868 Novemk2 7,1991 AS WASHINGTON DITHEXS STATES REMlRM HEALTH CARE INTRODUCTION That bericaa health care costs are skymcketing is something that just abut every Amexican knows. How much they arc skyrocketing is clear bm United States Depart ment of Health and Human S ervices statistics: health spending in America nached 662billionlastyear.

These soaring costs are putting encnmous tinancial pressures on America's busi nesses, causing thousands of small firms to increase the employee dum of health care costs ordrop cover age altogether. And, of course, when the costs of compensating an employee increase, employers begin ducing the work farce. Middle class Americans meanwhile, find themselves struggling not only with higher taxes, but also with higher health can costs asad rainonfamilvincome.

WhileWashington seems politically paralyzed when dealing withhealth cm, the tesarcmoVing.Almogteveystatele~iscansideringsamehealtficane fm. And nearly every policy moatedatthe national level is being debatedin America's state capitals o r actually is being put in place. Although these state experi ments provide a rich source ofinfbrmaticm, however, very few state-based dams ad dnss the mot causes ofout-of-amtrol health care costs and gaps in coverage. Fewer still embrace dorms that would control costs by changing the tax aatment of health to allow Ameri'cans to become health am consumers able to shop around far the best deaL Straining State Budgets. States are intmsted in health care refom because health costs an consuming an ever gnaterp a rtian of state resources. According to the Na tional Association of State Budget Officers (NASBO state Medicaid expenditures in creased by 18.4 pent between 1989 and 1990.' This federal-state health care program for welfare recipients now is the second la r g est budget item h many states, accounting for an average nationwide of over 14 per cent of total state expenditures? If cmnt trends continue, state Medicaid expendi tures will have increased more than 480 percent by the year 2000.3 hgrams for care of th e indigent, state employee health insurance, and other health care expenditures are also severely straining state budgets.

It is no wonder that state legislatures are taking the initiative in health care refurm.

The initiatives differ widely from state to state. Some are explaring employer man dates that quire employers toinsuretheir employees. Many state plans a~e similar to the play or pay model proposed in Congress. Under these plans, such as the Massa chusetts program, employers either must cover all their employees and their families with a minimum package of health benefits or pay a tax into a public program to cover uninsured families.

California, Colarado, Illinois, New York, and some other states; are contemplating Universal health care or version s of national health insurance. Connecticut and South Carolina, meantime, have enacted laws designed to make health insurance more afford able and available for small businesses. kgon is even planning to introduce explicit government rationing of Medicaid health care services.

Toward Universal Access. The pace of health care reform in the states should awaken the Bush Adminisuation and Congress that it is time to fashion genuine health care reform.The aims of the reform would be to keep the A merican health care system the best in the world, to extend coverage to all Americans, to reduce costs, and to con tinue to allow Americans the freedom to choose their health care while giving them a broader range of choices ing the tax treatment of healt h care to help the uninsured and spur consumer choice.

This can be done by ending the tax-free status of company-based plans and introduc ing instead a system of tax credits for the purchase of basic health insurance and the payment of health care costs. B y reforming the tax treatment of health care in this way the federal government can achieve the objective of universal access to affordable health care without increasing the deficit The way to do this is through wider consumer choice of health plans and b y refarm EMPLOYER MANDATE PLANS I Many states feel that the only political and financial way to ensure that their resi dents have adequate health care is to shift the cost of health programs to the private sec tor. Because the Employee Retirement Income S e curity Act (ERISA) of 1974 prohibits states from directly mandating businesses to provide health insurance, seved states are trying to do this indirectly through a play or pay system. By this, an employer is 1 State Ekpenditures Report, National Associati o n of Staw Budget Officers. 1991 2 Ibid 3 Rising Health Custs in America. Washington, D.C Families USA Foundation. October 1990 2 taxed to pay for public insurance for the uninsured, with the tax on his business offset by a tax deduction for the cost of pa y ing for private health insurance to his own work ers. Thus, private employers either must pay for private health insurance for their em ployees or must pay a tax that will finance public insurance for them through a public Program Only Hawaii currently ma n dates employers to pay for health insurance benefits in this way. Massachusetts did enact an employer mandate in 1988, but the program has never been put into effect because of fears that the measure would mise business costs signifcanfly and create unemp loyment and an economic slowdown. Oregon includes an employer mandate as part of its controversial Medicaid reform program, but the em ployer mandate requirement would not take effect until 19

