[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]




 
  ASSOCIATION HEALTH PLANS: GIVING SMALL BUSINESSES THE BENEFITS THEY 
                                  NEED

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

                                HEARING

                               before the

                      COMMITTEE ON SMALL BUSINESS
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION

                               __________

                     WASHINGTON, DC, JUNE 10, 1999

                               __________

                           Serial No. 106-19

                               __________

         Printed for the use of the Committee on Small Business



                   U.S. GOVERNMENT PRINTING OFFICE
60-579                     WASHINGTON : 2000



                      COMMITTEE ON SMALL BUSINESS

                  JAMES M. TALENT, Missouri, Chairman
LARRY COMBEST, Texas                 NYDIA M. VELAZQUEZ, New York
JOEL HEFLEY, Colorado                JUANITA MILLENDER-McDONALD, 
DONALD A. MANZULLO, Illinois             California
ROSCOE G. BARTLETT, Maryland         DANNY K. DAVIS, Illinois
FRANK A. LoBIONDO, New Jersey        CAROLYN McCARTHY, New York
SUE W. KELLY, New York               BILL PASCRELL, New Jersey
STEVEN J. CHABOT, Ohio               RUBEN HINOJOSA, Texas
PHIL ENGLISH, Pennsylvania           DONNA M. CHRISTIAN-CHRISTENSEN, 
DAVID M. McINTOSH, Indiana               Virgin Islands
RICK HILL, Montana                   ROBERT A. BRADY, Pennsylvania
JOSEPH R. PITTS, Pennsylvania        TOM UDALL, New Mexico
MICHAEL P. FORBES, New York          DENNIS MOORE, Kansas
JOHN E. SWEENEY, New York            STEPHANIE TUBBS JONES, Ohio
PATRICK J. TOOMEY, Pennsylvania      CHARLES A. GONZALEZ, Texas
JIM DeMINT, South Carolina           DAVID D. PHELPS, Illinois
EDWARD PEASE, Indiana                GRACE F. NAPOLITANO, California
JOHN THUNE, South Dakota             BRIAN BAIRD, Washington
MARY BONO, California                MARK UDALL, Colorado
                                     SHELLEY BERKLEY, Nevada
                     Harry Katrichis, Chief Counsel
                  Michael Day, Minority Staff Director
                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on June 10, 1999....................................     1

                               WITNESSES

Neese, Terry, CEO and Founder, Neese Personnel Services..........     3
Lehnhard, Mary Nell, Senior Vice President, Policy and 
  Representation, BlueCross BlueShield Association...............     5
Coleman, Jesse C., Vice President and Owner, Coleman's Hamilton 
  Supply Company.................................................     7
Gagne, Patricia C., Vice President, Claim Technologies 
  Incorporated...................................................     9
Rossmann, Joseph E., Vice President of Fringe Benefits, 
  Associated Builders and Contractors............................    12
Nicholson, John B., Proprietor, Company Flowers..................    14

                                APPENDIX

Opening statements:
    Talent, Hon. James M.........................................    36
    LoBiondo, Hon. Frank A.......................................    40
    McCarthy, Hon. Carolyn.......................................    41
    Sweeney, Hon. John...........................................    42
Prepared statements:
    Neese, Terry.................................................    44
    Lehnhard, Mary Nell..........................................    48
    Coleman, Jesse C.............................................    68
    Gagne, Patricia C............................................    72
    Rossmann, Joseph E...........................................    78
    Nicholson, John B............................................    85
Additional material:
    Letter from Schramm, Williams & Associates...................    90
    Statement of Maurice E. Newman III, President, National 
      Funeral Directors Association..............................    91


  ASSOCIATION HEALTH PLANS: GIVING SMALL BUSINESSES THE BENEFITS THEY 
                                  NEED

                              ----------                              


                        THURSDAY, JUNE 10, 1999

                          House of Representatives,
                               Committee on Small Business,
                                                    Washington, DC.
    The Committee met, pursuant to call, at 11:00 a.m., in Room 
2360, Rayburn House Office Building, Hon. Jim Talent [Chairman 
of the Committee] presiding.
    Chairman Talent. Good morning, ladies and gentlemen. 
Welcome. Thank you for joining us this morning. The purpose of 
this hearing is to address a major concern of the small 
business community, the difficulty of finding affordable health 
insurance and to discuss association health plans as a means of 
helping small business owners and employees gain access to 
affordable and quality health benefits.
    With over 60 percent of the 43 million uninsured Americans 
owning a small business, employed by a small business, or the 
dependent of an employer or employee, the need for increased 
access to health insurance options for small business becomes 
apparent.
    When I talk to small business owners about their health 
care difficulties, I get a consistent response: health 
insurance is simply too expensive for the average small 
business owner to purchase. This is especially distressing when 
coupled with the fact that some 64 percent of Americans rely on 
employer-based health insurance.
    Workers in small businesses are suffering because health 
insurance continues to be too expensive for their employers to 
purchase. This problem will continue to affect more and more 
small business workers, especially since the percentage of jobs 
created by small businesses and the number employed by small 
businesses continues to rise.
    We have to find a way to accommodate these working people 
and provide them with the health coverage they deserve. 
Association health plans would allow small businesses to 
utilize a familiar, dependable resource when purchasing health 
benefits, their trade association. It would allow small 
businesses to unite through these trade associations and obtain 
the same economies of scale, purchasing clout, and 
administrative efficiency that large businesses currently enjoy 
when purchasing health insurance.
    A study by the Consad Research Corporation found that AHPs 
would substantially increase the number of people with health 
insurance. They estimate that as many as 8 million people could 
gain coverage as a result of AHPs. AHPs would not only reduce 
the number of uninsured, they would also aid small businesses 
which have health insurance by enabling them to offer better 
benefits at a lower cost and with less of an administrative 
burden.
    We have a responsibility to the 43 million uninsured 
Americans to explore ways of expanding access to health 
coverage. I believe association health plans are a step in the 
right direction for small businesses; and I cosponsored, along 
with our colleague from California, Cal Dooley, the Small 
Business Access and Choice for Entrepreneurs Act of 1999, 
legislation which would allow small employers to offer coverage 
to their employees through AHPs.
    Representative Dooley and I are joined by many 
distinguished colleagues on this Committee in support of the 
ACE Act. The ACE Act has overwhelming endorsement from many 
associations who recognize the benefits its enactment would 
have for their members. The ACE Act would allow small business 
owners to work with their associations to design flexible, 
affordable benefit packages that meet the needs of the small 
business community and their respective industries.
    It would also allow small business owners to take an 
immediate 100 percent deduction of the cost incurred in 
providing health benefits, something large businesses are 
currently able to do. The ACE Act is a viable, market-based 
approach to providing affordable high-quality private sector 
health coverage to workers employed by small businesses.
    Today we have before us a diverse panel of witnesses. I am 
confident that through their testimony they will be able to 
give the Committee members valuable insight about the role 
association health plans would play both in increasing the 
number of small businesses who can afford health insurance and 
lessening the ordeal many small businesses face in purchasing 
health insurance individually. I am now pleased to recognize my 
colleague, Ms. Velazquez, for any opening statement she might 
wish to make.
    [Mr. Talent's statement may be found in the appendix.]
    Ms. Velazquez. Thank you, Mr. Chairman. Thank you for 
holding today's hearing on association health plans. Despite 
the booming economy and growth of the stock market, almost 43 
million Americans are still without basic health insurance. Of 
this, almost 60 percent are either self-employed or have a 
family member employed by a small business that does not 
provide health benefits.
    In 1997, workers in firms with fewer than 100 employees 
represented 32 percent of all workers age 18 to 64. Sixty 
percent of these workers obtain health insurance through their 
employer or their spouse's employer, but 28 percent are 
uninsured. Those uninsured employees in small firms account for 
49 percent of all uninsured workers.
    Because many small employers are marginal firms that 
struggle to remain in business, they are simply often unable to 
afford health care. Additionally, those small businesses that 
do provide health insurance are especially vulnerable to 
increases in premiums. These factors make it more difficult for 
smaller firms to provide health insurance.
    As a result of this, small employers have been the focus of 
numerous health insurance reforms over the past decade. It is 
crucial that a solution be found to this problem. The reason is 
that if our Nation's small businesses are to remain 
competitive, they must be able to offer health insurance to 
attract and retain employees.
    I would like to commend the Chairman for his continued 
efforts to help small businesses provide health insurance 
coverage for their employees. I am happy to work with you on 
this issue. Both last year and this year, I have been an 
original cosponsor of his bill to provide an immediate 100 
percent deduction for health care costs. This is a critical 
issue for millions of uninsured Americans.
    I hope that today's hearing will provide us with a greater 
understanding of this problem and possible solutions. Today we 
will be looking at one possible solution to providing small 
firms with the ability to provide insurance to their employees, 
namely association health plans. Employers have long been 
attracted to the idea of banding together to buy health 
insurance as well as to provide other benefits.
    Association health plans will be small business purchasing 
entities that could benefit from economies of scale and greater 
purchasing power. Additionally, these plans would provide small 
firms with some of the tax and pooling advantages that large 
corporations already have.
    Although AHPs offer the promise of reducing the number of 
uninsured, there are a number of issues that we have to 
examine. A recent study by the National Coalition of Health 
Care raises the question of whether AHPs will reduce health 
costs enough to induce small firms not now offering coverage to 
buy health insurance.
    Also, concerns have been raised because AHPs are exempt 
from many State laws and regulations, most notably those that 
mandate coverage of certain benefits. As a result, those who 
receive health insurance through an association health plan may 
be getting less coverage than they counted on.
    In closing, I would like to thank the Chairman for holding 
today's hearing and to reiterate my strong desire to help small 
businesses provide health care for their employees. I am 
looking forward to hearing the testimony of the witnesses and 
learning more about association health plans. Thank you, Mr. 
Chairman.
    Chairman Talent. I thank the gentlelady. Our first witness 
is Terry Neese, who is the CEO and founder of Terry Neese 
Personnel Services of Oklahoma City, Oklahoma, the corporate 
and public policy advisor for the National Association of Women 
Business Owners, and a frequent and always welcome witness 
before this Committee. Ms. Neese.

