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OSEC Congressional Testimony

Statement of Robert B. Reich Secretary of Labor before the Senate Committee on Small Business [03/10/94]


Mr. Chairman, Mr. Pressler, Members of the Committee.

Thank you for giving Administrator Bowles and me the opportunity to discuss the Administration's health care reform plan. These hearings demonstrate your commitment to a thorough exploration of issues which are of profound importance to the Nation. I know that members of this committee have worked extremely hard to advance the concept of meaningful and effective health care reform, and I want to applaud those efforts.

Last Fall, President Clinton and the First Lady each made historic appearances before Congress. They described for you a comprehensive plan for providing all Americans with health care coverage. The plan is based on six principles: security, simplicity, savings, choice, quality, and responsibility. With the introduction of the Health Security Act, the President has provided us with something that can be found nowhere else today: a blueprint for the comprehensive reform of our failing health care system.

Today, I would like to focus on the urgent need for health care reform and the substantial benefits it will bring to small business owners and their workers.

Health Care Costs Too Much Today

If there is one point we can agree upon, it is that we are spending too much for health care today. As a nation we pay the highest costs for health care in the world, spending a far higher percentage of our gross domestic product than any other industrialized country. Health care now consumes nearly 15% of GDP. Left unchecked, these expenditures will rise to about 18% of GDP by the year 2000 --just six years from now.

For all that money--for that truly staggering sum--what kind of health care system are we giving ourselves? What kind of value are we getting--now, and in six years when we will be spending almost 18% of GDP? I won't take your time now for a full discussion of the serious inadequacies of the current system. I know many of you are already well-informed on this subject. Let me just share some recent figures on a couple of points. Last year, the most recent data showed that 37 million Americans had no health insurance. The data available this year show that the figure has now risen to almost 39 million. A sobering study by the Children's Defense Fund reveals that, as bad as the rate of uninsurance is for the general population, it is substantially higher for children. In fact, the study indicates that by the year 2000, barely half of the nation's children will be covered by health insurance through their parents' employers. This is the health care system that we will be paying $1 trillion for next year.

Businesses Are Paying Too Much

Now, I want to make one point as clearly as I can. Today, nine out of ten of the non-elderly who have private health insurance get that insurance from an employer. Therefore, when I say that "we" are paying too much for health care, I am saying that employers are paying too much for health care.

Business currently spends over $200 billion on health care. Real business spending on health care per employee has risen by 200% since 1970. Remarkably, business health care expenditures now nearly equal after-tax profits. For a business, every dollar unnecessarily spent on health care is a dollar that cannot be invested in plant and equipment, research and development, higher wages, or workforce development.

A major element in the exorbitant prices that businesses are now paying for health insurance is the bloated and highly inefficient administrative structure we have for health insurance today. Over $45 billion of health care expenditures went for administrative expenses in 1992. And no wonder. Doctors, nurses, and hospital administrators must contend with 1500 different claims forms, most of which must be filled out by hand and submitted to more than 1000 different health insurers. And on top of all this, fraud and abuse may account for up to 10% of U.S. health care costs.

Another reason for the soaring cost of employee health insurance is that the premiums businesses are paying for this insurance are being inflated by $25 billion each year to cover the health care of those without insurance. In America, we don't leave the ill and injured to suffer and die just because they have no health insurance. Acutely ill uninsured people can obtain care, even if they can't pay, at hospital emergency rooms, which is an exceedingly expensive form of care. The hospitals recoup these costs by indirectly passing them through to insurance companies, who in turn raise premiums for those employers who do provide their workers with insurance.

A Brookings Institution study recently cited research that private payers pay about 130% of their actual costs.

Who are these uninsured people that are adding so much to the cost of health insurance? They are not the poor and unemployed, who are generally covered by Medicaid. The fact is, almost 85% of those without insurance are working people and their dependents. The businesses that employ these people are gaining a competitive advantage in a way that is economically unproductive and that we all surely find unacceptable: by shifting the cost of their employees' health care onto the backs of responsible businesses.

Workers Are Paying Too Much

As we have increasingly come to recognize, the fortunes of businesses and their workers are closely intertwined. It should be no surprise, therefore, that the pressures experienced by businesses as a result of skyrocketing health care costs are felt with full force by their employees.

In an ever more competitive environment, businesses have to a large extent passed on these rising health care costs by holding down employees' compensation. One way of doing this has been to redirect money that would otherwise have gone to wages. The Brookings Institution has estimated that rising health care costs have consumed 58% of workers' potential wage increases since 1980, and, if left unchecked, will soon consume 100%.

It is estimated that the average worker today would be earning almost $600 more per year if the cost of health insurance had not outpaced wages over the past 15 years. At the current pace of cost increases, by the year 2000, workers could lose another $1000 in annual wages.