95. Other states that consid ered employer mandates during this years legislative session included California, Flor ida, New York, and Pennsylvania. None of the bills, however, passed PLAY OR PAY HAWAIIAN STYLE Hawaii is the only state ever to mandate directly that employers pay for health insur ance for their worker s . Under Hawaiis 1974 Prepaid Health Care Act (PHCA) employ ers must cover all workers who complete at least four consecutive weeks of work, who work at least twenty hours per week, and whose monthly wage is at least 86.67 times the minimum hourly wage. Th e insurance benefits must equal or exceed a state-de fined package of minimum benefits. The employeespmium contribution cannot ex ceed 1.5 percent of his or her gross income, and co-payments and deductibles also are limited. Each employee must be given the option of purchasing dependent coverage but the employer is not required to pay for this coverage.

The Hawaii statute grants few exceptions to these general rules. Government em ployees, seasonal farm workers, and small businesses, comprised of family mem bers for instance, are exempt from the law. So are employers with fewer than eight employ ees. Some firms qualify as economic hardship cases and may receive state subsidies to help with the cost of coverage. But the criteria for such cases are extremely n a rrow and in practice few companies qualify cal, medical, and emergency care; home, office and hospital physician visits; most common diagnostic services; and maternity benefits. The Hawaii law was amended in 1976 to add coverage for drug and alcohol abuse treatment to the minimum package.

The law has been amended further since 1983, adding to the minimum package cover age for certain child health services, in vitro fertilization, new mental health and psy chological services, and most mently, mammography.

Not a Full Mandate Hawaiis experiment with employer-mandated insurance has not achieved its goals of universal coverage and cost control. Nor can the program be credited with the fact that nearly 98 percent of Hawaiian workers now have health in surance. In fact, Hawaiian employers have had a long-standing practice of giving their employees health care, in large part as a way of attracting workers in what has been a very tight labor market. Some 90 percent of all Hawaiian workers were insured before enact m ent of the 1974 law! By some estimates, Hawaiis Prepaid Health Care Act The mandated minimum benefits include: 120 days of hospital care, outpatient surgi 3 added just 46,000 individuals to the health insurance rolls. The Hawaii statute, more over, does n ot mandate coverage of dependents, nor does it apply to the unemployed.

As such, it is not, in practice, a full mandate. In fact, nearly 11 percent of the total Ha waiian population remains uninsured. This is only slightly below the national average of 13 percent The other face of Americas health caxe crisis is rising costs. Hawaiis reform has not appreciably controlled costs. In fact, health care costs are rising faster in Hawaii than almost anywhere else in the nation. Between 1980 and 1990, total health care spending in Hawaii rose 191 percent, considerably higher than the national average of 163 percent. Per capita health care costs in Hawaii in 1990 were $2,469, above the M tional average of $2,3186 Unique Situation. Even though the Hawaii prom falls f a r short in meeting its key objectives, some policy makers see it as the model for a national plan or for other states. They point to almost universal employer-paid coverage in Hawaii. Using Ha waii as a model, however, would be unwise, for in many respect s , Hawaii is in a unique situation. First, and most important, Hawaii benefits as an island very distant from the U.S. mainland. Its isolation means that it is relatively more difficult for com panies to move elsewhere if they feel that the cost of the hea lth care mandate is oner ous. This obviously is not the case with other states.

