[House Hearing, 105 Congress]
[From the U.S. Government Publishing Office]



 
            OVERSIGHT OF TAX LAW RELATED TO HEALTH INSURANCE

=======================================================================

                                HEARING

                               before the

                       SUBCOMMITTEE ON OVERSIGHT

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED FIFTH CONGRESS

                             SECOND SESSION

                               __________

                             APRIL 23, 1998

                               __________

                             Serial 105-54

                               __________

         Printed for the use of the Committee on Ways and Means

                               ----------

                      U.S. GOVERNMENT PRINTING OFFICE
51-827 cc                     WASHINGTON : 1999




                      COMMITTEE ON WAYS AND MEANS

                      BILL ARCHER, Texas, Chairman

PHILIP M. CRANE, Illinois            CHARLES B. RANGEL, New York
BILL THOMAS, California              FORTNEY PETE STARK, California
E. CLAY SHAW, Jr., Florida           ROBERT T. MATSUI, California
NANCY L. JOHNSON, Connecticut        BARBARA B. KENNELLY, Connecticut
JIM BUNNING, Kentucky                WILLIAM J. COYNE, Pennsylvania
AMO HOUGHTON, New York               SANDER M. LEVIN, Michigan
WALLY HERGER, California             BENJAMIN L. CARDIN, Maryland
JIM McCRERY, Louisiana               JIM McDERMOTT, Washington
DAVE CAMP, Michigan                  GERALD D. KLECZKA, Wisconsin
JIM RAMSTAD, Minnesota               JOHN LEWIS, Georgia
JIM NUSSLE, Iowa                     RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas                   MICHAEL R. McNULTY, New York
JENNIFER DUNN, Washington            WILLIAM J. JEFFERSON, Louisiana
MAC COLLINS, Georgia                 JOHN S. TANNER, Tennessee
ROB PORTMAN, Ohio                    XAVIER BECERRA, California
PHILIP S. ENGLISH, Pennsylvania      KAREN L. THURMAN, Florida
JOHN ENSIGN, Nevada
JON CHRISTENSEN, Nebraska
WES WATKINS, Oklahoma
J.D. HAYWORTH, Arizona
JERRY WELLER, Illinois
KENNY HULSHOF, Missouri

                     A.L. Singleton, Chief of Staff

                  Janice Mays, Minority Chief Counsel

                                 ______

                       Subcommittee on Oversight

                NANCY L. JOHNSON, Connecticut, Chairman

ROB PORTMAN, Ohio                    WILLIAM J. COYNE, Pennsylvania
JIM RAMSTAD, Minnesota               GERALD D. KLECZKA, Wisconsin
JENNIFER DUNN, Washington            MICHAEL R. McNULTY, New York
PHILIP S. ENGLISH, Pennsylvania      JOHN S. TANNER, Tennessee
WES WATKINS, Oklahoma                KAREN L. THURMAN, Florida
JERRY WELLER, Illinois
KENNY HULSHOF, Missouri


Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Ways and Means are also published 
in electronic form. The printed hearing record remains the official 
version. Because electronic submissions are used to prepare both 
printed and electronic versions of the hearing record, the process of 
converting between various electronic formats may introduce 
unintentional errors or omissions. Such occurrences are inherent in the 
current publication process and should diminish as the process is 
further refined.


                            C O N T E N T S

                               __________

                                                                   Page

Advisory of April 16, 1998, announcing the hearing...............     2

                               WITNESSES

Association of Private Pension and Welfare Plans, James A. Klein.    48
Communicating for Agriculture, Wayne Nelson......................    55
Connecticut Commissioner of Insurance, Hon. George M. Reider, Jr.    12
Employee Benefit Research Institute, Paul Fronstin...............    36
Health Insurance Association of America, Hon. Willis D. Gradison, 
  Jr.............................................................     6
National Association of Insurance Commissioners, Hon. George M. 
  Reider, Jr.....................................................    12
Riverdale Texaco & Precision Alignment Center, Sal Risalvato.....    19

                       SUBMISSIONS FOR THE RECORD

McDermott, Hon. Jim, a Representative in Congress from the State 
  of Washington, statement.......................................    70
Society for Human Resource Management, Alexandria, VA, statement.    71


            OVERSIGHT OF TAX LAW RELATED TO HEALTH INSURANCE

                              ----------                              


                        THURSDAY, APRIL 23, 1998

                  House of Representatives,
                       Committee on Ways and Means,
                                 Subcommittee on Oversight,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 1:07 p.m., in 
room B-318, Rayburn House Office Building, Hon. Nancy L. 
Johnson (Chairman of the Subcommittee) presiding.
    [The advisory announcing the hearing follows:]

ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

                       SUBCOMMITTEE ON OVERSIGHT

                                                CONTACT: (202) 225-7601
FOR IMMEDIATE RELEASE

April 16, 1998

No. OV-15

                      Johnson Announces Hearing on

                    Oversight of Tax Law Related to

                            Health Insurance

     Congresswoman Nancy L. Johnson (R-CT), Chairman, Subcommittee on 
Oversight of the Committee on Ways and Means, today announced that the 
Subcommittee will hold a hearing on oversight of current tax law 
related to health insurance. The hearing will take place on Thursday, 
April 23, 1998, in room B-318 Rayburn House Office Building, beginning 
at 1:00 p.m.
      
     In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from invited witnesses only. However, 
any individual or organization not scheduled for an oral appearance may 
submit a written statement for consideration by the Committee and for 
inclusion in the printed record of the hearing.
      

BACKGROUND:

      
     Under the Internal Revenue Code, employees are not taxed for the 
benefits they receive in the form of employer-provided health insurance 
coverage, and employers can deduct the cost of providing the coverage. 
A portion of health insurance premiums paid by self-employed 
individuals is also deductible.
      
     The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) 
(P.L. 99-272), as amended, requires employers with 20 or more 
employees, who provide health insurance plans, to offer continued 
access to group health insurance to qualified beneficiaries generally 
for up to 18 months (in some cases for longer periods of time) if the 
beneficiaries lose coverage under the plan as a result of a qualifying 
event, such as termination of employment (other than for gross 
misconduct).
      
     The Health Insurance Portability and Accountability Act of 1996 
(P.L. 104-191) includes tax provisions related to health coverage 
portability, increasing the deduction of health insurance costs for the 
self-employed, establishing a deduction for employer-provided long-term 
care insurance, and Medical Savings Accounts.
      
     Other tax-law provisions related to health insurance include 
cafeteria plans and flexible spending arrangements, itemized deductions 
for medical expenses, the use of excess pension assets to fund retiree 
health benefits, and several provisions related to long-term care.
      
     In announcing the hearing, Chairman Johnson stated: ``The 
deductibility of employer contributions to employee health insurance 
plans has been a significant factor in providing coverage to American 
workers. Over 65 percent of the non-elderly receive employment-based 
coverage. We need to examine the tax incentives that are currently in 
place to determine whether we can do more.''

FOCUS OF THE HEARING:

      
     The hearing will examine the operation of current tax law related 
to health insurance, and in particular, the effectiveness of the 
employer deduction for health care for employees, the COBRA health care 
continuation rules, and the premium deduction for the self-employed.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
     Any person or organization wishing to submit a written statement 
for the printed record of the hearing should submit at least six (6) 
single-space legal-size copies of their statement, along with an IBM 
compatible 3.5-inch diskette in ASCII DOS Text or WordPerfect 5.1 
format only, with their name, address, and hearing date noted on a 
label, by the close of business, Thursday, May 7, 1998, to A.L. 
Singleton, Chief of Staff, Committee on Ways and Means, U.S. House of 
Representatives, 1102 Longworth House Office Building, Washington, D.C. 
20515. If those filing written statements wish to have their statements 
distributed to the press and interested public at the hearing, they may 
deliver 200 additional copies for this purpose to the Subcommittee on 
Oversight office, room 1136 Longworth House Office Building, at least 
one hour before the hearing begins.
      

FORMATTING REQUIREMENTS:

      
     Each statement presented for printing to the Committee by a 
witness, any written statement or exhibit submitted for the printed 
record or any written comments in response to a request for written 
comments must conform to the guidelines listed below. Any statement or 
exhibit not in compliance with these guidelines will not be printed, 
but will be maintained in the Committee files for review and use by the 
Committee.
      
     1. All statements and any accompanying exhibits for printing must 
be typed in single space on legal-size paper and may not exceed a total 
of 10 pages including attachments. At the same time written statements 
are submitted to the Committee, witnesses are now requested to submit 
their statements on an IBM compatible 3.5-inch diskette in ASCII DOS 
Text or WordPerfect 5.1 format. Witnesses are advised that the 
Committee will rely on electronic submissions for printing the official 
hearing record.
      
     2. Copies of whole documents submitted as exhibit material will 
not be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.
      
     3. A witness appearing at a public hearing, or submitting a 
statement for the record of a public hearing, or submitting written 
comments in response to a published request for comments by the 
Committee, must include on his statement or submission a list of all 
clients, persons, or organizations on whose behalf the witness appears.
      
     4. A supplemental sheet must accompany each statement listing the 
name, full address, a telephone number where the witness or the 
designated representative may be reached and a topical outline or 
summary of the comments and recommendations in the full statement. This 
supplemental sheet will not be included in the printed record.
      
     The above restrictions and limitations apply only to material 
being submitted for printing. Statements and exhibits or supplementary 
material submitted solely for distribution to the Members, the press 
and the public during the course of a public hearing may be submitted 
in other forms.
      

    Note: All Committee advisories and news releases are available on 
the World Wide Web at `HTTP://WWW.HOUSE.GOV/WAYS__MEANS/'.
      

    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four 
business days notice is requested). Questions with regard to special 
accommodation needs in general (including availability of Committee 
materials in alternative formats) may be directed to the Committee as 
noted above.
      

                                

    Chairman Johnson [presiding]. The meeting will come to 
order. It is a pleasure to welcome you here today.
    The tax provisions in current law relating to health care 
are short on consistency and more importantly, short on 
fairness. This is hardly surprising, given the history of 
health insurance in this century. But with so many working 
Americans without health insurance coverage, it's a cause for 
great concern.
    Before the thirties, few health insurance plans existed. 
Fully 90 percent of the medical expenses were paid out of 
pocket. During the Great Depression, as an increasing number of 
people were unable to afford medical care, hospital-sponsored 
health insurance arrangements were created.
    By the late thirties, commercial insurers were offering 
comprehensive and major medical plans. In the forties, wartime 
price stabilization policies capped wages. Consequently, 
employers could not increase wages, but were often willing to 
increase compensation by providing more generous benefit 
packages, including health insurance, to attract employees. 
Unlike wages, compensation in the form of health insurance was 
a tax-free benefit.
    As a result, today's health insurance system is based 
primarily on employer-provided coverage with several public 
programs filling in some of the gaps in coverage.
    Over the years, the Tax Code has been amended, as the 
Nation's health insurance system has evolved. In 1943, the IRS 
ruled that employer contributions to group health insurance 
policies were not taxable to the employee. In 1953, the Service 
ruled that employer contributions to individual health 
insurances were taxable, a decision overturned when Congress 
enacted section 106 in 1954.
    ERISA, the Employee Retirement Income Security Act, adopted 
in 1974, and the Revenue Act of 1978 established the rules for 
cafeteria plans. The health care continuation rules known as 
COBRA, the Consolidated Omnibus Budget Reconciliation Act, were 
enacted in 1985. A provision for a deduction for health 
insurance costs for the uninsured was added by the 1986 Tax 
Reform Act, and broadened most recently by HIPAA, the Health 
Insurance Portability and Accountability Act. HIPAA also 
provides limitations on preexisting condition exclusions and 
favorable tax treatment for long-term care coverage and for 
medical savings accounts.
    Considered in isolation, all these provisions made good 
sense. Yet millions of Americans are paying their own health 
insurance premiums without the tax breaks available for 
employer-provided coverage, or for the self-employed. And 
millions more are unable to afford insurance at all.
    I have given a great deal of thought to how to go about 
making these tax provisions fairer, more consistent, and 
rational. The Tax Fairness for Health Consumers Act, which I 
have introduced this spring, would be one step in the right 
direction. My legislation would address the inequities that 
exist in our current system by giving individuals the same 
health insurance tax benefits that the self-employed enjoy.
    Congress provided tax deductibility for employer-subsidized 
health plans to encourage employers to offer coverage. We 
should do no less for the millions of Americans who are not 
fortunate enough to have health coverage through their 
employers.
    My legislation also builds on the portability provisions 
established in HIPAA by making COBRA coverage deductible. It 
also would build on the long-term care tax incentives 
established in the HIPAA Act by allowing individuals who 
purchase long-term care policies to deduct the costs of these 
policies.
    This hearing is an opportunity to review the effects of 
current tax law on health care coverage. With the information 
we gather today, we can better understand how to improve the 
Tax Code to provide broader access to health coverage.
    Before hearing from the first panel, I'd like to yield now 
to my Ranking Member, Mr. Coyne.
    Mr. Coyne. Thank you, Mrs. Johnson. And I want to thank you 
for scheduling this hearing here today. The growing number of 
working families without health insurance is of serious concern 
to us all. I am pleased that our Subcommittee has this 
opportunity to discuss the problem and some of the possible 
solutions.
    In my home State of Pennsylvania, 1.2 million people do not 
have health insurance. Over one-quarter of a million of them 
are children. Last year, Congress took an important step toward 
providing insurance coverage for children by creating CHIP, the 
Children's Health Insurance Program. We can accomplish even 
more if we aggressively seek those uninsured children who 
qualify for assistance.
    However, 86,000 of the uninsured children in Pennsylvania, 
and a comparable number of uninsured children in other States, 
do not qualify for any health insurance assistance. We must 
look for ways to help all of those children.
    We must also help uninsured adults. Most of them work full 
time but are unable to afford private insurance or the 
insurance offered by their employers.
    The purpose of this hearing is to discuss the effectiveness 
of current tax benefits designed to help people obtain health 
insurance. Tax deductions and income tax exclusions are 
certainly one way to approach the problem. Federal tax benefits 
currently finance 15 to 40 percent of the cost of health 
insurance for workers with employer-provided health benefits 
and for the self-employed.
    But no similar benefit exists for employees who must 
purchase their own insurance or cannot afford the health 
insurance offered by their employers.
    As we consider legislation to help more families afford 
health insurance, we must understand that additional tax 
deductions will not provide the whole solution to the problem. 
Two-thirds of the uninsured earn twice the poverty level or 
less. That's about $15,000 for an individual, or $32,000 for a 
family of four. Many of those working families have little or 
no tax liability. A tax deduction will not help them very much. 
Out-of-pocket costs like high deductibles and coinsurance 
payments are also a serious problem for families trying to 
afford health care.
    Our Subcommittee should also consider whether encouraging 
uninsured families to buy insurance on the open market is the 
best solution. The Commonwealth Fund has estimated that 
individual insurance policies are 20 percent more expensive 
than employer-sponsored group plans, which take advantage of 
larger risk pools.
    In conclusion, over 40 million Americans lack health 
insurance. Many more struggle to pay the deductibles and 
coinsurance required by their health plans. While recent data 
shows that more employers, including small businesses, are 
providing health benefits each year, the number of uninsured 
people continues to increase.
    I look forward to hearing suggestions from the witnesses 
here today and from my colleagues about how this trend might be 
reversed. As we consider this problem, we need to keep in mind 
who the vast majority of the uninsured are and focus on 
solutions that will help as many people as possible.
    Thank you.
    Chairman Johnson. Thank you, Bill.
    The first panel, please. Hon. Willis Gradison. Welcome, 
Bill, it's always a pleasure to have you with us. I'd like to 
offer a special welcome to Hon. George Reider, the Commissioner 
of Insurance from the State of Connecticut. I appreciate your 
being here, George. And Sal Risalvato from New Jersey, the 
owner of Riverdale Texaco and Precision Alignment Center. Thank 
you, welcome. It is a pleasure to have you.
    Mr. Gradison.

 STATEMENT OF HON. WILLIS D. GRADISON, JR., PRESIDENT, HEALTH 
                INSURANCE ASSOCIATION OF AMERICA

    Mr. Gradison. Thank you very much for the opportunity to 
testify on behalf of the Health Insurance Association of 
America. It's always a privilege to appear before my former 
colleagues on this Subcommittee and a particular pleasure today 
to renew acquaintances with so many members of the staff who so 
ably serve Members on both sides of the aisle.
    Despite vast changes in the private health care market and 
important State and Federal health care legislation passed 
during the last few years, there are still more than 41 million 
Americans without health insurance. That is why we are 
encouraged by the renewed interest in reducing the number of 
uninsured Americans by making health coverage more affordable.
    I applaud you, Madam Chairman, for introducing H.R. 3475, 
which would allow individuals without employment-based health 
coverage to deduct the cost of health insurance premiums from 
their taxes. This important legislation underscores the need to 
make health care more affordable for more Americans. It would 
also provide greater equity in the tax treatment of health 
insurance between people who obtained coverage at their place 
of employment and people who purchase coverage in the 
individual health insurance market.
    The private employment-based health care system has been 
tremendously successful in providing coverage to millions of 
Americans, even during times of rapidly increasing medical 
costs and swift improvements in medical treatment.
    Since the Internal Revenue Service recognized in the early 
forties that employer contributions toward health insurance 
premiums were not taxable to employees, the number of people 
covered by group health insurance has grown from less than 12 
million to approximately 150 million today.
    Nonetheless, there are practical limitations to relying 
solely on the employment-based system to expand health coverage 
to uninsured Americans. Many people work for companies that do 
not offer health insurance or do not contribute to the cost of 
their employees' health coverage.
    In addition, the over 12 million self-employed individuals 
currently may deduct only 45 percent of the cost of health 
premiums, and this will not reach full parity with larger firms 
under the current law until the year 2007.
    For these reasons, we strongly support greater equity in 
the tax treatment of health insurance benefits for the self-
employed and for individuals. We believe this goal can be 
accomplished by taking a balanced approach that builds on the 
strengths of the employment-based market, rather than 
undermining it. The employment-based system can and should work 
in tandem with a vibrant individual private health insurance 
market.
    When considering options to make individual coverage more 
affordable, it is equally important that Congress avoid 
imposing onerous requirements on the fragile individual market. 
Because the purchase of insurance is voluntary, guaranteed 
issue, community rating, and other similar mandates drive up 
insurance costs and, consequently, reduce the number of people 
covered by private insurance.
    For example, following the adoption of community rating and 
guaranteed issue requirements in New Jersey, average rates for 
the most popular individual indemnity health plans rose to more 
than double the national average for rates for similar 
coverage.
    During 1996 alone, the number of people with individual 
coverage in New Jersey declined 17 percent, and the number of 
families covered declined 37 percent. We believe that State 
high-risk pools are a more responsible way to meet the needs of 
covering individuals with higher health costs.
    Connecticut, for example, helps subsidize the cost of 
comprehensive medical benefits to about 1,200 high-risk 
individuals through a high-risk pool which caps rates for 
participants at 150 percent of standard premiums. These price 
caps work only when the necessary subsidy comes from broad-
based sources.
    Risk pools, however, will solve only a small part of the 
puzzle. The vast majority of individuals without health 
coverage are not in poor health. The key to expanding private 
health coverage to these individuals is to make coverage more 
affordable by extending tax equity or direct subsidies to the 
individual purchasers.
    Madam Chairman, the legislation you have introduced to 
allow individuals without employment-based coverage to deduct 
the cost of health insurance would help to achieve this goal. 
H.R. 3475 builds on the employment-based framework to gradually 
increase deductibility for individuals, rather than requiring 
that policies qualifying for the deduction include benefits 
mandated by the government.
    We are pleased that you have chosen to allow private market 
flexibility and innovation. We are also pleased that your 
legislation enhances individuals' ability to fully deduct the 
cost of long-term care insurance premiums. And in our written 
testimony, we provided some specific examples of additional 
steps that could be taken in this area.
    Similar legislation introduced by Senator Boxer would allow 
individuals to immediately deduct 100 percent of the cost of 
health insurance premiums subject to a $2,000 annual cap. It 
would also allow individuals to deduct health insurance 
premiums whether or not they itemize their deductions.
    Because these two bills apply only to those individuals 
with tax liability, they are not the complete answer to the 
challenge of providing health coverage to all uninsured 
Americans. There are 24 million uninsured, over half of the 
uninsured, that have incomes below 200 percent of the poverty 
level. But the approach taken in both bills would help make 
coverage more affordable.
    In conclusion, we support the use of broad-based State and 
Federal funding to subsidize the cost of health insurance for 
those who cannot otherwise afford it. We would also encourage 
Congress to consider tax credits, vouchers, and other subsidies 
as a means of making coverage more affordable for even more 
Americans. And we look forward to working with you and your 
colleagues on this Subcommittee.
    Thank you.
    [The prepared statement follows:]

Statement of Hon. Willis D. Gradison, Jr., President, Health Insurance 
Association of America

