ibles, and coinsurance according to a sliding scale based on their incomes.

Eventually, all Americans would be required to obtain coverage either from their employers or from the federal plan 2) Expanded Public Assistance The existing federal-state Medicaid program would be replaced by a new program, with eligibility divorced from welfare programs. This new program would provide health insurance coverage to the poor and unemployed, includ ing those now covered by Medicaid, as well as the self-employed and the employees of firms choosing to p a y a payroll tax rather than to provide their workers with private insurance.This new program would be a federal entitle ment with uniform federal rules and benefits. As is now the case with Medicaid, states would pay a portion of the cost of the new progr am. States would administer the program,subject to federal guidelines and regulations..

Premium and cost-sharing rules for the new government program would be the same as those for the mandatory employer-provided insurance envisioned by the Commission. Und er the new public program, individuals and families with incomes below the federal poverty threshold would be exempt from 4 I paying premiums or any cost-sharing (deductibles or coinsurance) for covered services.Those with incomes between 100 and 200 perc e nt of pover ty would pay a share of the premiums and cost-sharing according to a sliding scale based on income.The new program would pay health care providers ac cording to current Medicare rates or new rates determined using Medicare rules 3) The Minimum Benefit Package A new federally-specified minimum health insurance benefits package would be established. This package would supersede all existing state laws governing the content of health insurance polices.Thus states no longer would be allowed to requ ire insurers to provide more generous benefits than the federal minimum package. Private insurers could, however, still offer more generous coverage on a voluntary basis.

Employers who chose to continue providing their workers with private in surance, whether through traditional insurance or managed care plans, would be required to provide coverage meeting at least this new minimum standard.

The same minimum package would be provided to those enrolled in the new public plan, although lower-income individuals and families would be given more generous coverage.

The required minimum benefits provision would include all hospital ser vices, surgic al services, physician office visits, diagnostic tests, and preventive services (including prenatal and well-baby care and various cancer screening tests Mental health services of up to 45 inpatient days and 25 outpatient visits per year also would have t o be included. The annual deductible could be no more than $250 for a single individual, or $500 for a family.

Coinsurance charges in general could not exceed'20 percent for any of the covered services.The exceptions to that general rule would be a 50 perc ent limit on coinsurance for outpatient mental health visits and no deductibles or coinsurance at all for prenatal care, well-baby care, or'cancer screening tests.

Under the Commission's scheme, all iilsurance would in addition be re quired to include a " stop loss" or "catastrophic" feature, limiting an in dividual or family's out-of-pocket payments for deductibles and coinsurance to $3,000 per year 4) New Insurance Regulations The federal government would establish new regulations governing the way healt h insurance companies do business. Again, these would supersede exist ing state laws.

Insurers would be prohibited from applying pre-existing condition ex clusions. This means insurers could no longer limit or refuse coverage for the costs of treating a me dical condition the policyholder had at the time he ap plies for insurance, or had been treated for in the past 5 Insurers would be required to accept all groups .wishing to purchase health insurance. In the case of small groups, such as employees of a sm a ll company insurers would be required to set premium rates on the same terms for all groups within specified areas and would be prohibited from selectively in creasing rates for a particular group or individual. Insurers would, however be allowed to requi re specified minimum enrollment periods as a condition of providing coverage (to prevent policyholders buying a low cost policy, and then switching temporarily to a-more generousplan when they wanted an ex pensive service).

Insurers in the small group mark et would be required to include those groups in the managed care systems they offer larger employers, allowing them to choose between traditional insurance and Health Maintenance Or ganizations (HMOs) or Preferred Provider Organizations (PPOs 5) The Five- Year Phase-In Period would be put into effect according to a five-year timetable.

Year 1: Coverage under the new public program is extended to all pregnant women and children up to age six who are not cur rently covered by Medicaid or private insurance.

The new regulations on private insurers take effect.

Year 2: The new public program is expanded to include uncovered children up to age eighteen.

Unincorporated businesses are allowed to deduct the cost of health insurance fully from taxable income.

Firm s with fewer than 25 employees and average payrolls below $18,000 per worker receive a temporary 40 percent refundable tax credit toward the purchase of minimum coverage vide the minimum package of health insurance to all full-time and part-time workers a nd their non-working dependents either by purchasing private insurance or by paying the payroll tax for coverage under the public program.

Year 4: Employers with 25 to 100 employees become subject to the full mandate if at least 80 percent of their workers (and their de pendents) have not yet been provided by them with the basic minimum health insurance coverage, through private in surance or the public program.