Second, Hawaiis position as a gateway to Asia makes it alluring to business and thus often worth the increased cost of doing business in Hawaii. Third, there were rela tively f ew uninsured workers when the plan was enacted and few employers not al ready offering insurance. So the mandate was somewhat redundant. And finally, ap proximately 80 percent of Hawaiians are insured through one of two insurers, Blue Cross and Blue Shiel d or Kaiser Pexmanente. From the standpoint of regulatory author ity, this makes the program much simpler to manage NO MIRACLE IN MASSACHUSETTS The second major experiment to farce employers to provi& private health insurance is in Massachusetts. In 1988 t h e state legislature passed the Massachusetts Healthcare Plan (MHP) and Governor Michael Dukakis signed it into law. The program was de signed as a classic play or pay proposal. Employers with five or more workers were to pay a medical security contributio n equal to 12 percent of the first $14,000 dollars in wages of each employee. Employers might deduct from this amount the cost of that employees health insurance or other health cm benefits. The money paid by the em ployer went to the states unemployment a n d medical security funds. These would as sure health insurance to individuals without health benefits through an employer 4 Providing Health Insurance in the Workplace, Washington, D.C U.S. Department of Labor, 1988 5 Health Care in America: State Profile s , Washington, D.C American Association of Retired bns, 1991 6 Families USA Foundation, supra, note 3 1 An Act to Make Health Insurance Available to all Members of the Commonwealth and to Improve Hospital Financing; Chapter 23,1989 4 The Massachusetts Heal t hcare Plan has never been fully put into place. Though the unemployment insurance fund with its mandated contribution is now functioning, the more important part of the program, the medical security fund, repeatedly has been postponed. It now is scheduled to take effect in 19

94. That it will do so is unlikely be cause William F. Weld, who succeeded Dukakis as governor in January 1990, supports repeal of the law.

No Definitive Evidence. Since it has not gone into effect, there is no defdtive em pirical ev idence of the impact of the Massachusetts Healthcare Plan. Studies indicate however; that the programs cost to Massachusetts business during the fmt year of op eration would have been $694 million, forcing businesses to increase spending on em ployee heal t h care by at least 32 percent8 State-mandated health care spending also would throw thousands out of work as the cost of health care rose. Economists such as Clark University professors Attiat Ott and Wayne Gray estimate that the pmgram, if fully in opera t ion, would cost Massachusetts more than 9,OOO jobs9 Studies also indicate that the Massachusetts plan would not offer health insurance to those who cannot affard it. Of the Massachusetts residents currently without health in surance, meanwhile, some 58 er cent have incomes above $20,000 and 15 percent have incomes above $50,0

00. They would benefit from the program. As such, the program would subsidize health care for the middle class and the relatively wealthy at the expense of jobs for the poor and low-skilled.

As in many states, mmover, Massachusetts already has an uncompensated health care pool. This is a program in which the cost of unpaid hospital bills for those without insurance is distributed among all hospitals and, in effect, among all patients t hrough higher service fees. Because of this program, there is no evidence that the poor in Mas sachusetts lack access to quality health care or that the new state plan would signifi cantly improve access for the poor.

Bumping Into Economics. The basic pro blem with mandating employer benefits is that such mandates bump into the wall of simple economics. The amount of compensa tion each worker xeceives for his or her work is directly related to that workers produc tivity. Mandating an inmase in that compens a tion by requiring the employer to pro vide health insurance does nothing to inmase productivity. Thus one of two things happens: either 1) consumers must pay higher prices for products; or 2) more likely in a competitive economy, employers will be forced t o reduce their payroll costs to offset these new and inmasd costs of health benefits. Payroll reductions may take several foxms. One is a reduction in cash compensation, which in practice is unlikely. More probable is a reduction in the number of employee s , either through layoffs or by post poning the hiring of new workers. In either case, unemployment inmases, especially h 11 8 Attiat F. Ott and Wayne B. Gray, The Massachusetts Health Plan: The Right Prescription? Pioneer Institute for Public policy Resea r ch, Boston, Massachusetts, 1988 9 Ibid 10 Ibid 11 For more detailed information, see John Goodman, Gary Robbins, and Aldonna Robbins, Mandating Health Insuroncei Dallas,Texas, National Center for Policy Analysis, February 1989 5 among low-skilled workers for whom mandated health benefits constitutes a relatively large increase in employee compensation.