    I appreciate the opportunity to testify today on behalf of 
the Health Insurance Association of America (HIAA). It is 
always a privilege to appear before my former colleagues on the 
Ways and Means Committee. HIAA is the nation's most influential 
advocate for the private, market-based health care system. Its 
250-plus member companies provide health, long-term care, and 
disability-income coverage to more than 65 million Americans.
    HIAA has a long history of support for market-based 
initiatives designed to expand access to health coverage. I 
want to commend you, Madam Chairman, for your continued 
dedication to these important issues. I also applaud you for 
introducing H.R. 3475, which would allow individuals without 
employment-based health coverage to deduct the cost of health 
insurance premiums. This important legislation underscores the 
need to make health care more affordable for more Americans and 
to begin providing greater equity in the tax treatment of 
health insurance whether people obtain their coverage at their 
place of employment or purchase coverage in the individual 
health insurance market.
    Despite vast changes in the private health care market, 
state initiatives, and important bipartisan federal health care 
legislation passed during the 104th and 105th Congresses, there 
are still over 40 million Americans without health insurance. 
We are committed to working with Congress, and with the states, 
to preserve and improve the nation's private health care system 
and to expand opportunities for more Americans to purchase 
private health insurance coverage.
    In the aftermath of the Clinton Administration's failed 
attempt to expand health care coverage to all Americans over 
four years ago, it appears once again that there is increasing 
bipartisan interest in addressing these issues. For example, 
the Health Insurance Portability and Accountability Act of 1996 
(HIPAA) clarified the tax treatment of long-term care 
insurance, increased and accelerated the health insurance 
deduction for the self-employed, authorized the creation on a 
demonstration basis of tax-preferred medical savings accounts 
(MSAs), and made it easier for people to maintain health 
coverage when they change jobs. Last year, Congress attempted 
to expand health coverage for millions of uninsured children by 
committing more than $20 billion over five years to a new State 
Children's Health Insurance Program and to an expansion of the 
Medicaid program.
    In addition to your legislation, Madam Chairman, Senator 
Boxer has introduced S. 1902, which also would allow 
individuals to deduct the cost of health insurance premiums 
under certain circumstances. It also has been reported that 
Chairman Archer is developing a broader legislative measure to 
make health care more affordable. Among other tax initiatives, 
Chairman Archer reportedly would more quickly accelerate the 
gradual increase in deductibility of health insurance premiums 
for the self-employed, create new tax breaks for individuals 
purchasing long-term care insurance, create tax incentives for 
small businesses to buy health insurance for their workers and 
dependents, and provide a more generous tax deduction for 
health insurance purchased by individuals who do not have 
access to health coverage through an employer-sponsored health 
plan.
    The foundation for the current employer-based health care 
system was laid during the Second World War. In response to 
wartime wage controls put in place to prevent companies from 
raising wages, employers began offering more generous health 
insurance and other non-cash fringe benefits to their employees 
and deducting such costs as normal business expenses under 
section 162 of the tax code. In 1943, the Internal Revenue 
Service ruled that employer contributions toward premiums for 
group health insurance were not taxable to employees.
    Passage of the Employee Retirement Income Security Act of 
1974 (ERISA) helped make it easier in many respects for large, 
multi-state employers to manage their fringe benefits and 
further cemented the relationship by which millions of workers 
receive health benefits through employer-sponsored plans.
    As a result of these changes, the number of people covered 
by group health insurance has grown from less than 12 million 
in 1940 to approximately 150 million today.
    At the same time, a series of amendments beginning in the 
early 1980s increased the floor for individually deductible 
medical expenses from 3 percent of adjusted gross income to its 
current 7.5 percent. These reductions in tax benefits for 
individually paid premiums, among other factors, have 
contributed to a steep decline in the number of people insured 
through individual health insurance over the past two decades. 
Thirteen million people have individual coverage today compared 
with 36.1 million in 1978.
    While the private employer-based health care system is 
firmly rooted in its historic past, it has been overwhelmingly 
successful in providing coverage to millions of Americans even 
during times of rapidly increasing medical costs and swift 
improvements in medical treatment.
    Moreover, employer groups--particularly large employer 
groups--do a very good job of pooling health care risks, 
encouraging large percentages of employees and dependents to 
participate in their health plans, and spreading the costs of 
coverage among both healthy individuals and those that incur 
greater health costs. This pooling function is absolutely vital 
to maintaining a robust private market. In addition, 
administrative costs associated with group health insurance 
coverage generally are lower than for individual coverage. 
These facts, coupled with the favorable tax treatment of 
employer-sponsored coverage, have resulted in an employer-based 
structure that has been extremely successful in providing good 
health coverage to a large number of people in a relatively 
efficient manner. For example, the loss of revenue attributable 
to the employee exclusion has been estimated by the Joint 
Committee on taxation to be about $50 billion annually. That is 
a relatively efficient way to provide coverage to 150 million 
people when one considers that the Medicare program spends 
nearly four times as much to cover two-thirds fewer people.
    Despite these many positive attributes of employer-provided 
health care, there are some practical limitations to relying 
solely on employer-based coverage to expand health coverage to 
more uninsured Americans.
    Many people work for companies that do not offer health 
insurance or do not contribute to the costs of their employees' 
health coverage. One out of four employees between the ages of 
18 and 64 is not covered by an employer-sponsored plan, either 
directly or as a dependent of another worker. This is 
particularly true of individuals who work for smaller firms. 
Half of the employees of firms with fewer than ten workers lack 
employer-sponsored coverage.
    In addition, the 12.3 million self-employed individuals 
currently may deduct only 45 percent of the cost of health 
premiums and will not reach full parity with larger firms under 
current law until the year 2007. Forty-nine percent of 
uninsured workers are self-employed or work in firms with fewer 
than 25 employees.
    The availability of tax incentives is a key determinant as 
to whether an individual will be insured. According to the 
Employee Benefit Research Institute, individuals who pay for 
health coverage with their own after-tax dollars are 24 times 
as likely to be uninsured as those with employer-provided 
coverage.
    Today's changing workforce expectations and career patterns 
also increase the importance of maintaining a robust individual 
health insurance market. As you know, the nature of work itself 
is changing. The industrial revolution has given way to the 
information revolution. People entering the labor force today 
no longer expect to spend their entire career with one company. 
Employers are demanding more highly-skilled and more flexible 
workers. Many employees today are being asked--and in some 
cases are seeking--to take more personal responsibility for 
their own benefits.
    For these reasons, the Health Insurance Association of 
America strongly supports greater equity in the tax treatment 
of health insurance benefits for the self-employed and for 
individuals. We believe this important goal can, and should, be 
accomplished by leaving in place the current employment-based 
market which is working so well for so many Americans. We 
believe that the employment-based system can work in tandem 
with a more vibrant individual private health insurance market.
    In attempting to make coverage more affordable for more 
Americans by providing greater equity in the tax treatment of 
health benefits for individuals and the self-employed, we must 
be very careful to take a balanced approach that builds on the 
strengths of the employment-based market, rather than 
undermining it. Moreover, given rapid changes already underway 
in the market, a radical shift away from the current system 
(rather than supplementing employment-based system with a 
strengthened individual market) could be extremely disruptive 
and result in an increase in the number of uninsured.
    It is equally important when considering options to make 
individual health coverage more affordable that Congress and 
state legislatures avoid the temptation to impose onerous 
requirements on the individual private health care market. 
Because the purchase of insurance is voluntary, and because of 
the small, fragile nature of the individual market, guaranteed 
issue, community rating, and other similar mandates drive up 
insurance costs and consequently reduce--rather than increase--
the number of people covered by private health insurance.
    For example, Congress wisely avoided imposing individual 
market rating requirements when it guaranteed certain 
individuals who lose group coverage access to individual 
coverage under HIPAA. While a recent General Accounting Office 
(GAO) report found that HIPAA-eligible individuals were charged 
as much as 400-600 percent of standard premiums in four states 
where HIPAA's federal ``fallback'' mechanism has gone into 
effect, we have not seen evidence of comparable rates for these 
individuals in the 22 states that have adopted high-risk pools. 
Connecticut, for example, helps subsidize the cost of 
comprehensive medical benefits to about 1,500 high risk 
individuals through a high-risk pool which caps rates for 
participants at 150 percent of standard premiums. Such price 
caps may be tenable only when the necessary subsidy comes from 
general tax revenues or other broad-based funding sources, as 
is the case in state-created high-risk pools.
    Nonetheless, Senator Kennedy and Representative Pallone 
have introduced legislation (S. 1804/H.R. 3538) that would cap 
rates for individuals eligible for coverage under HIPAA at 150 
percent of standard premiums, regardless of whether a state has 
adopted a mechanism to spread risks beyond the fragile 
individual health insurance market.
    A peer-reviewed actuarial analysis conducted by HIAA found 
that the Kennedy/Pallone legislation would raise costs an 
average of 10.9 percent for roughly 5.5 million Americans and 
cause nearly 160,000 people to lose coverage. States that have 
enacted guaranteed issue and some form of community rating in 
their individual health insurance markets have experienced 
similar consequences--significant increases in the price of 
indemnity insurance options, and significantly fewer people 
covered in the individual market. For example, following the 
adoption of community rating and guaranteed issue in New Jersey 
in 1993, average rates for the most popular individual 
indemnity health plans rose to more than double the national 
average of rates for similar coverage. During 1996 alone, the 
number of people with individual coverage in the state declined 
17.2 percent, and the number of families covered declined 37 
percent.
    Experience clearly shows that, in attempting to expand 
health coverage to high-risk individuals, it is vital to 
provide a broad-based subsidy to offset additional costs, as in 
the risk pool model that has worked successfully in 22 states. 
Arbitrarily imposed price controls ignore the need for 
responsible funding of these costs, and threaten the very 
market we are relying on to provide coverage.
    Risk pools, however, will solve only a small part of the 
puzzle. The vast majority of individuals without health 
coverage are not in poor health. A 1994 Kaiser Family 
Foundation report, for example, asked uninsured individuals the 
primary reason they did not have insurance. Only three percent 
of respondents reported that they were uninsured because they 
had difficulty obtaining coverage due to ill health or prior 
illness, compared with 59 percent who indicated they could not 
afford health coverage. The key to expanding private health 
coverage to these individuals is to make coverage more 
affordable by extending tax equity or direct subsidies to 
individual purchasers.
    Madam Chairman, the legislation you have introduced to 
allow certain individuals without employment-based coverage to 
deduct the cost of health insurance would help begin to achieve 
this goal. H.R. 3475, which would gradually increase individual 
deductibility from 45 percent to 100 percent in 2007, has the 
virtue of building on the current deductibility framework for 
the self-employed. HIAA also is pleased that you have chosen to 
build on the current definition of medical care expenses under 
the tax code and allow private market flexibility and 
innovation, rather than requiring that policies qualifying for 
the deduction include benefits mandated by the government.
    We also are pleased that your legislation enhances 
individuals' ability to fully deduct the cost of long-term care 
insurance premiums. Incentives for the purchase of long-term 
care insurance were included in HIPAA. As a result, a new 
federal focus on streamlining public expenditures and 
encouraging individual responsibility has emerged. 
Nevertheless, HIPAA is not a panacea and will not, by itself, 
achieve the optimum public-private partnership for long-term 
care financing. HIAA believes that other equally important tax-
related changes, at both the federal and state levels, could 
make long-term care insurance more affordable to a greater 
number of people. The expansion of this market will restrain 
future costs to federal and state governments by reducing 
Medicaid outlays.
    Providing additional tax incentives for these products 
would reduce the out-of-pocket cost of long-term care insurance 
for many Americans, would increase their appeal to employees 
and employers, and would increase public confidence in this 
relatively new type of private insurance coverage. In addition, 
it would demonstrate the government's support for and its 
commitment to the private long-term care insurance industry as 
a major means of helping Americans fund their future long-term 
care needs.
    Some examples of additional specific actions that could be 
taken are to:
     Permit the tax-free use of IRA and 401(k) funds 
for purchases of long-term care insurance;
     Permit long-term care premiums to be paid through 
cafeteria plans and flexible spending accounts;
     Provide a tax credit for the purchase of long-term 
care insurance; and
     Encourage state tax incentives for the purchase of 
long-term care insurance.
    These tax incentives would largely benefit two groups: 
those who did not have the opportunity to purchase such 
coverage when they were younger and the premiums were lower 
and, as a result, now face the greatest affordability problems 
because of their age; and those younger adults, our current 
baby boomers, who need incentives or mechanisms to fit their 
own long-term care protection into their current multiple 
priorities (e.g., mortgage and children's college tuition) and 
financial and retirement planning.
    Finally, it is unclear from our initial reading whether 
H.R. 3475 is intended to allow individuals to deduct Medicare 
supplemental premiums, or premiums associated with private 
health plans available through the Medicare+Choice program. The 
HIAA fully supports extending individual tax deductions to 
these policies and believes that the bill's language should be 
clarified in this regard to explicitly allow such deductions.
    Legislation introduced by Senator Boxer (S. 1902) similarly 
would allow individuals to deduct the cost of health insurance 
premiums. The legislation is more expansive than H.R. 3475 in 
three key respects. First, it would allow individuals to 
immediately deduct 100 percent of the cost of health insurance 
premiums subject to a $2,000 annual cap. Second, it would allow 
individuals to deduct health insurance premiums whether or not 
they itemize their deductions. Finally, the legislation appears 
to allow employees to deduct their portion of health care 
premiums even if their employers offer and contribute toward 
their coverage. This last provision may help provide an 
important incentive for uninsured individuals who, with 
increasing frequency, now decline coverage offered by their 
employer according to a February 1998 study by the Lewin group. 
Unlike H.R. 3475, however, Senator Boxer's legislation would 
not allow individuals to deduct long-term care insurance 
premiums.
    Because H.R. 3475 and S. 1902 apply only to those 
individuals with tax liability, they are not the complete 
answer to the challenge of providing health coverage to all 
uninsured Americans. Twenty-four million uninsured Americans--
over half of the uninsured--have incomes below 200 percent of 
the federal poverty level. But the approach taken in both bills 
will help make coverage more affordable for many working 
Americans who are not currently covered by health insurance 
through their place of employment. Equally important, both 
pieces of legislation rely on the private insurance market 
rather than expanding the reach of government programs. Also, 
they will begin to close the tax equity gap between those who 
get health insurance at work and those who do not.
    In conclusion, HIAA supports the use of broad-based state 
and federal funding to subsidize the cost of health insurance 
for those who cannot otherwise afford it. We have witnessed the 
success of favorable tax treatment in helping to expand 
coverage to a large percentage of working Americans. Therefore, 
we believe that providing greater equity under the tax code for 
individuals and the self-employed is a reasonable way to make 
health coverage more affordable for a large number of the 41 
million Americans who currently do not have coverage. H.R. 3475 
and other similar measures would be a very good start. We also 
would encourage Congress to consider tax credits, vouchers and 
other subsidies as a means of making coverage more affordable 
for even more Americans.
    Again, we are encouraged that Congress is returning to the 
issue of the uninsured and considering ways to make private 
health coverage more affordable. We look forward to working 
with you as you consider ways to expand private health coverage 
and provide equitable treatment under the tax code for 
individuals who have taken responsibility for their own health 
care coverage.
      

                                

    Chairman Johnson. Thank you very much, Bill.
    George Reider.

   STATEMENT OF HON. GEORGE M. REIDER, JR., COMMISSIONER OF 
 INSURANCE, STATE OF CONNECTICUT; AND VICE PRESIDENT, NATIONAL 
             ASSOCIATION OF INSURANCE COMMISSIONERS

    Mr. Reider. Thank you very much. Good afternoon, Madam 
Chairman, Members of the Subcommittee. My name is George 
Reider. I am commissioner of insurance for the State of 
Connecticut. I am also vice president of the National 
Association of Insurance Commissioners. I am testifying today 
on behalf of the NAIC's Special Committee on Health Insurance. 
I appreciate the opportunity to testify.
    Today I will focus on the States' effort to implement the 
Health Insurance Portability and Accountability Act of 1996, 
known as HIPAA. I will discuss briefly the effect of Federal 
tax proposals on the implementation of HIPAA.
    I have three points to discuss. First and most important, 
most States have successfully implemented HIPAA. Second, some 
people eligible for HIPAA's protections in the individual 
health insurance market are being charged very high premiums, 
and this is a problem. Third, it may be difficult to measure 
the impact of Federal tax proposals to increase the 
affordability of individual health insurance.
    We are proud to report today that 46 jurisdictions have 
implemented the key requirements of HIPAA. All but five States 
have now acted. Earlier this month, Kentucky enacted HIPAA 
legislation. This represents a significant achievement for the 
States, especially given the complexity of the statute and the 
short timeframe for implementation that it imposed.
    There has been considerable attention focused on the five 
States that have not enacted HIPAA legislation. They are 
Missouri, California, Rhode Island, Massachusetts, and 
Michigan. The decision of the legislatures in these States not 
to act has complicated the implementation of HIPAA. But we do 
wish to emphasize that in four of these five States, there are 
State laws that provide some of HIPAA's protections.
    State insurance departments in these States are continuing 
to enforce State law for the benefit of consumers and to 
regulate the health insurance industry.
    In Connecticut, we modified our existing high-risk pool, 
the Health Reinsurance Association, HRA, to implement HIPAA's 
requirements for the individual health insurance market. The 
HRA has issued 40 policies to HIPAA-eligible individuals so far 
this year, including 14 to low-income individuals.
    I would like now to address the issue of health insurance 
affordability. The high cost of the policies offered to many 
HIPAA-eligibles is a problem. We commend the Chair for her 
concern about this issue as expressed in the tax legislation 
that she introduced, H.R. 3475.
    The NAIC commented on the high premiums charged to some 
HIPAA-eligibles in testimony last September before the Health 
Subcommittee of the House Ways and Means Committee. We also 
discussed this in March before the Labor and Human Resources 
Committee.
    This is particularly a problem in States where the so-
called Federal fallback standards are in effect and certain 
other States as well. Some carriers are segregating HIPAA-
eligibles from other individuals and rating them separately. 
This is one cause of the high cost of health insurance for 
these individuals.
    We believe that the language of HIPAA is adding to this 
problem in the individual health insurance market. The law does 
not explicitly impose restrictions on the premium rates that 
carriers may charge to people eligible for HIPAA's protections, 
and there is a critical omission in the statute. My written 
testimony provides further details about this problem.
    You have asked us to comment on Federal tax proposals 
relating to health insurance. One issue is whether expanding 
the deductibility of health insurance premiums to more 
individuals might help them to afford insurance. I cannot 
comment on this issue for the NAIC, because our expertise is 
the regulation of insurance and not Federal tax policies.
    But I can comment on the potential difficulty of measuring 
the impact of these tax proposals, especially on HIPAA-
eligibles. In most States, it is not easy to identify how many 
people are covered by individual health insurance policies, nor 
is there much information about how many people qualify for 
HIPAA in the individual market.
    Connecticut and other States do have some information about 
the number of HIPAA-eligibles who are participating in the 
State's high-risk pool or who have purchased commercial 
insurance. But we do not know how many people eligible for 
protections under HIPAA have not exercised their right. This is 
the number that must be identified to measure the impact of 
H.R. 3475.
    It is likely that many people cannot afford the high cost 
of coverage available to them under the law. The process of 
implementing HIPAA has just begun. State insurance departments 
are making every effort to ensure that the requirements of the 
Federal law are implemented and consumers receive the 
protection the law creates. But much work remains to be done to 
achieve HIPAA's full potential.
    Madam Chairman, on behalf of the members of the NAIC, I 
would like to thank you and the Subcommittee once again for the 
opportunity to testify today, and I will be happy to answer any 
questions. Thank you.
    [The prepared statement follows:]

Statement of Hon. George M. Reider, Jr., Commissioner of Insurance, 
State of Connecticut; and Vice President, National Association of 
Insurance Commissioners

                              Introduction

    Good afternoon, Madam Chairwoman, and members of the 
Subcommittee. My name is George Reider, and I am the 
Commissioner of Insurance of the State of Connecticut. I am 
also the Vice President of the National Association of 
Insurance Commissioners (NAIC).
    The NAIC, founded in 1871, is the organization of the chief 
insurance regulators from the 50 states, the District of 
Columbia, and four of the U.S. territories. The NAIC's 
objective is service to the public by assisting state insurance 
regulators to fulfill their regulatory responsibilities. 
Protection of consumers is the fundamental purpose of insurance 
regulation.
    I am testifying today on behalf of the NAIC's Special 
Committee on Health Insurance, of which I am the Vice Chair. 
This NAIC Committee is composed of 41 state insurance 
regulators and was established as a forum for NAIC members to 
respond to Congressional and federal requests for technical 
assistance.
    On behalf of the NAIC Committee, I would like to thank you 
for the opportunity to testify today on how proposed tax 
legislation would affect the implementation of the Health 
Insurance Portability and Accountability Act of 1996 (HIPAA). 
It is a privilege to appear before this Subcommittee.
    My testimony this afternoon will focus on the efforts of 
the states to implement HIPAA. I have three major points to 
share with you today. First, most states have successfully 
implemented HIPAA. In four of the five states that have not 
chosen to enact legislation implementing HIPAA, there are 
existing state laws that provide consumers with some of the 
same protections. Second, the high cost of the individual 
health insurance policies available to persons who qualify for 
HIPAA's protection in the individual market (HIPAA-eligibles) 
is a problem which we have raised in prior testimony, and which 
I explain below. Third, it may be difficult to measure the 
impact of proposed tax legislation, such as H.R. 3475, because 
of the scarcity of data about HIPAA-eligibles and about the 
individual health insurance market.

           I. Most States Have Successfully Implemented HIPAA

    Since HIPAA's enactment in 1996, 46 jurisdictions have 
implemented the statute's major provisions: the guaranteed 
issuance and renewability of all products in the small group 
insurance market; the implementation of federal standards or an 
alternative mechanism in the individual insurance market; 
limiting the permissible periods of exclusion for preexisting 
conditions in the group market; and requiring credit for prior 
coverage in the group market.
    This represents a significant achievement for the states, 
especially given the deadlines imposed by HIPAA and the 
complexity of the statute. It is due in part to the recognition 
by Congress, as expressed in the federal law, that many states 
had already enacted significant reforms in the small group and 
individual insurance markets. HIPAA builds upon these state 
laws, and in general, allows them to stand unless they 
interfere with a requirement of the federal law. Members of 
Congress are to be congratulated for their hard work in making 
certain that HIPAA narrowly limited its preemption of state 
law.
    Substantial attention has been focused on the five states 
that have not yet implemented HIPAA: Massachusetts, Rhode 
Island, Michigan, California, and Missouri. In testimony given 
before the Senate Committee on Labor and Human Resources on 
March 19, 1998, we provided information about the situation in 
each of these five states. I would like to share that 
information with this Subcommittee.
    Massachusetts enacted small group reforms in 1991. Then 
Massachusetts enacted extensive legislation in the summer of 
1996, just before HIPAA's passage, that reformed its individual 
market, including guaranteed availability of coverage without 
any preexisting condition exclusions. The individuals who 
qualify for guaranteed availability must meet certain criteria, 
but these are generally the same or more generous than HIPAA's 
requirements. At the same time, Massachusetts passed some 
portability reforms for its large group market. In concept 
therefore, the law in Massachusetts is similar to HIPAA's 
requirements in many areas, and in some situations provides 
greater protections, but does not address all of HIPAA's 
requirements. For example, a broader base of people have access 
to coverage in the individual market than under HIPAA; however, 
Massachusetts law defines small groups differently from HIPAA 
and does not address certifications of coverage. In addition 
Massachusetts does not provide for guaranteed renewability in 
the individual market to the same extent as HIPAA. The lack of 
specificity on how and when the federal government will 
regulate and when it will not is causing market concern for 
carriers and consumers.
    Rhode Island state law also contains significant 
portability rules. Under Rhode Island law, any individual who 
has had twelve months of uninterrupted coverage cannot be 
subjected to any period of exclusion for preexisting 
conditions. This rule applies regardless of whether an 
individual is moving from group to group coverage; from 
individual to individual coverage; from group to individual 
coverage; or from individual to group coverage. This feature of 
Rhode Island law provides greater protection than HIPAA. 
However, because it requires an individual to have had twelve 
months of uninterrupted coverage and to move immediately to new 
individual coverage, Rhode Island's law is more stringent than 
HIPAA. (The federal statute allows periods of interrupted 
coverage to be aggregated if the gap between periods of 
coverage does not exceed 63 days.) In addition Rhode Island has 
a small group law that offers many of the protections of HIPAA.
    Consumers in Michigan have excellent access to the 
individual market because Michigan Blue Cross and Blue Shield 
(MBCBS) is required by law to offer individual coverage to any 
Michigan resident. The Blues offer a choice of seven individual 
plans, and these are priced pursuant to pure community rating. 
Individuals are, however, subject to a six-month exclusion for 
preexisting conditions. But individuals who are converting from 
a group plan that MBCBS either underwrites or administers are 
not subject to a new preexisting condition waiting period. 
Because MBCBS represents over half the Michigan insured market, 
this protection applies to a substantial number of people.
    In the small group market, Michigan law requires guaranteed 
renewability and uses the HIPAA definition of preexisting 
condition. MBCBS is required by law to cover everyone, and this 
requirement applies to the large group, small group, and 
individual markets.
    California also has in place certain laws that are 
comparable to HIPAA. For the most part, California state law 
regulating the small group insurance market complies with 
HIPAA's small group requirements. In California, the insurance 
department staff continues to respond to consumer complaints 
and inquiries about individual coverage. The insurance 
department staff refers to the Health Care Financing 
Administration (HCFA) any cases that they cannot resolve with 
the carrier, but makes every effort to assist consumers before 
taking that step. In California, the Department of Corporations 
has jurisdiction over HMOs. The staff of this department are 
also making every effort to assist consumers before referring 
them to HCFA.
    Missouri's Director of Insurance reports the following 
information about Missouri, which was the first state to notify 
HCFA that it would not be enacting HIPAA legislation. Missouri 
already has a state statute that guarantees issue of two 
products in the market of three to twenty-five, but it does not 
effectively regulate rates, and very few policies have been 
issued under it. In addition, Missouri has no law guaranteeing 
issue of any product in the individual market, or in the market 
of twenty-six and over. The HIPAA minimum standards therefore 
significantly exceed Missouri state law. The Missouri 
Department of Insurance and HCFA have been coordinating their 
efforts for almost a year, and both report excellent 
cooperation. The Department of Insurance attempts to handle all 
complaints initially and then refers some to HCFA. Dual 
enforcement in this state means that carriers submit dual 
filings of the product forms for review and approval.
    I have provided detail about these situations to dispel any 
misconception that consumers in four of these states have no 
protections and that carriers have been left unregulated. While 
the fact that the legislatures in these states did not address 
HIPAA in 1997 has complicated the implementation of the statute 
in the short-term, the state insurance departments are 
monitoring the situation and enforcing their own state laws. 
The existing laws and regulations in four of these states 
significantly address HIPAA's goals of providing credit for 
prior health insurance coverage and increasing access to 
coverage for individuals and small groups.
    I would also like to update this Subcommittee on the 
situation in Kentucky. Under HIPAA, Kentucky was granted a 
statutory deadline of July 1, 1998, because its legislature did 
not meet in regular session in 1997. I am pleased to report 
that the Kentucky legislature has now enacted HIPAA legislation 
incorporating in state law the federal fallback standards for 
the individual health insurance market.
    I would now like to explain my own state's approach to 
HIPAA implementation. Connecticut amended its laws in 1997 to 
utilize its existing high risk pool as an alternative mechanism 
to provide health insurance without preexisting condition 
exclusions to all HIPAA-eligible individuals. Policies, 
including a special health care plan for low-income 
individuals, are available directly from the Health Reinsurance 
Association (HRA).
    HRA plans provide benefits that are comparable to group 
plans available to small employers under Connecticut's small 
employer legislation. Premiums for HRA plans may not exceed 
150% of average group rates in the state, and pool losses are 
assessed to member insurers and HMOs.
    Prior to the HIPAA amendments, the HRA had provided 
conversion plans without a waiting period for preexisting 
conditions to applicants who had been insured under an employer 
group plan for 12 months or more and whose coverage, including 
any COBRA continuation, had terminated.
    Because of the HIPAA changes, individuals who have been 
covered under self-insured plans may also be eligible for 
immediate coverage, without a waiting period. Self-insured 
employers, however, have declined to participate in the HRA 
pool, citing federal preemption under the Employee Retirement 
Income Security Act of 1974 (ERISA).
    The HRA has issued about 40 policies to HIPAA-eligible 
individuals this year, including 14 special health care plans. 
It is not known how many of these people would in any case have 
been eligible for conversion policies.
    In addition to providing insurance for persons formerly 
covered under group plans, HRA offers individual health 
insurance regardless of health status to any state resident, 
subject to preexisting condition waiting periods. HRA was 
established under state legislation in 1975.

II. The Language of HIPAA Contains Omissions and Ambiguities that Have 
   Complicated Its Implementation in the Individual Health Insurance 
                                 Market

    A recent report of the General Accounting Office, Health 
Insurance Standards: New Federal Law Creates Challenges for 
Consumers, Insurers, Regulators (GAO/HEHS-98-67) (the GAO 
Report), mentions some of the problems that have arisen in the 
initial months of HIPAA's implementation. The high cost of the 
individual policies offered to HIPAA eligibles by some carriers 
is one of the major problems. The NAIC commented on this issue 
in our testimony of September 25, 1997, before the Health 
Subcommittee of the House Ways and Means Committee, and in our 
testimony of March 19, 1998, before the Senate Committee on 
Labor and Human Resources. I would like to reiterate our 
concern and explain how the language of the statute itself is 
contributing to the problem.
    In our testimony before the Health Subcommittee of the 
House Ways and Means Committee, we noted that HIPAA does not 
explicitly impose restrictions on the premium rates that may be 
charged to persons who qualify under the statute for guaranteed 
issue in the individual market. However, states may choose to 
establish a high risk pool that provides for premium rates and 
covered benefits that are consistent with the standards 
contained in the NAIC's Model Health Plan for Uninsurable 
Individuals Act. Another option for states implementing an 
alternative mechanism is to adopt either the NAIC's Small 
Employer and Individual Health Insurance Availability Model Act 
or the Individual Health Insurance Portability Model Act. Both 
of these models contain risk spreading mechanisms and rating 
restrictions to ensure that the rates charged to eligible 
individuals are controlled. Finally, states adopting any other 
type of alternative mechanism must ensure that the mechanism 
``provide[s] for risk adjustment, risk spreading, or a risk 
adjustment mechanism'' and meets other criteria.\1\
---------------------------------------------------------------------------
    \1\ PHSA Sec. 2744(c), 42 U.S.C. Sec. 300gg-44(c).
---------------------------------------------------------------------------
    These provisions suggest that Congress did not intend 
carriers to classify HIPAA-eligible individuals separately from 
others in the individual market and charge them higher 
premiums.
    The ambiguity about restrictions on the premiums in the 
individual market is also contained in the HIPAA provisions 
containing the federal fallback standards. In states that do 
not implement an alternative mechanism, HIPAA permits carriers 
to limit their offerings to HIPAA-eligible individuals to a 
choice of either the two most popular policy forms or, in the 
alternative, to two policy forms with representative 
coverage.\2\ The statutory language addressing the policy forms 
having representative coverage explicitly requires them to be 
covered under a method of ``risk adjustment, risk spreading, or 
financial subsidization.'' \3\ The language addressing the two 
most popular policy forms lacks this language, presumably 
because Congress thought that the two most popular policy forms 
would always be subject to some method of risk adjustment.\4\
---------------------------------------------------------------------------
    \2\ PHSA Sec. 2741(c), 42 U.S.C. Sec. 300gg-41(c).
    \3\ PHSA Sec. 2741(c)(3)(A); 42 U.S.C. Sec. 300gg-41(c)(3)(A).
    \4\ PHSA Sec. 2741(c)(2); 42 U.S.C. Sec. 300gg-41(c)(2).
---------------------------------------------------------------------------
    This omission has made it extremely difficult for states 
attempting to implement the federal fallback provisions to 
prevent carriers from segregating HIPAA-eligible individuals 
from the rest of the individual market and increasing their 
premiums based solely on the fact that these individuals are 
HIPAA-eligibles. It has created the potential for gaming by the 
industry with respect to the policy forms that they will offer 
HIPAA-eligibles. We think that HIPAA should be interpreted to 
prevent carriers from segregating HIPAA-eligibles from other 
purchasers of individual health insurance, and we would have 
liked Congress to be more explicit about this intent. Because 
of the fragility of the individual insurance market, any 
activities by carriers that fragment the market into two 
separate pools will make the cost of insurance prohibitive for 
some individuals and will enable carriers to comply with the 
law in a technical sense, but avoid having actually to insure 
HIPAA-eligible individuals.
    In our testimony on March 17, 1998, before the Senate 
Committee on Labor and Human Resources, we stated that, for the 
fourteen jurisdictions in which the federal fallback standards 
in the individual market are applicable, the most important 
problem is the high cost of the individual policies offered to 
HIPAA-eligibles. It is also a problem for certain other states. 
We agree with the observation in the GAO report that the 
statute only imposes a risk-spreading requirement if a carrier 
chooses to offer two representative policies. If a carrier 
chooses instead to offer only its two most popular policies, or 
to guarantee issue all its individual products, HIPAA is silent 
about rating restrictions. At least four federal fallback 
states and at least two other states report this as an issue of 
major concern.
    Regulators in some of the states where the federal fallback 
standards apply in the individual insurance market had hoped 
for more guidance from the federal government about the 
appropriate risk-spreading mechanism to be applied to the 
individual policies that carriers must guarantee issue. They 
had also hoped for more guidance in the federal regulations 
about certain key terms, such as ``most popular policy form'' 
and ``representative policy forms.'' While the regulations 
define these terms, the definitions themselves raise additional 
questions.
    We are aware of the difficult actuarial issues raised by 
the federal fallback provisions of HIPAA. The NAIC is working 
to assist HCFA to develop provisions in the final regulations 
that will provide appropriate guidance. We also recognize that 
the complexity of this task is caused in part by the ambiguity 
of the statute.
    The ambiguity in the statute and the sparse guidance 
contained in the federal regulations have combined to create 
opportunities for gaming by carriers. They can manipulate both 
the content and the pricing of the policy forms that they offer 
to individuals. Some carriers impose automatic rate increases 
as high as 35% above standard rates on HIPAA-eligibles. This 
increase, or ``rate up,'' is imposed simply because an 
individual qualifies for HIPAA. It does not include additional 
increases based on the individual's actual health status. This 
practice has helped cause the dramatically high prices for some 
policies made available to HIPAA-eligibles in some states.

