The Elements of Health Incentives Reform

The Health Incentives Reform package contains a number of specific provisions which address each facet of our multipronged strategy First, it initiates Medicare coverage for the catastrophic costs of lengthy hospital stays and improves Medicare's cost-sharing provisions. These reforms encourage efficiency while reducing the cost burden on the severely ill

The plan establishes a prospectively-set hospital rate structure under Medicare that rewards cost effective hospital practices. This contrasts with the traditional Medicare p of reimbursing hospitals retrospec tively for whatever "reasonable" costs they incurred

The plan limits the open-ended tax subsidy of relatively high-cost private health Janis, which biases employee compensation towards elaborate health coverage instead of cash wages

The plan expands opportunities for Medicare beneficiaries to use their benefits to enroll in private health plans as an alternative to traditional Medicare coverage

The plan freezes payments to physicians under Medicare's reasonable charge system for one year at 1983 levels

The plan provides for gradual vearly increases in the Medicare Part B premium at. 1 deductible once again to cover a suffi cent portion of the program's costs through beneficiary payments

De plan expands authority under Medi care for the use of competitive bidding procedures and other cost efficient approaches for the purchase of laboratory services, duratar medical equipment, and other nonphysiciani – services and supples Further n. re payment for durable medical equip ment provided through home health agen cars woud be limated to 50 percent the percentage covered by Medicare

ur, der other circumstances

A provision of the plan will entitle the derly to Medicare benefits on the first day ₫ the ful month that individuals meet all , *.. tv conditions At present entitle ment begins on the first day of the month in which an indiva fual meets the conditions. fe only one day. This proposal is consistent with initial Social Security eligibuities for

individuals who attain age 62 Also, most private insurance coverage now remains in effect until Medicare coverage begins, thus most beneficiaries would not be affected

Finally, the plan makes two changes in Medicaid The reduction in Federal pav ments to States authorized by the Omnibus Budget Reconciliation Act of 1951 would be extended beyond 1984 for an indefinite period. The reduction would be cut, however, from 45 percent to 3 percent In addition, Medicaid beneficiaries would have to make nominal copayments for outpatient visits and hospital stays

Our legislative package contains additional Medicare and Medicaid provisions to strengthen program management, simplify requirements for program participation, produce savings in program spending, and reduce waste, fraud and abuse in these programs

Medicare Catastrophic Coverage and Cost
Sharing Reform

The "Medicare Catastrophic Hospital Costs Protection Act of 1983" improves coverage for long and expensive hospitalizations and introduces modest coinsurance on the initial days of hospitalization

The current Medicare Hospital Insurance program neither adequately protects beneficiaries in cases of prolonged illness, nor provides financial incentives to mini mize unnecessary utilization of services Medicare covers only 90 to 150 days of hos pitalization during a spell of illness depend ing on whether a "lifetime reserve" of 60 days has been previously exhausted, even if additional hospitalization is clearly warrant ed After the 60th day, cost sharing becomes onerous Patients pay 25 percent of the inpatient hospital deductible" $%% day for the 61st to 90th day and 50 percent -$175 day for lifetime reserve days. On the other hand after a deductible is paid for the first day no coinsurance at all is im posed until the 61st day of hospitalization eliminating any financial incentive for the beneficiary to leave a hospital as soon as it is medically advisable to do so

The bill provides Medicare reimburse ment for unaumited days of hospitalization under the Medicare Hospital Insurance pro

gram. At the same time, the bill imposes coinsurance for a maximum of 60 days annually (8 percent of the inpatient hospital deductible for the 2nd through 15th day of a spell of illness and 5 percent thereafter) to encourage beneficiary cost-consciousness and the efficient use of health resources. The bill also limits to two the number of inpatient hospital deductibles that could be imposed annually (no matter how many spells of illness occur) and reduces the skilled nursing facility coinsurance rate from 125 to 5 percent of the inpatient hospital deductible.

Prospective Payment for Inpatient Hospital Services Under Medicare

The "Medicare Prospective Payment Rates Act" will establish Medicare as a prudent buyer of services and will ensure for both hospitals and the Federal government a predictable payment for services. This system of payment can be implemented in October, 1983.

Medicare traditionally paid hospitals retrospectively determined reasonable costs. This system essentially paid hospitals for whatever they spent. There were, therefore, weak incentives for hospitals to conserve costs and operate efficiently. It is not surprising that under this system hospital expenditures have been and are continuing to increase rapidly. Medicare expenditures for hospital care have increased 19 percent annually from 1979 to 1982 The cost of a service varies substantially from hospital to hospital

The Tax Equity and Fiscal Responsibility Act (TEFRA) changed this system of hospital reimbursement by placing limits on what hospitals could be paid. My proposal builds upon the TEFRA improvements. This bill establishes a system of prospectively determined rates which will foster greater efficiency in the provision of hospital services Medicare payments for operating costs will be specifically related to the patient's condition, but will not vary from hospital to hospital (except to allow for differences in area wage rates). Rates will be set for each of 467 diagnosis-related groups. Capital expenditures and medical education costs will be excluded initially from the calculation of basic payments and reimbursed

separately. Additional payments will be made for unusual cases involving exceptionally long hospital stays.