Year 5: Firms with fewer than 25 employees become subject to the mandate if they have not yet p rovided at least 80 percent of their workers (and their dependents) with the basic minimum The employer mandates, insurance regulations, and new public program Year 3: All firms with more than 100 employees are required to pro 6 health insurance coverage, through either private insurance or the public program.

All special tax credits or subsidies for buying health insurance available to small businesses are eliminated at the end of the year, except for firms with ten or fewer workers at extreme financial risk. iAll remaining individuals-not-covered by either th e public pro gram or private insurance become eligible for the new public Prop 6) Long-Term Care Program long-term care entitlement program, financed mainly by a social insurance system.The program would be phased in over four years and serve all Americans needing long-term care, regardless of income. It would cover the first three months of nursing home care, and home and community-based care of up to 400 hours per year for an unlimited period. This new program would be financed completely by the federal g overnment, with the states ad ministering it according to the federal guidelines.

Beneficiaries would be required to pay either 20 percent of the actual cost of their care or 20 percent of the national average cost, whichever is lower.

This coinsurance wo uld be reduced for individuals with incomes between 100 percent and 200 percent of the poverty threshold, and eliminated entirely for those below the poverty line For care outside a nursing home, the program would use a case manager system to control cost s. The federal government would fix and regulate provider reimbursement rates both for home and community-based care and for nursing home care.

Sharing Costs With States. For persons with nursing home stays beyond three months, a second level of assistance would be available, with the cost shared by the states as well as by the federal government. Under this second tier of coverage, the new program would continue to pay nursing home costs after beneficiaries had spent their income and assets. However, bene ficiaries would be allowed to retain certain assets and resources. Specifically, single in dividuals could retain their home and $30,000 in other, non-housing assets.

They would also be allowed to keep $100 a month to meet personal needs and for the first year of a nursing home stay, they could retain 30 percent of their income to cover the cost of maintaining their own residences.

Beneficiaries would be required to use all other income and assets above these limits to defkay thecost of their care.The same rules would apply to couples, with the exception that they could retain $60,000 in non-housing as sets. h the case of nursing home patients with a healthy spouse, they would be allowed to retain income equal to 200 percent of the poverty level for a coup l e (or a total of about $16,900 in 1990 to support the healthy spouse living in the community The Commission recommends that the federal government establish a new 7 Under the Commissions proposal, new federal tax regulations would apply to employer-provid e d private long-term care insurance. These regulations would give such long-term care policies the same preferential tax treatment now given to employer-provided acute-care health insurance. The federal government also would set new standards for private l o ng-term care in surance policies 7 Additional Provisions in the Commission Report patible with the new federal minimum requirements for health insurance policies practice and standards of care to collect information on all doctors visits, hospital stays a n d procedures regardless of where they occur or how they are paid for 0 The federal government would develop and test better methods of as sessing and assuring the quality of medical care 0 The federal government would develop an expanded network of local r eview organizations designed to apply a uniform set of methods for review ing the quality medical care and create new procedures to deal with deficien cies 0 The federal Physician Payment Review Commission, an independent ad visory body within the Departm e nt of Health and Human Services respon sible for recommending changes in the ways Medicare pays doctors, would be empowered to study and test possible ways of reforming the current medical malpractice system and recommend changes to Congress 0 The federal government would increase spending on programs to pro vide medical services in underserved areas, to promote wellness and healthy habits among the population, and to conduct more research on treating long term illnesses and disabilities 0 The existing Med i care program would be restructured to make it corn 0 The federal government would develop national guidelines for physician 0 The federal government would develop a uniform national data system PROBLEMS WITH THE COMMISSIONS INSURANCE RECOMMENDATIONS The m o st serious and crippling problem in the Commissions majority report is its enormous cost.The report estimates that if all the proposals were put into effect immediately, federal government spending would need to in crease next year by $24.3 billion for ex p anding coverage to the uninsured 42.8 for establishing the new long-term care entitlement, and $2.6 billion for restructuring Medicare to comply with the new universal mandated minimum health benefits package, The net total cost is a staggering $68.8 bill i on. To put this sum in perspective, it 8 Is larger than the combined 1990 budgets of the Departments of Com Equals three times the 1990 budget for the Department of Housing and Is almost two-thirds of the amount the federal government will spend in 4 Repr esents a 5.3 percent-increase .in. the.entire federal budget.