  III. The Success of Federal Tax Proposals Intended to Increase the 
     Affordability of Health Insurance May be Difficult to Measure

    Proposals to amend federal tax law to make health insurance 
more affordable are one approach to the difficult issue of the 
high cost of health insurance for HIPAA-eligibles and others. 
We commend the Chairwoman for her concern about this problem as 
expressed in the bill she has introduced, H.R. 3475, the ``Tax 
Fairness for Health Consumers Act of 1998,'' which would make 
available to all individuals not eligible to participate in an 
employer-subsidized health plan the same tax deduction for 
their health insurance premiums as the self-employed currently 
receive.
    I am unable to offer any official comments on H.R. 3475 or 
any federal tax proposals because the expertise of the members 
of the NAIC is the regulation of insurance, not federal tax 
policy. I therefore wish to make clear that my comments are not 
to be construed as the position of the NAIC. While it is a 
laudable goal to increase the affordability of health 
insurance, I would like to explain the limitations of existing 
health insurance data that complicate assessing the impact of 
these proposals.
    In many states, it is not simple to define with precision 
the individual health insurance market. For example, in 
Connecticut we know that thirteen carriers have obtained the 
approval of the Insurance Department to sell individual health 
policies. We do not know how many people are covered by 
individual insurance policies, either as the purchaser of the 
policy or as a dependent of the purchaser. Nor do we know how 
many people in Connecticut are eligible under HIPAA to 
participate in Connecticut's alternative mechanism, which is 
its high risk pool (``Health Reinsurance Association'' (HRA)). 
We do know, as stated above, that Connecticut's high risk pool 
has issued 40 policies to HIPAA-eligibles so far in 1998, of 
which 14 are special health care plans for low-income 
individuals. It is not known how many of these people would 
have been eligible for HRA conversion policies in the absence 
of HIPAA. We also know that, as of March 17, 1998, 
Connecticut's high risk pool has issued approximately 1,224 
policies, and that the number of policies issued has 
approximated 1200 for a number of years. The high-risk pool 
receives about 1,600 telephone inquiries per month from 
individuals, agents, and brokers. This number increased 
slightly in January 1998, when HIPAA went into effect.
    Other states are attempting to collect data about the size 
of their individual insurance markets, and the number of HIPAA-
eligibles in this market. For example, the Colorado Insurance 
Department surveyed all carriers in that state's individual 
market to determine the numbers and types of policies sold and 
to obtain other information. As of January 21, 1998, 125 HIPAA-
eligible individuals had purchased commercial insurance, out of 
a total individual health insurance market consisting of 
approximately 152,357 covered lives. These 125 individuals do 
not include HIPAA-eligibles who have chosen to participate in 
Colorado's high risk pool rather than purchase commercial 
insurance. (In Colorado, there is a high risk pool, but the 
state did not choose to use the pool as its alternative 
mechanism under HIPAA.) It should also be noted that, for 
federal fallback states, any figures estimating the number of 
HIPAA-eligibles will often only reflect individuals whom 
carriers consider high risk HIPAA-eligibles. Others who qualify 
for HIPAA's protections are often sold standard individual 
policies, which are cheaper.
    Arizona, another federal fallback state, is also in the 
process of surveying its individual carriers to determine the 
scope of the individual market and the number of HIPAA-
eligibles.
    The states that have chosen to implement a high risk pool 
as their alternative mechanism report varied numbers. For 
example, Pennsylvania reports that, as of March 23, 1998, 64 
HIPAA-eligible individuals have enrolled in the state's 
alternative mechanism, which is operated by the Blue Cross and 
Blue Shield plans. In Indiana, three HIPAA-eligible individuals 
qualified for the state's high risk pool as of the end of 1997. 
These numbers are examples only, and are not based on a 
comprehensive survey.
    Moreover, all these numbers reflect only the people who are 
both HIPAA-eligibles and who can afford to pay the premiums for 
commercial individual coverage or to participate in a high risk 
pool. We do not know the number of individuals who would 
exercise their HIPAA rights if cost were not an issue. This is 
the number that needs to be identified in order to measure the 
impact of H.R. 3475.
    It is too soon to know whether these numbers of HIPAA-
eligibles will increase over time. HIPAA has been in effect in 
the individual market only since July 1, 1997, in the federal 
fallback states, and only since January 1, 1998, in states that 
implemented an alternative mechanism.

                             IV. Conclusion

    The process of implementing HIPAA has only begun. The 
states have made a tremendous effort to implement the law in a 
short time period, and they are working actively to ensure that 
consumers receive HIPAA's protections. However, it is a problem 
that the premiums charged to most HIPAA-eligibles for 
commercial insurance are very high, especially in states where 
the federal fallback standards are in effect. The NAIC has 
identified this problem in two previous Congressional 
testimonies and has also commented on the language of the 
statute that helps to create this situation. This lack of 
affordability makes HIPAA meaningless for many individuals who 
otherwise qualify for the statute's protections. We commend the 
Chairwoman for her concern about the issue of affordability of 
health insurance, but it is not within the area of expertise of 
the members of the NAIC to comment on the impact of H.R. 3475 
or other federal tax proposals. There is not extensive 
information about the number of individuals who qualify for 
HIPAA's protections in the individual market.
    Madam Chairwoman, once again, on behalf of the members of 
the NAIC Committee, I thank you for the opportunity to testify 
today. I hope that the information I have provided about the 
states' implementation of HIPAA will assist as you consider 
proposals to help make health insurance more affordable. The 
NAIC members look forward to continuing to provide their 
technical expertise to you and to the 105th Congress on issues 
relating to HIPAA and health insurance generally.
      

                                

    Chairman Johnson. Thank you very much.
    Mr. Risalvato.
    Mr. Risalvato. You've got it, Risalvato.

STATEMENT OF SAL RISALVATO, OWNER, RIVERDALE TEXACO & PRECISION 
            ALIGNMENT CENTER, RIVERDALE, NEW JERSEY

    Mr. Risalvato. Madam Chairman and Members of the 
Subcommittee, thank you very much for inviting me here today. 
The subject we are here talking about today is one that I've 
come before Congress a number of times to discuss. Each time we 
get a little bit better. Sometimes we take a step back; 
sometimes we take a step forward.
    I am here to discuss with you how this type of legislation 
and the deductibility of our health care premiums affect myself 
as a small business owner and other small business owners 
across our country.
    I was very pleased in your opening statement when you sort 
of described a little bit of the previous history of where 
we've come with health insurance and who's paid for it and 
who's covered it.
    The issue that we're talking about today--that's got its 
own little history. And I kind of got involved sort of as an 
advocate in the small business community somewhat because of 
this issue. When I first started to provide benefits for my 
employees as a small business owner, I had two mechanics that 
were working for me back in the early, mideighties, and they 
were good. And of course, as the owner of a small business, you 
want to know, are you competing with your pay to your employees 
as well as others. And I thought that I was, but you really 
can't get a good handle on that. Where's the gauge?
    But the one thing I was certain of is that other garages 
were not providing health care benefits for their employees. So 
bingo, I had something that they didn't have and I started to 
provide those benefits for my employees. I did that because I'm 
competing in the marketplace, not just for customers, but for 
employees. So I did that, and that was a very good thing. And I 
then found out at the end of the year that I could not deduct 
part of that health care policy that I paid for myself.
    Now I didn't do this as a tax writeoff; I did this as a 
benefit. But I learned about it after the fact, and I was very 
angry. But there wasn't anything I could do about it. And the 
original reason that I did it, it worked. I kept my employees 
and I had good employees and there are obvious benefits to 
that, because if I have better employees, I do more business. 
If I do more business, I make more profit. If I make more 
profit, I pay more taxes and I know you like that.
    In 1986, after a number of years of complaining about it, 
Congress was kind enough to throw me a bone. Now, I don't mean 
that in any disrespectful term. But that's exactly what they 
did. Congress recognized that the small business community was 
being treated differently.
    The chairman of the board of General Motors and Ford and 
all of the big Fortune 500 companies deduct the health care 
benefits for those persons in their employ, for the chairman of 
the board. And I ask you, am I not, in effect, the chairman of 
the board of my little subchapter S corporation? I am the 
chairman of the board. Why should I not be treated the same?
    So in 1986, Congress throws me this bone and then sunsets 
it in 1989, which Congress never sunsets anything except they 
sunset this and I couldn't figure that out. And then every year 
made me come back and beg for another bone. And I'm a meat and 
potatoes guy; I like a lot of meat on my bone and I was getting 
no meat, just bone. But I was chewing on it.
    That ran out in 1994 and I had to come back begging in 
1995, and fortunately, we made it a permanent deduction. We 
increased that 25-percent deduction that was that bone that 
Congress gave me in 1986. We increased that to 30 percent and 
made it permanent for 1995.
    And then in the course of these last few years, we have 
taken the deduction and we have continued its permanency and 
kind of phased it in over a bunch of years to the 100-percent 
level, which is actually fair; 100 percent is what is fair.
    So that's where we've come from. Where we're at now is we 
have it and we're phasing it in and we've recognized it's fair 
for 100 percent. Now I'm asking you, please let's speed up the 
process. Ten years is a long time, and this dog ages 63 years 
over that lifetime for the meat on his bone.
    I've recently spoken with a number of other small 
employers. I mean, people know that I'm involved in this issue. 
And they say that they don't provide any benefits even though 
they may have only one or two people working for them. They 
don't provide the benefits. But if they did, why should they 
provide them when they can't deduct them off of their own 
bottom line for what they purchase for themselves, only for 
what they purchase for somebody else? It's sort of senseless.
    So I am asking you on behalf of the small business 
community of the United States, on behalf of myself, please 
speed up this process. It will help get more small business 
owners motivated to provide some sort of benefits for 
themselves and their employees and to take them off of the role 
of the health care deadbeat and take them out of this cost-
shifting atmosphere.
    This is something that makes sense. We believe Congress 
should have the funds available to manipulate to provide this 
for the small business community, and I respectfully ask that 
you seriously consider this and adopt it. Thank you.
    [The prepared statement follows:]

Statement of Sal Risalvato, Owner, Riverdale Texaco & Precision 
Alignment Center, Riverdale, New Jersey

    Good afternoon. My name is Sal Risalvato. Thank you Mr. 
Chairman for giving me the opportunity to explain to you what 
it is like to own a small business, and to endure the 
unfairness in our tax code. I am here to speak about the 
deduction for healthcare premiums paid by the owners of small 
businesses.
    I am the owner of a small business. I own Riverdale Texaco, 
a gasoline service station in Morris County, New Jersey. I have 
been in the service station business since 1978.
    As I am sure you know, until last year, Congress had 
treated the deductibility of healthcare premiums for small 
business owners like a YO-YO. The Health Insurance Portability 
Act of 1996 solved half of the problem and put some sense into 
the tax treatment of healthcare premiums by establishing a 
permanent deduction. The train is now on the right track. The 
only problem is the train is moving too slow.
    I hope to accomplish several objectives today. First, I 
hope to make you understand the plain, simple, and obvious 
unfairness of the tax treatment of healthcare premiums as they 
relate to the owners of small business. Second, I would like 
you to understand how that treatment is working against any 
solutions in the reform of healthcare.
    I first started to provide healthcare benefits for myself 
and my employees in 1981. Previously, I myself was not insured. 
I have always owned my own business from the day I graduated 
from high school. As a healthy, inexperienced youth, I was not 
yet wise enough to realize the dangers of being uninsured for 
serious illness. Had I gotten seriously ill while I was in my 
early twenties, I would have had no means of paying for my 
illness, thereby becoming one of those that burden the 
healthcare system. I am sure you are all aware of the term 
``cost shifting.'' Had I become seriously ill back then, I 
would have been guilty of ``cost shifting.''
    I cannot say that it was a sudden rise in the level of my 
wisdom or the realization that I was a healthcare deadbeat that 
propelled my business into providing healthcare benefits for my 
employees. The very force that made me provide healthcare 
benefits back in 1981, is the exact same force that is the best 
solution to our healthcare crisis today. That force is the 
market place. The market place is the playing field for free 
enterprise. It produces quality, efficiency, and excellence. It 
is sparked by incentive and reward. It is doused by taxes, 
punishing regulation, and unfairness. Then it produces 
inefficiency and mediocrity.
    I had some pretty good employees back in 1981. I hoped I 
was paying them well enough to keep them. I just wasn't sure. I 
tried to compare their salaries with those of other shops, but 
never felt comfortable with the accuracy of the comparisons. 
One thing I know for sure, many shops, with the exception of 
auto dealerships, did not provide healthcare benefits for their 
technicians.
    It didn't take a genius to figure out that I could compete 
for employees better if I provided something only big business 
was providing. By competing for, and keeping better skilled and 
motivated employees, I was able to sell a better product. When 
I sold a better product, I attracted more customers. When I 
attracted more customers, I earned more money. When I earned 
more money, I spent more money, I saved more money, I invested 
more money, and yes I paid more taxes. That simply put is a 
free enterprise market place and how it operates. It is not 
more complicated than that.
    My accountant at the time almost spoiled the fun of 
participating in this new benefits game. When it came time to 
do the end of the year tax returns, he pointed out to me that 
the portion of the healthcare premium I had paid for myself 
could not be deducted as an expense, and therefore would be 
added to my income. I was so angry I felt like canceling the 
whole benefit. In fact I was a lunatic, being unable to 
understand why I was being treated so unfairly. It just didn't 
make any sense. Of course I came to my senses and recognized 
the whole reason I started the benefit in the first place was 
for the employees. I would simply have to live with it. But I 
didn't like it.
    I always ask myself, ``what decision would I have made if I 
knew before hand that I would be unable to deduct my share of 
the premium?'' I still do not know the answer to that question. 
Perhaps it may have delayed my decision to provide health 
benefits for my employees.
    In 1986, Congress threw me a bone. They now allowed me to 
deduct 25 percent of my premium. I still can't figure the 
rationale. If it was unfair to tax me on 100 percent of my 
premium, why has it now become fair to tax me on 75 percent? It 
still does not make any sense! Why am I different from the 
person that works for me? Why am I different from the president 
of General Motors? I pay the same income taxes as they do. 
Perhaps more or less based on our incomes. Neither my employee, 
nor the president of General Motors have the amount of their 
healthcare premiums added into their incomes at the end of the 
year. Why do I? Let me ask that question again. Why do I?
    The 25 percent deduction wasn't any great thing, but it was 
better than nothing. Like any begging dog, I took the bone and 
chewed on it. Unlike the majority of the senseless things that 
Congress sees fit to impose on small business, they had a 
built-in bone throwing stopper for this dog. Congress built 
right into the Tax Reform Act of 1986 a sunset for the 25 
percent deductibility of my healthcare premium. The deduction 
ended in 1989.
    From 1989 until 1995, Congress debated extending the 25 
percent deduction. Every year Congress made the same mistake. 
They didn't do the fair and sensible thing. They didn't do the 
one thing that will add incentive to small employers to seek 
healthcare benefits for them and their employees. Congress 
didn't make the deduction permanent, and they didn't make it a 
100 percent deduction.
    Instead, after annual debate and holding the dogs at bay, 
they always chose to spare another bone. Congress has extended 
the 25 percent deduction every year since 1989.
    A few years ago, I hired a new accountant. Every year he 
calls and asks to retrieve the invoices from my healthcare 
carrier from the file, in order to calculate how much of the 
premium was paid for myself. Each year I dutifully retrieve 
them. I guess that makes me a Retriever. I reported the numbers 
knowing that only 25 percent of those numbers would actually be 
deducted as expenses. My bone. The remainder was added to my 
income. I would like some meat on my bone thank you.
    In January of 1995, I came begging for my bone again. 
Congress had not extended the 25 percent deduction for 1994. 
Thankfully Congress threw another bone and extended the 
deduction through 1995 retroactive to 1994 and raised the 
deduction to 30 percent.
    The Health Insurance Portability and Accountability Act of 
1996, also known as the HIPAA bill, started to put a tiny bit 
of meat on the bone by raising the deduction to 40 percent in 
1997, 45 percent in 1998, and eventually to 80 percent by the 
year 2006. Chairman Archer's Taxpayer Relief Act of 1997 
continued adding meat by making the final deduction 100 percent 
by 2007. More meat.
    What I have come here to ask for is for Congress to push 
through legislation that would allow for the 100 percent 
deduction sooner than in 2007.
    I don't mean to sound greedy, in fact, I am grateful for 
the 100 percent deductibility of health insurance. But the 
problem is it doesn't go into effect until 2007. That's almost 
10 years away.
    Congress obviously recognized the unfairness and inequity 
of the deduction dilemma by passing the Taxpayer Relief Act of 
1997. The question remains: Why is it necessary to make small 
businesses wait until 2007 to deduct 100 percent of their 
health insurance when corporations have been receiving this 
deduction for years. The formula to reach 100 percent is too 
slow and does not provide small employers enough incentive to 
obtain healthcare benefits for their companies.
    At a time when most small businesses are finding it 
difficult to continue providing healthcare benefits for 
themselves and their employees, it is bad for the market place 
to not provide as much incentive as possible.
    I ask you, in the spirit of fairness, and in the spirit of 
concern for healthcare reform, to please pass legislation that 
will speed up the phase in of the 100 percent deductibility of 
healthcare premiums. Members of the Oversight Subcommittee, I 
think this will be a great step, and a great signal that 
healthcare reform is still a priority in this Congress.
    I apologize if there seems to be a facetious tone to my 
testimony. I mean no disrespect. I make the analogy of the dog 
and the bone only as a means of highlighting the silliness of 
this debate. This debate should be over and done with. I am 
frustrated, and my fellow small business owners are frustrated 
by the obvious and blatant unfairness of this tax policy. I 
think the time is right to act on the legislation I have 
requested here today. I wish you well in your efforts to 
achieve a more fair tax policy for all Americans, and thank you 
for the opportunity to testify.
      

                                

