VIII. The Multi-Payer Universal Coverage Model
The multi-payer model is designed to give employer groups the option of staying with their current coverage while
still creating a government program to insure persons without employer-sponsored coverage. The government
program would be identical to the single-payer model discussed above with the sole exception that employers
would have the option of providing coverage for their group. Employers who provide coverage would credit the
cost of the coverage they are providing against the payroll tax that they would be required to pay. All persons not
covered by an employer plan would become covered under the government plan.

Providing the option of continuing with existing employer coverage is likely to be popular in the initial years of the
program until the government program has had an opportunity to prove itself. Also, many employers with
employees across one or more states may find that it is more efficient for them to opt-out of the government
program so that they can have a uniform benefits plan for all of their employees. Because the idea is to give
employer groups the option of remaining with what they now have, employers who opt-out of the government plan
would be permitted to continue with existing managed care and indemnity plan models. The multi-payer option is
discussed in the following sections:

The Multi-Payer Opt-Out;
Impact on State Health Spending; and
Impact by Payer Group
A.The Multi-Payer Opt-Out
Under the multi-payer model, a single government program would be established to provide coverage that is
identical to that created under the single-payer model discussed above. The benefits package would be the same
as that created under the single-payer program and would be financed in the same way. Fee schedules also would
be developed and used to control health care cost growth as under the single-payer scenario. Also, as under the
single-payer model, employers would be required to pay two-thirds of the total payroll tax with the employee
paying the remainder.

The sole difference in the multi-payer scenario is that employers would be able to opt-out of the government
program to continue providing coverage through their own health plans. The coverage provided under these plans
must be at least as comprehensive as the standard benefits package established under the government program.
Also, the employer must pay at least two-thirds of the premium for such coverage, which corresponds to the
percentage of the total payroll tax that individuals would pay if they participated in the government plan. Employers
who opt-out would be permitted to continue offering coverage through existing managed care models including
capitation arrangements.

Under this program, eligible employees would be required to accept the coverage offered to them. Employers
would have the option of covering their part-time and temporary workers separately under the government plan by
paying the full payroll tax for their workers.

Employers who do not opt-out of the government program would pay the employer share of the payroll tax
required to fund the program as under the single-payer scenario. Employers who choose to opt-out would be
exempt from the payroll tax if the employer’s actuarially determined expected cost of providing the basic benefits
package is equal to or greater than the payroll tax amount that the employer would have paid if they had not
chosen to continue their health plan. However, firms whose expected costs are less than the payroll taxes that they
would have paid would owe the difference to the government program.

1.Calculating the Payroll Tax for Employers that Opt-Out

The payroll tax for an employer who decides to provide coverage would be calculated in two steps. First, the
expected cost of covering the employer’s work force would be estimated actuarially based upon the demographic
and geographic characteristics of their workers and their dependents. Second, the tax payment would be
calculated as the difference between the payroll tax that they would have paid under the government program (i.e.,
including employer and employee share) and the estimated cost of covering the workers who would be covered
under the employers plan (including employer premium share and employee premium contribution). This process
would be repeated each year.

The method for computing the expected cost of coverage would be based upon costs under the government
program. Thus, any increase in a health plan’s costs in excess of allowable spending growth under the public plan
could not be applied to offset the tax payment amount for the firm. Also, the higher cost of administering health
benefits under a multi-payer model could not be offset against the firm’s payroll tax liability. This would create an
additional incentive for employers to adopt efficient health plans. Due to the higher administrative costs of providing
coverage through an employer plan, most firms would find it less costly to simply pay the payroll tax, thus, covering
their workers under the government program.

As discussed above, in cases where a firm’s payroll tax payment exceeds the expected cost of covering the group,
the employers and the employees would pay the difference to the government program. Employers are required to
pay two-thirds of these costs with the employee paying the remainder. However, employers would be permitted to
pay a greater percentage of these costs. (This will typically occur in firms with collective bargaining agreements.)
There would be no tax payments in cases where the expected cost of coverage exceeds the payroll tax obligation.

2.Potential Gaming By Employers

Another potential problem with the opt-out model is “gaming” by employers. For example, employers with a
disproportionately healthy population (even after adjusting for demographics and geography) would typically find
that the cost of covering their group is less than the actuarially determined expected cost. These employers would
find it less costly to insure their own group and pay the difference between the payroll tax amount and the
actuarially determined expected cost. This would drive per-capita costs up in the government program because the
employers with healthier individuals would insure on their own, leaving only the higher cost employer groups in the
government program (i.e., this phenomenon is know as adverse selection).