Besides this enormous direct cost to the taxpayers, there would be addition al indirect costs to Americans. For instance, the report estimates that its proposals would cost American industry $14 .7 billion per year to comply with its new requirements PROJECTED COSTS OF PEPPER COMMISSION REPORT New Federal Spending In Constant 1990 Dollars Using Optimistic Assumptions merce, Education, Interior, Justice, Labor, and State Urban Development; v 1990 o n Medicare Cort (billiond 100 1 I 91 '92 '93 '84 '96 '90 '97.W '99 '00 '01 Year Notes This graph is based on the assumption that the Commission's recommendations are put into effect starting in 1991, and phased In according to the Commission's proposed sc hedule.

The Cornmission tacitly admits that the costs of its recommmendations will escalate in future years at rates of "at least 8 percent to 9 percent annually Taking the lowest estimate (8 percent and discounting for an assumed constant general inflatio n rate of 4 percent, yields a projected 4 percent rate of real spending growth.

The 4 percent rate of real spending 'growth is applied here to years beyond those for which the Commission provided estimates. Thus, this growth rate assumption is applied to: years 1997 and beyond for the mandatory health insurance provisions years 1995 and beyond for the long-term care provisions; and years 1992 and beyond for the Medicare expansion provisions.

The decrease in total spending in 1996 Is attributable to the pr ojected elimination of tax credits to small businesses for health insurance, effective that year 9 This estimate of the business costs, however, hides huge disparities in the burden on individual businesses. For example, the Commission calculates that whi l e businesses now providing their workers with insurance (generally larger firms) would face total new costs of $17.4 billion, these costs would be offset by projected savings of $30.2 billion. The savings would come mainly from dropping coverage for depen d ents of their workers who would be covered by other employers and from reductions in the amounts billed by providers to better insured patients to cover losses incurred in treating unin sured patients or ones whose insurance pays lower reimbursement rates .

These larger firms thus would enjoy total net savings of $12.8 billion. At the same time, businesses not currently providing insurance (generally smaller firms) would face total new costs of $36.4 billion, offset by projected savings of just $8.9 billion , for a total net new cost of $27.5 billion.

Greatly Understated Estimates. Even these cost estimates probably are greatly understated. Some members of the Commission itself argue that in a number of places the report underestimates true costs and overest imates potential savings for both the government and private sector. And even the Commissions own price tag envisions huge cost increases in future years, as the chart on the previous page indicates is found in the Commissions own words. In the section de s cribing possible tax increases to fund the cost of its proposals, the report recommends that Congress choose a package of tax increases whose projected revenues will grow at a rate sufficient to meet the projected growth in spending. To cover program cost s, states the re ort, revenues should increase by at least 8 per cent to 9 percent annually.

This statement tacitly admits that the reforms will do absolutely nothing to reduce the current health care inflation rate, now running at 8 percent to 9 percent a year, or double the general inflation rate. Indeed, given the in creased demand that the new benefits would unleash, the most likely effect would be to make the cost problem even worse. If ever there were a classic example of a government body recommendi n g that the nation blindly throw money at a problem, the Pepper Commission is it The Damaging Economic Effects Obscured perhaps by the direct costs of the Commissions proposals are numerous threats to the U.S. economy and individual citizens. Of particular concern is the proposed mandate of employer-provided insurance. This would constitute a heavy tax on jobs. Whether employers complied with the mandate by spending more on private insurance or by paying a 7 percent payroll tax to cover their workers under t he new public program, the effect Perhaps the most damning indictment of the cost of the recommendations 3p 3 Bid, Chapter 5, Revenues to Fmance Commission Recommendations, p. 137 10 would be the same. As with any tax, the more the government taxes some t hing, the more it discourages it. Taxing employment means fewer jobs.

The Commission generally pretends that it is employers who would bear the cost of the new spending or payroll taxes required to comply with the mandate. But it is forced in its report to admit that these costs really fall on workers, weakly conceding: Eco n omists typically assume that re uired employer expenditures are borne by workers, in reduced wages. Indeed the report explicitly admits that these costs will fall hardest on low-wage workers, the very population that is now most likely to lack health insu rance.

In the Commissions own words, Wage reductions, however, are not possible for workers at or near the minimum wage. For these workers, the cost would be reduced employment.These reductions could come in layoffs, slower ra es of employment growth or fa ilure to replace workers who leave their jobs.