    Chairman Johnson. Thank you very much. Mr. Risalvato, in 
talking with other small business men, if they could deduct 100 
percent of their premiums, if we made that possible 
immediately, would that be a sufficient motivation for them to 
offer a health insurance plan for their two or three employees?
    Mr. Risalvato. I believe in a large percentage of the 
cases, the answer to that would be yes, because many recognize 
that they need it. And they seem to be, by the way, the only 
ones that are aware that they can't deduct it. When I talk to 
other small business owners that are C corporations, they 
aren't even aware of the issue.
    But the ones that are aware of the issue are the ones that 
have gone to do it, and I guess in the course of being sold the 
insurance through agents or brokers or even in consultations 
with their accountants. Once they learn that fact, it sort of 
puts the brakes on. It certainly slows up the process.
    In answer to your question, I believe that a large 
percentage would, in fact, immediately negotiate for benefits 
for themselves and their families.
    Chairman Johnson. That's a very interesting answer, and I 
think an important one. One of the things that's very difficult 
in this area--and I had a meeting with Joint Tax about this 
yesterday--is that a lot of the information we are using to 
estimate the impact of this bill comes from 10 years ago. Now 
in 6 months, there will be some better information available. 
But you know, 10-year-old data in health care and in the health 
insurance business is practically useless.
    One of the issues that came up, and perhaps some of you can 
shed light on it, we believe--the Congressional Budget Office 
believes that 7 percent of the uninsured are in the 28-percent 
bracket. So they would get a significant deduction. One of the 
problems with deductibility is that someone in the 15-percent 
bracket doesn't get a very good incentive. So that's why the 
employer incentive is very important for small businesses.
    That does lead to another issue that the two of you might 
want to comment on, and that is the access of very small 
employers to group plans, in your estimation, in our market. 
That's one question.
    The other question is, if 7 percent are in the 28-percent 
bracket--and according to Joint Tax, if there's a 10-percent 
price cut, there's a 6-percent increase in participation with a 
28-percent price impact, shouldn't there be a fairly 
significant impact at least among the 7 percent of the 
uninsured who are in that bracket.
    I'd like your comments on that, because to this point, what 
we're mostly getting is estimates as to how this will be an 
equity bill. And it will be an equity bill. It will give people 
who are already buying their own insurance, and who get no 
ability to deduct at all, the right to deduct. If we're able to 
implement this in 1 year, it will be for everybody and that's 
actually the way it should be.
    That still is a big price for equity, which is a fair price 
to pay. Equity is important. But if you talk about expansion, 
then you have to try to figure out who is going to be able to 
benefit from this.
    Only if we develop the maximum incentives to participate in 
the current market structure, can we determine what the cost of 
subsidies for premiums would be, which is the next and final 
step and was part of the bipartisan national health care 
proposal that was introduced a number of years ago and came 
very close to passage, although the decision was made for the 
issue not to go to the floor.
    In that bipartisan bill, and in the Bob Michel proposal 
that Mr. Gradison will remember, we did close that final access 
issue, that market access issue with subsidies on the basis of 
premium. But you can't get there yet, and I have been struck by 
how little we know about the uninsured and how little we know 
about how many of them are employers who actually have a viable 
enough business so that if they could deduct the premiums, they 
would do so for themselves and their two or three employees.
    I'd like your thoughts on how powerful this lever could be 
if we do it right, and what you know about that 28-percent 
group.
    Mr. Gradison. Madam Chairman, we don't have any independent 
data. We rely heavily upon data that comes from your Committee 
and from the Congressional Budget Office and sources of that 
kind.
    Clearly, the recommendation that you have put in the form 
of a bill won't solve the whole problem. But clearly, it is a 
step in the right direction and will help you not only gain 
experience, but be in a better position to estimate what 
additional steps are needed.
    As we indicated in our testimony, ultimately, in addition 
to the question of deductions, the question of credits or 
vouchers or something--they are about the same thing, really--
needs to be considered in order to reach those, who are very 
numerous, who pay little or no Federal tax, but because of the 
cost of health insurance are unable either to buy it on their 
own or to afford to share in the cost of the plans offered by 
their employers.
    The most recent estimate is that there are 6 million 
Americans entitled to health insurance offered by their 
employers who do not take it up. And there are many reasons for 
that. But the main reason is affordability, because of their 
judgment that they are either unwilling or unable--more likely, 
unable--to meet the costs of the premiums, deductibles, and 
copays that would be involved.
    Chairman Johnson. Just to interrupt you there on that 
point. The 6 million that are offered insurance by their 
employers and don't participate, are those employees offered 
plans in which the employer offers no subsidy at all?
    Mr. Gradison. I think they are generally plans where the 
employer does, but there certainly has been a tendency of 
employers, as costs have risen rapidly, in many instances to 
shift a growing portion of that cost of the premium to the 
employees, especially for dependents.
    These data are spelled out in an article that appeared in 
Health Affairs in November of last year, and I think you might 
find that a useful source.
    Chairman Johnson. And then, George, perhaps you might know, 
I was very surprised, in talking with the Joint Tax Committee, 
that they believed that there are many employers out there who 
offer health insurance to their employees with no premium 
subsidy.
    Frankly, I've never run across that in my State. And I 
wonder if you are aware of plans of that sort, and if so, do 
you have any idea how much of the market is plans in which 
employers offer access to group insurance, but don't 
participate in any way in subsidizing premiums?
    Mr. Reider. I do not have those statistics, and I would be 
more than happy to gather with the staff anything we can 
provide, because I think that certainly is a point of interest, 
and highlighted by what we've said here today.
    Chairman Johnson. Excuse me, I'm sorry. I thought we had a 
little more time left than we do. We only have 5 minutes to 
vote. I am going to have to ask you to suspend and we will be 
right back and start with your questions. Then we'll go to Mr. 
Coyne and Mr. Portman. Thank you.
    [Recess.]
    Chairman Johnson. Since we are going to have votes 
periodically, we'll try to get back promptly and reconvene.
    Mr. Reider, I think what I asked you was to comment on a 
number of issues. First of all, what kind of incentive, in your 
experience, the 28-percent group would experience under the 
deductibility bill. And then what you know about this issue of 
the data in regard to the uninsured. And then, last, I know 
Connecticut has done a lot of work in trying to create more 
affordable group options in which a small business can 
participate. If we were, for instance, able to go to 100-
percent deductibility for the self-employed, what kind of 
incentive do you think would encourage very small companies to 
participate in the group market, and is there an affordable 
group market in which they can participate?
    Mr. Reider. Yes, and the question is of tremendous 
importance, but I would not have the statistics nor the 
expertise to speak from a tax standpoint. But as I indicated, 
we will certainly have staff gain any information we can.
    You raised the point of the fact that there were group 
policies that didn't offer any subsidization, and again, I 
don't know the specifics. But I do sense that there may be some 
movement, as was mentioned here just a few minutes ago, where 
that is happening for a variety of reasons. And I think it will 
be very difficult to determine that. But again, that's just a 
personal observation.
    As far as Connecticut and this small group business, I 
referenced the fact that we had the Health Reinsurance 
Association and that mechanism was put in place back in, I 
think, 1975, which intended to help address the small business 
availability, affordability issue. And I think Connecticut has 
continued to be active in that, and in fact, when HIPAA was 
passed, much of that mechanism was put in place as the 
alternate for that arena.
    Chairman Johnson. Do you mean under HIPAA the individuals 
were given access to that small group market?
    Mr. Reider. Yes. Well, they were given access to the Health 
Reinsurance Association, which allowed for availability, and 
then there is a limit on the amount that could be charged over 
and above the standard policy. That was available in the State 
of Connecticut, and that was the alternative mechanism that we 
turned to when we implemented the HIPAA measures. But we were 
pretty much there when that came down, and it has worked very, 
very well, I believe.
    Chairman Johnson. Well, in terms of your experience of the 
insurance market, does a 28-percent incentive constitute much 
of an incentive to participate? And is there any way that 
individuals can get into an affordable market?
    Mr. Reider. Again, I find that of great interest. I would 
just hesitate to comment, Mrs. Johnson, because it's an area 
that I don't have the statistics and wouldn't have the 
expertise.
    I would say this: As I indicated, we certainly applaud your 
efforts in looking at this and understanding it fully, because 
I think today in our country, affordability and availability 
remain a very critical matter.
    Chairman Johnson. I'd like to ask both you and the HIAA to 
try to look at your sources of information and try to see how 
many--for instance, what portion of the small group market has 
no employer subsidy in it. How real is that?
    And then whether there is any data that you have access to 
that might help us judge if we went to 100-percent 
deductibility for the self-employed, what groups that would 
bring, what small groups that would bring into the group 
market.
    And then if you can find any data that would help us to 
determine who this 7 percent of the uninsured that are in the 
28-percent bracket or above are, and what likelihood there is 
that deductibility would be a sufficient incentive for them to 
participate. Because those are all questions that we don't have 
answers to, and it's very hard to determine the impact of this 
legislation.
    Then one last thing I'd like you to look at is 15-percent 
deductibility and 28-percent deductibility as an incentive, if 
we opened up the Medicaid managed care plans of the States to 
these people. So that you would definitely have a lower cost 
plan, a more affordable plan, and a modest incentive. If you 
could get back to us on those kinds of issues, I would 
appreciate it.
    Mr. Reider. Surely will. We will gain any information we 
can and provide it as quickly as we can.
    Chairman Johnson. Thank you.
    [The information is being retained in the Committee files.]
    Chairman Johnson. Mr. Coyne.
    Mr. Coyne. Thank you, Madam Chairman. Congressman Gradison 
and Mr. Reider, given that it's pretty much agreed by everyone 
that a significant number of low-income individuals are not 
going to be able to benefit from a tax deduction because they 
just have no tax liability, I was just wondering if either one 
of you have any suggestions about what we could do for those 
people who would be left out of any benefit from a tax 
deduction program.
    Mr. Reider. What I testified to here today--and there are 
many elements, but one of the things that may be helpful to 
some extent is the fact that currently under HIPAA the 
companies can choose to place the person with one of several 
policies. And we think the intent clearly was that if they were 
the most popular policy, they'd be the most attractive 
dollarwise and so on.
    And what we believe, from the NAIC perspective, is it would 
be well to look at that and make it necessary that the 
companies spread that risk further, and therefore capture 
perhaps a lower rate than now is being offered, which is 
creating problems in some instances.
    So again, as far as the tax portion of that, I cannot 
comment, but I can comment that I think this is one in a number 
of steps that might be helpful.
    Mr. Gradison. Mr. Coyne, I should think that once you 
reckon with how much you may have available in the form of 
funds for tax reduction, that you might want to look at some 
mix of deductions, credits, or vouchers. Use deductions and 
credits as a means to target these funds to where they would do 
the most good.
    I can't quantify that. And we're going to try to help with 
the numbers that the Chair has asked for, but we keep coming 
back to the same sources that you have, so I don't want to 
leave the impression that these numbers are easy to come by.
    Mr. Coyne. Mr. Reider, in your testimony, you said that 
health insurance prices under HIPAA are much more reasonable in 
States with high-risk pools. Does that mean that instead of 
encouraging people to buy expensive individual policies, we 
should create risk pools or allow them to buy into larger 
public plans?
    Mr. Reider. Again, and I repeat, I think what's important, 
we believe, is to address this specific issue where it would 
force a broadening of the risk and therefore, we think, a more 
attractive price than what we've seen in some instances, which 
is rather troublesome to all of us.
    But we are not suggesting any specific action that would 
mandate it in each and every State, because the marketplace is 
different in each State. There are different companies, their 
employment picture, the availability, and whatever else.
    But we do think, and I can speak now for the State of 
Connecticut, that our approach to this, because it has a long 
history and whatever, has worked very well. And one of the 
things that we do at the NAIC is to share information and 
success, or problems as well to avoid them.
    And I think that all of the commissioners that I am aware 
of and the discussions I have had is that everybody is trying 
to work very hard on the same issue that you are working on in 
their given State, working with the legislatures, working with 
the authority they have to try to correct some of the problems, 
which is high price. And when you don't have affordability, you 
don't have availability, so they tie together directly. And I 
think there is a lot of activity by individual States.
    So I would not suggest that mandate, you do this, because I 
think you could end up in more difficulty. But to simply 
suggest that this particular provision be corrected, and then 
allow the States to determine how they go about achieving that 
spread.
    Mr. Gradison. Mr. Coyne, our observation with regard to the 
HIPAA experience is that the problem of affordability is 
concentrated in those States which don't have risk pools and 
therefore, that the focus should be on trying to encourage them 
to do so if they can.
    There is a lot to be said for risk pools in terms of 
improving the functioning of the very fragile individual 
market. For many years--Mr. Vaughan might remember, I don't 
remember for how many Congresses Mr. Stark and I would put in 
bills to encourage the creation of risk pools, but we didn't 
get much encouragement anywhere else and never were able to 
trade it with the Senate for anything so we stopped doing it. I 
mean, that's really what happened.
    But I still think that there is a lot to be said for the 
State level. It doesn't have to involve Federal encouragement, 
necessarily, but I think there is a lot to be said for 
recognizing that the HIPAA affordability problem is 
concentrated in the States which don't have risk pools.
    Mr. Coyne. Thank you both.
    Chairman Johnson. Mr. Portman.
    Mr. Portman. Thank you, Madam Chairman. I appreciate the 
testimony from all the witnesses this afternoon. Bill Gradison 
spent 18 years on this side of the table and became really the 
preeminent expert on health care on this Committee, so it's a 
little intimidating to ask him questions. He knows a lot more 
than we do. But it is also a good opportunity to get some 
information.
    I also would say Tim Miller is behind me, Mr. Gradison, who 
was serving you ably for many of those years. You trained him 
well.
    I have a number of questions, but I think what I'd like to 
focus on is the long-term care ideas you have. I know in your 
testimony, in your written statement, you go into some detail 
as to some additional thoughts beyond the deduction that is in 
Nancy Johnson's bill.
    In your oral statement, I think you were not able to get 
into all that, and I guess what I'd like to do is to hear a 
little more about long-term care from you. I think you would 
say that Nancy Johnson's proposal is a good start.
    Mr. Gradison. Yes.
    Mr. Portman. Providing deductibility for long-term care. 
And one question I just have, out of curiosity again given your 
background and expertise, is why other proposals haven't 
included more of a focus on long-term care. I think, Nancy, 
yours is the only proposal out there that has a deduction for 
long-term care that is across the board.
    And then if you could address some of the other things we 
could do in terms of long-term care.
    Mr. Gradison. Well, Mr. Portman, first of all, it's a lot 
more intimidating to sit down here than it was from up there. 
[Laughter.]
    But I think the reason is that such a major step was made 2 
years ago in the tax clarification with regard to long-term 
care. I mean, that was a very major step sought by people who 
want to encourage the development of a private market.
    It was sought by those who are concerned about the long-
term cost to Medicaid of nursing home bills. It was sought in 
part by those who were trying to learn from the experience of 
States like Connecticut which had taken the lead in some 
important experiments with regard to the interaction of long-
term care insurance to the spend down requirements.
    So now, frankly, from our point of view, we are approaching 
the long-term care issue on two fronts. The first has to do 
with the issuance of the regulations, and the Treasury has been 
very cooperative and open to suggestions. It is remarkable how 
many 12-page, single-spaced letters we send to them on long-
term care because of the number of issues that were left, as is 
often the case, unresolved by the passage of those statutes.
    But now our attention has turned to the tax status of these 
policies at the Federal and at the State level. We have been 
very aggressive this year in encouraging the legislatures to 
consider providing the same treatment at the State level for 
long-term care that you provided 2 years ago.
    So these additional steps are very encouraging, but they 
have implications beyond just long-term care. For example, the 
7\1/2\-percent threshold, as a practical matter, almost 
eliminates the possibility of deductibility for most folks.
    But I recognize that if you are going to reexamine the 7\1/
2\-percent threshold, quite apart from the revenue cost, it's 
unlikely that you're just going to do it for one particular 
kind of health insurance. You probably would want to do it more 
broadly.
    Mr. Portman. Which would be quite costly.
    Mr. Gradison. Which would, of course, be far more costly.
    Mr. Portman. Let me ask another question, since we have you 
here with your experience on health care and the relationship 
between health care and other issues. One I just will mention 
is that very much on the congressional calendar right now is 
the notion of a patient's bill of rights, the PARCA bill and so 
on.
    And you go into some detail in your written statement about 
the impact on affordability, and therefore, accessibility, 
along the lines of what Mr. Reider was talking about a moment 
ago. And I think we can't forget those issues. This is not all 
tax driven, after all, and a lot of it is driven by regulation 
and mandates and so on.
    But the larger question I have is tax reform. And if you 
could just for a moment step back and give us some sense of how 
tax reform as it's talked about--let's say the flat tax, for 
instance, where there would be a so-called pure flat tax, which 
has implications on the corporate side as well as the 
individual side on health care.
    How would that impact health care, and do you see any kind 
of major simplification effort out there that would be 
compatible with the kind of a health care program that you are 
talking about?
    As an example, in your long-term care proposals, you have a 
number of deductions and credits and so on. Those would seem 
inconsistent with simplification. Could you just address that 
generally.
    Mr. Gradison. We're very concerned about this, Mr. Portman. 
There's no question that these tax provisions as we have them 
today are having a positive effect in encouraging greater 
coverage, particularly at the group level, under health 
insurance. And you are going to hear some testimony relevant to 
this in the next panel.
    But if the employer deductibility were eliminated or it 
were retained, but the exclusion at the individual level were 
eliminated, there are solid reasons for concern that the number 
of people who would actually purchase health insurance would 
drop very, very dramatically.
    Nobody can promise you those amounts, but I think it's 
something that requires great care. There are definite 
tradeoffs involved in trying to broaden the base. In many 
respects, I look at what happened back in 1986, which was a 
major step in that direction, and then what's happened since 
then. And I have a feeling that while what we did was well-
intentioned, that there's been a drawing back, a sense that you 
have to have more targeted changes, that just leaving this up 
to the individuals and families and businesses to decide isn't 
enough to meet national objectives.
    And certainly, a lot of what was done in 1986 has been, if 
not totally reversed, at least the direction is going back to 
the way it was before 1986.
    Mr. Portman. Thank you. I look forward to further dialog on 
this and other issues. Thank you, Madam Chair.
    Chairman Johnson. Thank you.
    Congresswoman Thurman.
    Mrs. Thurman. Thank you, Madam Chairman.
    I really want to start with something that came to my 
attention from a letter that I received in my office about 
somebody who was working who could not afford health care. And 
this is the excerpt from the letter, and then maybe we can have 
some questions on this.

    Mrs. Thurman, you may remember that a little over 2 years 
ago I called your office and asked for help for a friend of 
mine. She had just been told by her doctor that her pap smear 
had come back positive and that he recommended surgery. At that 
time, she was employed as a bartender at a local restaurant and 
was not able to afford medical insurance. If affordable medical 
insurance had been available, she would be alive today.
    Marti died of one of the most easily discovered and easily 
curable forms of cancer today, cervical cancer. It was 
discovered in time. Had adequate and affordable medical 
insurance been available, she would have had a hysterectomy 
immediately and that would have been it. I am not looking for 
someone to blame. The blame is shared by all of us.

    Mr. Risalvato, let me ask you this question as a 
businessowner. If that 100 percent, based on the fact of the 
statistics that we're hearing today, that in fact, employers 
want more participation by employees and that, in fact, in some 
cases they are not providing at all, would that 100-percent tax 
deductible have helped, do you think, Marti, in this case?
    Mr. Risalvato. There's no way that I could tell you what it 
would have done in that instance. I can tell you that when I 
learned I couldn't deduct my own, I had already made the 
decision, and I still wonder how I would have made the 
decision.
    I still provide health care benefits for my employees. I 
have still to this day never taken a penny from them. That is a 
heartbreaking story, and not to seem without compassion, but 
shouldn't some onus be put on the individual to have purchased 
health care insurance, or put an importance on it on their own?
    And I just think that if the costs were lower, there would 
be more likelihood that the employer would have provided it. If 
there was a deductibility, there would be more likelihood that 
the employer would have provided it. And in this instance, 
there would have been more likelihood that the individual would 
have taken their own personal responsibility to do it for 
themselves, had not the employer done it.
    The key here is cost. The Chairman, in her opening 
statement, mentioned something that I don't always hear from 
people that are educated in health care. And that is the fact 
that there was a time when an employer provided for their 
employee a benefit rather than a pay increase or something 
else. You noted that in your opening remark.
    And that is what motivated me when I provided the health 
care benefits. I was a much younger man at the time. I was in 
good health, and I wasn't thinking of myself. I was thinking of 
the employee. And I do believe that many employers feel exactly 
as I do. This notion that small employers or large employers, 
for that matter, would just prefer to pocket the money rather 
than be concerned about the employee, I think is absolutely 
false.
    I have a genuine concern for my employees. I find that most 
of my small business colleagues have the same genuine concern. 
Would that 100-percent deductibility have helped Marti? There's 
no way I can answer that. I can tell you that that is one 
step----
    Mrs. Thurman. Well, let me ask you this.
    Mr. Risalvato. Yes.
    Mrs. Thurman. Would it have put you in a situation--and I 
don't know what's your situation, but you said in your 
testimony that you've talked to other employers because you've 
been involved in this issue.
    Mr. Risalvato. Yes.
    Mrs. Thurman. If this was a skilled worker that was making, 
maybe not minimum wage, but more than minimum wage but still at 
a very low rate compared to trying to raise a family. If they 
had had that 100 percent, would they give more benefits? Would 
that want them to come into an employee benefit package for 
them? Would they look at a 50-50 split? Would they be looking 
at a 75-25 split?
    Have they talked about that much in what they would be 
offering their employees as a 100-percent deductibility?
    Mr. Risalvato. Yes, I have spoken to many, and it ranges 
from, I could pay a little bit but I can't afford the whole 
thing, to I'd like to make it an incentive package where I can 
pay for as much of it as possible to take some of the burden 
from them.
    Keep in mind, an employee that has these benefits does not 
have that worry and he's a better employee, and that's what 
we're trying to make.
    Mrs. Thurman. Do I hear the issue--I mean, I've talked to 
some businesses that say, well, I can't afford this because it 
will make me less competitive. And I could tell you my response 
would be it would probably make you more competitive. But even 
in 1994 when we were talking about it and trying to get more 
businesses to come in, they were saying, Oh, no, you can't do 
this to us, this is going to hurt our bottom line, we won't 
stay competitive in the marketplace. There were all these 
excuses to why we couldn't have this happen.
    But yet this is a perfect example of what happens to folks 
who don't have access to medical care. And I don't disagree 
with the personal responsibility. But my guess is probably as a 
bartender, at least in that area, if they were making $12,000, 
$15,000 a year, I'd have been surprised.
    Mr. Risalvato. Please, Mrs. Thurman, don't categorize these 
as excuses when I am trying to pay the mortgage and the 
electric----
    Mrs. Thurman. I understand.
    Mr. Risalvato [continuing]. And keep the doors open to keep 
jobs. And I can tell you from personal experience, I stand 
there today right now. I am in business for 20 years. My 
business every day is a struggle to keep the doors open. I 
provide health care benefits as a small business owner for my 
employees.
    When we start talking about some of these mandates, and 
please take this back to your other colleagues in Congress, 
don't tinker with this system by making mandates, because you 
make it worse. You put people like myself in jeopardy of 
continuing a business, let alone continuing providing for the 
ones that I already am providing for.
    If tomorrow I need to make a decision as to whether I pay 
the electric because they send a notice that says if it's not 
paid on such and such a date you have no electricity. If I have 
no electricity, I don't have gas pumps, I don't have power to 
run the lifts and everything. If I am faced with that decision 
or paying a health care premium, you tell me which one should I 
make tomorrow.
    So we are in the exact same boat. When we ask for the 100-
percent deductibility, we are asking for one tiny little step 
that may be a motivation or a help to make us provide it, 
thereby putting more people in the system and eliminating a 
little bit of cost shifting. That's what we're asking for.
    But that's only one thing. There are many other things. The 
bottom line is the cost of the premium. It is no longer the 
situation where I'll provide the benefit because I can give the 
employee something of great value, rather than cash, pay 
increase. It is no longer that. It has gone from that to where 
I cannot afford it at all.
    And we've done some tinkering. We've done some good. We've 
got people tugging at a pendulum. And the object is to keep 
that pendulum right in the middle. I mean, we went through some 
serious changes in the last few years that pulled the pendulum 
way back, and now I think maybe the pendulum is starting to 
come back again this way. And it is going to keep doing that. 
And it's up to the Members of Congress to help direct it so 
that pendulum stays somewhere in the middle.
    But to put into this argument that small business owners 
want to keep the cash rather than provide the benefit is false. 
And that's not to say that there won't be any situations like 
that. Of course there will. There will be those small business 
owners or big business owners who are going to say, why should 
I provide that? I'm going to make a little extra profit for 
myself.
    By and large, a small business owner needs peace of mind as 
well, and he gets that when his employees are happy and when 
his employees can do the job and they can do it without him 
being there. Health care benefits is a means of providing that 
peace of mind for the small business owner as well.
    Help us with a little incentive. That's what I am asking.
    Mrs. Thurman. We should thank you from this Subcommittee to 
let you know that we do appreciate that commitment that you've 
given to your employees. That is an extremely important thing, 
and I hope that message is to show that competitiveness and the 
marketplace is not jeopardized because you happen to give a 
better package to your employees.
    Mr. Risalvato. Thank you.
    Chairman Johnson. In closing, let me ask particularly Mr. 
Reider or Mr. Gradison. You know, one of the options under 
HIPAA was for States to allow individuals--because the most 
difficult part of the bill was individual portability--
individuals to join the State employees benefit plan or some of 
the largest groups in the market, because while risk pools are 
important, they are 150 percent of premium. COBRA is important; 
it is 102 percent of premium.
    Frankly, most people are uninsured because they can't 
afford that kind of premium. And one of our goals in HIPAA was 
to really encourage continuity of coverage between jobs by 
giving you an affordable option. COBRA is really not 
affordable, and neither are the risk pools.
    It's better than the States in which there was 400 and 500-
percent increase in premiums. But this is very relevant for the 
small employers. If we give them deductibility, but all they 
can join because they are self-employed is a program whose 
average premium is 150 percent of the group plan, they can't do 
it.
    Are the States making any progress toward opening up more 
affordable group type plans or group levels of cost plans to 
individuals by either incorporating them in larger plans, which 
was what HIPAA's vision was, as one option, or incorporating 
them into publicly structured HMOs like the Medicaid Programs?
    Mr. Reider. Again, I can't speak with certainty as to what 
each of the States has done. Again, that's the type of question 
that we'll be more than happy to go back and explore and try to 
see if anybody has taken an innovative approach in that regard.
    Again, just speaking for Connecticut one more time, we 
think we've done some things that have been very helpful--and I 
say we in the sense that it goes back long into history but I 
think we all have to continue to search for ways to get to 
where you want to be.
    Chairman Johnson. To my knowledge, Connecticut hasn't 
solved the problem of creating access to a more affordable plan 
for individuals either.
    Mr. Reider. Right.
    Mrs. Thurman. One of my goals in sponsoring the children's 
health proposal is that I hope in States like Connecticut that 
rather recently went to a Medicaid managed care structure and 
now with the children's health, that we'll develop a structure 
through which it will be possible to see how much would it cost 
to help people into that structure.
    But I think this is a critical piece to sort of build down 
from the top, affordability, so we minimize the population that 
is going to need a premium subsidy.
    Mr. Reider. I want to just quickly comment, and you are 
very much aware of that issue, and part of that is the HUSKY 
plan which attempts to make insurance available to the young 
people in the State. I think that has been a very positive 
step.
    But we will explore and look for anything that might be 
helpful in the spirit of what you spoke of.
    Chairman Johnson. Thank you. That would be very helpful.
    Mr. Gradison. Mrs. Johnson, with regard to HIPAA, as you 
said earlier, the group to individual part is the part that has 
problems. That problem is focused on the less healthy of those 
who are entitled to the group to individual option and the 
guaranteed issue to that group. The healthier ones can go into 
the individual market today.
    Chairman Johnson. But are the premiums a lot more than the 
group premiums? Even for healthy individuals?
    Mr. Gradison. I would like to submit for the record some 
examples of what the premiums look like.
    Chairman Johnson. That would be helpful.
    [The following was subsequently received:]

                        1997 Monthly Health Insurance Premium Quotes for Selected States*
----------------------------------------------------------------------------------------------------------------
                                                Monthly Premiums
-----------------------------------------------------------------------------------------------------------------
                                                           Single, Age 40-44             Single, Age 45-49
                                          Family of  -----------------------------------------------------------
                 State                     4, $1000       $1000          $2000          $1000          $2000
                                          Deductible -----------------------------------------------------------
                                                       Male    Fem    Male   Fem    Male     Fem    Male    Fem
----------------------------------------------------------------------------------------------------------------
Texas..................................         $181    $80    $104    $58    $76    $100    $121    $73     $90
Georgia................................         $200    $78    $101    $60    $78     $98    $119    $76     $92
Virginia...............................         $194    $77    $100    $57    $74     $96    $117    $72     $88
Illinois...............................         $239    $95    $124    $72    $94    $119    $144    $91    $111
----------------------------------------------------------------------------------------------------------------
*Insurer: A large multi-line national health insurance carrier. Product: PPO plan with $1000 or $2000 deductible
  as indicated. Family: A two parent family of 4: parents age 35-39. Geographic Location: A relatively high cost
  (urban) area, for each state.

      

                                

    Mr. Gradison. I think you will find the policies vary 
enormously from a lot of the group policies. They generally 
have higher deductibles and higher copays, so they are not 
precisely comparable policy to policy.
    But the big problem with HIPAA are the higher cost, sicker 
individuals who don't automatically easily qualify for 
individual coverage. Now what that says is that they have to be 
subsidized. If they are put into a pool with the State 
employees or if they're put into a Medicaid managed care pool, 
they still have to be subsidized.
    And the question, in my view, is whether that subsidy 
should be hidden or whether it should be transparent. The same 
issue has arisen from time to time when suggestions have come 
up at the Federal level about adding certain groups and making 
them eligible for the Federal Employees Health Benefit Plan.
    If they stand as a separate group, you still have the 
question of how to pay for them. If you don't, then it 
increases the cost for other Federal employees.
    Chairman Johnson. I agree that if you segregate them off as 
a separate group. But I think some of us working on HIPAA 
envisioned a State making a decision that anyone who qualified 
under HIPAA would automatically go into, for instance, the 
State employee benefit plan, so you'd get the healthy as well 
as the sick.
    You would get in that big plan the risk spreading that you 
would need because you'd get everybody, because the inducement 
in HIPAA was to keep your coverage constant. I mean, have no 
break in coverage so you would never be eligible for 
discrimination on the basis of preexisting conditions. So we 
say to you, we are going to protect you from discrimination on 
the basis of preexisting conditions if you will make the 
investment to keep your insurance going between jobs?
    And if a State, any State, had put them all into the State 
employee system, then healthy people as well as sick people 
would have gone into the system. When they went to the next 
job, well people and sick people would go on to the next job.
    I think I did not appreciate how likely it was that States 
would then individually underwrite them. And that is true. In 
that system, the sick people can't afford insurance and the 
well people can.
    Mr. Gradison. But with regard to the well ones--and it's 
not a perfect term--but by well, I mean the ones who could 
qualify without any preexisting condition limitation in the 
individual market; if we pursue what you are outlining, they 
would effectively be told that this is the only option 
available to you if you go from group to individual.
    Now some people might prefer to maintain their coverage by 
going into the existing individual market, buying a high-
deductible policy. I would say they quite likely in many cases 
would find it less expensive than going into the State pool.
    So you can't automatically, in my opinion, assume that you 
are going to get everybody, all the group to individuals, 
unless that is the only option available to them. And that, in 
effect, would be taking away from them an option that they have 
in the market today as an individual, which is to shop for 
something that fits their circumstances which might be more or 
less expensive than a big pool.
    I would like--I beg your pardon.
    Chairman Johnson. Some examples would be very helpful.
    Mr. Gradison. We'd be happy to submit those.
    [The following was subsequently received:]

                    Health Insurance Association of America
                                                  November 23, 1998

The Honorable Nancy Johnson
Chairman, Ways and Means Oversight Subcommittee
United States House of Representatives
1136 Longworth House Office Building
Washington, D.C. 20515

    Dear Madame Chair Johnson:

    On April 23, 1998 I testified before the Subcommittee regarding 
market-based initiatives to expand access to health coverage. Several 
questions emanated from that hearing, and your staff called recently 
seeking additional information.
    During the hearing, you envisioned an arrangement where states 
could provide affordable health insurance coverage to individuals 
exercising their group-to-individual portability rights under HIPAA. 
Under the arrangement, ``HIPAA eligibles'' in a state would enroll in a 
large group such as the state employees' health benefits program, and 
HIPAA eligibles would be pooled and rated together with others in the 
group.
    I observed in response that there could be complications with this 
arrangement. The following quote was my statement at the hearing
    ``On one hand, if a state required all HIPAA eligibles to enroll in 
the state program, these individuals would be precluded from purchasing 
coverage in the individual market, which they might find preferable. 
Specifically, HIPAA eligibles that could pass underwriting requirements 
of individual market carriers might prefer purchasing a type of 
coverage (e.g. high deductible) that isn't offered in the state 
program.
    On the other hand, if a state allowed HIPAA eligibles to enroll in 
the state program, but did not require it, the HIPAA eligibles actually 
enrolling in the state program would probably be higher risk, on 
average, (if some lower risk eligible individuals chose to purchase 
coverage in the individual market). This could cause rates in the 
larger group to go up.''
    In response to your inquiry regarding an example, Kentucky serves 
as a case in point.
    Several years ago, the State of Kentucky adopted a policy of 
allowing individuals who were refused coverage in the individual market 
to enroll in Kentucky Care--the state employee health benefit program. 
By last year, some 4,000 non-state employees had entered the plan. Last 
year, the Kentucky Department of Insurance reported that the fund was 
losing millions of dollars a month, and was rapidly spending down 
reserves. At the Department of Insurance's recommendation, the 
legislature closed Kentucky Care to non-state employees. This summer, 
the state was forced to take stronger measures, by closing the self-
insured option, and severely limiting the plan choices available to 
state employees to mostly HMO coverage.
    It is unclear how much of the adverse financial experience was due 
to the enrollment of non-state employees, versus other factors, but 
this clearly was an important contributing factor.
    I hope my response is helpful.