    STATEMENT OF TERRY NEESE, CEO AND FOUNDER, TERRY NEESE 
  PERSONNEL SERVICES, OKLAHOMA CITY, OKLAHOMA, CORPORATE AND 
 PUBLIC POLICY ADVISOR, NATIONAL ASSOCIATION OF WOMEN BUSINESS 
                             OWNERS

    Ms. Neese. Thank you. Thank you, Mr. Chairman and 
Congresswoman Velazquez and members of the Committee. At Terry 
Neese Personnel Services in Oklahoma City, we employ 12 people 
and 1,000 temporaries on an annual basis. In 1998 we carried 
health insurance with a large national insurer. Our monthly 
insurance premiums for 12 employees were extremely high, but 
Terry Neese Personnel Services covered 80 percent of all costs.
    We had been insured by a national insurance company for 
about three years with no claims being filed on the insurer. 
Pretty remarkable. One day out of the clear blue, we received a 
call from the insurer that they were canceling our insurance 
due to the small number of people employed in the firm. We were 
all devastated.
    We spent about three months trying to find a firm that 
would insure the staff. This incident made it clear to me and 
my employees that something had to be done to assist small 
business owners in making insurance available at a reasonable 
cost without unfair and unjust cancellation.
    In my opinion and the opinion of my fellow NAWBO members, 
association health plans are the answer. Because of economies 
of scale and the dynamics of group purchasing, health insurance 
is much higher per employee for small businesses than it is for 
large companies. Small businesses that offer health benefits 
must comply with costly State and Federal mandates.
    The large companies that self-insure are exempt from those 
mandates. This is an enormous bias against smaller firms. The 
playing field must be leveled by allowing small businesses to 
band together across state lines to purchase health insurance 
through association health plans. NAWBO is a bona fide 
association, and our members and their families would benefit 
from this legislation.
    NAWBO as an association has substantial purpose other than 
offering health insurance. We collect dues from our members 
without conditioning such on the basis of their health status 
or on the basis of the members' participation in a group health 
plan. Women business owners want to be able to offer their 
employees coverage. We just can't afford it.
    Studies show that as firm size decreases, the likelihood of 
health coverage is dramatically reduced. While 82 percent of 
women business owners offer health coverage, only 48 percent of 
women-owned small business offer this benefit. Percents drop 
even lower as firms get smaller. Only 25 percent of women-owned 
firms employing less than five employees offer health care 
coverage. These are the bulk of our 40 million uninsured.
    New insurance coverage options for both the self-employed 
and those workers in small businesses will also promote 
increased competition and greater choice in the health 
insurance market. By giving workers new sources of coverage 
through trade and professional associations, it will make it 
easier and cost effective for many Americans to continue 
coverage under the same plan when changing jobs.
    Under association health plans, everyone wins, especially 
women who represent 9 million businesses, the fastest growing 
segment of small business owners. Statistics show that women 
business owners are dedicated to providing benefit packages to 
their employees.
    We also want to recruit the best talent. Health benefits 
will allow small businesses to attract and retain qualified 
workers. Today with the unemployment rate at 4.2 percent, 
excellent benefit packages are a key to attracting and 
retaining employees. We sincerely appreciate Chairman Talent 
and Congresswoman Velazquez for putting this hearing together, 
for pushing Congress to enact association health plans, and 
providing minority- and women-owned businesses the tools 
necessary to insure the workers that we care about and the 
insurance that they deserve. Thank you very much.
    Chairman Talent. Thank you.
    [Ms. Neese's statement may be found in the appendix.]
    Chairman Talent. Our next witness is Mary Nell Lehnhard, 
Senior Vice President of Policy and Representation for the 
BlueCross and BlueShield Association here in Washington, D.C. 
Ms. Lehnhard.

 STATEMENT OF MARY NELL LEHNHARD, SENIOR VICE PRESIDENT POLICY 
    AND REPRESENTATION, BLUE CROSS BLUE SHIELD ASSOCIATION, 
                        WASHINGTON D.C.

    Ms. Lehnhard. Thank you. Mr. Chairman and members of the 
Committee, I am Mary Nell Lehnhard, Senior Vice President of 
the BlueCross and BlueShield Association. Our member plans are 
very committed to finding ways to increase the number of small 
employers who can offer health care coverage.
    In February of this year, our board unveiled a two-part 
proposal to increase the number of people with insurance. 
First, we said Congress should apply a new litmus test and not 
pass legislation that would raise costs of health care 
coverage, thereby raising the number of uninsured.
    Secondly, our plans said Congress should focus on proposals 
to increase the number, in particular, of small firms and 
individuals who have coverage through changes to the tax 
system.
    My message today is that exempting association health plans 
and multiemployer welfare associations, MEWAs, from State 
consumer protection laws will undermine the first tenet of our 
proposal by raising premiums for many small firms.
    The proponents of AHPs and MEWAs have stated three 
objectives: the creation of large pools, like large employers, 
with the objective having lots of people in the pool so that 
the healthy cross-subsidize the sick enrollees; reducing the 
number of uninsured individuals; and, third, lowering costs for 
small firms.
    Let me comment first on the objective of creating large 
pools. The States understand extremely well that maximum 
pooling in a small group market is critical. It is the only way 
that you can get healthy people to subsidize sick people.
    In the 1980s, competition in the small group market had 
become almost entirely based on insurers targeting and 
enrolling the healthiest groups in the small group market and 
avoiding the sickest groups. Insurers did this by setting up 
lots of different pools of enrollees. The idea was to put your 
healthy people in one pool where you had very good rates and 
attracted new enrollment.
    You put your sicker people in a different pool, the rates 
got very high, and eventually those groups left you. Premiums 
for small groups were as much as 10 times less for small 
healthy groups and as much as 10 times more for groups that 
were sick, a 10 to one rate range in your healthy groups to 
your sick groups in the small group market.
    The States led by the NAIC said, essentially, ``no more of 
this.'' It is bad public policy; we can't tolerate it. And they 
required each insurer to accept all small group business 
applicants and put all of its small group business----
    Chairman Talent. We will go ahead and let you finish your 
statement, and then we will go vote. Evidently we are going to 
have to recess for a few minutes because we have several votes, 
but please continue.
    Ms. Lehnhard. They said to each insurer, put all of your 
small-group business in one pool, and we want all of your 
products in that pool and all of your enrollment in small 
firms. They allowed insurers to vary the rates in those pools, 
but they essentially said we are not going to have a 10 to 1 
range between the sickest and healthiest employer groups. We 
are going to allow you to vary your rate only by maybe a 1.5 or 
2 to 1 ratio.
    State regulators in nearly every State said that we want 
the insurance principle of maximum pooling of risk to work for 
small employers like it does for large employers. Our concern 
is that the AHP-MEWA legislation would reinvent the problem 
that States had just addressed.
    The legislation would mean a geometric increase in the 
number of employer pools and would enable MEWAs to target the 
healthiest groups once again by pulling them out of the State-
regulated market. They would do this by attracting healthier 
groups that don't need the State-mandated benefits, 
establishing membership criteria or marketing strategies that 
target healthier groups, and marketing association memberships, 
for example, only in the lowest-cost part of the State where 
your health care costs would result in lower premiums.
    The bottom line, instead of creating larger pools, the MEWA 
legislation would take us back--this point is made on the chart 
up here--to lots and lots of small pools of small employers and 
competition based on selection of the best risk.
    The NAIC has shared our position also--the legislation 
would mean certain groups ultimately would not be able to find 
affordable coverage. My second point is that the AHP-MEWA 
legislation will not solve the problem of the uninsured for 
small firms.
    As MEWAs attract healthier groups, those State-regulated 
pools will be left with an increasingly higher-cost pool of 
sicker and sicker employers and individuals. Moreover, while 
small employers could join AHP-MEWAs when they wanted to get 
out of the State-mandated benefit cost, when their employees 
needed those benefits they could jump back into the State-
regulated pool with the attendant higher-mandated benefit cost.
    The State-regulated market would very quickly become 
essentially a dumping ground for high-cost groups and State 
reform laws would quickly unravel. Premiums for many employers 
would become unaffordable, and the result would be less access, 
not more.
    Proponents of AHPs and MEWAs estimate that many more groups 
will become insured under their group. I would like to submit 
for the record an analysis by Peat Marwick, which finds the 
assumptions used are not credible. For example, they included 
in their base of potential enrollees both the Medicare and 
Medicaid population.
    Third, I would like to comment on the notion that AHPs and 
MEWAs could significantly reduce administrative costs. Rather 
than reduce costs, a recent analysis by William M. Mercer found 
that the administrative costs are essentially the same. After 
all, these are really just insurance companies. They are 
regulated by the Federal government, rather than by the state. 
The AHPs would incur the same costs as small group insurers.
    In addition, the enrollees would pay a membership fee, 
royalty or dues. Finally, I would comment on the regulatory 
bureaucracy that is going to be needed to assure regulation of 
these entities. AHPs and MEWAs would essentially, as I said, be 
new federally licensed insurance companies.
    AHPs would be licensed and regulated by the Department of 
Labor. DOL has said that with today's resources, they can 
expect to get around to each current ERISA plan once about 
every 300 years. This level of regulation is obviously 
inadequate for these new insurers, given the long history of 
MEWA fraud and insolvency.
    Yesterday we released a new study by Bill Custer and Martin 
Grace of Georgia State University finding the cost of 
regulating these federally certified AHPs would be $3.2 billion 
over seven years.
    In summary, we ask you to keep several facts in mind: 
number one, the proposal will very quickly and completely 
unravel state small-group reforms that are working. Secondly, 
it will mean there are two kinds of insurance companies, those 
regulated by the states where your constituents call the state 
insurance commissioner when they have a problem, often a local 
elected official, and those regulated by the Federal Government 
where your constituents will call the Department of Labor with 
their problems.
    And third, the proposal would require a massive federal 
infrastructure and bureaucracy to even get a start at providing 
adequate regulation. We urge this Congress to work with the 
states, not against them. The objectives of maximum pooling 
have been achieved. By the way, you can have AHPs that cross 
State boundaries.
    I think BlueCross and BlueShield plans insure about 60 
percent of the association health plans currently. We believe 
the next steps to helping small employers should be financial 
incentives for employers with low-wage workers, the people who 
can't afford the coverage, to address the affordability 
problem. Thank you.
    [Ms. Lehnhard's statement may be found in the appendix.]
    Chairman Talent. We will recess the hearing and then come 
back after the next couple of votes, and we will hear from Mr. 
Coleman.
    [Recess.]
    Chairman Talent. All right. We will reconvene the hearing. 
Thank you for your patience. Our next witness is Jesse Coleman, 
Vice President and owner of Coleman's Hamilton Supply Company 
in Trenton, New Jersey. Mr. Coleman.

STATEMENT OF JESSE COLEMAN, VICE PRESIDENT AND OWNER, COLEMAN'S 
  HAMILTON SUPPLY COMPANY, TRENTON, NEW JERSEY ACCOMPANIED BY 
    RAYMOND J. SAPUTELLI, ASSISTANT VICE PRESIDENT, EASTERN 
             BUILDING MATERIAL DEALERS ASSOCIATION

