Health Plan’s Employer-Funding Clause Draws Most Fire : Medicine: Controversy turns on Clinton mandate for business to cover 80% of cost for all employees. A small-business owners group strongly objects.

WASHINGTON —  Show us, Hillary Rodham Clinton likes to say. If anyone has a better idea, come and work with us. How would you guarantee affordable private medical insurance to every American?

What provokes these challenges from the First Lady is criticism of the Administration’s proposal to make employers pay 80% of the cost of basic health insurance for all employees, with workers picking up the remainder in most cases.

Many features of President Clinton’s health care reform plan are controversial. Almost every element in the proposal faces opposition from at least one special interest group.

But no provision has drawn such sustained fire from opponents as the idea of requiring businesses to pay the lion’s share of workers’ health insurance premiums. And on no feature of the plan does the Administration seem less willing to yield.

“You need to have an employer mandate,” said Ira Magaziner, a senior White House health care adviser. Short of a broad-based tax, he said, “we haven’t been able to find an alternative.”

If health coverage is to be truly universal, the Administration maintains, there is no politically feasible way to pay for it except employer mandates.

And if universal coverage is the President’s line in the sand--as he has repeatedly said it is--then the decisive battle over comprehensive health care reform will likely be fought over the employer mandate.

Ironically, Clinton chose the mandate as the key to his plan for financing universal coverage in large part because it would be an extension of the status quo: Most Americans already get their health insurance through the workplace. “Our plan,” the President has said, achieves its goals “by building on what works now.”

If fully implemented, the mandate would cover more than 80% of the estimated 38 million uninsured Americans who already are jobholders or dependents of jobholders. The remaining 7 million would receive premium subsidies from the federal government.

Job-based insurance is a byproduct of World War II wage and price controls that exempted employer-paid health insurance premiums. Companies were also allowed to deduct as a business expense--as they still are--the health benefits they provide to employees. Likewise, such benefits were not counted against individuals as taxable personal income--and they still are not.

As a result, offering generous medical benefits became a way to attract and retain good employees during a time of wage ceilings. Princeton University sociologist Paul Starr, who advised the Clinton White House last year, said employment-based insurance grew steadily until the late 1970s.

“Partly because employment has shifted from manufacturing to services, and unions have declined, jobs with health benefits have been stagnant while jobs without benefits have grown,” Starr wrote in his new book, “The Logic of Health Care Reform: Why and How the President’s Plan Will Work.”

Today, 138 million Americans under age 65 have employment-based coverage, or about five-eighths of the non-Medicare eligible population.

The 38 million uninsured represent 17.4% of the non-elderly population, including more than 20 million children. Among these are most part-time, minimum-wage and seasonal workers. Also, as health care prices have risen sharply, dependents are being dropped from coverage.

Employment-based health coverage can impose onerous burdens on small businesses, whose health insurance premiums are disproportionately high because of an insurance industry practice known as “experience rating.” That means rates for small groups, higher to begin with, are raised--sometimes exorbitantly--on the basis of one person’s costly illness.

As a result, small businesses pay 25% to 40% more for the same health coverage than larger firms, which make use of their size and bargaining power.

The Clinton plan guarantees that health premiums paid by businesses will not exceed 7.9% of their payroll costs; if they do, government subsidies would make up the difference. For the smallest firms with mostly low-wage workers, the cap would be just 3.5% of payroll.

Yet the National Federation of Independent Business, which represents 600,000 small-business owners, strongly objects to the employer mandate.

Health premiums often represent the single largest payroll expense for a small business, and an employer mandate could destroy many such enterprises, said John Motley, the NFIB’s vice president for federal government relations. He said 60% of the nation’s employers had fewer than five employees and that 74% of them did not provide insurance.

Such a new mandate, he said, would deter business start-ups and force many existing firms to raise prices, reduce wages or lay off workers.

But all that is already happening under the current system, Administration officials say. If the President’s reforms are enacted, “the cost for small businesses will be dramatically reduced,” Hillary Clinton said in a speech last week to the American Legion.

Even though many businesses, especially large firms, now spend more than 7.9% of payroll for health care and would seemingly benefit under the proposed employer mandate, few have been vocal in supporting the Clinton plan, in part because of their doubts about other parts of the complex agenda.

That reticence may have less to do with economics than an innate business suspicion of government, said Edward F. Howard, executive vice president of the Alliance for Health Reform, a nonprofit, nonpartisan educational organization in Washington.

“Businesses don’t trust government. Their leaders are people who have made markets work, and they just don’t believe government should run the health care system,” he said.

The Clintons have portrayed the employer mandate as an issue of fairness, saying that every business and individual should pay something in a system of universal coverage. They have noted that even the uninsured get treatment today, albeit often too late and in too costly a fashion--typically a hospital emergency room--with the costs shifted to those with insurance.

Experts agree that to attain universal coverage, there are only two alternatives to an employer mandate. “The only three people who can pay for universal coverage are individuals, employers or the taxpayers,” said Lynn Etheredge, a Bethesda, Md., analyst.

Rep. Jim McDermott (D-Wash.), as part of his so-called single-payer plan, is aiming at the taxpayers. But his broad-based tax is widely deemed politically unfeasible.

Sen. John H. Chafee (R-R.I.), the sponsor of a competing health reform plan, has proposed putting the financial burden directly on individuals to pay their own way. But the First Lady charges that this approach would be highly difficult to enforce and would encourage employers to drop their current insurance plans for their workers.

Thus the only “sensible approach,” she said, “is to build on the employer-employee system.”

Some analysts say they foresee possible areas of compromise on the issue.

White House officials are hinting that businesses, especially smaller firms, could end up paying less than 80% of premium costs. Another variable is to structure a long phase-in period, perhaps tied to some economic indicator, thus providing time for other elements of the reform agenda to bring down costs first. “Those things are all negotiable,” one top Administration health adviser said.

But “the mandate is the key to achieving universal coverage,” Hillary Clinton said. “Without the employer mandate, we will continue to tinker around the edges and not provide for universal coverage.”