            Sincerely,
                                              Bill Gradison
                                                          President
      

                                

    Mr. Gradison. I just want to take a moment to compliment 
all of you for your focus on this. I think there is an 
exceptional opportunity this year, especially if revenues 
become available as a result of the discussions on the tobacco 
issue, to plow that back into the health care field, along the 
lines that you and others up here on the Hill are discussing. I 
could envision that as being a very powerful health-related 
package for the benefit of the public.
    Chairman Johnson. Thank you. And I thank the panel for your 
participation. You've been very helpful.
    Now I would like to call up the second panel. Wayne Nelson, 
president of Communicating for Agriculture; James Klein, 
Association of Private Pension and Welfare Plans; and Paul 
Fronstin, senior research associate and director of the Health 
Security and Quality Research Program, Employee Benefit 
Research Institute.
    Good afternoon, and thank you very much. If we may, I am 
going to start with Mr. Fronstin of the Employee Benefit 
Research Institute first.

 STATEMENT OF PAUL FRONSTIN, PH.D., SENIOR RESEARCH ASSOCIATE 
  AND DIRECTOR, HEALTH SECURITY AND QUALITY PROGRAM, EMPLOYEE 
                   BENEFIT RESEARCH INSTITUTE

    Mr. Fronstin. Thank you. Madam Chair and Members of the 
Subcommittee, I am pleased to appear before you this afternoon 
to discuss continuation of health insurance coverage under 
COBRA.
    My name is Paul Fronstin. I am a senior research associate 
at the Employee Benefit Research Institute, a private, 
nonprofit, nonpartisan public policy research organization 
based in Washington, DC.
    EBRI has been committed since its founding in 1978 to the 
accurate statistical analysis of economic security issues. 
Through our research----
    Chairman Johnson. Excuse me, Mr. Fronstin. Could you pull 
the microphone just a little closer. Thank you.
    Mr. Fronstin. Sure. Through our research, we strive to 
contribute to the formulation of effective and responsible 
health and retirement policies. Consistent with our mission, we 
do not lobby or advocate specific policy solutions.
    The goal of COBRA was to relieve the hardship employees and 
their families experienced resulting from the temporary loss of 
group health insurance by providing a period of transition to 
other coverage.
    COBRA, as amended in legislation subsequent to its passage 
in 1985, requires employers with health insurance plans to 
offer continued access to group health insurance to qualified 
beneficiaries if they lose coverage as a result of a qualifying 
event.
    COBRA coverage can be considered advantageous for most 
workers as it allows continuation of the policy one had in 
place at work. Although an employee can be required to pay 102 
percent of the premium for COBRA coverage, workers can usually 
realize significant savings compared with purchasing an 
equivalent health insurance policy in the private market.
    COBRA premiums will usually be lower than insurance plans 
purchased directly from an insurance company due to economies 
of scale in administrating group health insurance and the 
reduced risk of adverse selection.
    Furthermore, employment-based health insurance typically 
covers a larger array of benefits than individually purchased 
health insurance for an equivalent premium. As a result, COBRA 
coverage would be a better buy than a plan purchased in the 
individual market.
    COBRA coverage can be considered even more beneficial to 
older workers who would get a community rate. COBRA is also 
seen as advantageous in general because it improves health 
insurance portability and reduces job lock.
    Many employers consider COBRA to be a costly mandate. 
Premiums collected from COBRA beneficiaries typically do not 
cover the costs of the health care services rendered because of 
adverse selection. The Clinton administration has recognized 
this in its Medicare buying proposal. In addition, COBRA 
recognizes it, as it allows employers to charge 150 percent of 
the premium for the disabled in months 19 through 29.
    COBRA imposes an additional administrative cost on 
employers. Not only do employers have to administer the plan, 
they must also find and notify COBRA-eligible individuals. This 
process could be costly, especially for divorced and separated 
spouses and other dependents. While health plans are allowed to 
charge 102 percent of the cost of the health plan, the 
additional 2 percent may not fully cover these administrative 
costs. Many employers also view the penalties for noncompliance 
as excessively large.
    Assuming that individuals electing COBRA coverage are a 
relatively higher risk population than the general work force, 
any expansion in the current law that affects either the size 
of the firm covered under COBRA or the length of time that 
former workers are eligible for continuous coverage would 
almost certainly increase employer costs for health insurance.
    In addition, subsidies for COBRA coverage would increase 
the percentage of eligible workers electing COBRA coverage. 
While this might reduce the degree of adverse selection, it 
would still drive up the overall claim costs for employers.
    One alternative to mitigate higher health care costs would 
be to allow workers to choose from plans that are similar to 
the current plan, such as plans with a high deductible.
    It should be noted, however, that previous research 
indicates that access to continuation of coverage is not likely 
to have a major effect on the level of the uninsured, although 
there is evidence that the availability of continuation of 
coverage increases duration of unemployment, suggesting that it 
allows individuals to spend more time in productive job 
searches.
    Another alternative would be to guarantee access to health 
insurance coverage either in the individual market or through 
State-sponsored high-risk insurance pools. HIPAA included 
provisions for group-to-individual portability for workers who 
have exhausted COBRA coverage. Under this provision, workers 
have an incentive to continue COBRA coverage in order to 
qualify for coverage in the individual market. As I already 
mentioned, this is costly to employers and workers.
    In order to reduce costs to employers, COBRA could be 
repealed if group-to-individual portability were guaranteed at 
the time that a worker leaves an employer. This, however, would 
have the effect of shifting the cost of continuation of 
coverage mandates from employers to insurance companies in the 
individual market and ultimately to individuals covered in this 
market.
    Thus, any expansion in continuation of coverage mandates 
either through COBRA or through increased access to insurance 
in the individual market would increase costs to workers, 
employers or insurers.
    I would like to mention that HIPAA does improve portability 
as it makes it easier for individuals to get new health 
insurance on job change. But in contrast, COBRA guarantees 
portability as it allows workers to maintain their current 
health insurance plan.
    If cost issues are not addressed with future COBRA 
expansions, employers may consider various alternatives to 
reduce, shift, or eliminate the impact of this increased cost. 
One alternative is for employers to continue requiring active 
employees to share in the increased cost through higher 
employee contributions.
    A second alternative is to reduce or eliminate health care 
benefits for active employees and/or future retirees and their 
families. A third alternative is to reduce the size of the work 
force eligible for health insurance benefits.
    Madam Chair, this concludes my statement. Thank you for the 
opportunity to testify this afternoon. I would be glad to 
answer any questions that you or Members of the Subcommittee 
might have.
    [The prepared statement and attachments follow:]

Statement of Paul Fronstin, Ph.D., Senior Research Associate and 
Director, Health Security and Quality Program, Employee Benefit 
Research Institute

                            Principal Points

     The goal of the Consolidated Omnibus Budget 
Reconciliation Act of 1985 (COBRA) was to relieve the hardships 
employees and their families experienced resulting from the 
temporary loss of group health insurance by providing a period 
of transition to other coverage. COBRA, as amended in 
legislation subsequent to its passage in 1985, requires 
employers with health insurance plans to offer continued access 
to group health insurance to qualified beneficiaries if they 
lose coverage as a result of a qualifying event.
     COBRA coverage can be considered advantageous for 
most workers, as it allows continuation of the policy one had 
in place at work. Although an employee can be required to pay 
102 percent of the premium for COBRA coverage, workers can 
usually realize significant savings compared with purchasing 
the equivalent health insurance policy in the private market. 
COBRA premiums will usually be lower than insurance plans 
purchased directly from an insurance company due to economies 
of scale in administering group health insurance and the 
reduced risk of adverse selection. Furthermore, employment-
based health insurance typically covers a larger array of 
benefits than individually purchased health insurance for an 
equivalent premium. As a result, COBRA coverage would be a 
``better buy'' than a plan purchased in the individual market. 
COBRA coverage can be considered even more beneficial to older 
workers who would get a community rate. COBRA is also seen as 
advantageous, in general, because it improves health insurance 
portability and reduces job-lock.
     Many employers consider COBRA to be a costly 
mandate for three reasons. First, premiums collected from COBRA 
beneficiaries typically do not cover the costs of the health 
care services rendered because of adverse selection. The 
Clinton administration has recognized this in its FY 1999 
budget proposal. Second, COBRA imposes an additional 
administrative cost on employers. Not only do employers have to 
administer the plan, they must also find and notify COBRA 
eligible individuals. This process could be costly, especially 
for divorced and separated spouses and other dependents. While 
health plans are allowed to charge 102 percent of the cost of 
the health plan, the additional 2 percent may not fully cover 
these administrative costs. Third, many employers view the 
penalties for noncompliance as excessively large.
     Assuming that individuals electing COBRA coverage 
are a relatively higher risk population than the general work 
force, any expansion in the current law that affects either the 
size of the firm covered under COBRA or the length of time that 
former workers are eligible for continuous coverage would 
almost certainly increase employer costs for health insurance. 
In addition, subsidies for COBRA coverage would increase the 
percentage of eligible workers electing COBRA coverage. While 
this might reduce the degree of adverse selection, it would 
still drive up the overall claim costs for employers. One 
alternative to mitigate higher health care costs would be to 
allow workers to choose from plans that are similar to the 
current plan, such as plans with a high deductible. It should 
be noted, however, that previous research indicates that access 
to continuation of coverage is not likely to have a major 
effect on the level of the uninsured, although there is 
evidence that the availability of continuation of coverage 
increases the duration of unemployment, suggesting that it 
allows individuals to spend more time in ``productive'' job 
searches. Some of this effect may be due to state-mandated 
continuation-of-coverage laws and the existence of dual labor 
markets.
     Another alternative would be to guarantee access 
to health insurance coverage either in the individual market or 
through state-sponsored high-risk insurance pools. The Health 
Insurance Portability and Accountability Act of 1996 (HIPAA) 
included provisions for group-to-individual portability for 
workers who have exhausted COBRA coverage. Under this 
provision, workers have an incentive to continue COBRA coverage 
in order to qualify for coverage in the individual market. As 
mentioned above, this is costly to employers and workers. In 
order to reduce costs to employers, COBRA could be repealed if 
group-to-individual portability were guaranteed at the time 
that a worker leaves an employer. This, however, would have the 
effect of ``shifting'' the cost of continuation-of-coverage 
mandates from employers to insurance companies in the 
individual market, and ultimately, to individuals covered in 
this market. Thus, any expansion in continuation-of-coverage 
mandates either through COBRA or through increased access to 
insurance in the individual market would increase costs to 
workers, employers, or insurers.
     HIPAA ``improves'' portability as it makes it 
easier for individuals with preexisting conditions to get new 
health insurance on job change. In contrast, COBRA 
``guarantees'' portability, as it allows workers to maintain 
their current health insurance plan.
     If cost issues are not addressed with future COBRA 
expansions, employers may consider various alternatives to 
reduce, shift, or eliminate the impact of this increased cost. 
One alternative is for employers to continue requiring active 
employees to share in the increased costs through higher 
employee contributions. A second alternative is to reduce or 
eliminate health care benefits for active employees and/or 
future retirees and their families. A third alternative is to 
reduce the size of the work force eligible for health insurance 
benefits.

                              Introduction

    Madam Chair and members of the committee, I am pleased to 
appear before you this afternoon to discuss continuation of 
health insurance coverage under the Consolidated Omnibus Budget 
Reconciliation Act of 1985 (COBRA). My name is Paul Fronstin. I 
am a research associate at the Employee Benefit Research 
Institute (EBRI), a private, nonprofit, nonpartisan, public 
policy research organization based in Washington, DC. EBRI has 
been committed, since its founding in 1978, to the accurate 
statistical analysis of economic security issues. Through our 
research we strive to contribute to the formulation of 
effective and responsible health and retirement policies. 
Consistent with our mission, we do not lobby or advocate 
specific policy solutions. I would ask that my full statement 
be placed in the record.

                                 COBRA

    COBRA's goal was to relieve the hardships employees and 
their families experienced resulting from the temporary loss of 
group health insurance by providing a period of transition to 
other coverage.\1\ COBRA, as amended in legislation subsequent 
to its passage in 1985, requires employers with health 
insurance plans to offer continued access to group health 
insurance to qualified beneficiaries if they lose coverage as a 
result of a qualifying event. COBRA requires continued access 
for 18 months for covered employees, spouses, and dependent 
children who lose coverage when a covered employee terminates 
employment (for reasons other than gross misconduct) or there 
is a reduction in his or her hours of employment. COBRA 
requires continued access for 29 months for qualified 
beneficiaries who are disabled at the time of the qualifying 
event, or who become disabled within the first 60 days of the 
qualifying event, as clarified in the Health Insurance 
Portability and Accountability Act of 1996 (HIPAA). HIPAA also 
clarified that the 11-month extension for the disabled applies 
to all qualified beneficiaries, not just to the policyholder. 
COBRA requires continued access for 36 months for spouses and 
dependent children who lose coverage as a result of a covered 
employee's death, divorce, or legal separation. In addition, 
spouses and dependent children qualify for continued access for 
36 months if a covered employee becomes eligible for the 
Medicare program.
    Prior to the enactment of the Omnibus Budget Reconciliation 
Act of 1989 (OBRA '89), coverage could be terminated prior to 
the end of the maximum period if the qualified beneficiary 
became covered under another group health plan. However, OBRA 
'89 provides that COBRA need not terminate before the maximum 
period if the qualified beneficiary becomes covered under 
another group health plan that excludes or limits a preexisting 
condition.\2\
    HIPAA includes additional COBRA clarifications affecting 
beneficiaries, newborns, and adopted children. First, newborns 
and adopted children will be allowed to enroll immediately 
under a qualified beneficiary's COBRA coverage, without being 
required to wait until the next open enrollment period. Second, 
COBRA coverage may be terminated as soon as any preexisting 
condition limitation in the new plan has been satisfied.
    The coverage offered must be identical to that available 
prior to the change in the workers' employment status. The 
qualifying employee or dependent may be required to pay up to 
102 percent of the premium (disabled qualified beneficiaries 
may be required to pay up to 150 percent of the premium for 
months 19 through 29). Group health plans for public and 
private employers with fewer than 20 employees are excluded 
from these provisions, as are plans offered by churches (as 
defined in sec. 414(e) of the Internal Revenue Code); the 
District of Columbia; or any territory, possession, or agency 
of the United States.

Advantages of COBRA

    COBRA coverage can be considered advantageous for most 
workers, as it allows continuation of the policy one had in 
place at work. Although an employee can be required to pay 102 
percent of the premium for COBRA coverage, workers can usually 
realize significant savings compared with purchasing the 
equivalent health insurance policy in the private market. COBRA 
premiums will usually be lower than insurance plans purchased 
directly from an insurance company due to economies of scale in 
administering group health insurance and the reduced risk of 
adverse selection.\3\ Furthermore, employment-based health 
insurance typically covers a larger array of benefits than 
individually purchased health insurance for an equivalent 
premium. As a result, COBRA coverage would be a ``better buy'' 
than a plan purchased in the individual market.
    COBRA coverage can be considered even more beneficial to 
older workers. Consider the following example for a small firm 
with a traditional fee-for-service health plan offered by Blue 
Cross Blue Shield in the Washington, DC, region for plan years 
starting March 1, 1995. Under the health plan, the annual 
premium for all workers with a family plan was $10,859. 
However, the expected cost of the plan varies greatly across 
workers. The actuarial cost for family coverage for workers 
under age 30 was $4,524, while the actuarial cost for workers 
ages 55 and older was $12,759. If a worker chooses COBRA 
coverage, the premium would be $11,076, or 102 percent of the 
annual premium. Young workers would have an incentive to forgo 
COBRA coverage, while older workers would have an incentive to 
accept COBRA coverage. As a result, the COBRA coverage pool of 
insured workers is adversely selected.
    COBRA is also seen as improving health insurance 
portability and reducing job-lock. Concern about portability of 
health insurance arises in situations where a worker is 
leaving, or would like to leave, a job, and during periods of 
unemployment and labor force withdrawal. Concerns arise when a 
worker is unemployed or retires prior to Medicare eligibility 
and desires ``bridge'' coverage. In addition, portability could 
help alleviate the loss of insurance benefits when a worker is 
offered a new job that could alter his or her insurance status. 
Workers may remain with current employers for a number of 
reasons. A prospective employer may not offer health insurance. 
A waiting period may be required before a worker becomes 
eligible for coverage. The benefits package offered through the 
prospective employer may be less generous. And, the worker (or 
a dependent) may have a preexisting condition that would not be 
covered under the plan. These scenarios may result in ``job-
lock,'' or in employees forgoing job opportunities that could 
potentially increase their productivity and income. In other 
words, workers may forgo job opportunities in which a better 
match between the worker and the employer would enable the 
worker to perform his or her job more effectively. For 
employers that want employees to leave or retire and for 
employees who would prefer to change jobs, job-lock can be 
undesirable.

Disadvantages of COBRA

    Many employers consider COBRA to be a costly mandate for 
three reasons. First, because of adverse selection, premiums 
collected from COBRA beneficiaries typically do not cover the 
costs of the health care services rendered. Second, COBRA 
imposes an additional administrative cost on employers. Not 
only do employers have to administer the plan, they must also 
find and notify COBRA eligible individuals. This process could 
be costly, especially for divorced and separated spouses and 
other dependents. While health plans are allowed to charge 102 
percent of the cost of the health plan, the additional 2 
percent may not fully cover these administrative costs. Third, 
many employers view the penalties for noncompliance as 
excessively large.\4\

COBRA Expansion and Alternatives to Expansion

    Assuming that individuals electing COBRA coverage are a 
relatively higher risk population than the general work force, 
any expansion in the current law that affects either the size 
of the firm covered under COBRA or the length of time that 
former workers are eligible for continuous coverage would 
almost certainly increase employer costs for health insurance. 
In addition, subsidies for COBRA coverage, as previously 
proposed by the Clinton administration, would increase the 
percentage of eligible workers electing COBRA coverage. While 
this might reduce the degree of adverse selection if 
individuals previously at the margin because of low expected 
health care costs accepted COBRA coverage, it would still drive 
up the overall claim costs for employers, especially self-
insured employers. One alternative to mitigate higher health 
care costs would be to allow workers to choose from plans that 
are similar to the current plan, such as plans with a high 
deductible. It should be noted, however, that previous research 
indicates that access to continuation of coverage is not likely 
to have a major effect on the level of the uninsured.\5\ 
However, there is evidence that the availability of 
continuation of coverage increases the duration of 
unemployment, suggesting that it allows individuals to spend 
more time in ``productive'' job searches.\6\ Some of this 
effect may be due to state-mandated continuation-of-coverage 
laws and the existence of dual labor markets.\7\
    Another alternative would be to guarantee access to health 
insurance coverage either in the individual market or through 
state-sponsored high-risk insurance pools. HIPAA included 
provisions for group-to-individual portability for workers who 
have exhausted COBRA coverage. Under this provision, workers 
have an incentive to continue COBRA coverage in order to 
qualify for coverage in the individual market. As mentioned 
above, this is costly to employers and workers. In order to 
reduce costs to employers and workers, COBRA could be repealed 
if group-to-individual portability were guaranteed at the time 
that a worker leaves an employer. This, however, would have the 
effect of ``shifting'' the cost of continuation-of-coverage 
mandates from employers and workers to insurance companies in 
the individual market, and ultimately, to individuals covered 
in this market. Thus, any expansion in continuation-of-coverage 
mandates either through COBRA or through increased access to 
insurance in the individual market would increase costs to 
workers, employers, or insurers.
    HIPAA also includes a provision to encourage states to 
provide medical coverage for high-risk individuals by granting 
tax-exempt status to organizations that establish high-risk 
insurance pools. These pools would be open to individuals with 
preexisting conditions. If individuals were to enroll in these 
pools instead of taking COBRA coverage, the burden of adverse 
selection would no longer fall on employers. It should be 
noted, however, that state sponsored high-risk pools have not 
been effective in covering a significant portion of the 
population, in large part due to high premiums. Hence, any 
attempt to use these pools for health insurance portability may 
yield mixed results.

COBRA Costs and Beneficiaries

    Several surveys have been conducted regarding issues 
surrounding the use of COBRA. A survey of approximately 200 
firms, covering 1.42 million workers, conducted by Charles D. 
Spencer & Associates, Inc., in the spring of each year has 
typically yielded consistent answers about the problem of 
adverse selection and COBRA coverage. According to the survey, 
average employer claims costs for COBRA beneficiaries were 
$5,591, compared with $3,332 for active employees in surveyed 
plans in 1996. Thus, average continuation-of-coverage costs 
were 156 percent of the active employee claims costs. Large 
differences between active employee costs and COBRA costs have 
been typical since 1990, when average active employee costs 
were $2,769, compared with $4,208 for COBRA costs (chart 1).
[GRAPHIC] [TIFF OMITTED] T1827.001

    Another study also found some evidence that COBRA 
beneficiaries used more health care than active workers.\8\ 
This study examined claims data from three large employer 
health plans, and found that COBRA costs ranged from 32 percent 
to 224 percent higher than health care costs for active 
workers. For one plan, these differences were due entirely to 
demographics, with COBRA beneficiaries being much more likely 
to be women of child-bearing age. These data would suggest that 
allowing employers and insurers to set COBRA premiums based on 
risk-adjusted factors, such as demographics, would reduce the 
level of adverse selection.
    While data on COBRA elections and limited data on the size 
of the COBRA population are available, virtually no data exist 
on COBRA beneficiaries themselves. For policy purposes, it is 
important to understand the characteristics of the COBRA 
population and how this population differs from the rest of the 
population. In order to gain a better understanding of the 
COBRA population, we used data from the 1993 panel of the 
Survey of Income and Program Participation (SIPP). SIPP is a 
longitudinal study that follows individuals for 36 months. 
Combining waves 6 through 9 of the 1993 panel allows the 
observation of individuals over a 12-month period. This 12-
month period, October 1994-September 1995, represents the most 
recent SIPP data that allow researchers to track the entire 
sample for 12 months.\9\
    Because the COBRA population is examined over a 12-month 
period, it is impossible to determine the full duration of each 
spell. Some spells may have begun before October 1994, while 
others may have ended after September 1995. As a result, we 
separate COBRA beneficiaries into two groups--those with COBRA 
coverage for the entire 12-month period and those with COBRA 
coverage for less than 12 months--with the understanding that 
the latter group may in fact have had COBRA coverage for 12 
months or longer. Our analysis sample represents 0.6 million 
individuals with COBRA coverage for 12 months between October 
1994 and September 1995, 4.4 million individuals with COBRA for 
less than 12 months, and 59.2 million individuals with 
employment-based health insurance coverage in their own name 
for the entire 12-month period.
    As you can see from table 1, the COBRA population is much 
older than the population of individuals with employment-based 
coverage through their current employer. While we may be 
capturing a retirement effect, meaning older individuals use 
COBRA as a bridge to Medicare coverage, we find similar results 
when limiting the analysis to workers. COBRA beneficiaries are 
also more likely than individuals with coverage through a 
current employer to be male, married, white, have no children 
under age 18, and to have a graduate school education. They are 
also less likely to be working.
[GRAPHIC] [TIFF OMITTED] T1827.002

    With respect to income, 12-month COBRA beneficiaries have 
higher personal income than the population with insurance 
coverage through their current employer (table 2). This 
difference is almost entirely due to differences in other 
personal income, which includes retirement income. This would 
suggest that retirees are using COBRA as a bridge to Medicare. 
However, workers are also more likely to be using other 
personal income for COBRA coverage. In both cases, the total 
population and workers had higher average asset income than 
persons with employment-based coverage through their current 
employer.
[GRAPHIC] [TIFF OMITTED] T1827.003

    Previous research has been unable to determine what happens 
to COBRA beneficiaries after COBRA benefits end.\10\ Using 
SIPP, we can determine the health insurance status of COBRA 
beneficiaries after they leave COBRA. According to chart 2, 41 
percent of persons ages 18-64 received coverage in their own 
name from their own employer after leaving COBRA. An additional 
12 percent received employment-based coverage as a dependent. 
Ten percent purchased private coverage on their own. Twenty-six 
percent became uninsured. The same general pattern can be seen 
for workers leaving COBRA coverage, with 48 percent returning 
to employment-based coverage in their own name, 9 percent 
gaining coverage as a dependent, 7 percent purchasing private 
coverage on their own, and 26 percent becoming uninsured.
[GRAPHIC] [TIFF OMITTED] T1827.004


The Health Insurance Portability and Accountability Act of 1996

    Portability was also the goal of legislation passed in 
1996. HIPAA established greater portability of health insurance 
in that it prohibits group health plans from imposing 
preexisting condition exclusion periods on individuals with a 
history of prior health insurance coverage. HIPAA did not 
ensure that a worker who changes jobs will have access to 
health insurance coverage on the new job, and did not ensure 
that health insurance on a new job would be affordable. In 
addition, HIPAA did not allow individuals to maintain the same 
group health plan after a job change. When a worker changes 
health plans on job change, there is a chance that he or she 
may well have to change health care providers, and there is 
also a high chance that the benefits package will be different; 
therefore, ``total'' portability is not achieved.
    Health insurance would be totally portable if a worker did 
not have to change health plans on job change. In order to 
understand portability, a brief examination of pension plans is 
helpful. All pension plans are portable in that they allow 
``vested'' workers to keep accumulated assets on job 
change.\11\ For example, if a worker with a defined 
contribution plan changes jobs, the amount accumulated in the 
account could be rolled over into a qualified individual 
retirement account and, in some cases, into the new employer's 
pension plan. Keeping this definition of portability in mind, 
HIPAA did not make health insurance totally portable. HIPAA 
``improves'' portability as it makes it easier to get new 
health insurance on job change for individuals with preexisting 
conditions. In contrast, COBRA ``guarantees'' portability, as 
it allows workers to maintain their current health insurance 
plan.