However, it is also possible that some employers would continue to insure on their own even if they have higher
than average costs. This is most likely to occur in unionized firms and in firms with highly compensated workers
who may be willing to pay more to retain private coverage. This behavior is particularly likely to occur in the early
years of the program when many consumers are likely to be cautious about shifting to the government plan.
Moreover, some employers may feel that they can provide coverage at lower costs through managed care
arrangements. Thus, it is difficult to predict whether employer behavior would result in an increase in per-capita
costs in the government program due to adverse selection.

This issue could be addressed by using actuarial methods to determine whether the public program is accumulating
a disproportionate share of high cost individuals. If so, the additional cost attributed to this could be recovered by
requiring an additional tax payment from firms that opt-out of the public program.

3. Assumptions

To the maximum extent possible, the assumptions that we used to model this scenario were the same as those used
in our single-payer scenario discussed above. For example, the increase in health services utilization among newly
insured persons under this scenario would be the same as under the single-payer plan scenario.

Employer behavior under the multi-payer model is extremely difficult to predict. In general, employers of low-wage
workers would find it less costly to pay the payroll tax, which is computed as a percent of income, than to continue
providing coverage. We also anticipate that most employers of higher wage workers would find participation in the
single-payer program less costly than continuing to provide employer coverage due to the lower administrative
costs under the government plan. However, some employers may be able to save by adopting managed care plans
with aggressive cost controls that are less costly than the expected costs for their workers and dependents under
the government plan. It is unclear how employers would respond to these incentives.

In general, employers facing a payroll tax in excess of what they now pay for coverage will find it less costly to
discontinue their employer plan because of the higher cost of administering private coverage. As discussed above,
this is because the employer pays the difference between their actuarially determined expected costs assuming
single-payer plan cost levels (for benefits and administration) and the payroll tax, which causes the employer to pay
the full amount of any of the higher administrative costs associated with the employer sponsored plan. Also, as
discussed above, the tax paid by firms that opt-out of the single-payer plan would be adjusted to correct for any
adverse selection into the single-payer plan resulting from employer “gaming” of the program. Consequently, most
employers will find it less costly to cover their workers under the single-payer program. However, employers who
are willing to sponsor managed care plans with aggressive cost controls may still find it less costly to insure on their
own.

Despite these cost incentives, many employers may still opt-out of the single-payer program to continue providing
coverage due to a potential preference on the part of workers and unions to remain with their current employer
coverage. For illustrative purposes, we assume that employers would be willing to pay the higher administrative
cost of continuing their current plan. However, we assume that all employers will discontinue their coverage if the
payroll tax is less than the expected cost of covering their workers.

Under these assumptions, about 49 percent of Maryland residents would be covered under a private employer
plan (Figure 10). These include Marylanders covered by out-of-state employers (9 percent) and persons covered
by Maryland employers who chose to continue to provide coverage (40 percent). About 51 percent of Maryland’s
population would be covered under the government plan.

Figure 10

Distribution of Persons in Maryland by Coverage Status Under the Multi-Payer Universal
Coverage Program in 2001 (in thousands)
Source:Lewin Group estimates using the Maryland version of the Health Benefits Simulation Model (HBSM)

The assumption that some employer plans would continue to offer coverage would have the effect of changing
the amount of administrative savings realized by shifting to the single-payer model. Our cost savings
assumptions were adjusted as follows:

Insurer Administrative Costs: There would be no insurer administrative savings for persons who remain in
employer sponsored plans;

Provider Administrative Costs: The amount of hospital and physician administrative savings that we
estimated under the single-payer scenario would be reduced in proportion to the amount of spending that
would continue to be covered under employer sponsored plans; and

HMO Expenditures: The increase in spending resulting from the elimination of HMOs under the single-
payer model would be reduced in proportion to the number of persons remaining in HMOs under the opt-
out scenario.
We assume that total health expenditure levels under the multi-payer model would be identical to those used
under the single-payer scenario. We also assume that these expenditure controls on hospitals would be fully
effective for both private plans and the government plan through continued use of Maryland’s all-payer hospital
rate setting system.

