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f 3 STATEMEIVT THE HONORABLE PETE STARK COMMITTEE ON WAYS AND MEANS November 18, 1993 Mr. Chairman, my purpose today is to suggest a dramatic simplification to the overall structure of the financing and flows of funds under the President's health care reform plan. In brief, my suggestion is to use the tax system, and the IRS, to replace the financial functions of the so-called "regional alliances." In announcing his plan two months ago, the President identified six key objectives for reform. One goal is to simplify the existing, complex system for financing health care. I strongly support this objective. However, I'm sorry to say, the President's plan has failed to meet this goal. Two weeks ago I asked the Congressional Research Service to identify all of the transfers of funds within the Clinton plan-- payments from one entity to another. Based on its review of the available statutory language, CRS identified 60 separate pipelines of money from one type of organization, or level of government, to another. - A vastly simplified version of the flow of money under the Clinton p'lan is shown in the first chart (see attached). A copy of the CRS memo identifying all 60 transfers is also attached to my statement. - As just one example of the complexity designed into the Clinton plan, consider the case of large employers who establish corporate alliances. In such a case, the employer would have to: 1. Make four separate payments to the Federal government (an assessments for a national risk pool, for coverage of early retirees, for graduate medical education, and payments into a guaranty fund); 2. Pay premiums to multiple health plans; 3. Pay fees to providers (if any single plan is self- insured); 4. Pay regional alliances premiums if enrollment is less than 100 persons in any given region; 5. Pay regional alliances premiums if employees chose such coverage through employment of a spouse; and finally 6. Rebate excess premiums to individuals who chose plans with premiums below 80% of the average cost plan. In the case of large, multi-State corporations, each firm could owe payments at least 50 different regional alliances. A careful analysis of the Clinton plan shows that'"much of this complexity is due to the creation of new financial intermediaries known as the regional alliances. In the Clinton plan, these State run entities perform several functions. They pool premiums from employers to establish area-wide community rating. They coordinate the payment of premiums from two-worker couples. They review and approve applications for low-income and small business subsidies. They act as a conduit for the transfer of Federal subsidy funds to each of the health plans. -1-

s t The health alliances have been fairly characterized as untested, unnecessary, bureaucratic organizations. They will require billions in Federal grants and loans to get started, and will cost as much as $10 billion annually--2.5 percent of premiums--to keep in full operation. Many of their financially- related functions are either already being done by some public agency, or could easily be assigned to one. There must be--and there is-- a simpler, better way. My suggestion, shown in the second chart, is based on the simple observazion that an existing Federal agency--namely the IRS--could perform the collection and disbursement functions of the alliances with less duplication and lower administrative costs. The advantages of using the IRS to collect health care premiums are numerous: 1. Familiarity with the System Both individuals and emnlovers are used to reporting income, withholding income taxes and employment taxes. It would be easier to build on the current collection system than to create an entirely new separate system for paying health premiums. Building on the tax filing system reduces paperwork requirements for individuals and employers rather than creating a new structure which must ascertain numbers of individuals covered in a household, whether there is an emplover and how much of the premium the employer has oaid on behalf of a worker, how much premium the worker has paid and whether, based on a detailed analysis of income, a subsidy is appropriate. 2. Confidentiality The Internal Revenue Code requires confidentiality of taxpayer information and the IRS has an excellent record of maintaining the confidentiality of taxpayer information. Any premium payment system that is premised on income will have to duplicate the confidentiality measures which already exist at the IRS. 3. Track Record for Collection of Revenues For Fiscal Year 1992, $479 billion was collected in individual income taxes, $89 billion was collected in corporate income taxes, and $408 billion was collected in payroll taxes for Social Security, Hospital Insurance and Unemployment. Any new entity created to collect premiums will have to replicate IRS's established and proven collection procedures. 4. Verification of income Information for Subsidies The IRS currently has the information (income of individuals and number of dependents) that would be required to verify whether an individual is entitled to a premium subsidy. Alternative collection methods would need to develop new forms and procedures to collect this information and probably require a duplicate copy of a tax return for verification. As with other programs such as SSI, subsidies do not always reach the--intended beneficiaries if the application process too complicated. 5. Efficiency of building on current collection system Involving the IRS in the collection of health care premiums may very well increase the IRS workload. However, the IRS should be able to accomplish the desired result more efficiently than a new entity because by utilizing existing procedures. I would be amazed if the IRS would spend even a fraction of the billions that would be required to support the proposed system of alliances. -2 - Y. : a-