                               Conclusion

    HIPAA included provisions that directly affected COBRA by 
clarifying eligibility criteria for newborns and adopted 
children and individuals with disabilities. These were minor 
changes to COBRA. More important, however, is the fact that 
HIPAA may indirectly result in more individuals electing COBRA 
coverage, and may result in individuals keeping COBRA coverage 
for longer periods. HIPAA allows individuals who keep their 
coverage in effect to avoid preexisting condition waiting 
periods, and guarantees access to health insurance coverage in 
the individual market after COBRA benefits have been exhausted. 
These HIPAA provisions combined with any attempt to expand 
COBRA coverage further, either through subsidies or by allowing 
workers to choose from plans with lower premiums, will likely 
result in increased employer health care costs. Survey data 
indicate that the primary issue concerning COBRA is its impact 
on claims experience and administrative costs for active 
employees, employers, and COBRA beneficiaries. If the cost 
issues are not addressed with future COBRA expansions, 
employers may consider various alternatives to reduce, shift, 
or eliminate the impact of this increased cost.
    One alternative is for employers to continue requiring 
active employees to share in the increased costs through higher 
employee contributions. Since at least 1987, employers have 
been increasingly shifting the cost of health insurance 
coverage onto workers. In 1987, 44.2 percent of workers with 
employee-only coverage had that coverage fully financed by 
their employer, compared with 32.5 percent in 1996 (chart 3). 
In addition, 36.7 percent of workers with family coverage had 
that coverage fully financed by their employer, compared with 
25.9 percent in 1996. As the employee share of health insurance 
premiums increases, active employees increasingly pay part of 
the cost of adverse claims experience under COBRA (above the 
102 percent of premium/cost allowed) because former employees 
and their families under COBRA are not paying the true cost of 
the coverage they are receiving.
[GRAPHIC] [TIFF OMITTED] T1827.005

    A second alternative is to reduce or eliminate health care 
benefits for active employees and/or future retirees and their 
families, thereby reducing or eliminating the COBRA 
continuation coverage. This might be a particularly attractive 
option for small employers, who are already experiencing high 
health insurance premiums. In addition, small employers are not 
as likely as large employers to absorb cost increases. The 
reduction in coverage shifts a greater share of the cost to 
employees, but elimination of coverage obviously exacerbates 
the problem of access to health insurance.
    A third alternative is to reduce the size of the work force 
eligible for health insurance benefits. Employers could 
accomplish this by substituting part-time workers for full-time 
workers or by increasing the hours worked by full-time workers. 
One study found that the increased use of part-time workers as 
a percentage of the labor force accounted for 7 percent of the 
decline in employment-based health insurance between 1988 and 
1993.\12\ Furthermore, another study found that hours of work 
increased for workers with health insurance by 0.06-0.10 hours 
per week, compared with workers without health insurance.\13\ 
The study also found that hours of work increased more rapidly 
in industries with relatively high health insurance costs.
    Finally, where possible, the employer may pass additional 
costs along to workers or consumers. Workers could be affected 
if wage increases are not as large as they would have been if 
COBRA costs were not an issue. Consumers would be affected if 
employers raised product prices, creating additional 
inflationary pressure in the economy.
    The survey data and the alternatives available to employers 
to deal with increased medical plan costs suggest that some 
changes to COBRA may be necessary. An increase in the 
percentage of the premiums allowed to be charged to COBRA 
beneficiaries may be in order to accommodate the higher level 
of claims costs associated with COBRA beneficiaries. The 
Clinton administration has recognized this idea in its FY 1999 
budget proposal. One provision of the proposal would define 
another COBRA qualifying event as occurring for current 
retirees when an employer drops retiree health benefits. This 
provision would allow retirees to elect COBRA coverage, but 
employers would be allowed to charge 120 percent to 125 percent 
of the premium. Any such increase should consider both the 
current impact COBRA claims are having on employers and COBRA 
beneficiaries' ability to continue the coverage if the premium 
becomes too high. Another alternative would be to reduce the 
length of time coverage is required to be offered. A shortened 
rather than lengthened COBRA coverage continuation period could 
help reduce employers' administrative costs. While those most 
likely to be affected are former employees' families, the 
survey data indicate that the majority of COBRA beneficiaries 
would not be adversely affected. The longer-term loss of 
coverage problem could be dealt with as part of the larger 
overall problem of health care access, costs, and quality. 
However, with COBRA and HIPAA generating a relatively large-
scale debate over legislation that does very little to affect 
coverage levels, even larger scale reforms concerning health 
care access, costs, and quality will likely be that much more 
difficult to accomplish.
    Madam Chair, this concludes my statement. Thank you for the 
opportunity to testify this afternoon. I would be happy to 
answer any questions that you or members of the committee might 
have.

                                Endnotes

    1. Paul Millholland, ``Employers' COBRA Costs,'' EBRI Notes, No. 11 
(Employee Benefit Research Institute, November 1992): 1-4.
    2. The Supreme Court is going to consider the case when a qualified 
beneficiary already has other health insurance coverage. The dispute 
concerns whether individuals who have other health insurance coverage 
prior to the COBRA qualifying event are eligible for continuation of 
coverage under COBRA.
    3. Adverse selection occurs when higher-risk individuals are more 
likely to seek health insurance coverage than low-risk individuals.
    4. Stephen H. Long and M. Susan Marquis, ``COBRA Continuation 
Coverage: Characteristics of Enrollees and Costs in Three Plans,'' in 
Health Benefits and The Workforce, U.S. Department of Labor, Pension 
and Benefits Welfare Administration (Washington, DC: U.S. Government 
Printing Office, 1992).
    5. Jacob Alex Klerman and Omar Rahman, ``Employment Change and 
Continuation of Health Insurance Coverage,'' in Health Benefits and The 
Workforce, U.S. Department of Labor, Pension and Benefits Welfare 
Administration (Washington, DC: U.S. Government Printing Office, 1992).
    6. Jonathan Gruber and Brigitte C. Madrian, ``Non-Employment and 
Health Insurance Coverage,'' Journal of Public Economics, forthcoming.
    7. Dual labor market theory suggests that there are two 
noncompeting labor markets: a primary sector that offers relative high 
wage, stable jobs that include employee benefits, and a secondary 
sector that tends to be low-wage and unstable. This theory would 
indicate that workers with health insurance who change jobs are likely 
to get another job with health insurance, but workers without health 
insurance tend not to gain health insurance on job change. See P. B. 
Doeringer and M.J. Piore, Internal Labor Markets and Manpower Analysis 
(Lexington, MA: DC Health, 1971).
    8. Stephen H. Long and M. Susan Marquis, ``COBRA Continuation 
Coverage: Characteristics of Enrollees and Costs in Three Plans,'' in 
Health Benefits and The Workforce, U.S. Department of Labor, Pension 
and Benefits Welfare Administration (Washington, DC: U.S. Government 
Printing Office, 1992).
    9. SIPP does not allow researchers to make a distinction between 
retiree health benefits and COBRA coverage. The health insurance 
question asks respondents to report the source of health insurance 
coverage, but limits the answers to current employer, former employer, 
or other. In order to make the distinction between retiree health 
benefits and COBRA coverage, data from the September 1994 CPS 
Population Survey were used to impute COBRA coverage for individuals 
ages 40-64. All individuals under age 40 were assumed to have COBRA 
coverage. SIPP also does not allow researchers to identify spouses and 
dependents with COBRA coverage; therefore, the population estimates 
presented in this paper should be considered a lower bound estimate.
    10. COBRA benefits will end either because the person has exhausted 
the benefits or stopped paying for the benefit before the 18-month 
benefit period was reached.
    11. For workers with a defined benefit plan, job change may result 
in a loss of potential benefits. Defined benefit plans typically base 
benefits in part on years of service. As a result, workers who change 
jobs may not be credited for past service with former employers. In 
addition, full vesting of pension benefits does not usually occur 
immediately for plan participants.
    12. Paul Fronstin and Sarah C. Snider, ``An Examination of the 
Decline in Employment-Based Health Insurance Between 1988 and 1993,'' 
Inquiry 33 (Winter 1996/97): 317-325.
    13. David M. Cutler and Brigitte C. Madrian, ``Labor Market 
Responses to Rising Health Insurance Costs: Evidence on Hours Worked,'' 
unpublished paper, October 1997.

The views expressed in this statement are solely those of the 
author and should not be attributed to the Employee Benefit 
Research Institute (EBRI), its officers, trustees, sponsors, or 
other staff. The Employee Benefit Research Institute is a 
private, nonprofit, nonpartisan, public policy research 
organization.
      

                                

    Chairman Johnson. Thank you very much.
    Mr. Klein.

STATEMENT OF JAMES A. KLEIN, PRESIDENT, ASSOCIATION OF PRIVATE 
                   PENSION AND WELFARE PLANS

    Mr. Klein. Thank you, Madam Chairman. I know that both you 
and the APPWP, who I represent, have been doing double duty 
today. You have chaired this morning's Health Subcommittee 
meeting, at which we were privileged to testify, and we 
appreciate the opportunity to be at both Subcommittee hearings.
    Madam Chairman and Members of the Subcommittee, my name is 
James Klein. I am president of the Association of Private 
Pension and Welfare Plans, the APPWP. Our members are 
principally large Fortune 500 companies and other organizations 
that provide benefit services to employers of all sizes. 
Collectively, our members either sponsor directly or administer 
health and retirement plans that cover more than 100 million 
Americans.
    I hope that you will indulge me in two respects this 
afternoon. First, as you may know, today is National Take Your 
Daughter to Work Day, and both my 7-year-old daughter and 10-
year-old daughter are here in the audience. So while I would be 
delighted to answer any questions at the conclusion of my 
prepared remarks, please make those questions easy since I only 
have 1 day a year to try to impress my kids. [Laughter.]
    Second and more seriously, I ask the indulgence of the 
Subcommittee as I share a number of statistics about the 
employment-based health system. But these statistics support a 
compelling message. Namely, that the employer-sponsored health 
system provides vital health insurance protection to the 
majority of Americans, and employers are driving the movement 
toward higher quality health care services.
    Congress is to be commended for consistently supporting the 
tax preferences accorded employer-sponsored benefits. It is a 
shining example of enlightened tax and social policy.
    There are 160 million Americans who are covered by 
employment-based health plans, because that is the most 
efficient way for the market to provide those benefits. 
Clearly, the tax preferences, both the employer deductibility 
and the employee excludibility, are essential to sustain this 
voluntary system.
    Without employer sponsorship, millions of people, 
especially low-income workers and their families, would be 
uninsured. And I think that goes directly to the point of the 
very moving letter that you, Congresswoman Thurman, read to the 
previous panel.
    The Office of Management and Budget estimates that in 
fiscal year 1999 the tax expenditure for employer-sponsored 
health benefits will be $76 billion. While that is certainly a 
very large number, it really must be looked at in the context 
of the estimated $303 billion that employers will spend on 
their employees' health plans next year.
    That means that for every dollar of tax expenditure, the 
Nation's employers will provide $3.90 of health benefits. This 
is a great bargain, not just for workers and their families, of 
course, but also for the Federal Treasury. What would otherwise 
cost the Treasury $303 billion if these benefits were directly 
publicly financed, instead costs $76 billion by providing it 
through employers.
    Of course, the benefits of the tax exclusion go well beyond 
just the dollars involved. The employer-based health care 
financing system also alleviates many of the problems that 
afflict the individual health insurance market, such as adverse 
risk selection, less than optimal purchasing of health care 
services, and high administrative costs which the witnesses on 
the earlier panel so ably discussed.
    APPWP recognizes, as do you, Madam Chairman, that for all 
the many advantages of employer-sponsored health benefits, many 
individuals must obtain insurance on their own because they are 
not covered by an employer plan. You have wisely sought to 
address this problem, Madam Chairman, by introducing H.R. 3475 
to extend tax-favored treatment to individually purchased 
health coverage.
    APPWP has consistently supported full deductibility for 
health coverage purchased by self-employed individuals. 
Similarly, we believe that H.R. 3475 deserves prompt and 
serious consideration. As the Committee considers the bill, you 
will want to ensure that expanding individual deductibility 
does not unintentionally provide an incentive for employers to 
decline sponsoring a plan.
    We applaud you for recognizing that fair and equitable tax 
treatment of individually purchased health benefits is also 
sound tax policy, and it can and should be developed without 
disrupting the group market. We welcome the opportunity to work 
with you on this matter.
    Allow me to conclude then by briefly but emphatically 
underscoring that Congress must resist proposals that add cost 
to the sponsorship of health plans. Currently, an astounding 40 
million of our fellow citizens are uninsured. Ill-advised 
policies, however well-intentioned, will worsen that problem. 
The cost of health care is the single greatest impediment to 
greater coverage. For every 1-percent increase in the cost of 
health insurance, 400,000 Americans lose coverage.
    For years, State legislatures have contributed to this 
problem by adopting a variety of costly benefit mandates. 
Regrettably, this trend has now found favor here in Congress. 
This is frankly perplexing to those employers, such as every 
member of APPWP, who are committed to providing health coverage 
to their employees.
    Just 4 years ago, Congress rejected the notion that all 
employers should be required to provide health coverage. Now, 
however, there is broad support for a variety of proposals to 
mandate that those employers who voluntarily offer coverage 
must provide certain types of benefits.
    Ironically, whereas Congress rejected the idea of mandated 
coverage advocated by the Clinton administration in 1994, it 
embraced the concept of mandated specific benefits in 1996 with 
the passage of mandates related to mental health benefits and 
minimum hospital length of stay following childbirth.
    To summarize then, I must note that, by definition, a 
benefit mandate is only directly imposed on those employers who 
provide health insurance protection to their work force. Those 
who sponsor health plans are penalized for doing so when costly 
mandates are enacted. But those employers who find it difficult 
to provide coverage for all the reasons stated by the earlier 
witnesses are also given further economic disincentives to do 
so.
    On behalf of the companies that I represent, I urge 
Congress to resist the temptation to become the Nation's 
employee benefits manager and to focus instead, as you are 
doing, Madam Chairman, on practical steps to extend coverage to 
the uninsured.
    Thank you for this opportunity to testify. I'd be pleased 
to answer any questions.
    [The prepared statement follows:]

Statement of James A. Klein, President, Association of Private Pension 
and Welfare Plans

    Madam Chairman and members of the Subcommittee, my name is 
James A. Klein. I am the President of the Association of 
Private Pension and Welfare Plans (APPWP--The Benefits 
Association), a national trade association of companies 
concerned about the employee benefits system. APPWP's members 
include Fortune 500 companies and other organizations that 
provide benefit services to employees. Collectively, APPWP's 
members either sponsor or administer health and retirement 
plans covering more than 100 million Americans. Our members 
take very seriously their role in providing health care 
coverage for their employees and family members, and are keenly 
interested in the laws, including the tax provisions, that are 
the foundation of employer-sponsored health plans. I would like 
to use this opportunity to provide the subcommittee with data 
concerning the employer-sponsored health benefits system, as 
well as our perspective on the importance of the tax 
preferences accorded to that system.

                                Overview

    Over 60 percent of all Americans, and almost 65 percent of 
Americans under the age of 65, receive some or all of their 
health insurance benefits through an employer-sponsored plan. 
One hundred and sixty million Americans are covered by 
employment-based health plans because that is the most 
efficient way for the market to provide those benefits. (see 
Table 1)

                               Table 1. Source of Health Insurance Coverage, 1996
----------------------------------------------------------------------------------------------------------------
                                                  Total                  Nonelderly               Elderly
                                        ------------------------------------------------------------------------
                                           Individuals   Percent    Individuals   Percent   Individuals  Percent
----------------------------------------------------------------------------------------------------------------
Total..................................     265,926,692     100%     234,049,354     100%    31,877,338     100%
Total Private..........................     187,052,082      70%     165,828,529      71%    21,223,552      67%
Employer...............................     160,771,239      60%     149,822,955      64%    10,948,284      34%
Direct.................................      85,478,208      32%      76,913,340      33%     8,564,867      27%
Indirect...............................      75,293,031      28%      72,909,614      31%     2,383,417       7%
Other Private..........................      26,280,843      10%      16,005,575       7%    10,275,268      32%
Total Public...........................      68,133,929      26%      37,420,022      16%    30,713,907      96%
Medicaid...............................      31,441,940      12%      28,226,604      12%     3,215,336      10%
Uninsured..............................      41,715,507      16%      41,379,413      18%       336,094       1%
----------------------------------------------------------------------------------------------------------------
Source: Tabulations of the March 1997 supplement to the Census Bureau's Current Population Survey
Note: The total for insurance categories may exceed 100% because individuals may have multiple sources of
  coverage.


    In 1954 common accounting practice was codified when 
legislation was enacted clearly excluding employer 
contributions for health benefits from employees' taxable 
income. The Office of Management and Budget estimates that the 
revenue loss resulting from the exclusion of employer 
contributions for employee health benefits from the employees' 
taxable income to be $76 billion in fiscal year 1999. While 
that is a very large number, it needs to be looked at in the 
context of the $303 billion that employers will spend on their 
employees' health plans in fiscal year 1999. That means that 
next year for every $1 of tax expenditure for employer-
sponsored health insurance, America's employers will provide 
$3.90 worth of health benefits to their employees and family 
members. This is quite a bargain for the nation's workers and 
their families, as well as for the federal Treasury. What would 
cost the Treasury--and the taxpayers who support it--$303 
billion if these benefits were directly publicly financed, 
instead costs $76 billion in foregone revenue, by encouraging 
employers to offer this vital protection. And the bargain 
enjoyed by both the government and plan participants has 
remained essentially constant even as the health care system 
and the amount spent on health care have changed over the 
years.
    However, the benefits of the tax exclusion accorded 
employer-sponsored health benefits go well beyond just the 
dollars that employers spend on their employees' health 
benefits. As described below, the employer-based health care 
financing system also alleviates many of the problems that 
currently afflict the individual health insurance markets: 
adverse risk selection, less than optimal purchasing of health 
care services, and high administrative costs.
    We recognize, as do you Madam Chairman, that for all the 
many advantages of the employer-sponsored health benefits 
system, many individuals must obtain health care coverage on 
their own. Fair and equitable tax treatment of individually-
purchased health benefits is also sound tax policy, and can and 
should certainly be developed without disrupting the group 
market. APPWP has supported full deductibility for health 
coverage purchased by self-employed individuals. We look 
forward to working with you and other members of the Ways and 
Means Committee on ensuring that the needs of both the 
individual and the group market are properly addressed.

                              Risk Pooling

    The employment-based health system allows risks to be 
pooled more broadly than an individual insurance market can 
sustain. An individual's choice of health insurance coverage in 
an individual market is determined by an assessment of their 
own risks and income. As a result, those with the greatest 
demand for health insurance are those most likely to use health 
care services. Premiums in the individual market are therefore 
necessarily higher to cover the costs of the greater risks.
    By contrast, employer health plans are offered to employees 
and their dependents as a portion of a compensation package. 
The individual's self assessment of their own risk, and how 
well a prospective employer's health plan protects them from 
that risk, is only one of a set of factors that lead them to 
accept or reject a job offer. Consequently, more good risks are 
part of an employer's risk group arrangement reducing the 
effective premium and making employment-based health insurance 
more cost effective that the alternatives.
    The exclusion of the value of employer contributions for 
health benefits from employees' income for tax purposes lowers 
the effective costs of health insurance for employees and 
increases health insurance coverage. Tying the exclusion 
expressly to employment-based plans provides an incentive to 
make that health insurance purchase cost-effective--further 
increasing health insurance coverage.
    If the tax exclusion were removed, the result would be to 
increase dramatically the effective price of health insurance. 
The healthier individuals would be the first to drop their 
coverage, resulting in a riskier employer pool and raising the 
costs of coverage even more for those still purchasing 
coverage.
    Estimates of the impact vary, but they all imply an 
enormous loss of health insurance coverage would result from a 
limit on, or removal of, the tax exclusion for employer health 
benefits. Researchers investigating a proposal that would cut 
the value of the exclusion by half estimated that between 8.6 
and 14 million people would lose health insurance coverage 
(Gruber and Poterba, 1997). Another researcher estimated that 
removing the exclusion would increase the number of uninsured 
Americans by at least 16 million. (Cutler,1997). It is 
important to note that those most likely to lose coverage would 
be low income workers and their families.

                         Health Care Purchasing

    From the beginning of World War II until the early 1980s 
both the number of people receiving employment-based health 
insurance coverage and the scope of that coverage expanded. 
This expansion, together with the introduction of the Medicare 
and Medicaid programs in 1965, greatly increased the number of 
Americans with health insurance. It also produced an 
inflationary push in the cost of health coverage that has 
created an evolutionary pull in both the health services market 
and the employment-based financing system.
    Health care cost inflation gradually changed the dynamics 
of the health care financing system. National health 
expenditures have consistently risen faster than national 
income at least since 1960. In that year, national health 
expenditures accounted for about 5 percent of Gross Domestic 
Product (GDP). By 1996, national health expenditures had nearly 
tripled to just under 14 percent of GDP.
    Yet the rate of growth in national health care expenditures 
has slowed in recent years. This moderation of health care cost 
inflation occurs after a decade of rapid evolution in the 
health care delivery system, both in terms of technological 
innovation, and in the organization and financing of the 
delivery of health care services.
    Employment-based plans have provided much of the impetus 
for the evolution of the health care system. Employers offer 
health benefits to attract and retain their desired workforce. 
Employers gain a competitive advantage if they can offer their 
employees a higher quality health plan at a lower cost than 
their competitors. As a result, employers have a strong 
incentive to seek out and purchase cost-effective care. 
Moreover, because their goal is to attract and retain workers, 
employers have an incentive to tailor their plans to fit the 
needs of their employees.
    Employer attempts to manage health care cost inflation have 
focused on two issues: reducing the amount of waste in the 
health care delivery system and applying cost-benefit criteria 
to the introduction of new technology. Measuring the amount of 
waste in the system, or the benefits of any health care 
procedure, requires an ability to measure the effect of health 
care on a patient, or a population.
    The need to evaluate health plans and health care providers 
for selective contracting, and to evaluate care as it is being 
provided, has led to the development of a health information 
industry. This industry supplies providers, insurers, 
employers, and consumers with information on the quality, 
appropriateness, and cost effectiveness of the care they are 
producing or consuming. Employers, specifically, established 
the Health Plan Data Information Set (HEDIS) to meet their 
needs for valid measurements of such criteria as quality and 
cost effectiveness; and this has certainly led to the growth of 
this health information industry. Quality assessment methods 
continually are being developed and implemented for measuring 
health service outcomes and patient satisfaction, and 
evaluating competing physicians, hospitals, and health plans. 
This industry is still very much in its infancy with much work 
yet to be done before the health care market is optimally 
efficient; but it is unlikely to have existed at all without 
the demand for it from employers.

                          Administrative Costs

    One of the advantages of an employer-based health plan is 
the ability to spread the administrative costs over the entire 
insured group, which leads to significant savings for 
individuals within the group. These costs include marketing, 
enrollment, and claims processing. It has been estimated that 
the cost of an individual health policy is 30 percent higher 
than a similar group health policy due to administrative costs 
alone. (Thorpe, 1992, Congressional Research Service, 1988).
    Economists have long recognized that the cost of 
information is one of the barriers to an efficient health care 
delivery system. Employers significantly reduce the costs that 
individuals on their own would incur in gathering information 
about health plans and providers. Moreover, employers can 
spread those costs over their entire workforce. While an 
individual will often find it difficult to allocate enough time 
to gather the data needed to make informed choices, employers, 
especially large companies, typically employ benefits 
professionals who are experts in health care and health 
insurance and in communicating this information to company 
employees. Employers are also able to supplement their own 
services in these areas with those of professional benefit 
consulting firms with highly sophisticated knowledge of health 
plan operations.

          Challenges Facing Employment-Based Health Insurance

Costs

    As health care costs increased and became a larger component of 
total compensation, the focus of employment-based plans moved from 
expanding coverage to containing costs. Moreover, the increase in 
health costs began to reduce the number of employers, especially 
smaller employers, who could afford to offer coverage and reduce the 
number of workers who elected to participate in their employer's health 
benefits plans.
    The number of Americans without health insurance increased slowly 
throughout the 1980s and then grew sharply during the economic downturn 
at the beginning of the 1990's. Since 1993 the percentage of Americans 
who are uninsured has remained fairly constant despite strong economic 
growth. The latest data available indicates that 18 percent of 
Americans (over 41 million) under the age of 65 are without health 
insurance. (See Chart 1)
[GRAPHIC] [TIFF OMITTED] T1827.006


    The reason for the increase in the number of Americans without 
health insurance is primarily the increase of health care costs 
relative to family income. As these costs increase, families decrease 
their purchase of health care services and especially health insurance. 
Insurance is a hedge against the likelihood that an individual or a 
family will need health care services. Those who are most likely to 
reduce their purchase of health insurance are those whose family income 
or perceived risk of needing health care services are low.
    Of course, one of the most disturbing results of this reality, is 
that lower income families who feel economically compelled to decline 
coverage, are precisely the families who have fewer financial resources 
to draw upon when they become ill and lack either sufficient, or 
possibly any, insurance to cover their health care costs. While the 
lack of coverage for these individuals is at best a daunting prospect, 
and at worst a potential personal financial catastrophe, the rest of us 
either as taxpayers or as health care consumers fortunate enough to 
have health care coverage are also directly affected negatively. When 
people who are uninsured receive health services, the costs are borne 
by various taxpayer-financed public programs or by health care 
providers who, where possible, pass those costs on to employers and 
other health care consumers with the resources to pay for services. 
This, of course, makes the cost of health insurance more expensive for 
those who have it.
    In pure economic terms, to say nothing of the human dimension, it 
would be far preferable for the government to bear the cost of the tax 
expenditure for employer-sponsored or individual health coverage for 
those who currently lack coverage, than to pay directly for so-called 
uncompensated care through public programs. To the extent that the 
health care costs of the uninsured fall to individuals who must 
purchase health insurance, or pay directly for health services in a 
non-tax favored manner, they are bearing an added cost. Even for 
employers who may deduct whatever added cost they bear for paying for 
health services for the uninsured; the added cost imposed on them still 
makes health care more expensive for these employers and their 
employees.