Another response to escalating costs has been to require workers to pay an increasing share of their health care costs. Employer efforts to increase their employees' share of health care costs were a key issue in almost half of the major strikes in 1990. Labor agreements have increasingly shifted health benefit costs to the workers.

The alternative to reductions in compensation is to reduce or eliminate entirely the health care coverage itself. And in fact, the percentage of employers providing coverage has been eroding steadily in recent years. Employer coverage of the non-elderly population fell from 66.8% in 1988 to 62.5% in 1992.

Skyrocketing health care costs are only part of the problem for American workers. Surveys show that up to 30% of workers are "locked" into their current jobs because they fear their new employer may not offer insurance, or because someone in their family has a preexisting condition that would not be covered if they switched jobs. Job lock is a serious impediment to workforce mobility at a time when the economy needs a more flexible, agile workforce.

Among part-time workers, only 28% of those who work in large firms, and 5% of those who work in small firms, participate in health care plans at least partially supported by employers. Temporary workers have an even harder time qualifying for medical benefits.

Concerns about health insurance also contribute to "welfare lock." Studies show that a substantial number of non-working welfare recipients would be more likely to work if they could be assured of continuous health care coverage.

Small Businesses Are Handicapped Under the Current System

While the explosion in health care costs has been felt by every American business, its impact on small businesses has been especially damaging. Soaring insurance premiums are putting affordable health insurance beyond the reach of more of these businesses every day, while those that can still pay are fighting to remain competitive.

The President understands that small business is the nation's engine of economic growth. He also recognizes that the current health care system is a nightmare for these firms. Small businesses pay premiums up to 35% higher than large corporations for the same coverage. Administrative costs eat up as much as 40 cents of every dollar small businesses spend on health insurance premiums, eight times as much as large companies. Small businesses are increasingly facing the choice of paying unaffordably high rates for health insurance or providing no insurance and, as a result, losing good workers who leave for a job with insurance. In addition, small businesses suffer from the worst aspects of the current insurance system, such as individual underwriting, occupational red-lining and age-rating.

Despite these disincentives, most small businesses still offer health insurance for their workers. As costs continue to rise, however, fewer and fewer are able to continue doing so. Higher health insurance prices not only reduce net income, but increase the competitive advantage the business can gain over others by terminating its employee health insurance. It is pushing businesses to shift health care costs onto their employees or other businesses.

The Remedy: The Health Security Act

A number of reform proposals have been made which claim to achieve the same goals as the President's proposal, including the key issues of universal coverage and meaningful cost control. The President's approach, however, is the only one that provides all the specifics on exactly how these goals will be achieved. And no other proposal will so dramatically improve the terms on which health care will be available to small businesses.

Let me list for you the benefits of the reform proposal detailed in the Health Security Act, and then I will explain them in turn.

  1. Cost-Savings -- A truly competitive health insurance market and major administrative efficiencies will be achieved through the regional alliance system, which will give smaller businesses access to insurance on terms now available only to the very largest employers.
  2. A Level Playing Field -- "Community-rated" health insurance premiums and regional purchasing alliances will lower costs for small businesses, increasing their competitiveness with large firms and increasing profits, wages and jobs.
  3. New Business Formation and Investment -- Reducing health care costs will free more funds for investment, and guaranteeing universal coverage, regardless of employment status, will spur entrepreneurship and new business formation.
  4. Small Business and Low Wage Workers -- The premium discounts provided by the Health Security Act are designed to minimize any potential adverse employment effects on small businesses and low-wage workers.
  5. Worker Mobility-Worker Choice -- Enabling people to keep their health insurance when they find a better job or leave welfare for employment will end job lock and welfare lock. Guaranteed coverage will also free individuals to join or start new businesses. Workers in small firms will be able to choose from a number of insurance plans.
Cost Savings

The establishment of regional alliances is an essential element for achieving the President's goal of controlling costs. By routing health insurance for all small and mid-sized employers through regional alliances, we can eliminate much of the administrative waste that burdens the current system.

Regional alliances will provide a mechanism for large numbers of people to pool their purchasing power. For the first time, small businesses and their workers will have the bargaining clout to purchase health insurance on terms previously available only to the largest employers. For example, administrative expenses in the alliances will be limited to 2.5% and in health plans they will be about 10.9% of claims, compared to the 35% or more that is typical for insurance policies sold to small businesses today. Community rating requirements will also eliminate many of the discriminatory insurance practices, such as individual underwriting and age-rating, that can so dramatically increase the cost of health insurance for small businesses today.

The regional alliances will provide two additional improvements over the current system. First, alliances will provide essential information about the covered population so that health plans can effectively set prices. For consumers, alliances will provide information on plan costs and service quality based on information collected from consumer surveys and the development of health outcome measures.