Both economic experience and economic analysis thus suggest that governments would be making a serious mistake if they mandated that employers cover employees health insurance benefits. Not only does such a mandate fail to address the fact that company-ba s ed insurance is rising rapidly in cost, but a federal mandate for specific benefit packages would limit the ability of employers to negotiate lower benefits with employees ALL-PAYER HEALTH CARE PLANS Various state legislatures look to the Canadian-style u n iversal health care system as a model, ignoring the mounting problems that the Canadians have been having The Canadian plan is a variation of what is called an All-Payer system, with the govern ment responsible for financing the system and contracting wit h physicians and hospi tals to deliver health care services.

Among the states that this year have been giving serious legislative consideration to such a plan are California, Colorado, Florida, Indiana, Iowa, Kansas, Minnesota, Mis souri, New Jersey, New Yak, Ohio, Oklahoma, Oregon, Vermont, and West Virginia.

State legislators supporting Canadian-style health care have formed a national network known asThe State Alliance for Universal Health Ch. They have found a sympa thetic forum with the National Confe rence of State Legislatures (NCSL an influential association.of state legislators. By the end of the 1991 legislative sessions, however none of these proposals had become law. Preliminary hearings we~e held in mode Is land and Washington twelve separate s ystems operated individually by Canadas ten provinces and two terri tories. It is financed jointly by the provinces and the federal government, much like the Medicaid system in the U.S.

Government-Operated System. The proposals considered by state legislat ures this year varied greatly in their details. But all established a single-payer, government-oper ated, tax-funded system designed to ensure coverage to all state residents. Such plans generally would ban private insurance for any benefits included in t h e government plan. In practice, insurance companies would cease to function as insurers, and instead would act simply as reimbursement agencies on behalf of the government. The number of private insurance companies would shrink considerably under such pla n s. Recogniz ing this, Colorados Canadian-style proposal even would have included funding to re train unemployed private insurance agents Although the Canadian system is a national health care system, it is actually 12 For a complete discussion of the fail u res of the Canadian health me system, seeMichael Tanner, Canadian Health Care in America: Prescription for Disaster Tk Stare Factor, American Legislative Exchange Council, June 1991 or Edmund F. Haislmaier, Perception vs. Reality: Taking a Second Look at C anadian Health Care, Heritage Foundation Backgrounder No. 807, January 3 1 199 1 6 .Another common feature of all the Canadian-style health care programs is that they are all very expensive. Virtually all the state proposals would guarantee expensive heal t h benefits and require massive tax increases on state residents Example: In California Senator Nicholas Petris, a Democrat from Oakland, this year inmduced a universal health care program giving all Califomians a comprehens ive package of medical benefits . His proposal included hospitalization, preven tive care, primary and tertiary cm for acute or chronic conditions, rehabilitative care, long-tenn care, mental health services, dental care, and prescription drugs.

The Petris program would be funded through a 10 percent payroll tax on all em ployers. For small businesses, the tax would be phased in over three years. In ad dition, employees and the self-employed would pay a special tax. Also California would increase its tax on unearned income and a special t ax would be levied on gross business revenues Example: In Ohio, a proposal called for a 9 percent payroll tax on total wages paid out by employers, and a 1 percent tax on employees Example: In Kansas, proposed legislation called for an 8 percent tax on th e wages paid by firms, plus an 8 percent income tax surtax on the self-employed, and a 2 percent surtax on interest and dividends. Consumers would pay an extra 10 per cent tax on beer, alcohol, and tobacco products, and a graduated surtax on the per sonal i ncome tax running as high as 5 percent Example: In Illinois, a plan introduced this year would have cost state residents more than $12 billion per year. The Illinois plan would have been funded through higher personal and carparate income taxes as well as higher taxes on alcohol and tobacco Example: In Missouri, a plan costing $6 billion was introduced.

None of these proposals have passed into law PROPOSALS TO REFORM THE INSURANCE MARKET Instead of considering employer mandates or government-financed insur ance, some states have sought to refm the small group insurance market. The object of this is to make insurance mare affable to state residents who are uninsured or lack broad cov erage, or to make it easier and less expensive for businesses to purchase i nsurance for their employees.