Huge Job Loss. The report estimates that the unemployment resulting from its recommendations would be between 25,000 and 50,000 jobs. But it then dismisses it as a number that is small enough to be offset by job crea tion through the normal workings of the economy. However, Commission member and labor economist John F. Cogan, now a Hoover Institution Senior Fellow and formerly Deputy Director of the Office of Management and Budget (OMB sharply disagrees.The o n ly economist to serve on the Commission, Cogan projects the likely job losses to be in the range 500,000 to 1.4 million. Neither projection, however, considers an economy in recession with a slow, or even negative rate of job growth. Also left unstated is the fact that newly unemployed individuals and their dependents would increase the burden on other public assistance programs, adding to the indirect cost of the Commissions proposals.

Higher-wage workers would not tend to face job cuts, but employers wou ld tend to compensate for any increased employment cost imposed by the new mandate by adjusting salaries or other fringe benefits.The result: reduced dis posable income for these families and hence cutbacks in non-health spend ing. Employers might also re c oup part of the extra costs by raising the prices they charge for their products, making U.S. goods less competitive here and abroad. Furthermore, as the cost of these new taxes and mandates escalate in the future faster than wages and general inflation, a s the Commission implicit ly admits they will, all of the adverse economic effects would grow f 4 6 4 &id, Chapter 2, Blueprint for Health Care Reform, p. 67 5 Loc. cit 6 hid, pp. 167-168 11 WHY THE PROPOSALS WOULD BE POLITICALLY UNSTABLE Even if Congress were to enact the Commissions recommendations, they would not be a lasting reform because the programs would soon founder amid political and economic turmoil -much as the 1988 catastrophic health care legislation began to unravel before it even took effec t . There would be for example, enormous constituency pressure on Congress to add more and more services under the mandated ininimum-benefit package, and reduce its cost-sharing requirements on beneficiaries. This would come from consumers wishing more free or lower cost services. But it would also come from providers initially excluded from the system (for example, chiropractors or optometrists There can be little doubt that Congress would bow to this pres sure. State legislators already have done so, enact i ng over 800 laws in the past fifteen years requiring insurers to cover specific providers or services even when consumers expressed little or no interest in the benefits. The political and economic problem of state insurance mandates, which artificially i n crease the cost of insurance, simply would be transferred to the federal level.

Another source of instability is the assumption that co-payments and other forms of cost sharing would be raised to keep pace with general inflation. In deed the Commission f ails to recommend such a basic inflation adjustment for future years. If the proposed coinsurance rates remain constant over time their real values will erode and their effectiveness in deterring wasteful con sumption will gradually diminish. In the case o f beneficiary cost sharing, Corn missioner Cogan points to the Medicare outpatient deductible as an example of how political pressure generated by benefipries would produce results contrary to good economic and health policy. In the quarter-century histor y of Medicare, Congress has increased that deductible only twice, from the original $50 to the current 75. Had the deductible simply increased accord ing to the general inflation rate, needed for its effects on consumer behavior to remain constant, it woul d today be $203 Commissions proposed scheme would soon manifest itself in other ways as well. As insurance costs escalated, Congress would come under increasing pressure from business and taxpayers to regulate health care providers. The result would be a g r owing web of government regulations, restrictions, and price fixing, leading inevitably to even more distortions in the system. U1 timate1y;Congress would be faced with the option of either deregulating the system and handing the resources and decision-ma k ing power back to con sumers and providers, or, more likely, following regulatory logic to its natural conclusion by creating a fully nationalized system Web of Regulation. The political and economic instability of the I I It is actually quite likely that the greatest pressure for a fully nationalized system would come from employers. By proposing a universal system of man I 7 Ibid,p. 169 12 A government monopoly, of course, would achieve some initial savings, but over time it would become as unresponsive a nd inefficient as any other monopoly.This pattern can be seen readily born the experience of other countries with national health systems. In common with such countries as Britain and Canada, the U.S. would face large problems in trying to control the act i ons of both providers and consumers. Consumers would demand more and more services; providers would resist cost controls. Eventually, as in all nationalized systems, the government would only be able to restrain es calating costs by imposing a cap on tota l health care spending, with the in evitable results of rationing and waiting lists, to adjust the disparity between unrestrained demand and finite resources. In Canada, for instance, patients can expect to wait four to seven months for heart surgery, two t o five months for disc surgery, two to seven months for cataract removal, and up to a year for hemorrhoid surgery or hernia repair. 8 I 8 Steven Globerman and Lorna Hop WaitingYourTurn: Hospital Waiting Lists in Canada,nFmserForum The Fraser Institute, Va n couver, Canada, May 1990, pp. 16-21 13 Reform current public assistance programs to provide low-income Americans with vouchers based on income to use in purchasing medi cal care and health insurance Require all heads of households to purchase basic catast r ophic health insurance for themselves and their families thing other than a policy disaster ber two very important points Before enacting any long-term care legislation, Congress.needs to remem Fund these changes by eliminating the current tax exclusion f o r emp1oyer:provided health insurance, thus making them budget neutral With this system of tax credits, working Americans would be able to buy for themselves the health insurance and medical care they needed for themselves and their families. Furthermore, b y putting the dollars and decision-making power back in the hands of consumers, this strategy would provide new incen tives for Americans to seek the best value in medical care and health in surance. In this way, consumers would exert pressure on provider s and in surers to become innovative and efficient. All parties concerned, consumers providers and insurers, would be tangibly and directly rewarded for any steps they took to curb escalating health care spending and reduce or eliminate ad ministrative cos ts and wasteful or marginally useful purchases WRONG GOALS IN LONG-TERM CARE 9 Butler, op. cit.