    Mr. Coleman. Good morning, Mr. Chairman and distinguished 
members of the Committee. Thank you for giving me the 
opportunity to speak to you this morning about H.R. 1496. My 
name is Jesse Coleman, and I am the Vice President of Hamilton 
Supply Company, Incorporated.
    We are a lumber and building material dealer in Trenton, 
New Jersey. The company was incorporated in 1924, and we 
currently have 65 employees. I also sit on the board of Eastern 
Building Material Dealers Association.
    I am testifying before you today on behalf of over 800 
small businesses that make up the EBMDA in support of H.R. 
1496, the Small Business Access and Choice for Entrepreneurs 
Act, and association health plans in general.
    First and foremost, I would like to commend Congressman 
Talent for his work on this crucial issue and for scheduling 
this hearing to review how AHPs will benefit small business 
owners and employees by increasing access to affordable health 
care options.
    In my business, I am constantly battling to attract or 
retain quality employees. In many cases, my strongest 
competition for the best people is from large corporations, and 
the battle is often won or lost based on the benefit packages. 
These large companies have an immediate advantage over my 
company in that they can offer less expensive health care 
programs.
    As self-insured plans, they are governed under ERISA and 
exempt from compliance with onerous and expensive state-
mandated underwriting requirements. At Hamilton Supply, we went 
through a period where we tried to level the playing field by 
self-insuring. The difficulty came in the fact that my company 
group was simply too small to get credible experience rating 
over time, and our good years simply did not generate the 
savings to offset the bad years.
    We now participate in the Eastern Group Trust, a medical 
program offered by the EBMDA. As a member of this organization, 
my company has been able to stabilize health care costs. But as 
a Director of the association, I am also aware that the 
insurance trust could do much more for companies smaller than 
mine if we could operate like an ERISA plan as envisioned in 
H.R. 1496.
    If these smaller companies were allowed to join employee 
insurance pools to obtain health care coverage similar to mine 
for their employees and given freedom to design a plan 
according to their individual needs that our Fortune 500 
competitors already enjoyed, this combination of pooled risk 
and design freedom would allow them to afford association 
benefit plans.
    It is important to note here that my company and many 
others, some larger, but most smaller, in the Delaware, 
Maryland, Pennsylvania, New Jersey area utilize the EBMDA for 
many services that help and make our businesses more efficient. 
This is a critical distinction in the debate over the role of 
AHPs in health care.
    The EBMDA is not a group of businesses that simply come 
together to purchase insurance. Rather, Eastern, like all bona 
fide associations, exist for one reason and one reason only, to 
serve the needs of the membership.
    Bona fide associations like the EBMDA have an outstanding 
track record of providing a host of services, only one of which 
has been high-quality health insurance coverage. Among other 
things I did to prepare for this testimony in front of the 
Committee today was to get a haircut on Monday.
    Jokingly, I said to my barber that he had to fix me up 
because I was testifying in front of a Congressional Committee 
on Thursday. He asked me what it was all about; and when I 
explained it to him, he said that he hoped that I would 
succeed.
    I asked him if his employer provided health care insurance. 
He said that his employer did not and that he obtained it 
himself. I then asked him how much he was paying for his 
coverage, and this was when I knew I had to try to impress upon 
you, Mr. Chairman, and the members of this Committee the real 
everyday costs that are associated with mandated plans.
    He told me that he paid $1,000 a month for himself and his 
wife. He showed me his plastic ID card for the program. It was 
a standard state-mandated BlueCross and BlueShield 80/20 plan 
with a thousand dollar deductible. This gentleman, who was in 
his early 60s and spends over 25 percent of his gross income 
for medical insurance, and he and his wife have no chronic 
health problems.
    Then we talked about the barber, his coworker next to him, 
who was a couple of years younger. This gentleman chose not to 
obtain coverage. He chose to take a chance. I would venture to 
guess that many people in his situation choose to take a 
chance. That is why so many people are without health care 
coverage today.
    You can be sure it is a very risky bet to make with your 
life not to carry health insurance. That decision could end up 
costing you all you have worked towards your entire life should 
an illness occur. If these gentlemen were allowed to join a 
group as small as 1,000 persons, the size of my associations's 
pool, my barber's cost for health care would be $343.14 a 
month.
    This is such a dramatic difference, that I believe this 
coworker would not hesitate to join the pool that made health 
care insurance this affordable. Why not give thousands of hard-
working people like them a chance to obtain affordable 
insurance? Supporting H.R. 1496 is a step in the right 
direction.
    Allowing AHPs to cross State lines without being subject to 
mandates that do more harm than good when it comes to buying 
affordable health care is the right thing to do. If my barber 
had an association-sponsored health plan like the one available 
to me, his situation would be dramatically improved. Allowing 
AHPs under ERISA to provide health care insurance as one of the 
many services that bona fide trade associations provide would 
mean that many more people would be insured. Thank you very 
much.
    [Mr. Coleman's statement may be found in the appendix.]
    Mr. Hill. [presiding]. Thank you, Mr. Coleman, and that is 
a fine haircut, by the way.
    Mr. Coleman. Thank you.
    Chairman Hill. Our next witness is Patricia Gagne, Vice 
President of Claims Technologies, Inc.

      STATEMENT OF PATRICIA GAGNE, VICE PRESIDENT, CLAIMS 
              TECHNOLOGIES, INC. DES MOINES, IOWA

    Ms. Gagne. Good morning, Mr. Chairman and members of the 
Committee. My name is Patricia Gagne. I appear today on behalf 
of the Boys & Girls Club Workers Association in support of H.R. 
1496. I am the Vice President of Claim Technologies, 
Incorporated, a small employer of 12 employees in Des Moines, 
Iowa; and I am a member of the Self Insurance Institute of 
America.
    My company is the broker and administrator of the insurance 
programs sponsored by the Boys & Girls Club Workers 
Association. B&GCWA asked me to attend here on their behalf 
today to state that they believe H.R. 1496 will allow employees 
working for small businesses to obtain more affordable health 
coverage by enabling the formation, continuation, and control 
of association health plans.
    The opportunity to participate in an association health 
plan will, as you have heard here today, allow small employers 
to enjoy the same economies of scale as larger employers.
    We wish to commend Representative Talent for sponsoring 
this bill, which will help thousands of small employers provide 
better benefits for their employees. Standing to gain most 
considerably are nonprofit employers like those of the Boys & 
Girls Club of America.
    In fact, Representative Talent, securing coverage for their 
employees through the B&GCWA health plan today are for Boys & 
Girls Clubs from your home State of Missouri. I would like to 
summarize the comments made in our written statement first with 
a few facts about the Boys & Girls Club Workers Association.
    The Workers Association was established over 30 years ago 
for the purpose of improving benefits for the employees of the 
more than 700 clubs throughout the country that make up the 
Boys & Girls Clubs of America. The average club employs five 
full-time employees.
    Of particular interest of the Boys & Girls Clubs was the 
development of a medical plan that would provide, among other 
things, portability of coverage when an employee transfers from 
one club to another, usually across State lines, benefits 
comparable with large employers, many of whom they compete 
against when hiring and retaining their good and qualified 
employees.
    Affordable premiums and coverage for clubs with only one 
employee, which is the way that many Boys & Girls Clubs begin 
and most small employers begin. This is of great importance 
because today the Boys & Girls Clubs of America is the fastest 
growing youth organization in the country.
    The Workers Association Insurance Trust provides group 
health insurance for 250 Boys & Girls Clubs representing 4,000 
lives across the country. However, its ability to continue to 
do this will be questionable without the passage of legislation 
like that supported by H.R. 1496.
    Our experience in trying to secure health coverage for this 
group of nonprofit small employers is as follows: in 1944, 
American Heritage Life Insurance Company, who had profitably 
insured the Workers Association health and life coverages for 
13 years, advised that it would not be in the small employer 
health insurance market in California due to state laws that 
they found too prohibitive there.
    Then in 1995, it decided that it could not afford to 
continue to provide health coverage to any association of small 
employers in multiple states because it could not justify the 
overwhelming cost of compliance with state health insurance 
regulations. As a result, the Workers Association first was 
forced to terminate medical coverage for 46 clubs insuring 
approximately 600 lives in California.
    On January 1, 1994, we rolled over all participating 
California clubs to the Health Insurance Plan of California, 
the HIPC. However, today only 17 clubs remain insured with the 
HIPC. The reason for this attrition is the higher cost of the 
HIPC's plans, as well as the administrative problems that clubs 
have experienced in trying to understand and comply with the 
many rules and requirements of that program.
    Our search for a new carrier to replace AHL in all the 
remaining States encompassed more than 54 insurance carriers. 
With one exception, every carrier declined, largely due to an 
inability to be in compliance in all States.
    Beginning January 1 of 1996, the Workers Association moved 
its medical and life insurance plans to the CNA companies of 
Chicago, Illinois. Unfortunately, CNA encountered the same 
difficulties as AHL had: the cost of compliance was too great; 
and on July 1 of 1997, CNA advised us that we needed to seek 
another insurance company because they would be terminating our 
medical policy effective December 31.
    Once again, CTI conducted an extensive search for a 
carrier, but the marketplace was no different than it had been 
only 2 years before. With no other alternative that it could 
find and in the belief that self-funding was the correct 
funding alternative for its medical benefit plan, on January 1, 
1998, the Boys & Girls Club Workers Association became a self-
insured health plan with specific and aggregate stop loss.
    The elimination of insurance carrier fees and profit 
margins has already had a significant impact on our plan. Since 
becoming self-insured, the B&GCWA has given no rate increases 
to its medical plan participants, and after its first year of 
being self-insured, the medical plan was actuarially determined 
to be fully reserved.
    Yet, as a self-funded multi-State association plan, the 
existence of our health insurance plan is not secure. There is 
nothing to protect our status in each of the States that we 
currently have participants in. As has been done to other 
plans, we know that ours can come under attack and be forced to 
disband on a State-by-State basis if we cannot comply with 
State regulations.
    H.R. 1496 would protect the B&GCWA Insurance Trust and 
others like it. The B&GCWA sees many advantages of Federal 
standards for AHPs. ERISA has played an important role in 
holding down health insurance costs for large and medium-sized 
employers.
    H.R. 1496 builds on the current successful ERISA framework 
adopted by Congress in 1974. The Federal standards in H.R. 1496 
will help by increasing the insurance coverage choices 
available to the members of the Workers Association. As you 
know, under H.R. 1496, AHPs can offer self-insured coverage, 
but must also offer at least one option of insured coverage.
    H.R. 1496 also requires AHPs to meet stringent standards 
for reserves, stop-loss protection, and solvency 
indemnification. The Boys & Girls Club Workers Association 
recognizes that State governments have a valid concern and a 
desire to ensure long-term comprehensive health insurance 
solutions for the employees and families of small employers.
    But we know from firsthand experience that State regulation 
of national plans and the elimination of association health 
plans is not the answer. In addition to our growing list of 
clubs leaving the HIPC in California, we have clubs that, while 
the association was insured by CNA, they were forced to leave 
the Workers Association medical plan in the State of New York 
and participate in the state purchasing pools there.
    Their premiums increased by over 75 percent in a 2-year 
period. How can this be acceptable when these same clubs were 
insured through the Workers Association Insurance Trust for 13 
years, during which time the plan remained solvent and 
profitable?
    Boys & Girls Club Workers Association greatly applauds H.R. 
1496's provision of a regulatory framework to qualify 
association health plans. We believe that H.R. 1496 is in the 
best interests of the Boys & Girls Clubs and similarly situated 
organizations, and we urge you to support the passage of H.R. 
1496. Thank you for this opportunity.
    [Ms. Gagne's statement may be found in the appendix.]
    Chairman Talent [presiding]. Thank you.
    Our next witness is Mr. Joseph E. Rossmann, the Vice 
President of Employee Benefits Operations, Associated Builders 
and Contractors.

   STATEMENT OF JOSEPH E. ROSSMANN, VICE PRESIDENT, EMPLOYEE 
BENEFITS OPERATIONS, ASSOCIATED BUILDERS AND CONTRACTORS, INC., 
                        WASHINGTON, D.C.