According to the Employee Benefits Research Institute (EBRI a Washington-based research organization, nearly 85 percent of all Americans without health insurance are either employed or are a dependent of an employed person. EB RI reports too that nearly half of all uninsmd workers are employed by a company with 25 or fewer em- 13 ployees.

This is what prompts many states to fmd ways to make health insurance more afford able for small businesses. Proposals tend to feature two br oad approaches: 1) the elimi 7 nation of state-mandated health benefits in employer-based plans in order to bring down the cost of such insurance to businesses; and 2) changes in the laws governing the ways in which insurance companies write insurance ben e fits packages in order to assure wider coverage of state residents I State-Mandated Health Benefits There is a growing consensus that mandated health insurance benefits are a major contributor to rising health insurance costs, pushing health insurance bey ond the reach of small businesses. Mandated benefit laws quire all health insurance contracts writ ten within a state to cover specific diseases and disabilities and to pay for spdic health care services.

During the past two decades, state legislatures hav e enacted hundreds of such man dates, usually as a result of physicians groups wishing to have their specialty services covered by all insurance policies. In 1970, there were only thirty mandated benefit laws nationwide. Today, there axe more than 7

00. Maryland alone has

49. These man dates cover services of all kinds of medical conditions, from AIDS to alcoholism and from acupuncture to in virro fertilization. l4 These mandates drive up the cost of health insurance. Blue Cross and Blue Shield of Maryla nd, for example, estimates that Marylands mandated benefits requirements ac count for 13 percent of the costs of all claims paid.15 Mas..achusetts Blue Cross and Blue Shield estimates that mandates add $54.74 to the monthly cost of each policy in that sta t e. l6 These inmased costs are particularly onerous for small businesses, which typically operate on very tight profit margins and in any case tend to pay more for health insurance coverage. As a result, many small businesses reluctantly choose to forego h ealth insurance for their employees. Surveys show repeatedly that most small businesses would offer health insurance if they could. The Number One reason given for not providing insurance is cost.

No Frills Insurance. Inmasingly state legislators are reali zing that eliminating spe cific mandates will reduce the costs and make health insurance more affordable to small businesses. This common sense observation is behind the rapidly growing move ment in many states to allow small employers to buy no frills or bare bones health insurance for their employees, stripped of requirements to provide many extra and costly services.

This means scrapping certain mandated senices that axe peripheral to a basic health care path for ordinary workers and their families, suc h as matment for mental dis orders or substance abuse. The National Federairon of Independent Business (NFIB a 13 Updare: Employes without Health Insurance, Employee Bendits Research Institute, 1990 14 For a general discussiOn of the problems of statemand a ted health insurance benefits, see Goodman, et al State Mandated Health Benejirs: The Wrong Prescription, Washington, D.C The Stae Factor, American Legislalive Exchange Council, January 1990 15 Mandated Benefits Study, Blue Cross and Blue Shield of Maryla n d, March 1988 16 Mandated Benefits Study, Blue Cross and Blue Shield of Massachusetts, October 1988. membership organization of some 500,000 small companies, estimates that basic poli cies free of state mandates could cost 25 percent to 45 percent less th an plans contain ing state mandated benefits.

This year, Arizona, Arkansas, Iowa, Maryland, Montana, New Jersey, North Caro lina, North Dakota, and West Virginia enacted legislation to exempt small employers from mandated benefits. Sixteen states now permit bare bones policies for small businesses. In addition, Georgia passed legislation permitting such pol icies for individ uals earning less than 200 percent of the povertylevel.