I It is important to recognize that using the IRS to facilitate the flow of money does not prejudice any oarticular lan to reform the health care financing or delivery system. it merely simplifies the flow of money and maximizes the administrative efficiency. Obviously, it would work for a single payer plan, such as Medicare for all. But it would work lust as well for reforms based on other r.odels--even for managed competition. For example, under the Clinton plan, health plans could still bid and negotiate premiums. The premium dollars would simply be transferred to the plans from the Federal government instead of from the alliances. Premiums could still be pooled across geographic areas. Large employers could still elect to contract directly with Federally approved health plans. The same levels and types of subsidies could be provided; they would simply be calculated by a different entity--the IRS. I have explored this concept with both the Tax Staff of this Committee, and the staff of the Joint Committee on Taxation. Thus far, neither has identified any insurmountable problems. There certainly are questions and issues that would need to be resolved, as would be the case for any plan. However, many of the issues that need to be addressed in the collection of premiums are currently resolved in the Internal Revenue Code. I would like to highlight some of these issues in my oral testimony and refer you to a memo prepared by the Joint Committee on Taxation which further details the way the Internal Revenue Code addresses the same issues for tax purposes. In the tax code, we have procedures in place to deal with the issues such as who gets to claim a dependent in the case of divorce or legal separation. The tax system has mechanisms to ensure that families with more than one worker and workers with more than one employer have the proper amount of tax withheld. The filing of the annual tax returns allows for a reconciliation of accounts. These same mechanisms could apply to the allocation of health care premiums or costs. The tax system already has payment structures for individuals who are self-employed. It has thresholds so that individuals with income below a certain level can avoid filing entirely. Information required to implement the premium subsidy for the low income individuals could be built into the modified W-4 Form. The tax system currently accommodates a District of Columbia family with one spouse employed in Maryland receiving health coverage from the other spouse's employer in Virginia. We do not need to reinvent the wheel to have a premium collection process that we know works in the real world. Mr. Chairman, I recognize Members' reluctance to entertain the idea of new taxes. But my proposal would impose no additional financial burden on our constituents that would not otherwise be reguired as part of the President's health reform plan. In fact, the administrative efficiencies would probably reduce the overall cost. I urge my colleagues to set aside their prejudices, and to seriously consider the obvious advantages of using our existing resources--the Internal Revenue Service--to simplify and facilitate the financial transactions inherent in health reform. I thank you for you attention, and I would be pleased to answer any questions. -3-

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States 9IOSU68 Stark Alternative Federal ® sun Health Plans 0 m m

New and Modified Payment Flows President Clinton's Health Security Act From To Description Automobile Plans Payment for services as a result of auto insurer injury Corporate Federal Assessment for transitional national risk pool alliance Corporate Federal Guarantee funds for self-funded corporate alliance alliances Corporate Plans Premiums (if corporate alliance is insured) alliance Corporate Providers Payments for services (if corporate alliance is alliance self-funded) Corporate Regional Optional regional alliance enrollment of alliance alliance <100 employees in a given region Corporate Regional; Premium for 2-earner family choosing alliance alliance regional alliance Employer Federal Assessment for coverage of early retirees Employer Individual Rebate for choice of low-cost plan if employer pays >80 percent of average Employer Regional Share of premium alliance Federal Employer Modified tax treatment of pre-funded retiree benefits Federal Individual Increased deduction for self-employed Federal Individual Modified tax treatment of long-term care insurance Federal Individual Personal care tax credit, disabled workers Federal Plans Medicare beneficiaries choosing alliance plan Federal Providers Grants to hospitals serving vulnerable population Federal Providers Medicare prescription drug benefit Federal Providers Pay services for enrollees, transitional risk pool Federal Providers Payments for graduate medical education, academic health centers Federal Providers Tax incentives for practice in shortage areas 4 Federal Regional Premiums for Federal employees alliance

a New and Modified Payment Flows President Clinton's Health Security Act From To Description Federal Federal Federal Regional alliance State State Subsidies for employers and individuals Long-term care block grant Payment for Medicare if State operates single-payer plan k ; Federal Federal Federal State State State Per capita payments for welfare recipients Start-up grants for alliance system Wrap-around plan for low-income children and welfare recipients Individual Individual Individual Individual Individual Individual Individual Individual Individual Federal Federal Federal Federal Federal Federal Plans Providers Regional alliance or corporate alliance Higher Part B premium for high-income Medicare enrollee Increased Part B premium for prescription drug benefit Payback of subsidy for high-income retiree Premium for transitional national risk pool Tax on excess benefits received from employer Tobacco taxes (actually collected from manufacturers, importers, etc. ) Supplemental coverage Cost-sharing Share of premium Manufacturer Federal Rebates for Medicare pharmaceuticals Plans lans Federal ederal Assessment for transitional national risk pool Taxes for activities previously treated as tax- m CD ~ Plans Federal exempt IHS facilities as providers Use of VA DOD W Cli 4 , , N ~ Plans Plans Providers Regional alliance Payments for enrollee services Administrative withhold

, ! New and Modified Payment Flows President Clinton's Health Security Act From To Description Plans Regional Withholds for graduate medical education. alliance academic health centers Plans State Guarantee funds Regional Corporate Premium for 2-earner family choosing alliance alliance corporate alliance Regional Federal Administrative withholding in event of alliance Federal takeover Regional Federal Payments for graduate medical education, alliance academic health centers Regional Federal Premiums to VA, DOD, IHS plans alliance Regional Plans Cost-sharing subsidies for low-income alliance enrollees Regional Plans Premiums alliance Regional Providers If regional alliance operates'fee-for-sbrvice alliance plan State Federal Hospital insurance tax for excluded employees State Providers if State operates single-payer plan State Providers Services under long-term care block grant State Providers Wrap-around plan for low-income children and welfare recipients State Regional Medicaid maintenance-of-effort for non- alliance welfare enrollees State Regional Per capita payments for welfare recipients alliance U.S. Posta; Federal Alliance tax Service U.S. Postal Plans Premiums for employees Service Workers Plans Services as a result of work-related illness or compensation injury carrier Source: Congressional Research Service analysis of Health Security Act.