Mandates

    This discussion of the uninsured is relevant to this subcommittee's 
oversight because the tendency of state governments, and in recent 
years the federal government, to mandate certain benefits has increased 
the cost of coverage which has led to more uninsured Americans.
    In an effort to extend either the scope of coverage or the number 
of individuals with health insurance coverage, policy makers have 
imposed a number of mandates on employment-based health insurance. The 
power to limit or deny the tax-favored treatment of employer-sponsored 
benefits has proven to be an effective mechanism to enforce some of 
these mandates. However effective these mandates may be in achieving 
their intended purposes, they typically have had the unintended 
consequence of increasing the costs of health plans and thus reducing 
health insurance coverage.
    Mandates at the state level--applied primarily to fully insured 
health plans--have existed for some time. But more recently they have 
found favor here in Congress, as well, through the enactment of 
specific benefit mandates. This apparent willingness by Congress to 
mandate benefits is frankly perplexing to those employers--such as 
every member of the APPWP--who are committed to providing health 
coverage to their employees. Just four years ago during the debate over 
comprehensive health care reform, Congress completely rejected the 
notion that all employers should be required to provide health coverage 
to all full-time employees. Now, however, there is broad support among 
many in Congress for legislation to mandate that those employers who 
voluntarily offer health coverage to their employees must provide 
certain types of benefits. Whereas Congress rejected the idea of 
mandated coverage advocated by the Clinton Administration in 1994, it 
embraced the concept of mandated specific benefits in 1996 with passage 
of mandates related to mental health benefits and minimum hospital 
lengths of stay following childbirth. By definition, a benefit mandate 
is only imposed on those employers who provide health insurance 
coverage to their workforce; so those who sponsor coverage are 
penalized for doing so, and those who do not provide coverage are given 
further economic disincentives to begin doing so.
    Perhaps the foremost example of how mandates impose additional 
costs on employers and thereby cause plan participants to lose health 
coverage, is the one mandate that at the time of enactment was 
purported to be paid for by participants and which was intended 
specifically to prevent people from losing coverage. The health care 
continuation provisions of the Consolidated Budget Reconciliation Act 
of 1985 (COBRA) require employers to allow employees and their 
dependents who would lose health insurance coverage due to job loss or 
change in marital status to remain in their group health insurance plan 
for a specified number of months. Employers are allowed to charge a 
premium of not more than 102 percent of the actual premium charged to 
active employees. However, the actual costs of providing coverage to 
individuals who elect COBRA is approximately 50 percent higher than the 
average cost of providing coverage to active employees. (Spencer's 
Employee Benefits Survey, September 1997). The difference between the 
premium charged and actual costs are borne by the employer and all 
employees in the plan. The relationship between higher costs and more 
uninsured is not theoretical. Researchers have found that while the 
number of workers offered health insurance by their employers has 
increased slightly over the last decade, the number of workers who 
turn-down that coverage has more than doubled over the same period. In 
1996, six million workers declined health insurance from their 
employer, largely because of costs (Cooper and Schone, 1997). Another 
study determined that a one percent increase in the cost of health 
insurance results 400,000 Americans losing health insurance coverage 
(Lewin, 1997).

                                Summary

    The employment-based health insurance system is the 
foundation of the health care delivery system. It allows most 
Americans an opportunity to attain high quality cost-effective 
health insurance that they otherwise could not purchase. 
Employers, responding to changing economic conditions, have 
spurred a rapid evolution in the health care delivery system. 
Yet this system faces important challenges. Long-established 
tax policy has made it possible for employers to be able to 
afford to sponsor health benefit plans, and has made it 
economically beneficial for workers, especially low income 
workers and those who might otherwise risk being unprotected, 
to accept such coverage. The result has been a system that 
covers more than 160 million Americans.
    Despite the enormous success, adverse public policy 
initiatives have added to costs, reduced the number of 
employers, especially small employers, that offer health 
insurance as an employee benefit and increased the number of 
Americans who feel compelled to decline coverage even when it 
is available through the workplace. These policies must be 
resisted by Congress to ensure the continuation of employer 
involvement in the health care system, with all of the benefits 
that that involvement means for both expanded coverage and for 
health care system innovation and quality improvement.
    Thank you, Madam Chairman and members of the subcommittee. 
I would be pleased to answer any questions.

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Government)
    Pauly, Mark V., ``Taxation, health Insurance, and Market Failure in 
the Medical Economy,'' Journal of Economic Literature, vol. 24, June 
1986, pp. 629-675.
    Thorpe, K., Inside The Black Box of Administrative Cost, Health 
Affairs, 11(2): 41-55, 1992.
      

                                

    Chairman Johnson. Thank you very much.
    Mr. Nelson, welcome.

    STATEMENT OF WAYNE NELSON, PRESIDENT, COMMUNICATING FOR 
                          AGRICULTURE

    Mr. Nelson. Thank you. Chairman Johnson and Members of the 
Subcommittee, thank you for the opportunity to testify on 
behalf of our members on issues related to tax policy and 
health insurance. My name is Wayne Nelson. I am president of 
Communicating for Agriculture, a national association of 
farmers, ranchers, and rural small business members in all 50 
States.
    our national headquarters are in Minnesota, where CA was 
founded 26 years ago. CA works on a variety of issues including 
health and tax policy and how it affects rural Americans. We 
have concentrated on ways to reduce costs and improve access to 
health coverage for our members.
    We want to thank you for holding this hearing and for 
recognizing the current inequities in the tax law regarding the 
deductibility of health insurance premiums. We believe this is 
an opportune time for Congress to fix a longstanding injustice 
in tax policy that has discriminated against the self-employed 
and people who pay their own health insurance.
    It is also an opportune time to extend and improve medical 
savings accounts. This health insurance concept holds much 
promise for providing another option for millions of people to 
help control their health costs while providing more choice at 
the same time.
    Our members are predominantly self-employed, so they 
typically pay for all of their health insurance. This puts them 
at a disadvantage to employees who get their health insurance 
paid through their employers and trying to hold down the cost 
of health care and, in many cases, even having health insurance 
at all.
    CA and many other organizations representing small business 
and agriculture have long fought to get the tax deduction for 
health insurance premiums raised to 100 percent. We recognize 
that a deduction for the self-employed is slowly increasing to 
reach 100 percent by the year 2007. But that's a long time to 
wait, especially when corporations can already deduct 100 
percent of premiums.
    In 1998, the self-employed will be able to use less than 
half, 45 percent of the allowable percentage of deductions 
allotted to corporations. The extra costs related to the lower 
deduction is very significant to many individuals and families 
who may pay hundreds or even thousands of dollars more in 
health costs than corporate employees.
    There is no justifiable reason why the self-employed and 
others who pay for their own health insurance should only be 
allowed a partial deduction for health insurance premiums while 
large corporations can deduct the full amount.
    Virtually everyone who has looked at the issue of the 
uninsured attribute the main reason to high cost. Too many 
individuals and small businesses simply cannot afford the cost 
of coverage. Studies have shown the lack of a full tax 
deduction and rising costs of coverage contribute to a higher 
rate of uninsured.
    Numbers from the U.S. Census Bureau in 1996 reveal that 
over 60 percent of Americans covered have employment-based 
coverage. Less than 10 percent of people covered purchase their 
coverage individually. The reality is that far too often, 
individuals cannot afford individual coverage and opt to go 
uninsured.
    There are also indications more small businesses facing 
higher costs for small group health insurance following various 
State and Federal regulatory insurance changes in recent years 
are increasing opting not to offer insurance to their 
employees. Rather than contending with the redtape, 
uncontrollable costs, and headaches of insurance programs, some 
small employers are simply offering their employees an 
additional monthly wage and are leaving the employees to buy 
their own insurance.
    Additionally, corporate downsizing has increasingly led to 
individuals starting their own businesses, leaving them to face 
the challenges of obtaining affordable health insurance by 
themselves.
    Congress has an excellent opportunity to accelerate the 
health insurance deduction for self-employed to 100 percent 
this year and correct inequities favoring corporations. 
Chairman Archer has indicated that legislation might be 
forthcoming accelerating the deduction, as well as expanding 
MSAs and possible other incentives for individuals in small 
businesses concerning health tax policy.
    Representative Johnson has introduced H.R. 3475 which would 
offer the present tax deduction to all individuals who pay 
their own health insurance costs. It would also help the 
growing number of employees purchasing their own coverage due 
to the aforementioned corporate downsizing or employers opting 
to drop previously offered health care plans.
    We support that effort. However, we also believe it is 
important that Congress move to accelerate the deduction 
allowed to 100 percent for everyone who pays their own health 
premiums.
    The Senate is also looking at helping the self-employed and 
individuals gain health insurance tax equity with corporations. 
A bill has been introduced that would allow the first $2,000 of 
health premiums for a taxpayer, spouse, and dependent to be 
fully deductible. It would allow self-employed individuals to 
choose to use the current deduction or deduct the first $2,000 
they spend in insurance premiums, whichever is more 
advantageous to the taxpayer.
    Unfortunately, the bill does nothing to accelerate the slow 
phase-in to 100 percent.
    The uninsured problem has always been more severe for 
people who work for small businesses or are self-employed. 
Congress must find ways to address their needs. CA believes 
that the ability of the self-employed and employees to help 
control their own health care costs makes the case for 
permanent MSA legislation.
    The current MSA law was enacted as a 4-year pilot program. 
We'd like to see the caps removed on the number of MSAs that 
can be sold. We'd like to allow MSA deductible amounts to be 
adjusted to better fit the needs of policyholders, and we'd 
like to have both employers and employees contribute to an MSA.
    If the Federal Government is serious about lowering the 
number of uninsured in the country, estimated to be over 40 
million, then CA urges you to support the suggestions we have 
made in this testimony on accelerating the health insurance tax 
deduction for the self-employed and individuals and improving 
MSAs.
    Thank you very much for the opportunity to address these 
important tax and health issues.
    [The prepared statement follows:]

Statement of Wayne Nelson, President, Communicating for Agriculture

    Chairwoman Johnson and members of the Subcommittee, thank 
you for the opportunity to testify on behalf of our members on 
issues related to tax policy and health insurance.
    My name is Wayne Nelson. I am President of Communicating 
for Agriculture (CA), a national association of farmers, 
ranchers and rural small business members in all 50 states. Our 
national headquarters is in Minnesota, where CA was founded 26 
years ago. CA works on a variety of issues including health and 
tax policy and how it effects rural Americans. We have 
concentrated on ways to reduce costs and improve access to 
health coverage for our members.
    We want to thank you for holding this hearing and for 
recognizing the current inequities in the tax law regarding the 
deductibility of health insurance premiums. We believe this is 
an opportune time for Congress to fix a long standing injustice 
in tax policy that has discriminated against the self-employed 
and people who pay their own health insurance. It is also an 
opportune time to extend and improve Medical Savings Accounts. 
This health insurance concept holds much promise for providing 
another option for millions of people to help control their 
health costs while providing more choice at the same time.
    Medical Savings Accounts are an innovative way for 
individuals to control their own health care costs. Medical 
Savings Accounts, enacted under recent legislation, offer an 
option to people who pay for their own health insurance to 
lower their costs by purchasing a less expensive, higher 
deductible, health policy and depositing the premium savings 
into an account to pay for routine and preventive medical care. 
The deposits would be tax deductible.
    Our members are predominantly self-employed so they 
typically pay for all of their health insurance. This puts them 
at a disadvantage to employees, who get their health insurance 
paid through their employers, in trying to hold down the cost 
of health care and in many cases even having health insurance 
at all. CA and many other organizations representing small 
business and agriculture have long fought to get the tax 
deduction for health insurance premiums raised to 100 percent. 
We recognize that a deduction for the self-employed is slowly 
increasing to reach 100 percent by the year 2007, but that is a 
long time to wait--especially when corporations can already 
deduct 100 percent of premiums. In 1998, the self-employed will 
be able to use less than half (45%) of the allowable percentage 
of deductions allotted corporations.
    The extra cost related to the lower deduction is very 
significant for many individuals and families who may pay 
hundreds or even thousands of dollars more in health costs than 
corporate employees. There is no justifiable reason why the 
self-employed and others who pay for their own health insurance 
should only be allowed a partial deduction for health insurance 
premiums while large corporations can deduct the full amount of 
insurance costs.
    Virtually everyone who has looked at the issue of the 
uninsured attribute the main reason to high cost. Too many 
individuals and small businesses simply cannot afford the cost 
of coverage. Studies have shown the lack of a full tax 
deduction and rising cost of coverage contribute to a higher 
rate of uninsured. Numbers pulled from the U.S. Census Bureau 
in 1996 reveal that over 60 percent of Americans covered have 
employment-based coverage. Less than 10 percent of people 
covered purchased their coverage individually. The reality is 
that far too often individuals cannot afford individual 
coverage and opt to go uninsured.
    There are also indications more small businesses facing 
higher costs for small group health insurance, following 
various state and federal regulatory insurance changes in 
recent years, are increasingly opting not to offer insurance to 
their employees. Rather than contending with the red tape, 
uncontrollable costs and headaches of insurance programs, some 
small employers are simply offering their employees an 
additional monthly wage and are leaving the employees to buy 
their own insurance. Additionally, corporate downsizing has 
increasingly led to individuals starting their own businesses--
leaving them to face the challenges of obtaining affordable 
health insurance.
    Congress has an excellent opportunity to accelerate the 
health insurance deduction for self-employed to 100 percent 
this year, and correct inequities favoring corporations. 
Chairman Archer has indicated that legislation might be 
forthcoming accelerating the deduction as well as expanding 
MSAs and possible other incentives for individuals and small 
business concerning health tax policy. Representative Johnson 
has introduced HR 3475, which would offer the present tax 
deduction to all individuals who pay their own health insurance 
costs. It would also help the growing number of employees 
purchasing their own coverage due to the aforementioned 
corporate downsizing and/or employers opting to drop previously 
offered health care plans. We support that effort. However, we 
also believe it is very important that Congress move to 
accelerate the deduction allowed to 100 percent for everyone 
who pays their own health premiums.
    The Senate is also looking at helping the self-employed and 
individuals gain health insurance tax equity with corporations. 
A bill has been introduced that would allow the first $2000 of 
health premiums for a taxpayer, spouse and dependent to by 
fully deductible. It would allow self-employed individuals to 
choose to use the current deduction or deduct the first $2000 
they spend in insurance premiums--whichever is more 
advantageous to the taxpayer. Unfortunately, the bill does 
nothing to accelerate the slow phase in to 100 percent tax 
deductibility for the self-employed.
    The uninsured problem has always been more severe for 
people who work for small businesses or are self-employed. 
Congress must find ways to address their needs. CA believes 
that the ability of the self-employed and employees to help 
control their own health care costs makes the case for 
permanent MSA legislation. The current MSA law was enacted as a 
three year pilot program. Remove the caps on the number of MSAs 
that can be sold. Allow MSA deductible amounts to be adjusted 
to better fit the needs of policy holders. Let both employers 
and employees contribute to an MSA. Let anyone, who wants to, 
purchase this type of coverage.
    If the federal government is serious about lowering the 
number of uninsured in the country, estimated to be over 40 
million, then CA urges you to support the suggestions I have 
made in this testimony on accelerating the health insurance tax 
deduction for the self-employed and individuals, and improving 
MSAs. Thank you for the opportunity to address these important 
tax and health issues.
      

                                

    Chairman Johnson. Thank you very much for your testimony, 
and thank you, Mr. Nelson, for some of your suggestions as to 
other ways we could reach out into this market, particularly to 
help small employers provide affordable policies to their 
employees.
    I was interested, Mr. Klein, in your testimony where you 
mentioned that for $76 billion in foregone revenues, that is, 
in tax expenditures, the private sector is spending $303 
billion and for that is covering 160 million.
    Bill Gradison, in a part of his testimony that he didn't 
actually read, mentioned that Medicare spends four times as 
much to cover two-thirds fewer people than the private sector. 
Now elderly people often have more costs, but I think it's 
very, very significant that Medicare is so much more costly for 
a smaller number of people and it bespeaks the tremendous 
problems that we do have in that system.
    Mr. Klein. By the way, Madam Chairman, if I could just 
clarify. The number, the $76 billion and the $303 billion--your 
point is absolutely correct, but it does include both private 
and public employers, in other words, the Federal Government 
employees, State and local government employees, and so forth. 
Not public programs.
    Chairman Johnson. The employee sector, yes. But I was very 
interested that a couple of you pointed to the movement in the 
small business sector to simply give employees more money 
rather than a group plan. Those are not the same things. I 
mean, if you give them more money, it doesn't necessarily let 
them buy into a group plan.
    I'd like to hear your thoughts--all three of you, perhaps--
on what kind of incentive effect we might get from making sure 
that all employers, subchapter S and all the little guys, had 
the 100-percent deductibility right away to encourage them to 
provide benefits to their employees as well as to themselves.
    Would that be a very powerful incentive, in your experience 
in watching these issues out there, Mr. Nelson, in your 
community? Would that ability to completely deduct your 
premiums be an incentive for the very small business men to 
offer coverage to his two or three employees?
    Mr. Nelson. We certainly think it would. And it would be 
one that would help stem this tide of small employers not 
offering the insurance. And if they had 100-percent 
deductibility sooner than the year 2007, it would certainly 
seem that they would be more willing to continue to offer the 
plan as a small employer. I know I would on my farm with my 
employees. The 100-percent deduction would certainly help to 
continue offering insurance to those people.
    Mr. Klein. I would concur. It certainly would help. It's 
always hard to point to exactly what the results would be. 
Certainly there would still remain, it would seem, advantages 
of the employer system because of the active role that 
employers play in selecting health plans, pushing amongst 
health care providers for quality care, and just the benefits, 
of course, of group purchasing.
    And I think some of the earlier comments that you heard 
about, the irony that a self-employed individual could deduct 
the expense for his or her employees, but not for him or 
herself currently, is a tremendous disincentive for that 
person.
    Chairman Johnson. That is ironic, but most States have 
now--I mean, in our State, the biggest business organization 
has a group plan that very small employers can join. I think 
States have moved a long way, either through the Farm Bureau or 
some other group, to provide access to larger group plans for 
very small employers.
    Presumably, they would have access to more affordable plans 
than their individual employees would have in the individual 
market. I was wondering, as we've made other changes, for 
instance when these larger group plans came on the market and 
made themselves available to smaller employers, did we see 
significant growth in small employer participation in the 
health benefit programs.
    Mr. Fronstin. I think we have. I don't know that we could 
quantify it. Getting to your first question in terms of the 
incentive from the tax preference at 100 percent, I think there 
would be an incentive. I don't know if I would label it as a 
strong incentive, because there are other factors to consider 
if a small employer is going to offer health insurance, such as 
discrimination provisions.
    We've looked at, from Census data, the cost-sharing 
arrangements across the spectrum of firm sizes and we see that 
for--and this is at the worker level, not the employer level--
we see that for workers in small firms who have health 
insurance, their employer is more likely to fully finance the 
insurance than a worker who works for a large employer.
    And one reason is the discrimination provisions which I 
believe say that the owner of a small business cannot benefit 
more from that plan than the employees.
    Chairman Johnson. That's true in pension law. Is that true 
in health benefit law?
    Mr. Fronstin. I have been told it is by a small business 
owner.
    Chairman Johnson. I have never heard of that, and I 
honestly don't believe that is true.
    Mr. Fronstin. OK. Well, I could certainly check into it.
    Chairman Johnson. We need to know more about what is 
driving that.
    Mr. Fronstin. OK. Another reason that's driving it is that 
large employers are more likely to offer choice. With choice 
comes a contribution from the employee. So that automatically 
builds in this difference.
    Chairman Johnson. But others have told me that actually in 
a very small business market, premiums are likely to be shared 
50-50, employer-employee. In fact, the Joint Tax Committee 
estimator believes that there is a very large small business 
market in which the small business owner offers the plan, but 
provides no portion of the premium at all. Have you ever seen 
that?
    Mr. Fronstin. We haven't looked at that by firm size, but 
getting to the question that came up in the earlier panel, we 
have looked at, from the employee side, what percentage report 
that their employer does not contribute anything. And it's 
small. I don't have that data with me, but I remember it 
being----
    Chairman Johnson. If you could share with us whatever data 
you have on that subject of how many employers there are out 
there offering plans but not participating in on the costs, 
that would be very helpful.
    Mr. Fronstin. I will.
    [The following was subsequently received:]

    This is a very important question, one that I (or anyone 
else) do not have a good answer for. The only nationally 
representative survey of employers was recently released by the 
Center for Disease Control, National Center for Health 
Statistics. They did not report data on employers paying for 
health insurance. Papers from the 1993 RWJ-Rand Employer Health 
Insurance Survey also did not include this information. I can 
tell you that data from the March 1995 CPS indicates that only 
6.3 percent of persons ages 18-64 with employment-based health 
insurance in their own name paid the full cost of their health 
insurance. Hence, very few workers do not have help. But I 
would argue that no employers (except maybe those with minimum 
wage workers that offer health insurance) really pay any of the 
cost.
      

                                