B.Impact on State Health Spending
Total health spending in Maryland would increase by $207.2 million under the multi-payer model in 2001
(Table 13). This compares with an actual reduction in spending of $345.8 million under the single-payer
model. Thus, health spending under the multi-payer model would be about $553 million higher than under the
single-payer plan.

The higher costs under the multi-payer program are attributed primarily to the fact administrative cost savings
would be less than under the single-payer model. As shown in Table 13, administrative savings would be
$505 million under the multi-payer proposal compared with $1.1 bullion under the single-payer program. Also,
prescription drug rebate savings would be about $71.7 million less than under the single-payer program,
reflecting the fact that the rebates received by the plan (i.e., Medicaid rebate levels) are greater than can be
obtained by private insurers in general. However, the increase in costs resulting from reduced reliance on
HMOs would be smaller than under the single-payer model because many employers are expected to continue
their HMO plans.

The net change in utilization of health services would be the same under both scenarios (i.e., an increase of
$675.9 million). This reflects the fact that both programs require the same standard benefits package resulting
in increased utilization by insured and under-insured persons. Also, the reduction in uncompensated care costs
under these two universal coverage programs also would be the same due to the use of a standard benefits
package.
Table 13
Changes in Health Spending in Maryland under the Single-Payer and the Multi-Payer
Universal Coverage Proposals in 2001 (in millions) a/

a/Includes all persons in the state including those with public and private coverage.
Source: Lewin Group estimates using the Maryland version of the Health Benefits Simulation Model (HBSM)

1.Expenditures by Payer Group
Total expenditures under the government plan would be $10.7 billion in 2001 under the multi-payer program
(Table 14). This includes net benefits payments of 10.4 billion and about $271 million in program
administrative costs. Total federal and state revenues transferred to the single-payer plan (i.e., Medicare,
Medicaid, etc.) would be $6.1 billion. The program would also collect $4.6 billion in new tax revenues from
the various dedicated taxes created under the plan.
Table 14
Analysis of Program Costs and Revenues under the Maryland Multi-Payer Universal
Coverage Proposal in 2001 Employers Have the Option to Continue to Offer Insurance
(in millions) a/

a/Includes only persons in public programs.
b/Includes provider payments for acute care health services that are covered under the program. Provider payments
are estimated based upon overall average provider payment levels under current programs. Excludes patient
copayments and spending for non-covered services.
c/We assume that provider payment rates are reduced to reflect reduced uncompensated care expenses and savings
in provider administrative costs.
d/Reflects the net change in state and local employee benefits expenditures as a result of shifting from employer-
based health coverage to the payroll tax. Assumes all state and local government employers are enrolled in the single-
payer program.
e/Includes the cost of administering benefits under the single-payer program. Estimates based upon the cost of
administering benefits under the Medicare program.
f/The program will be reimbursed for services provided to persons who are covered under the CHAMPUS program.
g/Federal Medicare program funding for Maryland residents would be transferred to the Maryland single-payer
program. This includes federal funding for Part-A and the federal share of funding for Part-B.
h/The state share of funding for the Medicaid program is transferred to the single-payer program. Estimates exclude
the state share of funding for disproportionate share hospital payments.
i/The federal share of funding for the Medicaid acute care program would be transferred to the single-payer program.
Includes benefits payments, administration and the federal share of disproportionate share hospital payments.
j/Current state and local funding for mental health and various indigent care program would be transferred to the
single-payer program. Includes funding only for state health programs, which are not also included under the state
share of the Medicaid program.
k/The program imposes a payroll tax on employers of 5.9 percent and employees of 2.9 percent.
l/Assumes a net increase in revenues from the Maryland alcohol tax rates to the national average ($28.5 million ) and
a increase in the tobacco tax to $1.25 per pack of cigarettes ($172.1 million).
m/The bill imposes a personal income tax equal to 4.0 percent of state income tax done on a progressive scale.
n/Employers are assumed to pass-on the change in employer health care costs under the program as a change in
wages resulting in corresponding changes in state personal income tax revenues.
Source: Lewin Group estimates using the Maryland version of the Health Benefits Simulation Model (HBSM).