This is an important change from the current system that will increase competition in the health care market, holding costs down. As every economist will tell you, reliable information is essential for an effective market. Today, however, many poor decisions are made about health insurance because businesses and their employees cannot get good information about the quality of different plans.

Second, the alliances will serve as the negotiating representative of its members, and, to a great extent, will relieve businesses of much of the administrative burden that exists today -- enrollment, for example, will be handled largely by the alliances, and the alliances will provide procedures to resolve benefit claims disputes. Regional alliances can realize the economies of scale that only large businesses enjoy today.

The savings generated by these changes will be significant. A study released this week by the Department of Health and Human Services shows that employers who now pay for employee health insurance will save an average of $605 per worker in the year 2000. This totals nearly $60 billion in that year alone. Net of new expenditures by businesses that are not now contributing to employee health care, American businesses overall would achieve savings of about $30 billion by the year 2000. In addition to the savings achieved by businesses, employees that currently contribute toward the cost of their employer-sponsored health plan will collectively save an additional $29 billion in that year.

The partial integration of workers' compensation medical costs into the new system will also help lessen the burden that these costs impose on American industry. Under the Health Security Act, workers who are injured on the job will receive care through their regular health plan and the doctor they have chosen. Employers will continue to buy separate insurance through workers' compensation insurance carriers on an experienced-rated basis. Regional alliances will set fee schedules for workers' compensation cases.

This policy will ensure that the cost savings of health care reform are passed on to the workers' compensation system, while preserving the employer's incentive to maintain a safe and healthful workplace. It also will eliminate contentious disputes over which provider will treat a work-related injury. And the fee schedule will prevent providers from charging higher fees for workers' compensation cases.

Large and small businesses alike will benefit from the plan's increased emphasis on preventive care. This will result in fewer lost work days and a healthier, more productive workforce.

A Level Playing Field

Small businesses that are currently providing health insurance have a special stake in reform. Today, significant cost disparities sometimes exist among firms and industries because of widely divergent health care costs or the lack of coverage. This difference, in turn, may result in a competitive advantage for some firms. Health care coverage, however, should not be the basis for an advantage in the marketplace, and indeed, one of the major benefits of the Health Security Act would be a fairer and more competitive economic environment. These gains will be achieved under the Health Security Act without adverse affect on employment rates.

Health care reform will, of course, affect different firms differently. Firms that are not now providing insurance will face increased costs after reform. Firms that are currently offering coverage, however, will on average enjoy cost reductions. These gains come from universal coverage, thereby virtually eliminating cost-shifting, from federal discounts, and from slower growth in costs over time. Economy-wide, the average firm will experience cost reductions of about $230 per worker in 2000. There will also be changes in the distribution of costs among industries. For example, manufacturing, which has a relatively high rate of covered workers, will see expenditure reductions compared with industries in which relatively few firms provide coverage. These effects will help to level the playing field so that businesses will be competing on market factors aside from whether they provide health care.

New Business Formation

Guaranteed universal health care coverage will act as a major encouragement to the formation of new small businesses. Past experience shows that employees of large, established firms often develop an interest in leaving their company to start their own independent business and pursue their own creative ideas. Such a transition today, however, usually means giving up the security of assured health care coverage, putting themselves and their families at risk. The difficulties faced by self-employed workers and small businesses today in purchasing health insurance creates large disincentives for individuals to leave covered jobs to start new businesses. The Health Security Act, by providing universal coverage and generous discounts to small, low wage businesses, effectively eliminates the "job lock" that has been a major obstacle to new business formation. The result will be a valuable infusion of entrepreneurial activity in the small business sector of our economy.

Health care reform will also facilitate greater productivity growth. As administrative expenses and unnecessary care decrease and the health care industry becomes more efficient, the economy will be able to produce more output than it would have without reform. This productivity increase will raise living standards, which is the principal objective of this Administration's economic policies.

Impact on Minimum Wage and Lower Skilled Workers

Lower paid workers are heavily concentrated in smaller, low-wage firms. The provisions in the President's plan relating to small businesses are therefore especially meaningful for this part of our workforce.

For the majority of small businesses, which still provide health insurance for their workers, the President's plan would achieve a substantial reduction in their labor costs, a critical point that the CBO analysis confirms. For small businesses that do not presently provide employee health care coverage, the President's plan would raise labor costs, but only moderately, based upon a system of discounts that places substantial limits on these costs. Firms with 75 or fewer employees and low wages will receive discounts, with firms of less than 25 employees paying no more than 3.5% of total payroll on health insurance. This amounts to just 15 cents per hour for a minimum wage worker. No firm would be required to pay more than 7.9% of payroll for health insurance under the President's plan.