    Mr. Rossmann. Thank you, Mr. Chairman. ABC appreciates the 
opportunity to testify before the Small Business Committee, and 
we thank Chairman Talent and members of the Committee for 
undertaking a sensible look at improving the Nation's health 
insurance coverage and the opportunity to talk about 
legislation which would enhance the association health plans.
    I have a detailed written statement. I would just like to 
cover some of the highlights of that statement now. Associated 
Builders and Contractors, ABC, is a national trade association 
representing over 21,000 contractors, subcontractors, and 
suppliers through a network of 83 chapters.
    Construction as an industry is small businesses with 94 
percent of all construction companies being privately held. 
There are 1.3 million construction companies which are not 
incorporated. ABC as an association has a 50-year history of 
serving its members. It offers a myriad of services for members 
through its public affairs department, government affairs, 
meetings and conventions, education for management, craft 
training and apprenticeship training.
    ABC's association health insurance plan is just one of its 
many services, but as a purchasing pool for small employers it 
has had a real impact on the small employer market in both 
price and design. I would like to relate some real world 
experiences on what association health plans have done in the 
past and what we feel they can do in the future through the AHP 
legislation that is currently in Congress.
    ABC is a perfect example of an industry purchasing pool. It 
started 42 years ago by five contractors who couldn't buy 
health insurance coverage because it wasn't available to 
employers of their size.
    Since that time, the Insurance Trust has served as a 
voluntary purchasing pool for members. An important component 
of the plan's long term success is the fact that it is guided 
by contractor members who serve as trustees and actually 
participate in the program for themselves and their employees.
    The Trust board is a key ingredient in aggregating the 
voices of small employers to negotiate price and coverage with 
insurance carriers and other providers. ABC's insurance program 
offers HMOs, PPOs, and traditional insurance plans, all of 
which have in-network and out-of-network benefits.
    All of our plans also provide wellness benefits with 
coverage for physicals and annual checkups. This feature 
includes 100 percent coverage for annual PAP smears and 
mammograms for women covered under the program.
    ABC also offers dental coverage, life insurance, and 
disability programs to serve members. Today, the program covers 
31,000 employees and dependents nationwide; and the majority of 
those covered work for small construction companies of five to 
20 employees.
    Each ABC plan currently is fully insured with claims 
payment processing done by the insurance company. The insurance 
company also provides medical case management for larger 
complicated claims. Plan administration and enrollment are 
handled by staff in the insurance division at ABC's national 
headquarters over in Rosslyn, Virginia.
    The insurance trust operates in full compliance with ERISA, 
COBRA, and HIPAA. Complying with the federal HIPAA legislation 
requires that ABC and other associations provide open access to 
all members and provide employees credit for prior coverage. In 
fact, association health plans are specifically referenced and 
defined in the HIPAA legislation and required to take all 
members.
    Like a large employer, association health plans can have 
economies of scale in numerous ways. The ABC plan, which 
operates nationally, has total expenses of about 13\1/2\ cents 
for every premium dollar. These costs include all marketing, 
administration, and insurance company risk charges, claims 
payment expenses, and even premium taxes.
    If you compare these numbers to small employer marketing 
and administration costs of insurance companies, which can run 
30 percent or more if the small employer buys it directly from 
the insurance company, you end up with savings in the AHP model 
of anywhere from 15 to 20 percent or more.
    Bona fide associations like ABC have an established 
infrastructure which allows them to communicate with members 
more effectively because of their preestablished relationship. 
Another component of association health plans is that any 
profits or margins of a health plan in a given year don't go to 
the stockholders of an insurance company, but they stay right 
there in the plan to inure to the benefit of participants 
keeping costs lower in the future.
    All of these items come into play before we ever start 
talking about any savings that may be available through state-
mandated benefits. AHPs can also be similar to large employers 
with unique plan designs. As an example, the ABC plan, which 
serves the construction industry, has coverage for safety 
glasses in all of its programs, a small item but one that you 
don't usually see in the small employer market.
    The problems association health plans like ABC's face today 
are evident in the differing state laws on ratings and benefits 
and in the reduction of the number of insurance carriers in the 
association market.
    State health care reforms have not always had the positive 
impact they purport for small employers. A number of states 
like Maryland's reform have actually forced us to increase 
rates and reduce benefits to comply with the law.
    State insurance reforms in New York forced ABC's insurance 
carrier to completely withdraw from the market for employers 
with less than 50 employees. What this means for smaller 
employers is fewer alternatives for health insurance coverage 
for themselves and their employees.
    Recent mergers of insurance companies have reduced 
competition likewise and alternatives for small employers, 
mergers such as U.S. Health Care and Aetna or Unicare Insurance 
buying up the group operations of Mass Mutual or John Hancock 
and even BlueCross of Georgia. These are just a couple of 
examples that are reducing the alternatives for small 
employers.
    We feel that we need to bring competition back into the 
system, rather than continually reducing it. That is why 
association health plan legislation is so necessary for small 
employers. ABC strongly supports H.R. 1496, the ACE Act, and 
feel it would enhance association health plans and provide 
options for small employers through bona fide associations.
    Association health plans do and can provide affordable 
health coverage to small businesses and extend insurance to the 
uninsured. We know that AHPs are not the entire answer for the 
uninsured. However, we feel it can be an essential component in 
the future. I appreciate the opportunity to be a part of this 
hearing and look forward to answering any questions. Thank you, 
Mr. Chairman.
    Chairman Talent. I thank the gentleman.
    [Mr. Rossmann's statement may be found in the appendix.]
    Chairman Talent. Our next witness is Mr. John Nicholson, 
the proprietor of Company Flowers in Arlington, Virginia. Thank 
you for being here, Mr. Nicholson.