Elsewhere, the terms of the debate are clearly shifting against mandated benefits as the social and economic cost of imposing such mandates sinks into the thinking of more and more s tate legislators. And while existing mandates have not been lifted in most states, lobbyists for physicians groups have found it increasingly difficult to se cure new mandates. Typically, legislation establishing a mandated benefit in most states now requ i res that proposed mandatory benefit to undergo screening first to deter mine its cost-effectiveness and likely impact on the cost and availability of health in surance Underwriting Reforms those insurance underwriting pctices that make it difficult for sm a ll employers to pur chase health insurance Along with limiting mandated benefits, several states have attempted to change Underwriting refarms wexe pioneered last year in Co~e~ticut, and variations of the approach were passed this year in Colorado, Flarid a , New Jersey, North Carolina South Carolina, and Vermont. Refom of health insurance underwriting is being pro moted by a number of prominent health insurance and public policy groups, including the Health Insurance Association of America (HIAA the Blue Cr o ss and Blue Shield Association, the Golden Rule Insurance Company, the National Association of Insur ance Commissioners (NAIC and the American Legislative Exchange Council ALEC a memtxmhip organization of state legislators. l8 have certain feams in common . These include Although the details of these reform proposals differ significantly in each state, they Renewability of coverage. Neither employer groups nor individuals within a pup can have their coverage canceled because of deteriorating health of the g r oup of insured or one of its members 17 Stare Legislanve Responses to the Healrh Insurance Crisis, Washington, D.C National Federation of Independent Businesses, August 5,1991. 18 See, for example, Health Insurers Finalize Small BusinCss Coverage Refom, W a shington, D.C Health Insurance Association of America, March 1,1991; Options for Assuring the Availability of Privare Coverage io Small Employers, Blue Cross and Blue Shield Association, April 1991; Report of the Subcommittee on Insurance Rcfotm Task Forc e on Healrh Care,.Washington, D.C American Legislative Exchange Council, March 1991 9 Continuity of coverage. Once an individual obtains health insurance COV erage in the small employer market and satisfies a plans restrictions, that person should not have to meet those reqhments again when changing jobs or when an employer changes carriers. Some variations of this provi sion for continuity go further by making an employees insurance pack age portable, enabling the employee to carry it from job to job.

Premium limits. Carriers are restricted in how much they can vary insur ance premiums between similar groups. Most plans and proposals also would.limit the extent to which-aninsurer can increase a pups premium from year to year.

Thm is much less consensus, ho wever, over another underwriting reform: guaran teed issue. This is a technical term meaning that no small employer can be refused health insurance coverage by an insurer selling in the small group market. It also means that no employee within a small gro u p can be rejected for coverage. Guaran teed issue virtually ends the current insurance practices of experience rating and medical underwriting. By experience rating, an insurance company calculates future premium increases according to the frequency or am ount of past insurance usage. By medical underwriting, an insurance company limits or denies coverage or sets the ini tial premium for coverage on the basis of the health status and expected risk of an in surance applicant.

Experience rating and medical un derwriting can be applied either to an individual or a group, or an individual within a pup. Because a guaranteed issue requirement in creases the risk to the insurer, most such reform measures also include a mechanism to spread this additional risk throu ghout the entire pup insurance market.Typically this is done through a reinsurance pool, in which insurers insure themselves against unusu ally high costs incurred in covering an individual or group.

Advocates of guaranted issue reform argue that such a le gal requirement is the only way to make sure that all small employers have access to affordable health insurance for their employees. Since small groups, by definition, a less able to spread the risks raised by high-cost employees than a large groups, man y small employers cannot hope to meet traditional experience-based and medical underwriting standards.

Opponents of the reform warn that by adding these high risk employees to the total insurance pool, whatever the risk-spreading mechanism, the state will increase the cost of insurance for all small groups. This cost incre.ase could be substantial. Some actuar ies estimate that premiums could increase as much as 35 percent in some cases, and 15 percent to 20 percent on average. The increased cost thus migh t literally drive small em loyers out of the insurance market as fast as the underwriting reforms bring them in. 8 19 Unintended Consequences, Forbes. April 1.19

91. See also Ted A. Lyle. The False Promise of Small Group Reform. Emphasis,-January 1991;-How ard Bolnick, Hen? We Go Again, Bests Review. 1986 10 RATIONING HEALTH CARE The Oregon legislature this year approved the funding and enforcement of one of the most controversial state health reform proposals in the country. In amending its state Medicaid l aw this year, Oregon guarantees all state residents under the poverty level a basic level of health care. Currently only residents with incomes below 58 percent of the poverty line are eligible for services under the Medicaid program, which is the fed era l-state health care plan for welfare recipients. But, while the Oregon program would extend coverage-to more residents it would not cover all services cmntly provided by the states Medicaid program.2d The plan currently is awaiting approval of the U.S.