    Chairman Johnson. And if you have the ability to look at 
that by size, that would be very helpful.
    Mr. Fronstin. I do. I know it's in the range of 4 to 8 
percent, and if my 5-minute memory serves me right, it really 
hasn't changed over time, whereas the percentage not paying the 
full cost has significantly eroded.
    Mr. Klein. Could I amplify on your comment about the 
pension and health distinction? I think you are absolutely 
right. Of course, in the pension arena, which is the other half 
of what our organization does, the nondiscrimination rules are 
a tremendous impediment to providing coverage. And I know Mr. 
Portman is working on legislation in that regard and has been, 
as have you, Madam Chairman, been very attentive to the need to 
correct those.
    I think you are quite right though on the health side. 
There is a provision of the Tax Code, if I am not mistaken I 
think it's section 105(h) of the Internal Revenue Code that 
speaks, I believe, in some general terms that health benefits 
are not to be provided in a discriminatory fashion. But it has 
never really been an issue.
    I don't really believe Treasury has ever even issued any 
regulations because that just isn't the way health benefits are 
provided. In the self-employed context, in fact, it is just the 
opposite. Self-employed individuals' employees often get the 
coverage when the entrepreneur doesn't, and in the more general 
corporate world, everybody from the chief executive officer to 
the person in the mailroom is covered by the same health plan.
    Mr. Nelson. One additional comment. If the 100-percent 
deductibility didn't help everyone to keep their insurance or 
others to get it, your bill at least would address the people 
that didn't have that. If this employer would say, OK, I'm 
going to give you another $500 a month and you do your own 
benefits, at least then they could deduct their own premiums 
that they bought.
    Chairman Johnson. It would be preferable if the employer 
would join a plan so that there would be group rates.
    Mr. Nelson. Right.
    Chairman Johnson. And then if we give deductibility, that 
increases affordability to the more affordable plans in the 
market to better balance of coverage and affordability. That's 
a very interesting point to me that you do see that movement in 
the market toward cash and away from benefits.
    I think that's one of the reasons why it's important to 
begin moving forward and expanding in a more equitable fashion, 
access to at least the tax deductibility, recognizing that some 
of the ideas for tax credits in certain sectors and expansion 
of MSA employer and employee contributions would also be very 
valuable in expanding access and affordability.
    Mr. Fronstin. Can I add one more point to this? I also 
think that small employers are more likely to fully finance it 
because of minimum participation requirements that the insurer 
may place on the employer. Because if you're insuring a small 
employer, you don't want just one person to accept coverage. 
You want everyone to accept coverage to minimize the risks of 
adverse selection.
    So in order to increase participation, you really have to 
look at----
    Chairman Johnson. That is true, and that could be where 
that came from. That is a problem, and that may be something 
that we do want to think about this time around.
    Mr. Coyne.
    Mr. Coyne. Thank you, Madam Chairman. Mr. Fronstin, I know 
you have done a great deal of research on issues that affect 
the uninsured, and I'd just like to ask you a couple questions 
not about your testimony here relative to COBRA.
    In 1997, in a report on the uninsured, you concluded that 
the self-employed are not likely to purchase health insurance 
in large numbers, even when it is fully deductible. And I just 
wonder if you have any sense of why that is.
    Mr. Fronstin. Well, again, I think there are other factors 
going on besides the deductibility that I mentioned. You have 
the requirement that an insurer may require you to have minimum 
participation levels. That's going to cost you more than just 
buying it for yourself and making it available for your 
workers.
    Mr. Coyne. Your report also mentioned that the number of 
uninsured children increased between 1995 and 1996, and you 
attributed the increase to a drop in children receiving 
Medicaid. Do you think that was because fewer children were 
eligible or were there some other reasons?
    Mr. Fronstin. I am not 100-percent sure of the reasons. I 
believe that is one reason. We really haven't looked at it in 
great detail to try and figure out exactly what is going on 
there. But overall, fewer families are eligible for Medicaid, 
so that is certainly--you know, we have seen that.
    But I think we also found that the effect was largest among 
children that were under the poverty level and under age 6, 
which would mean that they were eligible for Medicaid anyway. 
So there is something going on there and we don't really have 
our hands on it yet.
    Mr. Coyne. And you intend to look at it further?
    Mr. Fronstin. I'd be glad to look at it.
    Mr. Coyne. Thank you.
    Chairman Johnson. Excuse me.
    Mr. Portman.
    Mr. Portman. Thank you, Madam Chair. First of all, I want 
to thank Mr. Klein and also Lynn Dudley in your office for 
working with us on pension simplification. I think there is 
some overlap here in terms of the issues we are discussing, and 
I hope we can get something introduced in the next couple of 
weeks on that to further provide access to retirement savings.
    On health care though, in your testimony, you talk about--
and Mrs. Johnson raised it earlier--tax expenditures versus 
government expenditures through public programs. And I think 
what you are saying, if I read it right, is that in just pure 
economic terms that tax expenditures are a much more efficient 
way to pay for so-called uncompensated care.
    The numbers that Mrs. Johnson talked about and then the 
individualized numbers, for every dollar of tax expenditure you 
get about three dollars and ninety cents' worth of health 
benefits. I guess one wouldn't want to make a direct comparison 
there because some of those folks are going to go out and 
purchase health care even without the subsidy, correct?
    Mr. Klein. Yes, some would do so.
    Mr. Portman. Do you have any sense of what that would be? I 
mean, to compare the tax expenditure versus what would 
otherwise be a public expenditure. I know that is difficult to 
because of the way our health care market works, but do you 
have any sense of that? Would it be $3 or $2?
    Mr. Klein. I think it would be very hard to quantify that, 
since I think the point here was that if this were a burden 
that would have to be absorbed by government it would be all 
shelled out by the taxpayers through the Federal coffers. But 
here, by encouraging a voluntary system, it can be done much 
more cheaply.
    Mr. Portman. I think it's a good point. I was just trying 
to get a better sense of what the numbers are. I think at some 
point there is a public policy option which says tax 
expenditures are more expensive than the public program. And I 
don't know how far you go.
    I mean, you could have a tax credit, I suppose. That would 
be the richer credit we could provide, or richer benefit we 
could provide in tax terms. And you could even provide 
additional incentives to employers. How far you go is, I guess, 
the question I would have.
    Mr. Klein. Well, I guess another way of looking at it is 
that this tax preference is such a crucial part of employer 
sponsorship of plans, for all the reasons that were 
demonstrated by witnesses on both panels. While it's true that 
there would be some people who would go out in the individual 
market, with or without tax incentives, and buy it, because of 
the disadvantages of the individual market that we discussed, 
it would be much more expensive. So that would sort of mitigate 
the other way in terms of this being less of a bargain.
    Mr. Portman. Or the advantages of the pool and the benefits 
you get from a larger group.
    The other issues I have really relate to some of the 
questions that were raised in the last panel, and that has to 
do with the differences between Mrs. Johnson's bill and maybe 
some other proposals out there and how they would relate to one 
another.
    One is long-term care. I don't know if you gentlemen have 
any thoughts on that. But as I look at the Senate proposal, for 
instance, I don't see a deduction for long-term care. Is that a 
critical element of this? Let me ask you this way, is it more 
important to provide long-term care coverage, given that we 
have limited resources here; or to provide, let's say, for the 
6 million people that Mr. Gradison talked about who are working 
but who are not taking advantage of the ability to achieve 
health care through their employer, and to provide for them a 
deduction even though they are working? Do you see what I am 
saying? How would you prioritize these?
    Mr. Klein. I'll leave that to the infinite wisdom of the 
elected Members of Congress to decide. Fortunately, we are 
operating more in an era of surpluses than deficits.
    Mr. Portman. But even in an era of surpluses, what would be 
the priorities for you all?
    Mr. Klein. I think that more employers would like to be 
able to offer long-term care, and more individuals want to buy 
it, apropos of the so-called sandwich generation I mentioned 
before. My children are here today; and my parents are also in 
the audience, because they happened to be in town as well; and 
I think that long-term care insurance is something that is very 
much on the minds of everybody, and it's going to be more so as 
my generation, the baby-boomer generation, retires.
    I think that with all of this, you've got to balance how 
much money is available. But I think you also have to come to 
the conclusion, as a matter of policy, that this is a tax 
expenditure that is worth it, both to extend vital basic 
coverage to individuals who are uncovered, as well as long-term 
care, which is clearly going to be a form of coverage which is 
going to only grow in importance.
    Mr. Portman. Any thoughts on that?
    Mr. Fronstin. Yes, I would add that in terms of setting 
priorities I think, if you have to set priorities, you need to 
look at what the impact is going to be. Certainly people are 
more focused on health insurance and going to the doctor today 
and getting into an accident tomorrow than they are about long-
term care, which may be 30 or 40 years away for some people. 
And at the same time, they may be thinking that it is something 
they hope to never use even if they eventually buy it.
    But certainly, giving it the tax preference would raise 
awareness and increase education, which is what I think we need 
with long-term care insurance.
    Mr. Portman. And given the Federal role in all this, there 
is also perhaps an interest from our point of view as 
policymakers trying to determine all these priorities, that 
might be something that is a little more urgent than it would 
be for someone in his or her thirties thinking about long-term 
care.
    Mr. Fronstin. Absolutely.
    Mr. Portman. Because of the demographic shift and the 
problems we've got with Medicare and so on. Mr. Nelson, any 
thoughts on that? Most of your folks probably are in the self-
employed category, and would like to see the 100-percent 
deduction immediately.
    Mr. Nelson. Right. That would be our priority.
    Mr. Portman. Is long-term care a big priority?
    Mr. Nelson. I'd point out that I can't quantify as to how 
large a priority, but it's certainly on our list and we've 
certainly discussed it. The important thing, I think, to look 
at is how much cheaper it is to purchase long-term care as you 
are younger, of course.
    And so in the incentives, there is a balance there 
somewhere, where you get a deduction where you would have 
people buying long-term care younger and then probably spending 
the same money or less money than they would if they waited 
until they were 60 years old and a very high premium.
    Mr. Portman. So it could be a public policy goal to provide 
some encouragement early on to do that.
    Mr. Nelson. Right.
    Mr. Portman. Well, thank you very much. There are lots of 
other questions, but again, I really appreciate the input. I 
think it's very timely. I think Congress may be poised to do 
something in the tax area with regard to accessibility.
    Mr. Klein. And Mr. Portman and Madam Chairman, if you could 
just indulge for one moment. Thank you for the kind words on 
APPWP's efforts on the pension matter. I have found over the 
years that there are many Members of Congress who are often 
willing to be out front on health care issues; very few on 
pension issues. And the Chairman is certainly one of them, and 
you have become certainly one of them as well with your effort 
on these matters. And we thank you for that.
    Chairman Johnson. We will be holding a hearing on that 
matter in the months ahead, and at that hearing we hope to get 
a better grasp of how much SIMPLE has simplified things and how 
much difference it has made, and whether SAFE and whether all 
of the ideas that Rob has for simplifying the small business 
pension world. This is really terribly important.
    Karen.
    Mrs. Thurman. Thank you, Madam Chairman. Let me ask a 
question. Is there any concern from any of you if the tax 
deduction were put into place, that it could potentially 
increase premiums? And I'll give you the idea that we hear 
sometimes, if we give tax deductions for education that tuition 
will rise because you can get away with it.
    Do you feel that could happen at all? I didn't mean to do 
the hard question in front of your kids.
    Mr. Klein. I suppose it could work that way. Health 
economics sometimes works in perverse ways, from other kinds of 
goods and services. But I guess I would probably disagree, 
because I would think that the deductibility would enable more 
people to go out and obtain it in a much more efficient way 
than the kinds of uncompensated care that we have now that are 
shifted either to other purchasers in the system like my 
members, for example, or to public programs, be they Federal, 
State, or municipal. That is a lot of wastefulness.
    And so whatever economic effect might occur by making those 
deductible would hopefully be more than offset by this more 
efficient purchase. And that people also wouldn't be therefore 
having to wait as long to get into the health care system, 
because that's another problem of the uninsured, and their 
costs would be lower.
    Mr. Fronstin. Certainly, if you are bringing in more 
healthy people, it will either reduce rates, because you are 
going to have a less adverse group or rates won't go up as 
fast. So the opposite effect may happen. There may be 
additional competition to enroll these people.
    Mrs. Thurman. With that answer in mind, though, let me ask 
you this, because I've got a chart up here that just talks 
about taxable income for married, joint filers if they were 
making zero to $42,000, their average insurance was $5,600 and 
their tax benefit would be about $840. So their net insurance 
cost would be about $4,760.
    If you went down to, say, $100,000 to $155,000 for taxable, 
their tax benefit would be about $1,736, and then it would be 
about $3,864, assuming it would still be $5,600. So the real 
issue here is--and I don't disagree with you, because I think 
we see it in the Medicare Program, I think we've seen it in 
others--that we can get into this group, and the more people we 
have to spread our risk over, the lower our costs become.
    So if we did this tax incentive, that's still only going to 
pick up a small portion. I don't see it picking up--I don't 
know what the number is, but whatever. But you're still looking 
at that, even from zero to $42,000, of only getting the tax 
benefit of $840, it still costs them $4,700. If they have two 
children, trying to buy a house, have two cars, I don't know 
where they get the money to pay for that.
    So help me. Is there something else Congress can do besides 
just a tax incentive to get other people into these programs?
    Mr. Klein. Yes. The tax incentive that is contained in the 
Chairman's bill will certainly help address a component piece 
of that 40 million uninsured.
    Mrs. Thurman. How many is that, do you know?
    Mr. Klein. I don't know that that's been done.
    Chairman Johnson. Unfortunately, but truthfully, most of 
the data we have is 10 years old. We are having a very hard 
time getting the data. And then the other thing that is a 
component in this is the variability of costs.
    Now, for instance, the premium costs that you gave are 
probably specific to your State. There are other figures that, 
for instance, if somebody in this category wants to buy a high 
deductible, then their actual deduction could be quite 
considerable relative to their premium.
    I think one of the things that's been made a lot clearer to 
me today in this hearing is that if we can get more small 
employers to offer coverage to their employees because they are 
going to benefit, that we might have a bigger impact that way.
    So there is an equity argument here that's quite powerful. 
I mean, all those who are currently paying ought to have the 
right to deduct.
    And then there is an expansion argument that really varies 
according to State cost, that will vary according to how many 
small employers come into the whole sector, and then will vary 
as to how many of that 28-percentile income bracket actually 
use this as an incentive.
    But you're right. This doesn't solve the whole problem. 
Exactly how much it does solve, we are really having a hard 
time figuring that out.
    Mr. Klein. Right. If I may answer the question----
    Mrs. Thurman. Let me ask Dr. Fronstin, because some of this 
is actually based from his, that was a nonelderly population 
with selected sources of health insurances by family income. I 
believe this is the report generated by you.
    Mr. Fronstin. Yes.
    Mrs. Thurman. That gives us kind of an average, but we've 
got to have some idea of potential amount of people. I mean, 
I'm not saying that everybody would take advantage of it 
anyway, but say within a selected amount of that lower income, 
how many people--or reverse that, those people in more of a 
middle income who potentially would benefit, who might go ahead 
and take this, who might get a benefit of $1,700, $1,800.
    How many people would we be talking about there? Because if 
we can get those folks in, the benefit to the whole program is 
that it brings more people in which should then bring the cost 
down for everybody so we could encourage more people to get in. 
Right?
    Mr. Fronstin. Yes. I don't want to pick a number from 
there, because it would really be impossible just to look at 
the tables we present in this paper and pick a number. But 
getting back to your point about income levels, aside from the 
fact that low income are less likely to pay taxes, so there may 
be a lower benefit. If they were paying taxes, if they're in a 
15-percent tax bracket and they're only getting an $800 benefit 
compared to someone who's making $100,000 or more, that $800 
may be more valuable to them than someone who is making 
$100,000.
    Mrs. Thurman. Maybe more valuable, but their cost doesn't 
change. The cost is still the same.
    Mr. Fronstin. That's right. But at least as far as health 
insurance goes, that higher income person probably already has 
it.
    Mrs. Thurman. Well, that's part of the problem too. They 
already are affording it and so that's a problem, and I 
understand all that. I'm just trying to figure out--I mean, I 
have no problem and have voted several times. I think it's a 
wonderful idea to give tax deductions for small businesses. I 
think it's a great idea.
    But quite frankly, we've done that. I mean, I know we're 
not to the full 100 percent. The problem is for everybody's 
benefit, we've got to have that incentive to bring people in, 
and that's what we've got to look for.
    Mr. Klein. Yes, and you asked the question, which I 
apologize for not directly answering when I gave the first 
response, and that is what else might Congress do in addition 
to this deductibility, since we all concede that it won't solve 
the entire problem.
    I would suggest three things. And first, since we are 
talking about health care, I would suggest that Congress take a 
page from the Hippocratic oath and first, do no harm, and I 
refer back to the comments in my testimony about the problem of 
mandates and the problem of adding cost.
    Mrs. Thurman. I don't disagree.
    Mr. Klein. The second thing, on a more positive note, I 
suppose, would be to extend the current ERISA preemption to do 
away with a lot of those State-mandated benefits that have also 
added such tremendous costs on the fully insured market. Not to 
interfere with the States' regulatory authority over the health 
insurance marketplace or those matters, but rather to preempt, 
as ERISA preempts at the Federal level for self-insured 
companies, the opportunity for those State legislatures to 
enact the--what is it now--900 various State mandates.
    And I guess maybe the third thing that Congress might 
suggest doing, is a little bit more of a philosophical answer. 
And that is that government might decide to lead by example. 
The Federal Government is the largest purchaser of health care 
in this country, both on behalf of its employees, certainly, 
but also for the public programs for which the government is 
essentially the plan sponsor.
    And government should really use its position, I think, as 
the Nation's largest purchaser, not in some grand regulatory 
scheme, but rather to lead by example and not to be catching up 
with the private sector in terms of advances in managed care, 
for example, but really to be leading. I think that some of the 
steps that have been taken, certainly in Medicare last year, 
have led in that direction and that's very positive. And 
there's a lot more of that to do.
    So maybe it involves your pressing public policies as they 
relate to Medicare and other publicly financed programs; and 
also directives to the Office of Personnel Management in its 
role as the purchaser for Federal employees to do those kinds 
of positive things.
    Mrs. Thurman. Some of that would be taken care of by the 
marketplace, and I know Nancy probably agrees that in some of 
our rule areas, we can't even get managed care into some of 
those areas. So you can talk about them all day and set them by 
example, but if we can't get people and get competition in 
there, we are still at the mercy of whatever is available. And 
sometimes there's nothing but fee-for-service.
    Mr. Nelson. And that's going to continue. I mean, it might 
change a little in the future, but we still have to recognize 
that there is going to have to be a substantial fee-for-service 
system in the rural areas.
    MSAs might be one way that we would like to see----
    Mrs. Thurman. If you had that kind of money to set aside.
    Mr. Nelson. Right. That's true.
    Mrs. Thurman. But reimbursement rates to managed plans at a 
more equitable as versus what we're seeing, even though we're 
getting ready to go into somewhat of a----
    Mr. Nelson. It's been started, but it needs to be evened 
out a little bit.
    Mrs. Thurman. It's got a long way to go.
    Mr. Nelson. It's still not very even.
    Mrs. Thurman. That's right.
    Chairman Johnson. Thank you very much for your testimony. 
And in conclusion, some of you, as in the preceding panel, 
represent significant research capability. We really need your 
help in trying to look at the uninsured people who are in the 
28-percent bracket, and you have to do this State specific. 
National averages don't give us a lot of help. Looking at the 
market State by State, what's the cost of various insurance 
plans that would be available to people? What would a 28-
percent incentive look like? And what kinds of plans would 
enable people to buy? What premium subsidy would it offer for a 
high deductible for a modest plan, for a high-cost plan?
    Also, what is going to be the effect of CHIP, of the plan 
that will cover all children? And again, this sort of has to be 
State by State, because while CHIP goes up to 200 percent of 
poverty income, in Connecticut it's going up to 300 percent of 
poverty income.
    And anybody thereafter is going to have the right to buy 
health insurance for their children at $40 a month if their 
employer doesn't offer it. It's still a small business benefit.
    But can you help us see what dimensions of incentives this 
would provide, because I believe for the 77 percent over 28 
percent, who are in the 28-percent category, looking at the 
prices of insurance in that market, this is going to be 
significant. Could you also help us look at how many very small 
employers there are who don't have the right to deduct 100 
percent of premium for their employer, and therefore, if they 
had that right, might get into this market.
    My friend, Mr. Portman, never ceases to amaze me in the 
questions he comes up with. His question about long-term care 
insurance was very relevant. The estimate on this bill shot up 
when we included long-term care. I couldn't believe it.
    So I can tell you roughly, though, from work years ago, a 
couple of years ago, that I wanted to see what would happen if 
we reduced the employer deduction from 100 percent down to 
whatever, so that everybody would get the same. And I can tell 
you it dropped about 18 points down to about 82 percent if you 
included long-term care insurance and Medigap insurance 
deductibility.
    There is a terrible inequity in our structure, and we do 
have to put some first things first. And if you can help us 
look at the number of small employers who don't under current 
law get to deduct 100 percent, that gives us some sense of how 
many employees might gain access if we went immediately to 100 
percent, at least for self-employed people who employed other 
people.
    So if you can help us slice this up to look at where do we 
get the greatest incentive right now for health care coverage. 
The employer market and the 28-percent market do indicate that 
there is some significant opportunity to expand coverage, as 
well as to correct an absolutely horrendous equity issue where 
you have low-income families, many of them struggling to carry 
health insurance because they have a child with some illness 
and not getting a penny of deductibility.
    We will be moving forward. My bill doesn't represent 
necessarily the shape of final action. There are other ideas on 
the table. And then there will be a limited number of dollars 
available.
    I really urge you to use your research capabilities to give 
us suggestions or comments on questions that I've raised, 
because we need to move forward in the next couple of weeks 
with better data than we have now.
    Thank you very much for participating, and anyone in the 
audience who would like to offer data-based ideas, please feel 
welcome to do so. Thank you very much.
    Mrs. Thurman. Madam Chairman.
    Chairman Johnson. Sorry.
    Mrs. Thurman. Mr. Coyne had asked, if it's agreeable with 
you, if I could request unanimous consent that the following 
two documents would be included in the Oversight Subcommittee's 
hearing record.
    Chairman Johnson. Of course.
    Mrs. Thurman. The first one is the Health Insurance Reform 
Project, which was sponsored by George Washington University 
with support from the Robert Wood Johnson Foundation, and the 
second is the recent report commissioned by the AFL-CIO 
concerning the impact of employer cost shifting and other 
economic factors on the erosion of employer-provided health 
insurance coverage.
    Chairman Johnson. Absolutely.
    Mrs. Thurman. Thank you very much.
    [The inserts are being held in the Committee files.]
    [The following questions submitted by Chairman Johnson and 
Mr. Fronstin's responses are as follows:]

    Q. What is the variation in the amount employers contribute 
to health plans? (I am looking for a break down in either 
numbers or percentages of employers, if possible. I already 
have data showing that most employers contribute between 70-
80%.)
    There is no one answer here. A recent survey from William 
M. Mercer, a benefits consulting firm found the following for 
the employee contribution in 1997 (the employer contribution 
would be 100 minus the numbers below):
indemnity plan
    employee-only 24%
    family 32%
hmo
    employee-only 23%
    family 34%
PPO
    employee-only 23%
    family 36%
POS
    employee-only 22%
    family 31%
Note: these numbers have been virtually unchanged since 1993.
    Q. How many employers do not offer coverage for the 
employees' dependents?
    This is another question that I cannot answer from the 
employer perspective. I can answer it from the employee 
perspective but the data is old. According to data from the 
April 1993 Current Population Survey, only 6.4 percent of wage 
and salary workers with employment-based health insurance were 
only offered employee-only coverage.
    Q. How many of the employees who do not have employer-
subsidized coverage have incomes high enough to purchase health 
insurance on their own? (You may not have data to support that 
kind of determination, but it would at least be helpful to know 
the incomes of employees without employer-subsidized health 
coverage.)
    I'd like to follow-up with you on this one. In order for me 
to do that I need to know if you want 1. all workers without 
employment-based coverage. 2. all workers without employment-
based coverage through their own employer (marital status 
complicates this picture because you can be working with 
employment-based coverage through your spouse) 3. uninsured 
workers.
    Q. Is it realistic to assume that an employee who declines 
employer-sponsored health coverage can get the potential 
employer's contribution back in cash wages?
    Yes and no. Some employers will, some won't. However, if 
you assume that more and more of the cost is being shifted onto 
workers, then when they decline coverage they effectively get 
the cash wages because they are already part of salary.
      

                                

    Chairman Johnson. Thank you.
    [Whereupon, at 3:29 p.m., the hearing was adjourned subject 
to the call of the Chair.]
    [Submissions for the record follow:]

Statement of Hon. Jim McDermott, a Representative in Congress from the 
State of Washington

    As a physician, I have found it quite difficult to 
understand why Congress has done so little to address the 
health care needs of the tens of millions of uninsured and 
underinsured Americans over the past 4 years. As a 
psychiatrist, I find it very difficult to comprehend the 
schizophrenic way in which this Committee has chosen, or not 
chosen, to address the issue of health care tax incentives.
    I have devoted my time in Congress to promoting efforts to 
guarantee universal health coverage to all Americans. I have 
also attempted several times in this Committee and on the floor 
of the House to both increase the self-employed health care tax 
deduction and create a health care tax credit for the working 
uninsured. Each time that I have offered these proposals the 
Republican Majority--including many of the people here today--
has voted to kill those efforts. So I have great difficulty 
taking this election-year hearing seriously beyond it's 
supposed public relations value.
    However, in the slim chance that the Majority is sincere 
about improving the affordability of health care coverage for 
all Americans, I would like to describe alternative legislation 
which I support.
    Early last year I reintroduced H.R. 539, legislation which 
will give working Americans who are not provided health 
insurance by their employer a refundable tax credit worth 30% 
of the cost of their health insurance premiums. Although the 
credit would be refundable, it could not exceed the amount the 
employee actually paid in income and payroll taxes.
    The 30% tax credit will begin to phase-out for individuals 
earning more than $25,000 and for families earning $40,000 or 
more. These income levels will also target the benefit to the 
lower and middle income working Americans who comprise almost 
80% of the nonelderly uninsured.
    To guard against the possibilities of tax fraud, a payment 
for health insurance may be eligible for the credit only if it 
is substantiated in such form as the Secretary of the Treasury 
directs.
    This legislation is important because it will begin to 
equalize the tax treatment of health insurance costs for all 
working Americans. Under current law, if an employee receives 
health insurance through his employer, and the employer pays 
part or all of the employee's health insurance premium costs, 
that benefit is not included in calculating the employee's 
taxable income. Similarly, a self-employed person is currently 
able to deduct 45% of the cost of his or her health insurance 
premiums. Under the recently enacted Health Balanced Budget Act 
of 1997, this percentage will reach 100% in 2007. Once again, 
the tax code is providing a subsidy for the cost of health 
insurance by allowing a self-employed individual to deduct a 
percentage of the cost of health insurance resulting in lower 
taxable income.
    There is only one group of working Americans who receive no 
subsidy through the tax code for their health insurance costs--
-working Americans whose employers provide no health benefits. 
The BBA has worsened this inequitable situation. Why should a 
doctor or attorney who is self-employed be able to deduct a 
portion of the cost of his/her health insurance, while a 
secretary, who must buy his/her own health insurance policy, 
not be able to deduct one cent of the cost?
    It is simply not fair for the tax code to grant certain 
classes of employees preferential treatment when it comes to 
the cost of health insurance. Cost is still the primary reason 
people are uninsured.
    I am skeptical that a straight deduction, like the one 
proposed by the Chairperson (H.R. 3475), will make any 
difference in the affordability of health coverage for the 
working uninsured. I looked at that option earlier this year 
and found that we cannot escape the following facts:
     Most uninsured are in the lowest income tax 
bracket;
     Most uninsured would be helped very little by an 
income tax deduction for health insurance costs;
     The cost insurance would remain prohibitive for 
most of these families; and
     For the few uninsured in upper income tax 
brackets, a deduction for their health insurance costs would be 
very attractive.
    While I'm encouraged that the Majority is finally willing 
to admit there is a problem with inequity in the tax code when 
it comes to health care, a deduction merely pays lip-service to 
the problem. If you want to make a difference, a targetted tax 
credit, such as the one I propose, will help make health 
insurance affordable for those employees who have to pay their 
way.
      

                                

Statement of Society for Human Resource Management, Alexandria, 
Virginia

    Madam Chair and Members of the Subcommittee on Oversight, 
thank you for the opportunity to express the views of the 
Society for Human Resource Management. The Society for Human 
Resource Management (SHRM) is the leading voice of the human 
resource profession. SHRM, which celebrates its 50th 
anniversary in 1998, provides education and information 
services, conferences and seminars, government and media 
representation, online services and publications to more than 
95,000 professional and student members through out the world. 
The Society, the world's largest human resource management 
association, is a founding member of the North American Human 
Resource Management Association and a founding member and 
Secretariat of the World Federation of Personnel Management 
Associations (WFPMA).
    We are strong supporters of initiatives that make health 
care more affordable, thus lowering the numbers of uninsured. 
Madam Chair, your bill, H.R. 3475, which allows for the full 
deduction of health premiums for those individuals without 
employment based health care coverage ensures greater tax 
equity for the self employed and others. We applaud your 
efforts as well as those of Chairman Archer. We support his 
ideas to create new tax breaks for those purchasing long-term 
care insurance and creating tax incentives for small businesses 
to purchase health insurance for their employees.
    Although we are clearly concerned about the numbers of 
individuals without healthcare coverage, we are proud of the 
contributions employers have made to increase the numbers of 
individuals covered by employer sponsored plans. In addition, 
Congress greatly contributed to these efforts by passing the 
Employee Retirement Income Security Act (ERISA) of 1974 which 
helped facilitate employer-sponsored plans to cover many more 
employees. However, legislation has to be carefully crafted in 
order to provide incentives and not create mandates which would 
only drive up costs and increase the number of uninsured.
    Another ongoing area of concern for human resource 
professionals is the Consolidated Omnibus Budget Reconciliation 
Act of 1985 (COBRA). The goal of the legislation was to provide 
employees and their families with temporary healthcare coverage 
when an employee is between jobs. However, it was passed 
without Congressional hearings and has been administratively 
difficult and costly for employers. The premiums collected from 
the beneficiaries do not cover the costs of the healthcare 
services because of adverse selection and it is very expensive 
to administer. Also, the noncompliance penalties are unusually 
high. President Clinton in his State of the Union address 
advocated a proposal that would mandate COBRA coverage to 
retirees that are no longer covered by retiree health benefits. 
The retiree would be allowed COBRA coverage for up to ten 
years. Clearly, this type of mandate would force many employers 
to stop providing healthcare coverage and we strongly oppose 
this proposal.
    Employers offer healthcare benefits because it is good 
business. Companies compete for and work to retain the very 
best employees we can, we realize that high quality healthcare 
coverage is one of the tools we have to attract and keep highly 
skilled and motivated employees. We want and need for our 
employees to be healthy. The employer-sponsored system also 
addresses some of the problems associated with individuals 
purchasing health care independently, such as adverse risk 
selection, group purchasing power, and higher administrative 
costs. In fact, the Congressional Research Service estimated 
that an individual health policy is 30 percent higher than a 
group health policy due to administrative costs.
    Health care cost inflation has been a problem for employer-
sponsored plans and is a major factor in the changing nature of 
our health care system, from fee for service to managed care. 
In 1960, health expenditures accounted for close to 5 percent 
of Gross Domestic Product. In 1996, it jumped to 14 percent of 
the GDP. However, costs are now being contained and we have a 
stronger and more accessible healthcare system. We urge you and 
the Subcommittees to support allowing the market to make any 
needed corrections rather than destroying the progress we have 
made by mandating certain benefits. As was stated, mandates 
simply increase costs and lead to more uninsured.
    However, our workforce is changing. We have many more 
independent contractors, temporary employees and consultants 
than we did just a few years ago. We need to keep the employer-
sponsored healthcare system strong, but we must also work to 
strengthen the individual health insurance market.
    We believe your legislation is an important step in the 
right direction. The self employed and others who pay for their 
own health insurance should get the same deduction, not a 
partial deduction, for health insurance premiums. In addition, 
continuing the current deduction for employer-sponsored plans 
is critical to maintaining the strength of the system.
    We look forward to working with you as you address the 
issue of the deductibility of health benefits for the self 
employed, small business owners and others who do not have 
employer provided healthcare coverage. In addition, we would 
like to work with you to strengthen the employer provided 
healthcare market and provide healthcare incentives through the 
tax code.

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