 STATEMENT OF JOHN B. NICHOLSON, PROPRIETOR, COMPANY FLOWERS, 
                      ARLINGTON, VIRGINIA

    Mr. Nicholson. Thank you for allowing me to appear before 
you to talk about getting adequate health care at reasonable 
costs for small businesses such as our flower shop in north 
Arlington, which has been described--excuse the advertisement--
as the best little flower shop in all of Washington.
    We have five full-time employees, three of whom are a 
family, and several part-time employees who work on an hourly 
basis. We pay one-half of their medical insurance and one, our 
daughter, obtains virtually identical coverage through her 
spouse's insurance program, which is substantially cheaper 
since is he a professor at the University of Maryland and, 
therefore, part of a much larger group.
    Our family has been a part of the local university 
hospital's HMO for many, many years. We started with the HMO 
when my business included 13 full-time employees. When I quit 
to become a sole entrepreneur, we were forced to join a made-up 
small business group based in Massachusetts, which charged us 
rather substantial fees to remain with the same HMO.
    When we bought our flower shop some 8 years ago, the HMO 
had changed its policy to allow three or more employees to 
constitute a group, so we saved almost half of the monthly cost 
by abandoning the made-up small business group and working 
directly with the HMO.
    Then last month, approximately 30 days prior to the end of 
our current contract with the HMO, we were informed that we 
would no longer be eligible for insurance. We were told by the 
HMO that their new owner had decided to cease supplying service 
directly to employee groups of less than 10 subscribers. Each 
one of our employees could join as a separate individual, but 
there would be no prescription coverage, and the family rate 
would go from $552 to $571 for the substantially reduced, that 
is, no-prescription coverage.
    We frantically began searching for a substitute, not only 
anxious about coverage but a little bit irate that 20 years or 
more with this HMO meant nothing, basically. As luck would have 
it, I had not recorded our new HMO underwriter's name in our 
files, so I had to call the previous person with whom I dealt 
with at the HMO and he listened to our story, contradicted his 
fellow underwriter, and asserted that the policy was just being 
reviewed.
    Sure enough, back came the response that the dictum against 
10 applied only if the group did not have 100 percent coverage. 
That meant that all five of our full-time employees had to be 
signed up with the HMO. Our daughter, however, was covered by 
her husband's policies and her anxieties about medical coverage 
were already taken care of. Our anxieties continued.
    So another day of worry, while I have other things to do, 
and then finally back came a response. Can you verify that the 
daughter's coverage is there so that we can remove her from the 
group and thereby obtain 100 percent coverage for our HMO?
    Well, I faxed off the records, et cetera, and finally we 
were back to being eligible for coverage. True, our families 
rates went up from $552.49 a month to $715.21 including basic 
medical and prescription drug coverage. But frankly, we were so 
relieved to be able to continue coverage with that HMO of our 
choice that we just tightened our belt and resolved to pay 
more.
    I hope these rather small details help you understand what 
it is like where the rubber hits the road and how important it 
is to provide small businesses with adequate coverage 
mechanisms such as an association health plan.
    Drawing some conclusions from our experience, number one, 
medical coverage is not just pricing, not just a competitive 
business like valuations of a commodity. Certainly, that is 
necessary; but, frankly, our emotional attachment to almost a 
quarter century of personal care from one institution dictates 
stability in lieu of constant changes.
    The proposed cutoff of service from the HMO was traumatic 
to me, especially because my employees looked to me as a source 
of stability and trust. Bigger numbers, secondly, have an 
impact, so aggregating small business clientele into a larger 
group makes sense if properly run.
    Sadly, our early experience was otherwise, and we were 
relatively helpless to find another service group or know what 
other small businesses were being changed by the Massachusetts 
made-up small business service group. Had our HMO offered to 
guide us to a small business group with which they worked 
successfully, we would have respected their choice.
    Third, most of the sources that we contacted last month did 
not accept HMOs, which provoked questions in my mind as to why. 
I hope that whatever solution you, Congress, come up with that 
it does embrace including HMOs.
    And finally, stability of coverage is of high importance. 
Frankly, I have already spent too much time from my business 
looking at all of this. I want a rock solid source to be the 
best for me and employees at what my peers agree is a 
reasonable cost.
    That is the way that I look upon my trade association and 
that is what a CEO of a major corporation, I think, looks to 
his human resources experts to find. Lower, lower, lower prices 
invoke only the dictum: you get what you pay for. So thank you 
for inviting me and taking time to discuss with me my everyday 
work-a-day solutions. I would be pleased to answer any 
questions.
    [Mr. Nicholson's statement may be found in the appendix.]
    Chairman Talent. Thank you, Mr. Nicholson. I thank the 
whole panel. In just a second, I am going to recognize the 
ranking member. Ms. Lehnhard, let me ask you just one question. 
I want to establish something. You said in your testimony that 
AHPs could, under the bill that Mr. Dooley and I filed, 
establish membership criteria that would essentially limit 
enrollees to healthier groups, rather than take any small group 
that applies, as required by HIPAA.
    I want to know what you mean by that. I take it that you 
don't mean, for example, that the National Restaurant 
Association can refuse to take a member of their association 
into the AHP or refuse to cover any of their employees on the 
same basis as they would cover other employees, because the 
bill specifically requires that the AHP be offered to all 
members of the association and all of the employees, according 
to HIPAA. Tell me what you mean by that.
    Ms. Lehnhard. I think it is two things. One is that, 
obviously, certain associations by definition are going to have 
much healthier memberships. I think your bill recognizes that 
by trying to say, we are only going to let the healthier health 
associations, the ones who are at least of average health, be 
certified. We don't think this is really a workable way to 
address the problem.
    Also for the individual business, I believe that the 
association in the individual business can actually underwrite 
and exclude individuals who have an existing health condition, 
which is a very obvious form of excluding people who are 
sicker.
    Chairman Talent. I am not sure what the comment means. 
Associations can, under the bill, sponsor plans the same way 
that large companies currently do. I don't think there is 
anything in the bill that refers to healthier associations or 
anything like that.
    My concern is for the 43 million uninsured people out 
there, of whom about 60 percent either work for or are 
dependents of people who work for small businesses. They don't 
have any coverage now. They are not in the small-group market. 
They are not in anybody's market.
    This would make insurance available to them which would 
help everybody. You can't possibly say that would affect the 
small-group market. We have a lot of evidence, that it is 
precisely the people who have the sicker employees who can't 
get the insurance on the small-group market.
    If they were part of a big national group akin to IBM, or a 
big national company, they would be able to get it less 
expensively. That is the evidence that we have been getting all 
along. I know the concern over the years has been about this, 
but I think the bill has been reworked to remedy these issues. 
I think that it is going to have the opposite effect that you 
suggest, and that you are going to see smaller groups with 
sicker employees going into AHPs because they can join a larger 
group that way, a stable group with fewer administrative costs, 
which will in turn lower their costs. That doesn't even count 
the people who aren't insured now who will be covered. Go ahead 
and make your comment and then I will recognize the gentlelady 
from New York, Ms. Velazquez.
    Ms. Lehnhard. As you mentioned, right now any group with 
sick employees can find coverage. In every State, small 
insurers have to accept every small group. I think my point was 
that the insurance commissioners in the states have worked very 
hard to make sure that there are these big pools for small 
groups. They told every insurance company, you put all of your 
groups in the same pool to make the coverage more affordable 
for the sickest groups.
    And our concern is that if you run that system parallel to 
a system that says, if you don't need mental health coverage, 
if you don't need substance abuse coverage, if you don't need 
the women's mandates, you can go over into this product and not 
have those benefits; but when you get sick, boy, you can jump 
back into this other product that is run by the State. You are 
going to divide the population into those who need 
comprehensive benefits and those who don't, and it won't be 
manageable.
    Chairman Talent. What has the small-group reform done for 
people who are uninsured?
    Ms. Lehnhard. There is a very recent study by the Urban 
Institute that what it did was stop a tremendous erosion in the 
small-group market caused by risk selection. The author's 
concern is that MEWAs with their different benefit packages, 
those based on people dividing themselves on what they need, 
would return to that very negative public policy of risk 
selection, competition based on risk selection.
    Chairman Talent. The evidence we have had is to the 
contrary--I haven't had a lot of small businesses call me up 
and say their insurance premiums are going down. I just haven't 
had it.
    Ms. Lehnhard. All of the insurance premiums are going up.
    Chairman Talent. Exactly. If these reforms are enabling the 
sicker people are able to afford insurance, then the premiums 
should be going down, and they are not.
    Ms. Lehnhard. They are not going down, however. For 
example, the commissioner in Maryland has made it very clear 
that more small groups in Maryland have coverage because they 
have stabilized the market. They have lowered premiums for the 
very sick groups who were--the premiums were just totally out 
of sight for those groups.
    Yes, healthy groups might have had to pay a little bit more 
to help subsidize that, but next year they might be the group 
that is sick and benefiting from the subsidy.
    Chairman Talent. We will get back to this later. I want to 
recognize the gentlelady from New York.
    Ms. Velazquez. Thank you, Mr. Chairman. Ms. Lehnhard, why 
should a large employer enjoy Federal preemption of State 
regulation but not the small employer?
    Ms. Lehnhard. I don't think that we are talking about a 
federal preemption for a small employer in this case. What we 
are talking about is a federal preemption for a group of small 
employers that are essentially an insurance company. That is 
very different. It is essentially a MEWA.
    There is a long history of insurance companies for small 
employers disappearing. As you heard, it is very difficult to 
manage and it is very difficult to keep stable. An insurer can 
enroll healthy people, have a low rate, and in 3 years it is 
not manageable. MEWAs have a history of closing down and going 
somewhere else when times get bad.
    There are a lot of very good companies in this business. A 
lot of the people here today--I know there are some very good 
association health plans. We have about, I think, 50 to 60 
percent of the association health plan business in the country. 
We feel that it works pretty well. Would it be cheaper if you 
didn't have the state-mandated benefits? Yes.
    But you can't get rid of state-mandated benefits for part 
of the market and keep them for the rest of the market and 
expect the market to work. It is like our plans have said, we 
will be out of the state-insured business. We will be in the 
association health plan business.
    Ms. Velazquez. What kind of benefits would most often be 
preempted by association health plans?
    Ms. Lehnhard. I think most of the mandated benefits are, 
breast reconstructive surgery, women's benefits, mental health, 
and in some states, substance abuse.
    Ms. Velazquez. If AHPs are allowed, could you describe what 
would happen to those small businesses who are not a member of 
the association and forced to remain in the State insurance 
pool?
    Ms. Lehnhard. Our plans have said--we are in the small-
group business in every State. We cover one out of four small 
employers in the country. And we supported the State reforms. 
Our plans have said that the small-group insured market won't 
be sustainable if the association health plans are preempted 
from the reforms. This happened in Kentucky. Kentucky passed 
small group reform. They applied it to the state-insured 
market. They said, we are going to let association health plans 
out from under it. 60 percent of the market moved to the 
association health plans. We were the only carrier left in the 
State and losing money, and the State had to repeal their 
small-group reforms. You can't run a market with two different 
rules and expect it to be stable.
    Ms. Velazquez. Ms. Gagne, would you like to comment on 
that?
    Ms. Gagne. It is a case of which came first, the chicken or 
the egg. Did the insurance companies exit as a result of state 
regulation and, therefore, BlueCross and BlueShield was the 
only game in town? Rates went up. Employers had no choice. They 
had to go self-insured. They had to seek an alternative 
solution if they were going to provide insurance. We have seen 
it happen over and over again.
    Ms. Lehnhard. I think the rates went up after they left the 
insured market. The people left the insured pool in the state--
according to the State analysis, they were so sick you could 
hardly sustain the premiums because every year the premiums 
went higher and the healthier people would leave. The 
concentration of sick people got worse each year in Kentucky.
    Ms. Velazquez. Yes, sir.
    Mr. Rossmann. If I could comment on the point that the lady 
made on the Kentucky program. I have a different understanding 
of that, and I think there is some bad information going around 
on that.
    The association health plans in Kentucky represented only 3 
percent of the total market. It is my understanding that the 
health care reform done in 1994 by the State and then again in 
1996 which limited rating and went to a modified community 
rating and required certain mandated levels of benefits, 
actually drove 45 insurance companies out of the individual and 
group market.
    So it was the lack of competition that drove insurance 
companies out of the market. It wasn't association health 
plans. They weren't that big of a piece of the puzzle.