Some have argued that even these minimal additional costs could cause job losses. The evidence simply does not support this view. These levels of cost increases would not even bring the current cost of minimum wage labor up to the real levels of the mid-1980's. The CBO analysis quite clearly finds that the President's plan would not significantly reduce low-wage employment. In fact, to the contrary, the CBO confirms the Administration's point that its health care reform plan will tend to increase employment by putting an end to the welfare lock that has discouraged the unemployed from accepting work that would leave them without health care coverage.

Neither do empirical studies of past increases in the minimum wage support the contentions of job losses that the critics have put forth. These studies show that moderate wage increases of the size that would be imposed by the Health Security Act would have minimal effect on employment of low wage workers. During the health care reform transition period, workers would be eligible for enhanced retraining and employment services through a comprehensive dislocated workers program. Workers would be eligible for services under this program regardless of the cause of their displacement.

Enhanced Mobility and Other Benefits for Workers

Worker mobility has traditionally been one of the great strengths of our Nation's economy, and the the President's approach, by virtually eliminating health coverage as a barrier to worker mobility, will help us maintain that strength.

Under the Health Security Act, health insurance will be completely portable. As a consequence, people will no longer feel they cannot seek a better job because of fear of losing health insurance coverage. People on welfare will no longer feel that they cannot join the workforce, because of fear of losing health insurance coverage. Individuals who would like to start or join a small business would not be prevented by fear of losing their own health insurance or by the prohibitive costs and burdens of providing their employees with health insurance.

The President's plan will also guarantee workers a choice of plans. Today, among firms that offer health insurance, 94% of employees in firms with 1-24 workers, and 84% of employees in firms of 25-49 workers have only one choice of health plan. Under the new system, workers, not employers, will choose the plan that suits them best. Through their regional alliance, small business employees will be able to select from among every qualified health plan that is marketed in the region.

Universal, community-rated coverage also reduces the incentives to hire people based on their age, family status or other health insurance factors, rather than their skills and qualifications. In addition, firms will no longer have an incentive to hire part-time and temporary workers simply to avoid paying health care benefits.


We cannot afford not to reform our current health care system. The rising cost of the system to businesses, to government, and to individuals demands it. The eroding quality and coverage of the system cries out for it.

Even when change is in the best interest of all Americans, there is a natural fear of stepping beyond the status quo. I am convinced that many concerns about the President's plan have little to do with health care reform per se, and much to do with the pervasive anxieties arising from economic and social changes that are already affecting Americans. We cannot let these anxieties paralyze us and prevent necessary reforms. Our health and the health of our economy depends on our ability to provide health care security at an affordable price for all Americans.

These fears are especially real among small business owners and workers because they are among the most vulnerable in our economy. But it is essential to recognize that it is the current system that is most harmful to them. The high cost of coverage has made health care an important factor in the competitive equation of business, and it shouldn't be. As this committee well knows, small business entrepreneurship is a dynamic element of job creation in our economy. Unfortunately, the high cost of health insurance has become a serious obstacle to new business formation. Taking risks in the marketplace should be encouraged and rewarded, but the ability to protect one's health and that of one's family should not be a risk that one has to take. The Health Security Act will eliminate that concern.

A close and thoughtful consideration of the President's plan for health care reform will surely lead this committee to one conclusion: that it will strengthen the small business sector of our economy. By unleashing the powers of vigorous free enterprise competition, it will drive down the cost of employee health insurance throughout the economy. Through a measured system of employer discounts, it will limit the impact of health reform on those small businesses that could be most vulnerable to change. It will level the playing field between small and large employers by giving small businesses access to employee health insurance at prices as low as--indeed, lower than--those available to large businesses today. Small businesses will no longer be at a disadvantage in competing with large firms to hire the best workers. By establishing a system in which employers take responsibility for their own--and only their own--employees, the plan will also level the playing field among smaller businesses, creating an economy in which businesses compete based on their productivity and quality, not on their ability to avoid providing employee health care.

The CBO's analysis corroborates these benefits of the President's plan explicitly. The CBO confirms that smaller firms typically pay much higher premiums than larger firms, and that the Health Security Act would benefit small business. Let me quote them: "This leveling of costs could benefit all small businesses--not just those that provide insurance today. With access to more affordable insurance, small businesses would be better able to attract workers who now demand health insurance as a condition of employment."

The President's plan will extend quality health care coverage to almost 39 million Americans who now are without coverage. And the CBO's analysis confirms what this Administration has consistently maintained: that we can do this while reducing total health expenditures, while achieving long term deficit reduction, and with a negligible or positive effect on employment.

I look forward to working closely with the members of this Committee in our efforts to improve the lives of American workers and their families.

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