Clinton proposes new tax-exempt borrowing class: health alliances.

WASHINGTON -- President Clinton's draft health care reform plan proposes to create a new class of tax-exempt borrowers -- hundreds of health care alliances that states would form to collect medical insurance premiums from the people and businesses in their regions.

The alliances would be authorized to issue tax-exempt debt for short-term cash flow needs. The plan also calls on states to set up guaranty funds that could issue tax-exempt bonds to pay doctors and hospitals if a health plan became insolvent.

Overall, the plan gives the states major new financial responsibilities to set up and administer universal health care networks and to start long-term institutional and community care programs. In return, the plan promises to save the states some money by taming their top budget problem -- spiralling Medicaid costs.

According to a Sept. 6 draft plan of the White House's health care working group, as reprinted by Commerce Clearing House Inc., the states would organize health alliances either as state agencies or as non-profit corporations, which are exempt from federal taxation under section 501 (c)(3) of the tax code.

The state-organized alliances would enrol all of the consumers and businesses within a designated region, except large businesses with more than 5,000 employees that choose to organize their own health purchasing alliances.

Because the health care coverage provided through the alliances would be near-universal, administration officials estimate that more than two-thirds of the nation's $1 trillion of annual spending on health care would be funneled through the new tax-exempt organizations.

The draft plan says the entities would be given "the power to borrow to cover short-term cash flow shortages created by mismatching of required payments to "health care providers] and receipts of premium payments and subsidies."

The volume of short-term borrowings by alliances designated as. state agencies generally would not be limited under federal tax law. But if an alliance is designated a 501(c)(3) organization, its borrowing volume would be limited, bond lawyers and federal officials said. Under the tax law, all such organizations except hospitals are restricted from having more than $150 million of tax-exempt bonds outstanding at any one time.

But Leslie Samuel's, Treasury's assistant secretary for tax policy, testified before a House subcommittee in June that the Clinton administration "would not be opposed" to a legislative repeal of that cap. they pointed out.

In addition, Treasury Secretary Lloyd Bentsen, the former chairman of the Senate Finance Committee, and Sen. Daniel P. Moynihan, D-N.Y., the current chairman, have supported liberalizing the cap.

The alliances' cash flow financings also would have to meet new arbitrage rules that were published in June, lawyers said, but the rules should not be an obstacle to such financings as long as they are short-term and the proceeds are spent quickly. Under the new rules, cash flow financings that are not outstanding for more than two years are exempted from certain arbitrage restrictions.

The cash flow of the alliances would come primarily from insurance premiums that would be paid 80% by employers and 20% by consumers to purchase a standard health care benefits package. In addition, the alliances would receive subsidies from the federal government and the states to cover the unemployed and provide assistance to low-income workers and small businesses.

The alliances' primary vision would be to represent health care consumers and negotiate with doctors and hospitals, which would organize into pools or "health plans" to offer the standard benefits package to alliance members.

States would be responsible for establishing both medical and financial standards for the provider health plans, including setting minimum capital standards and monitoring the plans for financial solvency.

As part of an effort to protect providers from bankruptcy, the draft plan requires states to establish guaranty funds to pay doctors and hospitals for any standard benefits services that could not be reimbursed due to the insolvency of a health plan.

The state guaranty funds also would have tax-exempt borrowing powers, according to the draft report. They could "borrow funds against future assessments in order to meet the obligations of the failed plan," it says.

The state could assess payments of up to 2% of the premiums of the other health care plans within an alliance to pay the obligations of the defaulted plan. The guaranty fund could borrow against those future assessments.

According to bond lawyers, if bonds proceeds were used to finance the guaranty fund or if the guaranty fund were used to secure a bond issue, the investments in the fund would have to be restricted to a yield below the bond yield.

While the draft plan would impose some broad and exacting new mandates on the states, it also would relieve states of some responsibilities and alleviate some of the budgetary pressures of the unrelenting increase in health care costs, said a state official who has worked closely with the White House working group.

State surveys have cited the uncontrolled growth in Medicaid, the indigent health care program, as their top budgetary problem. The draft plan estimates that state Medicaid payments will be lowered cumulatively by about $73 billion between 1994 and 2000 largely because working people, whose employers will be required to pay 80% of their health care, will be taken off the Medicaid rolls.

The states and the federal government would also reap additional savings as a result of the caps on Medicaid spending that the draft plan would institute in 1996 and beyond. And some medical services, such as mental health care, would be largely taken out of states' hands and be paid under the universal system.

The reform plan requires states to divert some, but not all, of those savings into subsidies for low-income individuals and small businesses covered under the universal system, the state official said. So "the jury is out" on exactly how much the states will save, he said.

States generally are pleased at the high degree of administrative flexibility the plan would give them, the official said,

"The President is a former governor, so he truly understands the situation of the states. The plan was drafted with the states' problems in mind," he said.

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