As discussed above, we estimate that about 40 percent of Marylanders would continue to receive coverage
through a Maryland employer health plan. Consequently, total spending under the multi-employer plan would
be $10.7 billion compared with $15.6 billion under the single-payer model (Table 15).

Table 15
Summary Comparison of Tax Rates and Costs Under the Single-Payer Model and the
Multi-Payer Universal Coverage Model
Source: Lewin Group Estimates using the Maryland version of the Health Benefits Simulation Model (HBSM).

The tax rates under the multi-payer plan would be lower than under the single-payer model. For example, the
payroll tax rate for employers would drop from about 6.3 percent to 5.9 percent. Similarly, the payroll tax rates
for employees would decline from 3.2 percent under the single-payer model to 2.9 percent under the multi-
employer plan. This decline in the payroll tax rates required to fund the program occurs because employers who
do not offer insurance must pay the payroll tax for all workers including those covered under a spouse’s employer
plan even in cases where the employee would receive no benefits under the government plan. This tends to have
the effect of spreading the cost of the program across a larger participant payroll base .

The percentage increase in personal income taxes would also drop from 10.8 percent under the single-payer
model to 3.9 percent under the multi-payer model. This is largely explained by the fact the lower payroll tax rate
would effectively reduce the states payments to the fund for state and local workers.
2. Employer Health Spending
We estimate that employer health spending under the multi-payer proposal would be higher than under the single-
payer proposal by about $696.0 million (Table 16). Employer spending under the multi-payer plan would
increase by $1.1 billion compared to an increase of $406.5 million under the single-payer model (i.e., before wage
effects). This reflects our assumption that employers would continue with their health plan as long as this does not
result in higher costs to the employer. However, it is difficult to estimate the net impact of the multi-payer plan on
employers due to the difficulties in predicting employer behavior.

Table 16
Change in Employer Costs Under the Single-payer and Multi-Payer Models
In Maryland in 2001
a/Employers are assumed to pass-on the savings and/or increases in cost under the health reforms to workers in the form
of changes in wages as labor markets adjust to these changes in employee compensation.
Source: Lewin Group Estimates using the Maryland version of the Health Benefits Simulation Model (HBSM).

Households would pay about $366.2 million more for health care under the multi-payer model than under the
single-payer plan. This reflects the fact that workers ultimately pay the cost of employer sponsored insurance
either through tax payments or wage effects associated with employer health spending.

As discussed above, the multi-payer model would result in higher employer health spending than would the
single-payer model. For example, the average increase in health spending per worker would be $508 under the
multi-payer model (Figure 11). Per worker health spending would on average be higher under the multi-payer
model than under the single-payer model for all firm size groups.

The increase in employer costs under the multi-payer model for firms that do not offer insurance would be lower
under the multi-payer model than under the single-payer model. Employer costs in firms that currently do not
offer insurance would increase by $366.3 million under the multi-payer program compared with an increase of
$457.0 million under the single-payer plan. This reflects the fact that the employer payroll tax rate under the multi-
payer model would be less than under the single-payer plan. However, over time, we expect these changes in
health care costs to be passed on to workers in the form of corresponding changes in wages as labor markets
respond to these changes in employee compensation costs.

Figure 11
Change in Health Spending Per Worker Under the Single-Payer Model and the Multi-Payer
Model in 2001: Before Wage Effects

Source: Lewin Group Estimates using the Maryland version of the Health Benefits Simulation Model (HBSM).

3. Impact on Family Health Spending
On average, families would spend more for health care under the multi-payer model than under the single-payer
plan at all income levels. Family health spending would increase by an average of $57 under the multi-payer
model compared with savings of ($261) per family under the single-payer program. Family costs under the multi-
payer model would be higher than under the single-payer model for all income groups except those with incomes
of $150,000 or more. This is because these high-income families are expected to benefit the most from the lower
payroll tax under the multi-payer program.

Table 17
Change in Average Household Health Spending in Maryland Under the Single-Payer
Model and the Multi-Payer Model in 2001: After Wage Effects a/ b/
a/Excludes institutionalized persons.
b/Includes changes in premiums, out-of-pocket expenses, taxes earmarked to fund health reform, and after-
      tax wage effects.
Source: Lewin Group Estimates using the Maryland version of the Health Benefits Simulation Model (HBSM).
10   Under this scenario, the employer savings are equal to the actuarially determined expected costs and their actuarially
       determined costs.
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