Department of Health and Human Services, which must agree to such changes in Med icaid coverage.

Oregons Priority List. In accordance with the plan, the Oregon Health Services Commission drafted a priority list for health services ranking the medical service s available to Oregonians. Issued this spring, this list ranks 709 health cost services by cost, the duration of a treatments benefit, improvement in the patients quality of life and community values. Preventative services and diagnostic care are to be av ailable to all recipients and wm not included in the list.

Wi& the $175 million appropriated by the Oregon legislature for the current fiscal year, the program will pay for the first 585 sewices on the priority list. This means that treatment for swelling of the esophagus is funded; disk surgery is not. Funded too are most childhood illnesses, treatment of most accidents and injuries, immunizations, ser vices for treatable cmcers, and payment for AZT, a drug treating those suffering from AIDS symptoms. Med icaid also will reimburse preventive care services such as mam mograms.

Tax on Wags The Oregon plan, if it goes into effect, will not cover some services cmntly provided by Medicaid. These uncovered items include treatments for illnesses that usually heal slowly without treatment, like viral sore hats and colds conditions that respond to home treatment, like diaper rash and mild food poisoning and treatments that are considered by public health authorities to be either ineffective or not cost-effective lik e lower back surgery, treatment for severe brain injury, care for very premature babies, advanced cases of certain cancers, and advanced cases of AIDS ness. Small businesses would be allowed to institute a basic health benefits package similar to the packa g e that the state delivers to the poor. Businesses failing to pay for health insurance for their employees would be subject to a tax on wages paid, as yet un determined, starting in 1995 The Oregon program also contains a play or pay health insurance manda t e on busi 20 Prwridzatwn qfHealth Services: A Report to the Governor andlegislature. Oregon Health Services Commission 1991 11 LESSONS The Oregon program cannot take effect until it receives a regulatory waiver Bom the federal Health Care Financing Admini s tration (HCFA the division of the U.S. Depart ment of Health and Human Services running the Medicaid program. A federal waiver would grant an exemption from certain Medicaid rules. The waiver request, however is consibd controversial by the Bush Administr a tion. In addition, several liberal members of Congress, including Representative Henry Waxman, the California Deme crat who chairs the powerful House Subcommittee on Health and the Environment have indicated opposition to the Oregon program and may attemp t to block it. The Ore gon program is also coming under fire hm anti-abortion activists and advocates far the disabled, who claim the plans outcome-based priority decisions makes it discrimi natory against premature babies and the handicapped.

Oregons prog ram is significant because it represents the first deliberate attempt by a government body to ration health care services. It provides a potentially important case study of the problems of providing access to health care within a fixed government budget. Since several reform proposals, such as Canadian-style plans, include a fixed budget, the workability of Oregons rationing system may determine the fate of these proposals.

Special-Interest Battleground. As an explicit rationing system, the Oregon pre gram already has become a battleground for interests associated with various disease constituencies and health care specialties. Groups are battling with each other to make sur e that their needs or seMces are included in the list of covered services. Even be fa the program was enacted, legislators bowed,to powerful political pressure by se nior citizens groups and exempted the elderly from the programs rationing mecha nism. AIDS activists and the lobbyists for the disabled are already demanding broader coverage and other groups are likely to follow their lead.

Critics of the plan see the cost control objective eventually being abandoned and re lentless group pressure either to be exempted from rationing or to gain expanded cover age. If political pressure farces an expansion of benefits, the Oregon program will end up simply expanding the number of people eligible for state benefits without control ling costs FOR THE STATES AND T H E FEDERAL GOVERNMENT Some state experiments on health ca~ reform atie based on sound ideas; others are not. What is crucial, however, is that the states are laboratories for reform. It is through this experimentation that good health care policy is likely to emerge.

To be sure, some approaches seem more likely to succeed than others. Instead of 6y ing to mimic Canada, imposing employer-mandated health benefits, or adopting ration ing, state lawmakers would do better to take actions that will make insurance more af fardable for small business employees and their families. The most important ref would repeal state-mandated benefits for insurance packages, bringing down the cost of basic health care in the several states.