    Ms. Lehnhard. I can submit for the record that after they 
passed the reforms, the association health plans became 32 
percent of the market. This is the state's own report.
    Ms. Velazquez. Ms. Gagne, one of the concerns that I have 
is insolvency. The Department of Labor estimated that it could 
get around to regulating large ERISA plans only once every 300 
years. Who is going to be examining these AHPs to ensure they 
are properly regulated and funded?
    Ms. Gagne. I am not probably the best person to answer that 
question. I am sure that needs to be done and that is an issue 
that needs to be addressed. I think that if you put the 
requirements into place and monitor the association health 
plans to make sure they are in compliance, that you remove some 
of the bad risks and horror stories that are associated with 
age-old MEWAs.
    The fact is there is a lot of very healthy association 
health plans out there that have been operating for large 
numbers of years without any regulatory framework whatsoever. 
So I think that if you give them guidelines to work within, 
yes, you may want to watch them; but I am not so sure that it 
is as monetary intense of a process or as personal intense of a 
process as is being suggested.
    Ms. Velazquez. Ms. Lehnhard, would you like to comment on 
that?
    Ms. Lehnhard. The association health plans right now are 
regulated by the states. And I can tell you in our insured 
business, we file our financial documents once a year with the 
state. They review those documents; they ask us questions. If 
we are in trouble, we have to give them a plan of recovery. If 
we don't meet it, they literally put someone from the insurance 
department in our company to cosign any check over $1,000 or 
whatever amount. Under this bill, the companies would do self-
reporting to DOL and tell DOL when they thought they were in 
trouble, a very different level of regulation.
    Ms. Velazquez. Mr. Coleman, today's legislation would allow 
AHPs to terminate coverage if they provide written notification 
of their intent at least 60 days in advance of termination. 
What if an AHP decided to terminate its plan after one of its 
members gets seriously ill with a costly illness, whose cost 
will be incurred largely in the future, let's say two years? 
What will happen to the sickest invalids?
    Mr. Coleman. I am not sure that I could answer that because 
I might have to defer that to one of my experts in the back. 
But it is my understanding that there would be requirements for 
moneys to be set aside just for that reason, reserves.
    Ms. Velazquez. If any of the experts who are with us, if 
they have any other information or comment they would like to 
add?
    Mr. Saputelli. I am having trouble hearing. I am sorry.
    Ms. Velazquez. Saying that today's legislation would allow 
AHPs to terminate coverage if they sent a written notification 
of their intent in 60 days, what if an AHP decided to terminate 
its plan after one of its members gets seriously ill with a 
costly illness whose cost would be incurred largely in the 
future, say two years? What will happen to the sickest 
invalids?
    Mr. Saputelli. I guess Mr. Coleman's answer is partly my 
answer as well. There are reserves in each association health 
plan. But my association, the Eastern Building Materials 
Dealers Association, has existed since 1949. We have seen the 
sickest of the sick. We have seen the healthiest of the 
healthy. We have never left anyone uninsured since 1949.
    I don't see where in a bona fide trade association where 
our job, among other jobs, is to provide quality health 
insurance to our members. I don't see where it is in our best 
interests to take one of those programs, which is health 
insurance, and leave our members in the cold.
    Ms. Velazquez. Ms. Lehnhard, would you like to comment on 
that?
    Ms. Lehnhard. I would just comment that the trade--the AHPs 
he is talking about, again, is regulated by the state and the 
state law is you can't drop groups. It is guaranteed renewable. 
And I know that in that particular state, you couldn't stay in 
the small-group business and begin to drop your small-group 
coverage.
    Ms. Velazquez. I will finish, Mr. Chairman. Ms. Neese, the 
proposals that we have been discussing today seem to do nothing 
to address the health insurance access problems of small 
businesses that are not part of an association. What should be 
done to assist those businesses?
    I would like to add also, what could be done to help part-
time employed workers who have the ability to get health 
coverage?
    Ms. Neese. Well, let me speak to your last question first 
about part-time and temporary workers because I know that is an 
issue that many people talk about. Being in that business, I 
actually provide insurance for my temporary employees.
    So I am in a plan where they can go in and be on insurance 
for 30 days, 60 days, until they actually acquire a job. It is 
very high. But that is a benefit that I provide my temporaries. 
I couldn't help but think as I was sitting here listening to 
everyone--and this kind of goes to your first question--about 
why can't we go back to 30 years ago when I could go to the 
doctor, any doctor that I wanted to go to, and have my 
insurance with whoever I wanted to have it with and any doctor 
and go in for services and write a check for what I needed to 
pay for and my insurance pay the rest. It was really simple. 
What has happened in the last 30 years to change that?
    Ms. Velazquez. Ms. Gagne.
    Ms. Gagne. Ms. Velazquez, I would like to address your 
question that you asked a little bit earlier about the reserve 
requirements and what would happen to protect the person who 
became sick and the association plan decided to desist.
    I think the reserve requirements in the AHP legislation are 
far more stringent than most insurance companies themselves 
even pretend to agree to. We just left an insured arrangement 
and became self-insured. When we compared the reserves that we 
had upon leaving CNA and kept all of those reserves intact 
against what this legislation would require us to have, we will 
increase our reserves by almost 15 percent in order to be in 
compliance with this legislation.
    That is the route that the Boys & Girls Club Workers 
Association chose to take, to be in compliance with what would 
seem to be the minimum requirements of this legislation. That 
is more than we had set aside as an insured arrangement with 
the CNA companies. There are solvency requirements and 
indemnification requirements and things that I am not even sure 
where we are going to go to find them yet; insurance 
requirements, I am not even sure where to go to find them yet.
    I think we have done a lot with this legislation to protect 
the solvency of the AHPs. I have been involved with AHPs that 
met just that fate, that hit upon a bad stretch of bad claims 
experience and were forced to terminate their plans because 
they hadn't thought far enough ahead. They never thought it 
would happen to them. That is an unfortunate situation. It 
happens amongst the employer groups as well, though.
    I have also been involved with large employers who hit upon 
the same bad stretch of financial experience, whether it was 
health insurance related or simply business related. They were 
forced to disband their health insurance plans and maybe even 
their entire operation. Those things are sad. When they happen, 
it is unfortunate; but I think the AHP legislation goes a long 
way to protecting those exact same situations.
    Ms. Velazquez. Yes, sir.
    Mr. Nicholson. You asked about what would happen if the 
employer wasn't a member of the trade association. Generally 
speaking, employers don't join trade associations because they 
are not getting service; and, therefore, it is not worth the 
money. I am chairman of the FTD flower shops in Virginia, and I 
would love to have FTD offer health insurance because so many 
of our shops and shop owners can't get it at a reasonable 
price. Were that to be the case, I know surely that we would 
have many, many florist shops joining FTD, probably.
    Ms. Velazquez. Mr. Chairman, I will come back with more 
questions. Thank you.
    Chairman Talent. For the record, let me just say that over 
the course of debating this bill for a number of years, the 
reserve requirements have continually been increased. The 
bill's reserve requirements are a minimum of $500,000 up to $2 
million as prescribed by the Secretary of Labor, of aggregate 
stop-loss insurance, with an attachment point of not greater 
than 125 percent of expected plan claims, specific stop-loss 
insurance, indemnification to satisfy claims in the event of 
mandatory plan termination.
    These were designed to meet objections that had been raised 
by the American Academy of Actuaries. It is interesting that 
people who raise these objections about reserves don't withdraw 
their objections when their concerns are addressed. Mr. 
Rossmann, is your trust covered by state law?
    Mr. Rossmann. Yes, it is. We have a fully insured program, 
Mr. Chairman.
    Chairman Talent. Covered by state mandates?
    Mr. Rossmann. Yes, it is.
    Chairman Talent. You offer insurance at lower cost than 
employers can get on a small group market; is that correct?
    Mr. Rossmann. We feel that our costs are lower for some of 
the examples that I mentioned in my testimony earlier, the fact 
that we have a built-in infrastructure and we have the ability 
to communicate with our members. I think the overall 
administrative and insurance cost for our program are less than 
what you would see in a small-employer market.
    Chairman Talent. You are covered by the state mandates, 
right?
    Mr. Rossmann. Yes, sir.
    Chairman Talent. I have a letter from the Western Grower's 
Association, which I will put in the record.
    [The information may be found in the appendix.]
    Chairman Talent. They are an association health plan in 
California. Their least expensive family plan is $114 per month 
for employees of any age. They are covered by the state 
mandates.
    Plans offered under the state's small-group insurance 
reforms vary for the same coverage of $273 a month to $304 a 
month. Ms. Lehnhard, these association health plans that must 
offer California's state mandated health benefits, offer 
coverage at less cost than the state small groups market.
    Ms. Lehnhard. That is right. We administer a number of 
these. He is absolutely right that you have lower marketing 
costs, lower communication cost. But I think that makes a key 
point, that you can do it under current law.
    Chairman Talent. It also makes the key point, does it not, 
that your argument that the difference between the two markets, 
one being covered by state mandates and the other not, is the 
reason why association health plans are attractive and would 
introduce an instability?
    Ms. Lehnhard. Right now you don't have the existence of an 
entity without the state-mandated benefits. I don't understand 
the question.
    Chairman Talent. Right. But the point is that AHPs still 
offer much greater choice of coverage at a lower cost for the 
employers who participate.
    Ms. Lehnhard. We haven't disputed that. We work with 
associations all the time to minimize costs. They can help us 
with the communication cost. Many times they are younger and 
our small-group pools will be a big mix of older and younger 
groups. There are many reasons why it might be less expensive 
than the State-run pool, particularly if they can work with us 
to minimize some of the administrative costs.
    Chairman Talent. That is one of the points. Mr. Rossmann, 
your plans offer your members more choices. They can join your 
plan, and you offer a number of different choices of coverage 
for them; is that right?
    Mr. Rossmann. That is correct. We offer about 18 different 
plans currently, but if they don't like the association plans, 
they can go out in the open market and buy from anyone else.
    Chairman Talent. So there is more competition; people have 
the market, the competitive market, at their disposal.
    Mr. Rossmann. Yes, sir. And I feel what we are seeing now 
is less and less competition. With State health care reform the 
way that it has been, we are seeing association programs such 
as ours not being able to offer members options, in New York, 
for example, in the under-50 market and in other States.
    Chairman Talent. We know there is less competition in the 
small-group market, right? Ms. Lehnhard has already testified 
that one company controlled 60 percent of it. BlueCross and 
BlueShield. Is that right, Ms. Lehnhard?
    Ms. Lehnhard. No. These are 51 different companies insuring 
60 percent collectively. They are all independent.
    Chairman Talent. But they are all a part of the national 
BlueCross and BlueShield. Your association controls 60 percent 
of the market?
    Ms. Lehnhard. No. We are not in the insurance business.
    Chairman Talent. Do you expect your constituent companies 
to lose market share if this bill is adopted?
    Ms. Lehnhard. No. They expect to gain much of the 
association health plans business, but they think it will be at 
the cost of the people left in the State-insured market.
    Chairman Talent. Okay. I will now recognize Mr. Hill.
    Mr. Hill. Thank you, Mr. Chairman. Just for the record, Ms. 
Lehnhard, did your association support the Patient Protection 
Act or the Patient Bill of Rights, either one of those bills?
    Ms. Lehnhard. No. We are not supporting Federal legislation 
in that area.
    Mr. Hill. I just want to clarify something that you said 
earlier. Under ERISA plans, ERISA plans, exempt plans, can't 
exclude sicker people. Isn't that correct? I mean, they could 
theoretically dissolve a group that was a sicker group, but 
under HIPAA, they can't exclude sicker people now. Is that 
correct?
    Ms. Lehnhard. That is correct.
    Mr. Hill. If this bill was to pass, your members could 
compete for these association plans and would compete for them. 
You just made that statement. Your concern is--and I think 
there is a valid concern, by the way--that having one set of 
regulations, a state-regulated plan, and then having the set of 
plans that are outside of those state regulations, and, in 
essence, what this bill would do would be to allow fully 
insured, multiple-employer, multiple-state groups to be able to 
be exempt from state mandates.
    Ms. Lehnhard. It would also say to self-funded MEWAs or 
health plans, you are not subject to any state law; you are 
regulated by DOL. We think that is where the market would go.
    Mr. Hill. You may be right about that. The question that I 
would ask you is, is that the ERISA plans have been more 
successful in controlling costs and the MEWA plans than the 
state-mandated plans generally. Would you agree with that or 
not agree with that? That is why they exist, isn't it?
    Ms. Lehnhard. No. In fact, we are seeing a trend back from 
self-insured plans to insured plans. I think they have adopted 
the same techniques. Now, an ERISA plan would achieve a 
savings. A large ERISA employer would achieve a savings because 
they don't have to establish the reserves that a state 
requires, and they pay benefits out of their cash flow.
    But in terms of managing health care costs, there is not a 
difference. We have large insured groups, we have large self-
funded groups we administer.