To the extent that a hospital operates effciently it would earn a surplus, and to the extent it operates inefficiently it would show a deficit. Hospitals with higher costs will not be able to pass on extra costs to Medicare beneficiaries and thus will face strong incentives to make cost-effective changes in practices.

Changes in the Tax Treatment of Employer Contributions to Health Plans

The Health Costs Containment Tax Act of 1983 is designed to encourage employers to provide an adequate level of health benefits to their employees, while eliminating the open-ended tax preference for health bene fits over cash wages.

Under current tax law an employer's contribution to an employee's health plan is not included in the employee's gross income This bill will limit tax-free health benefits paid by an employer to $175 per month for a family plan and $70 per month for individual coverage. These limits will be indexed to increase yearly in proportion to the Consumer Price Index. Employer contributions above these amounts will be included in the employee's income and taxed (income and Social Security) accordingly Thus, individuals can choose to purchase as much health insurance as they wish with after-tax dollars, but the tax laws will not subsidize the purchase of unlimited health insurance.

Elaborate health benefits funded with tax-free, employer-paid contributions are in flationary-they insulate consumers, providers, and insurers from the cost conse quences of health care decisions By doing so, they contribute both to the persistence of inefficient forms of health care financing and delivery and to overuse of health serv ices. The limit on tax-free benefits will help to alleviate these problems while allowing employers to provide adequate tax-free coverage to protect an employee against the serious financial consequences of illness Employees will be free to purchase more comprehensive health care coverage with after-tax dollars.

The proposal will be effective on January 1 1984 except with respect to collective bargaining agreements in effect on January 1 19%, which will not be subject to the few rules until the earher of January 31, lsh or the first date on which such agreement is reopened after January 31, 1983 Ojinal Medicare Voucher

The provision of the Health Incentives Korem package that creates an opportunity for Medicare beneficiaries to enroll in alternative health plans is contained in the Medicare Voucher Act of 1983 "

Last year Congress, with the support of Admanistration, amended the Medicare statute to permit payments on a risk basis to HMO and other competitive medical plans at provide Medicare beneficiaries with verige at least as extensive as the Medicare benefit package. The optional voucher provision will bund on current law by alawarg Medicare beneficiaries to use Medi

• Iment in a private health plan will „titary. Once a year beneficiaries will the of porturaty to switch private plans or to elect traditional Medicare erage. A quashed health plan may be an HIMO

an in de manity insurer or a service"

fari A private plans must cover at a marimean the services provided under A and B of Medicare and must par tale in a coor finated annual open en twi

Meliare Phynuran Puyment Freeze and kaj stai hermburu ment limite

The other provin ns of this package are mvd," a tied in the Heath Care Financial

charges for physician services will be held at 1983 levels for one year beginning in July, 1984 Under current law prevailing charges would otherwise be increased in July, 1984, by the annualized 1984 value of the Medicare Economic Index while in creases in customary charges would not be constrained This limit is consistent with other steps contained in the Budget to reduce the structural deficit

The Tax Equity and Fiscal Responsibility Act TEFRA limited the increase in hospital expenditures under Medicare to the increase in the cost of goods and services hospitals purchase the hospital "market basket index") plus one percent This provision amends TFFRA to limit the rate of increase in hospital expenditures for fiscal year 1984 only to the increase in the hospital market basket index

These proposals are part of a govern ment wide freeze aimed at reducing the Federal deficit Medicare spending for physicians increased by 21 percent in 1982 and is expected to rise by 19 percent in 198d and 17 percent in 1984. As mentioned earl er, Medicare hospital expenditures have grown at comparable rates. In this time of fiscal crisis, we must ask all participants in the health care market physicians hospi tals, and program beneficiaries, to do their part in slowing increases in spending Graduated Increases in the Supplementary Medical Insurance SML or Part B. Premium

This provision will freeze the Part B premium at the present. $12-20 per month for the remainder of 1985, instead of increasing it to $15/50 in July, as was previously an nounced The delay coincides with the delay in the cost of living increase for Social Security recommended by the National Commission on Social Security

In January 1984 the Part B premaum wal be set at 25 percent the percentage specified in current law of pro„ram costs for ased benchi janies for that calor, far year Over the next four years the Part B pre maum will be increased 25 percentat peints each year to reach 15 percent of pr. gram costs for the e derly in JanGATA 19ss Thereafter the premam for each cal endar year would be set at 15 percent of

program costs (the actuarially adequate rate) for the elderly for that year. When Medicare began, Congress envisioned that the elderly would bear 50 percent of SMI costs and the law initially required that SMI costs be equally financed by the general taxpayer and the users of SMI services.

By gradually raising the SMI premium to 35 percent of program costs, this provision provides for a more equitable balance between general revenue and premium financing of Medicare Part B.

Indexing the Part B Deductible

The Part B deductible will be increased in January of each year based on annual changes in the Medicare Economic Index. This provision would maintain the constant dollar value of the deductible.