For a more detailed explanation of these and related proposals, see Butler and Haklmaier, op. ciL, and 2) While reforms in Medicaid are needed so that existing funds can be used more efficiently, those most worried about long-term care costs are not the poor. Rather, they are older workers and retirees with com fortable levels of assets and income, who are ineligible for Medicaid.

These Americans correctly fear that the potential costs of long-term care couldcompletely consume the savings and assets they have care fully accumulated over a lifetime, leaving nothing for their heirs While it is easy to sympathize with these fears, the fact is that long term care fo r middle-income and upper-income Americans does not concern access to needed medical care, but questions of asset protec tion and estate planning.

With workers already funding $356 billion a year in subsidies to the elderly through Social Security and Medi care, to call for imposing on them another 42.8 billion in taxes simply to protect the private estates of affluent senior citizens is irresponsible. Not one cent of the new spending proposed by the Pepper Commission would go to help impoverished senior ci tizens obtain care they currently need but is not already provided for them by Medicaid.

Furthermore, from an insurance perspective, even the very structure of the Commissions proposed long-term care program is backward. The program would provide the most generous benefits to those facing the least risk.These are the relative majority of disabled elderly Americans who incur short nurs ing home stays or need only limited spells of home care assistance.The much smaller number who incur long stays in a nursin g home or need more exten sive home care would still face large out-of-pocket bills. Such inverted scheme might be attractive to Congressmen seeking to buy the greatest num ber of votes from their elderly constituents, but it cannot be called insurance and it is no solution to the long-term care problem.

Moreover, the likelihood of the costs of such a program ballooning com pletely out of control in future years is just as acute as in the medical care sys tem envisioned by the Pepper Commission. Warns Commi ssioner Cogan in his dissent to the report During the last 15 years, numerous proposals have been brought before the Congress to provide long-term care assistance for the elderly. Each proposal has failed enactment. The principal barrier has been long-ter m cares exorbitant expense and the well-recognized fact that we have no known method of controlling its ex plosive cost growth. Nothing in the majoritys recom mended plan alleviates these concerns. While I have great respect for the Commissions staff, I ha v e no con fidence that the estimated cost of $42.8 billion will prove accurate. More likely, the estimate will prove to 15 be onl a fraction of the recommendation's eventual cost. 1J THE ALTERNATIVE STRATEGY Congress's role should not be to create an enorm o us new federal entitle ment program that imposes additional, heavy taxes on working America simply to further subsidize fluent retirees. Rather, Iawmakers should stick to the more appropriate tasks of improving the delivery of long-term care ser vices to t he poor those who legitimately need government help and en couraging middle-income Americans to use private insurance to protect their assets from nursing home costs -precisely the same prudent actions they take to protect themselves from other financial catastrophes.