    Mr. Hill. Mr. Rossmann, would you care to address that 
question? Would it be your judgment that the multiple-employer 
plans have been able to contain costs as opposed to the 
individual group plans?
    Mr. Rossmann. I think when you compare them to the smaller-
employer group plans, yes. I think they are more cost effective 
because of the infrastructure that I mentioned. Also, the type 
of plan that you are going to have is through a bona fide 
association. It is not just for some health care purchasing 
pool.
    That is the key, in my mind, the fact that this bill is for 
bona fide associations who are in existence for other things 
than just doing health insurance, but health insurance can be 
an important component of it and can help to keep costs down 
for smaller employers.
    Mr. Hill. Isn't it true that one of the problems with the 
effort to try to create small-group guaranteed issue that we 
haven't really been able to get the real costs of that 
guaranteed issue benefit outside the confines of the small-
group marketplace? Most of the costs of providing that benefit 
have been forced to be captured within that small-group market. 
Would you agree with that statement, Ms. Lehnhard?
    Ms. Lehnhard. I am not sure I understand your question.
    Mr. Hill. Obviously, guaranteed issue is a benefit. The 
costs of providing that benefit should be spread to the largest 
pool possible, but it has been hard to get the costs of that 
benefit out of the pool of small employer groups. The states 
have had a difficult time.
    Ms. Lehnhard. We have a whole history in BlueCross and 
BlueShield of groups saying they don't want to subsidize other 
groups. We used to pool everybody. But the large groups are not 
going to subsidize the small groups. The small groups generally 
don't want to subsidize the individual market.
    Mr. Hill. But large groups already had guaranteed issue. So 
when states went to guaranteed issue and we passed HIPAA to 
provide national guaranteed issue, it was primarily associated 
with the small-group market, correct?
    Ms. Lehnhard. Yes.
    Mr. Hill. And the costs of that benefit have been confined. 
We have had difficulty spreading that out into the other pools. 
You can't spread it to a self-insured association pool. Am I 
correct?
    Ms. Lehnhard. There are no self-insured association pools 
right now. I think that is exactly what the State commissioners 
have said. We have got to keep those pools big and stable.
    I would make the point that the HMO that Mr. Nicholson 
talked about stayed in business. It didn't go out of business. 
It has been there 20 years. It is a State-regulated entity. If 
you look at the history of AHPs or MEWAs, it is a terrible 
history in terms of staying in the market and stability. That 
is why our plans oppose MEWAs--it is not a competitive issue.
    They want a stable market where they can have a retention 
strategy of keeping people and keeping them happy, not 
churning.
    Mr. Hill. We have heard testimony today, though, that is, 
individual state strategies are making it more difficult to 
maintain these association plans because some states aren't 
eligible for those association plans anymore or because of 
state mandates they can't comply with.
    Ms. Lehnhard. We are able to insure association health 
plans in every state. We have that business in every state.
    Mr. Hill. But they are state-by-state association plans as 
opposed to multi-state.
    Ms. Lehnhard. We have national association health plans, 
also. You flip the switch on the computer, and it adjusts the 
benefits. You can do it. We have a lot of them.
    Mr. Hill. The experience in Montana as a consequence of all 
of this is that the small-employer group impact has been about 
a 25 or 28 percent increase in the cost of small-employer group 
insurance. And so employers in Montana are saying there has got 
to be a better option.
    Ms. Lehnhard. I think what will happen, though, is if you 
start setting up these entities in Montana that jump out of 
that State pool, you will have premium increases of 40 percent 
for that pool that is left. Where do they go?
    Mr. Hill. To the associations.
    Ms. Lehnhard. If they can get in.
    Mr. Hill. The last point I want to just ask about this--and 
I would ask all of you to address this. One of the troubling 
aspects of all of this is obviously the effort for guaranteed 
issue, both on the individual and group market, has been to try 
to find a way to help sicker people get insurance. That is an 
appropriate social interest.
    Is it appropriate, though, that we try to contain the cost 
of all of that within the group insurance market or should we 
look for some mechanism to help support that outside the 
insurance mechanism itself?
    Ms. Lehnhard. We have said that we think the states have 
created the pools and you have got to go beyond that for 
subsidies for your very small groups. Thirty-eight percent of 
groups of employees of groups under 10 are uninsured. It is the 
highest rate of any size group. It is your low-wage workers.
    We have urged Congress, get it on the table with all of the 
debate over the surplus. Look at beginning to use those 
resources to help low-wage workers in small groups, either 
through increasing the employer share or the employee share.
    You have to make it easy for small employers because they 
don't have people to handle the administrative costs. We have 
recommended deducting it from their quarterly Social Security 
payment so they have a regular cash flow for it.
    Mr. Hill. Mr. Rossmann.
    Mr. Rossmann. I guess to respond to your question, 
Congressman, what concerns me with state pools or any type of 
pool that you have, as you said, the small-employer market is 
one segment of the whole thing. What concerns me is we have 
less and less competition today than we have ever had before.
    I think that is what makes our country great and that is 
what makes our small employers great, is the fact that they 
compete with each other and are successful with new and 
creative ideas. What we need to do is put more competition back 
into the system.
    I can tell you from ABC's perspective and trying to have 
access. All employers have access to coverage. It is whether or 
not they can afford it right now. From the ABC perspective in 
the last 4 years, about 40 percent of the employers that came 
into the program for the first time were employers that had not 
provided health care coverage to their employees before. It 
wasn't because we have such a great health insurance plan.
    It was basically competition for good quality craft people 
in the labor market. But because they needed to get good people 
to work for their companies, they realized they had to start 
providing benefits.
    Mr. Hill. The competition that you are looking for is, 
obviously, competition among insurers, competition among 
providers. That is the value of the purchasing pool. The point 
that you made earlier--and perhaps you want to comment again--
is that the benefits of that competition accrue to the 
association rather than to the benefit of the insurer.
    Mr. Rossmann. That is absolutely true. If you have an 
association health plan and it has good experience in one given 
year, those benefits stay in that program and inure to the 
benefit of the participants in the plan, rather than going to 
some stockholders.
    Mr. Hill. And that allows you to mitigate for maybe 
increasing costs, slow the increase of premiums to associate 
with that, or, if you have a bad year, to mitigate the impacts 
of that 1 bad year without having to adjust premiums looking 
prospectively, right?
    Mr. Rossmann. Absolutely correct. Yes, sir.
    Mr. Hill. Thank you. Thank you, Mr. Chairman.
    Chairman Talent. Ms. Millender-McDonald.
    Ms. Millender-McDonald. Thank you, Mr. Chairman. Mr. 
Chairman, I regret that I have not seen your bill or your 
proposed bill, and so therefore I can't comment on it. On its 
face it sounds great, but then I need to look at it in its 
totality in order for me to be able to even decide as to 
whether I am going to support it, basically, because what my 
colleague just said.
    We are looking for insurers, insurance companies to insure 
those who are high risk because the low risk really have no 
problems in getting plans. But this plan that you have, several 
questions have come to mind. Mr. Rossmann, before I get into 
the questions, you made a point of saying that this plan is for 
other than for health. Are you talking about the AHP or what 
plan are you speaking of when you speak of this plan is other 
than for health?
    Mr. Rossmann. I am sorry. I don't remember that particular 
point. But ABC has an association plan that offers group life 
insurance, dental benefits, disability benefits, and also 
health insurance to the members so our program covers all 
health and welfare benefits.
    Ms. Millender-McDonald. Okay. Fine. We do recognize that 
plans have to be comprehensive, especially given the fact that 
state plans have to cover to those who are high risk.
    The question to Ms. Lehnhard, do you agree that the state 
plan has to be a broader plan, it has to be a bigger pool so 
that we can take in all of those, albeit high risk, low-risk 
insureds?
    Ms. Lehnhard. That was certainly the objective of the state 
insurance commissioners when they passed these laws. They said 
put all of your--they said to us, you can't run three different 
pools. We can have separate association health plans that are 
insured. But they said for the rest of your small-group 
business, put it all in one pool.
    Ms. Millender-McDonald. When you have these AHP plans, how 
much does it take from the pool of those who are high risk as 
opposed to low risk?
    Ms. Lehnhard. I think the dynamics are that, if we are 
running a state-insured pool with maximum cost subsidy for the 
very sick, and there is a choice of an association health 
plan--it could be an association that is very defined, but it 
could be the chamber of commerce that is basically anybody, 
everybody which becomes an insurance company--they are saying, 
join us and you don't have to pay for substance abuse, you 
don't have to pay for mental health, you don't have to pay for 
all of the bone marrow transplants.
    Ms. Millender-McDonald. So it siphons them out of this 
pool?
    Ms. Lehnhard. The people who don't need the benefits are 
going to move over to that lower-cost option; and when they get 
sick, they are going to move back into the insured pool. They 
tried this in Kentucky. We stayed in that market, but we were 
the only carrier that stayed in that market.
    Many of our plans in different States said, we wouldn't 
stay there. And then that is going to leave a pool of people 
who can't get into the association health plans in some states 
without any coverage.
    Ms. Millender-McDonald. Perhaps they have not had enough 
wherewithal to provide for any of their claims that they should 
have for a very serious and chronic illness.
    Ms. Lehnhard. Very few people can personally cover a 
serious illness.
    Ms. Millender-McDonald. I suppose that is where we are 
going. This is a question that we have, especially for me, 
coming out of Los Angeles. It is so important that we have 
insurance that can cover the at-risk as well as low-risk 
people.
    Mr. Chairman, I don't know what your plan is all about, but 
I am going to have to look at it because I must say that small 
businesses do need a plan. But we have got to make sure that it 
is a plan that encompasses everyone, both the at-risk as well 
as the low-risk. That is where the problem comes when we speak 
about insurance. Thank you, Mr. Chairman.
    Chairman Talent. I thank the gentlelady. Let me ask the 
panel a couple of more questions. Would you say that on the 
whole, currently, ERISA plans or employers who are under ERISA 
plans offer better, more in-depth, wider range of coverages 
than people who are in the small-group market?
    Ms. Gagne. As a broker and consultant for health insurance 
plans for the last 18 years, I would say absolutely that is 
true.
    Chairman Talent. So in other words, employers right now who 
are covered under ERISA, forget about AHPs for a second----
    Ms. Gagne. Just employer and employer group plans.
    Chairman Talent. You have more choices of better coverage 
if you happen to work for one of those, right?
    Ms. Gagne. Sure. They can spread the risk around to all of 
their many members.
    Chairman Talent. They are exempt from the State mandates 
right now.
    Ms. Gagne. If they are self-insured, and the majority of 
them certainly are.
    Chairman Talent. Yet they still for the average individual, 
sick or not, you are better off having access to those plans 
than being on the small-group market, aren't you?
    Ms. Gagne. If it is a stable employer, yes.
    Chairman Talent. Absolutely. There is no question about it. 
So if the ill people are acting rationally, unless they need 
one of the State mandates, they would rather be in a plan 
covered by ERISA than a small group plan. Isn't that right?
    Ms. Gagne. I certainly would be if I was ill.
    Chairman Talent. So absent from the mandate issue, creating 
AHPs nationally is going to tend to draw, is it not, more ill 
people into the AHPs and out of the small-group market, absent 
the mandate issue?
    Ms. Gagne. The mandates that I am familiar with on a state-
by-state basis, generally speaking, don't address the very ill. 
Most of the stock insurance plans that are out there address 
the needs of the very ill. Even when you look at medical 
savings account type plans, high-deductible and high-risk 
plans, they are there to protect the people that are very ill.
    Chairman Talent. Exactly. The average person with diabetes 
or cancer or who is ill because he or she has some kind of 
heart problem, for the vast range of physical illnesses, if you 
are ill and you have a choice or your employer has a choice of 
having you in the small-group market or having you under an AHP 
or ERISA plan, the vast majority would opt for coverage under 
an ERISA plan.
    Ms. Gagne. That is right.
    Chairman Talent. That is exactly right. So far from 
contending with a lot of ill people to be left in the small-
group market, these people are going to run into the AHPs 
because they get lower-cost coverage and they get more choices, 
don't they?
    Ms. Gagne. That is right. Most employers are not making 
benefit decisions on whether or not you cover a mammogram.
    Chairman Talent. Exactly. In fact, many of the ERISA plans 
cover what is mandated by many of the States, don't they?
    Ms. Gagne. And most of the AHPs that are in existence do as 
well.
    Chairman Talent. The argument about AHPs, about quality, 
actually works in the direction of AHPs because what you are 
going to end up with is far more choices with far better 
coverage for far more people. Isn't that right?
    Ms. Gagne. That is absolutely correct.
    Ms. Millender-McDonald. If the gentleman would yield for 
just a second, I would just want to ask will the premium be 
down.
    Chairman Talent. Oh, yes. No question. Even Ms. Lehnhard 
would admit that. That is why she says they are going to move 
because it is going to cost less. She is just saying that the 
coverage is going to be inferior. You are going to get a lot of 
sick people who will stay in the small-group market because 
they need that coverage with those mandates, and we have just 