Wisely, the National Governors Associ ation this August emphasized the need for more state experiments. The federal government should give such state action a green 12 light by speeding up the waiver process-by which states are given temporary exemp tion from federal des to permit innovative policies to be tried. The Bush Administra tion should grant waivers even when it is skeptical of the outcome, because testing the ories-even though they may seem invalid-is the essence of experimentation.

Federal action is needed not just to encourage stat e experimentation, but also to change the perverse incentives in the tax treatment of health benefits. The current ar rangement distorts state experiments because ardinary Americans m encouraged to make health benefit choices that guarantee inefficiency, r apid price increases, and gaps in insurance. Under federal tax law, money spent by an employer on a worker's health insurance is not counted as taxable income to the worker. Thus, even though that money is part of the worker's total wages, he avoids payin g any income or payroll taxes on it.

Tax Relief. This tax treatment gives American workers and their families very gen erous tax relief on their medical expenses-but only on two conditions. First, they must purchase their medical cm through health insuranc e. And second, they must pur chase their health insurance through their employer.

In many cases, however, it would be mm desirable or cost effective to purchase low-cost or routine medical cme directly out-of-pocket rather than filing an insurance claim, or to buy a Werent health insurance plan than the one offered by the employer.

Workers are heavily penalized for doing this because they receive no tax relief for doing so.

To make matters worse, a worker who has employer-sponsored health insurance who i s cost-conscious, and seeks out providers who offer good quality at good prices is not rewarded, since he or she cannot pocket any savings. Mareover, physicians who dispense more services gadless of their benefit, or charge higher prices, are re warded wi th more income.

Weighing Price and Quality. Washington should complement state experimenta tion by ending the tax incentives that discourage low-cost health cm. Specifically .

Congress should end the tax-free status of company-based health plans, making s uch plans appear as taxable income in the worker's W-2 form. Instead of this tax exclusion Congress should enact a system of tax mdits so that families can buy any health plan they wish, providing it exceeds at least a basic level of benefits determined b y federal law. Such a tax reform would make the cost of plans clearex to families and would give them the incentive to pick the plan with the best combination of quality and price.

Today they have little incentive to be concerned about price. It would also give tax help to those without company-based plans, permitting them to pay for a plan Be cause the current system is a product of the federal tax reform of the current sys tem can be affezted only by Congress, not the state legislatures 21 Stuart M. Butl e r and Edmund F. Haislmaier, eds A National Health Systemfor Americu (Washington, D.C.:The Heritage Foundation, 1989 Stuart Butler A Tax Reform Strategy to Deal with the Uninsured JOWM~ ofrk AmericanMedicalAssociarion. May 15,1991 13 CONCLUSION While healt h cm policy analysts have focused on the debate in Washington, D.C an intense battle is undenway in Americas state capitals over how to refm Americas health care system. Virtually every state legislature this year has consided or enacted some type of healt h care reform legislation. Some have been good. Some bad. Many will affect the future of health cm in America.

Driven by an understandable concern over the impact of skyrocketing health care costs on already fragile budgets, state legislators have sometime s reached for drastic solutions, such as rationing or employer-mandated insurance, which make matters even worse. The best reforms-such as a change in federal tax policy-can only take place in Washington, while many of the worst, such as Canadian-style un iversal care or mandated employer benefits, would be realized at the state level.

Important Guidance. While state legislators should be applauded for taking the ini tiative on health cm reforms, they should nevertheless carefully examine the conse quences of any reforms on access and quality and consider the economic consequences on bu sinesses, employees, and taxpayers. The debate at the state level and the experi ence of programs already intduced provide important guidance.

Health cm is an emotional issue. Since it accounts for oneeighth of the American gross national product, health c are changes could also have a profound effect on the U.S. economy. It is impatant, theRfm, that federal and state legislam pay close at tention to the lessons of the =farm movement at the state level Repared for The Heritage Foundation by Michael Tanner D irector of Research Georgia Public Policy Foundation Atlanta,Georgia 14