Specifically, Congress should Restructure the public assistance for long-term care, now provided through Medicaid, to create a more responsive program for meeting the needs of the elderly poor; t tives, to buy long-term care insurance while t hey are younger and the premiums are low, to protect themselves when they retire Provide tax relief to help working families willing to shoulder the cost of providing non-institutional we to their elderly relatives Change existing tax policies and regulat i ons to enable today's middle-in come and upper-income retirees to obtain more affordable long-term care in surance, and remove penalties to enable them to use their existing financial assets and resources, such as life insurance and Individual Retirement A c counts, to pay for long-term care services proach to meeting the needs of America's present and future retirees for long-term care, than that proposed by the Commission Encourage working Americans and their spouses, through tax incen Such a strategy con s titutes a much fairer, compassionate and efficient ap CONCLUSION 1 Some 31 million Americans lack health insurance today for at least part of any year.The reason: they have been priced out of the market by escalating health care costs and tax policy that d iscriminates against them. A majority of the Pepper Commission proposes that Congress respond to this problem by throwing more money at it. While such an approach certainly would result in some improvement in coverage, the costs would be unacceptably high . Those 10 Pepper Commission Final Report, op. cit p. 1Z 11 For a more detailed explanation of these and related proposals, see Edmund F. Haislmaier Making Long-Term Health Care More Affordabk Heritage Foundation Buc&pmder No. 755, February 23,1990 16 costs would come in the form of new federal spending, higher taxes, reduced employment and diminished disposable income for Americans.

Basic Structural Reform Needed. Furthermore, even those costs will esca late in future years unless Congress reforms the basic underlying incentive structure that govern the decisions of health care consumers, providers and insurers. The present employer-provided insurance system, and particularly the health care tax policies and regulations that support it, have created a sys t e m in which consumers are encouraged to over-consume and providers to over-price and over-prescribe. Neither consumers nor providers are directly and tangibly rewarded for economy or efficiency. Prudent consumers thus are effectively prevented from pocketi ng any savings they achieve on their health care. And efficient providers and insurers who offer good value -that is quality services at reasonable prices -rarely can attract more customers.

Until this situation is reversed, health care costs will continue to escalate and even more Americans will join the ranks of the uninsured. All the Pepper Commission proposes is to pour gasoline on the inflation fire by legislating ac cess to health and then passing the tab to business and the taxpayer. If Con gress ad opts the Pepper Commissions solution only one thing will change.

The-escalating costs will be expressed not in terms of more uninsured Americans, but rather in terms of higher taxes, fewer jobs and declining productivity and purchasing power. Such a result is hardly a solution.

Needed instead, is for Congress to enact reforms which create a consumer oriented, market-based health care system.Th e keys to such reforms are that 1) Consumers be given control over the money spent on their health care and the power to decide how best to spend it 2) All Americans receive, through the tax code, an equal incentive to pur chase needed medical care and he a lth insurance 3) The tax code and public programs be further reformed to provide direct subsidies to Americans with low incomes or high medical costs, sufficient to increase their purchasing power in the medical marketplace and thus allow them to buy the care and insurance they need.

These reforms would create powerful new incentives for consumers providers, and insurers to seek or provide the best value in health care quality services at reasonable prices. Furthermore, rather than the system being distort ed by the unintended consequences of government attempts to artificially lower health care costs for the needy, a restructured subsidy sys tem would directly give to disadvantaged Americans the extra purchasing power they need to buy into the reformed and improved medical market.

While the Pepper Commission proposes the wrong means to achieve the worthy goal of expanding access to health insurance and medical care for the uninsured, it seeks to achieve the wrong goal entirely in long-term care policy. The goal of reform in long-term care fmcing should not be to find ways for the government to protect the estates of affluent retirees. Rather the goal should be to clear away obstacles in the tax code and government 17 regulations that hamper efforts by Ameri c ans to use private means to protect their private assets. Even more important, Congress should eliminate policies that encourage Americans to ignore their own potential need for long-term care until it is too late to do anything .but rely on government as sistance.

Removing Tax Biases. Equalizing the tax treatment of all medical care and health insurance expenses, including those for long-term care as well as acute care, would be a major step in the right direction. With existing biases removed from the tax code, Americans ;quickly would see that the best value for their health care dollars is found in purchasing insurance for unlikely but expensive events, such as catastrophic acute or long-term care, and not in covering routine medical treatments.To its c r edit, the Commission does propose a small step in this direction, arguing that employer provided long term care insurance should receive the same tax treatment as employer provided acute-care insurance. But this is far from enough, and in the context of t h e Commissions other recommendations would probably have little, if any, effect of health care tax policy, but it should also remove barriers to Americans using their existing financial assets, such as life insurance and Individual Retirement Accounts (IRA Q , to pay for long-term care insurance and ser vices tion to Americas health care problems that many members of Congress had hoped for. Those problems are too important to leave unattended. Congress should put the Commissions report aside and move on with t he difficult task of developing better access to affordable health care for all Americans Not only should Congress make this reform part of an overall restructuring Unfortunately, the Pepper Commission failed to provide the workable solu Edmund F. Haislma ier PolicyAnalyst 18