The 1981 Reconciliation Act increased the Part B deductible from $60 to $75. Before this amendment, the deductible had remained at $60 since 1972, despite a 250 percent increase in program reimbursements per aged enrollee between 1972 and 1981.

Current law does not provide for future increases in the deductible. As a result, the initial beneficiary liability for medical serv ices will decrease in real terms over time and these costs will be shifted to the Feder

al government. Furthermore, the value of the deductible as a deterrent to unnecessary utilization will again diminish.

Other Proposals

The legislation I am submitting today includes other items, all of which are designed to make Medicare and Medicaid more effective and efficient programs. They include, among others, proposals for competitive purchasing for laboratory services and durable medical equipment and reimbursement charges for certain Medicare

services.

Nominal Medicaid Copayments

This provision requires States to impose nominal copayments on all Medicaid beneficiaries for hospital, physician, clinic, and outpatient department services. Specifically, the categorically needy would have to pay $1 per day for hospital services and $1 per visit for physician or outpatient serv

ices. The medically needy would have to pay $2 per for hospital services and $1.50 per visit for physician services. Beneficiaries who are enrolled in HMOs or who are institutionalized would be exempt from all copayment requirements.

First-dollar insurance coverage, such as that which Medicaid provides, leaves the consumer with virtually no financial incentive to question the need for services. Services that are totally free are likely to be overutilized. If patients share in some of the costs, they and their physicians will reduce unnecessary or marginal utilization. There is substantial evidence that cost-sharing can reduce health care costs, mostly by reducing unnecessary utilization.

Budgetary Effect of the Health Incentives
Reform Package and Other Medicare and
Medicaid Provisions

These provisions will have a substantial impact on reducing the size of the Federal budget and the Federal deficit. In fiscal year 1984 this legislative package will have a cumulative budgetary impact of $4.2 billion: the net Medicare impact of spending reductions and premium increases is a budgetary reduction of $1.7 billion; Federal Medicaid spending reductions amount to from the change in the tax treatment of $256 million, and increased tax revenues employer-paid health benefits amount to $2.3 billion. These savings are sustained and, in fact, grow in subsequent years.

The legislation that we are advancing today reflects our most thoughtful effort to address and reform the basic economic incentives that operate in the health care sector. Since health care now represents over 10 percent of our Nation's Gross National Product and is growing as a proportion of GNP each year, the enormous task of structural reform is well worth undertaking. As I mentioned earlier, we have taken great care to devise a legislative package that shares the responsibility for such reform and the burden of reductions in health care financing fairly among all segments of our society. The distribution of budgetary savings among workers and Medicare and Medicaid beneficiaries confirms our efforts in this regard

Our need to constrain the growth of our national spending for health care in the interests of a healthy and stable economy is urgent Regulatory approaches to health care cost containment tried previously have proven ineffective and sometimes counter productive to this goal. I urge you to join

me in facing the challenge before us and consider favorably our approach to health incentives reform.

The White House, February 28, 1983.

RONALD REAGAN

to Switzerland

February 28, 1953

The President today announced his intention to nominate John Davis Lodge, of Connecticut, as Ambassador to Switzerland He world succeed Faith Ryan Whittlesey, who has accepted the position as Assistant for Pic Liaison at the White House.

Mr. Lodge served in the United States Navy in 1942-1946 and was in the United States Naval Reserve until 1966, as captain He was a law clerk with Cravath, de Gers5 Swame and Wood New York City in 1691951 and in 1931-1932, he had an ir f.vidual law practice in New York City From 1952 to 1942, he was an actor with m. ti n picture producing companies in the Ur, ted States, England, France, and Italy In 1946 he was with the American EconomFoundation From 1946 to 1950, he was a Urated States. Representative from the State

of Connecticut and was Governor of the State of Connecticut in 1951-1955. He was Ambassador to Spain (1955–1961) and to Argentina (1969-1974) From 1961 to 1969, he was on speaking tours and engaged in political activity. Since 1974 he has been a speaker and writer in Westport, Conn In 1982 he served as United States Repre sentative to the Thirty-seventh Session of the General Assembly of the United Nations.

Mr Lodge graduated from Harvard University (BA, 1925) and Harvard Law School JD, 1929. He attended the École de Droit in Paris in 1925-1926. His foreign languages are bilingual French and Spanish, fluent Italian, and some knowledge of German. He was born October 20, 1903, in Washington, D C

The President today announced his intenten to appoint James B Furth, Jr, to be Fesderal Representative of the United States on the Sabine River Compact Administra ten Louisiana and Texas. He will succeed Larar Þ. Cartoon

Mr. Furth has operated as an independ ent geel gust primarily in Mississippi Ala bama Florida north Louisiana, east Texas,

and Arkansas, since 1960 From 1954 to 1960 he was employed as petroleum geolo – gist by Ohio Oil Co (now Marathon Oil Co i in Jackson, Miss

He graduated from the University of Texas at Austin BA, 1948 BS, 1950 He is married, has three children and resides in Jackson, Miss. He was born April 13, 1926 in Marshall Tex