established that the sick people overwhelmingly on balance are 
going to move into the AHPs.
    Ms. Gagne. If you have a very, very sick person, they are 
going to leave your AHP plan and jump into the State's mandated 
plan because it provides----
    Ms. Millender-McDonald. You say they are or are not?
    Ms. Gagne. The assumption that we have heard today, that 
people will leave the AHP plan and join a plan that is in 
compliance with all state mandates because they have some very 
sick people is just absolutely backwards because they are going 
to stay with the lower-cost plan during those periods of time 
that the plan has got the most stability.
    Ms. Millender-McDonald. Gives you the same mandates that 
the state insurance company does?
    Ms. Gagne. The states mandates, by and large, aren't for 
high-risk problems. The state mandates that are out there deal 
with things like wellness care, very important things, but not 
things that are important necessarily to the person who has 
already been diagnosed with colon cancer.
    Ms. Millender-McDonald. May I just point out----
    Chairman Talent. I will just suspend for just a second and 
I will reclaim any time. Generally, a way to look at this 
mandate situation, I say with the greatest respect, is a bit of 
a red herring. This is the point I made before. Even 
controlling for the mandate issues, looking at AHPs that are 
covered by state mandates compared to the small-group markets 
that are covered by State and the AHPs offer better coverage at 
less cost. That is the point Mr. Rossmann just made. He has an 
AHP like that. He is covered by the State mandates. He is 
offering coverage at less cost because there are efficiencies 
and economies of scale that you get with an AHP apart from the 
mandate issue.
    The only other thing I will say is I am working on the bill 
to try and--I think the direction ERISA ought to go in is we 
ought to have some mandates. Why should you have a country 
where people in the United States have no floor, their 
insurance, because we had 140 million people covered by ERISA 
now.
    I think that we ought to have basic patient protections in 
there and what we ought to be arguing about is what ought to be 
in ERISA and what ought to be protected and not whether to 
allow everybody in the small businesses these economies of 
scale. Ms. Lehnhard, your rebuttal.
    Ms. Lehnhard. In the one State where we do have self-funded 
AHPs, California, they can't set their own benefits. Some of 
those AHPs, for example, have a $20,000 cap on the payout for 
the year. They don't have 365 days of hospitalization. That 
would not happen under state-insured groups.
    I don't think that your bill provides that kind of 
protection. It doesn't allow for a floor of benefits. You could 
have 10 days of hospitalization under the plan with no 
guarantees that it is going to be marketed so that it is clear 
that you only get 10 days of hospitalization.
    Chairman Talent. Well, I will tell you that we had somebody 
from the Western Growers Association from California testify at 
our press conference. As a matter of fact, they brought a 
little girl named Lizette Alvarez. Her mom is a migrant worker 
who worked for one of the members of the Western Growers 
Association operating as an AHP in California. She had one of 
these family plans. I think the cost of hers was about $140 a 
month. She got a heart transplant under that plan. This little 
girl was at the press conference and her mom just said, if it 
hadn't been for this AHP, I wouldn't have had health insurance 
and my little girl wouldn't be here today.
    This is real people. We have been arguing here about people 
who currently have coverage under small group, and are they 
going to get better, and what is going to effect them. What 
about the 43 million people who don't have any coverage? They 
are out there now, and their total cost is being picked up.
    Ms. Gagne. If there is a plan out there in California, 
there very well could be, that is offering a plan that has a 
$20,000 a year benefit, I first would want to know why they 
think that plan is a benefit to their members.
    They wouldn't be offering a benefit plan that their members 
wouldn't buy. That just wouldn't be in their best interests. So 
that $20,000 worth of coverage must be worth something to 
somebody. If it is all that membership can afford for its 
employees, it is certainly better than nothing.
    Mr. Rossmann. I would comment also, Mr. Chairman, that I 
think the association health plans with separate trusts and 
trustees who are actually member firms and participants of the 
program are going to take a look at the benefits that they 
offer to the members who purchase for their employees, and they 
are going to buy comprehensive-type benefits.
    I don't think that you are going to see a complete slashing 
of benefits in association plans because they are providing 
those same things for their employees now.
    Chairman Talent. Plus, when you self-fund, you don't have 
the insurance company's profits to take care of, do you? Right 
there, there is a cost that you don't have.
    Ms. Neese, you wanted to say something. Maybe you can 
comment as an employer and as somebody who deals with employers 
of personnel. Would you rather deal with--if you have a concern 
about your insurance where you think that you would get better 
responsiveness from a NAWBO association person, National 
Association of the Women Business Owners, or from the State 
insurance department, who do you think would be more responsive 
if you had a complaint about your insurance?
    Ms. Neese. NAWBO.
    Chairman Talent. That is kind of easy. I was in the 
legislature for 8 years. I am going to tell you that anybody 
who thinks, with the greatest respect, that people are pleased 
with responsiveness from the State insurance departments is 
going to have a complaint--and maybe I am overstating it. That 
is probably unfair, but I sure have got a lot of constituents 
who weren't very happy about it. Go ahead.
    Ms. Neese. Two things. One is, and I know Congresswoman 
Millender-McDonald wasn't here when I talked about this, but 
Mr. Nicholson and I both had our insurance cancel us. And I 
happen to have someone on the plan who--not during the time 
that we were insured, but prior to the insured time--had had 
two heart attacks and colon cancer.
    And so to go out and try to find somebody that we could get 
our employees insured by after we had been canceled was very, 
very difficult. And this person's insurance premium was about 
$800 a month. These heart attacks and colon cancer was not 
during the time that we were insured by this particular 
company. They had no claims under this insurance company, and 
they canceled us because we didn't have enough numbers for them 
to insure.
    Chairman Talent. But if this bill passed and NAWBO, 
National Association of Women Business Owners, sponsored AHPs, 
that would allow you to buy insurance for that very ill person 
under the same terms as the person who hadn't had that history. 
That would be the law.
    Ms. Neese. Exactly. The other point I want to make, NAWBO 
is a bona fide association. We do a lot of things for our 
members. All of you know the exponential growth right now of 
women business owners and minority-owned businesses.
    And so we are helping a lot of women go out and start their 
own companies. Once they do, we provide a lot of education and 
training. We have partners that partner with us on capital 
financing and a number of different issues like that.
    So this would be a great recruiting tool for us as well to 
go out and pull a lot of the women business owners that don't 
have insurance right now to come into our association, and we 
could assist them with their insurance needs.
    Ms. Millender-McDonald. Even someone with a preexisting 
illness?
    Ms. Neese. I would certainly hope so.
    Ms. Gagne. They are required to by law.
    Ms. Neese. And not only be able to provide them with 
insurance, a great recruiting tool for us because there are so 
many women business owners today; but also when they come in, 
we can provide them with so much education and training to 
continue to build their business and grow their company and 
hire more people. So it would be a great thing for NAWBO.
    Chairman Talent. The gentlelady from New York has another 
question or two.
    Ms. Velazquez. We have heard today that currently existing 
AHPs include state mandates in terms of their coverage. If this 
is the case, why then allow AHPs to be exempted from state 
minimum benefits?
    Mr. Rossmann. I can't say. Speaking specifically for ABC, I 
do not think that we would eliminate all state mandates if the 
AHP provisions of H.R. 1496 passed. What we need to do is to 
compete in the open market to get our members to purchase the 
insurance coverage through their association health plan. So to 
say that, carte blanche, the association trust would drop 
mandated benefits, I don't think that would occur.
    Ms. Velazquez. Ms. Lehnhard.
    Ms. Lehnhard. I don't know if I need to respond. I don't 
know why they feel a need to drop the mandated benefits.
    Chairman Talent. If the gentlelady would yield, what I am 
trying to do--this bill goes back to before me--but the reason 
that I want at least a partial exemption is that some of the 
state mandates--and I was in the legislature. The hair plugs or 
dance therapy or that sort of thing, I do think drive up costs 
without really meeting any kind of broad-base needs.
    I would like to have some kind of a definition where we 
allow the mandates that provide a floor for decent quality 
coverage for people. I might could put that in the rest of 
ERISA also.
    Ms. Velazquez. Mr. Rossmann, I believe that there is a 
difference between cookie cutters and minimums. Could we all 
agree that there is a minimum, that women who have a C-section 
birth are entitled to a minimum stay in a hospital or that 
there is a minimum number of PAP smear or breast exams that 
people are entitled to?
    Mr. Rossmann. I think that we have those provisions in law 
right now. As I mentioned earlier, under ABC's plan we provide 
coverage for PAP smears and annual mammograms.
    Ms. Velazquez. I am talking about under this bill.
    Mr. Rossmann. Under this bill?
    Ms. Velazquez. Yes.
    Mr. Rossmann. Again, I think it goes back to the 
associations having the ability to be competitive. If the 
market is going to require that, which it seems to me now that 
the market does require that, to make sure that we have 
physicals and coverage for wellness benefits, that in all 
probability you are going to see association health plans do 
that type of thing voluntarily.
    Ms. Velazquez. So what you are telling me is that in order 
to be competitive that we will do that at the expense of how 
many breast exams a woman can have under this legislation?
    Mr. Rossmann. No, ma'am. I said they would include those in 
order to be competitive with the rest of the insurance 
industry. I didn't mean to say that would exclude it. I meant 
they would include it just as we have it included today.
    Ms. Gagne. I think the Boys & Girls Clubs operates in 42 
States. Without exception, every time a State has mandated a 
benefit that made good sense, whether it was the coverage of 
mammograms or coverage of reconstruction surgery after a breast 
cancer, they have adopted those things.
    I can't speak across the board for all association health 
plans. There are probably health plans out there to which that 
coverage is not that important. If it is not that important, it 
is probably also not that expensive. Those aren't the things 
that are stopping association health plans from growing and 
from being in existence today. It is state-by-state warfare 
against self-assured association health plans.
    Ms. Millender-McDonald. Why is that? Why is there a war?
    Ms. Gagne. Well, I think the reasons are very complex, but 
there seems to be a strong desire to keep the small-employer 
business in the State and to not allow--for instance, for the 
Boys & Girls Clubs to go into the State of Missouri and insure 
four Boys & Girls Clubs in that State for some reason seems to 
threaten--and Ms. Lehnhard has expressed that, that we are 
somehow deteriorating the small-employer group pool there.
    I don't understand that argument very well either. It 
doesn't make any sense to me. We are providing insurance there, 
and that would seem to me to be a mainstay and a goal of the 
State of Missouri.
    Ms. Millender-McDonald. Ms. Gagne, do you have data and 
statistics to show that you have a large percentage of high-
risk people in the AHPs?
    Ms. Gagne. I can speak to our AHPs. We have all risks. We 
have never denied anybody or walked away from anybody. We have 
insured premature twins 2 years ago who both ran close to a 
million dollars apiece, and they are still on the plan today. 
We haven't been able to preclude coverage to anybody based on 
health risk status.
    But in order to compete, if I started to do that under any 
pretense to select my risk, the Boys & Girls Clubs, whom I 
serve, would quickly say that is not a plan I would support. I 
don't trust that plan. That plan is not going to be the one 
that I need. I am going to find the rock solid insurance 
coverage that I need to protect my employees.
    Ms. Millender-McDonald. Ms. Lehnhard, your concerns are 
what? Can you outline to me your concerns to the AHPs?
    Ms. Lehnhard. We think AHPs are a good thing. You have 
heard that they are very successful. They are regulated right 
now by the states, and they meet the state-mandated benefits. 
And we think that is--it is appropriate.
    Our concern is if you start to run a dual system that says 
you can choose, you can choose whether to be under the state-
insured market and you have to provide--it is not the hair 
transplants--it is mental health and substance abuse. Those are 
significant benefits.
    And you can choose whether you want to have that or a plan 
that doesn't have any of the State-mandated benefits, you are 
going to get a skewing of the market so that the people who 
need those benefits are in the State-insured pool, and those 
who don't need it move out, and it is not a sustainable 
business.
    Our plans have said we can't manage a pool of people who by 
definition need these mandated benefits, particularly when in 
the year that they don't need them they can go into the 
association health plan. Under HIPAA, we have to take them 
right away. We can't refuse anybody, and they can move back and 
forth very freely.
    Ms. Millender-McDonald. I keep hearing you cannot refuse, 
and yet you are saying, Ms. Gagne, she is saying, Ms. Lehnhard 
is saying you cannot refuse people period. But what she is 
saying as I am hearing, that there are some AHPs that do not 
have the high-risk people, therefore leaving them in the larger 
pool in the State as opposed to--and siphoning off the ones who 
are low risk who can afford to go to an AHP and get better 
services.
    Ms. Gagne. I don't think that there is any experience of 
that happening. What Ms. Lehnhard has said is that BlueCross 
and BlueShield across the country actually insure a large 
number of AHPs. The majority of them have their insurance and 
their claims administration done there. They cannot alienate 
people under those plans any more than they can under any other 
plan.
    Ms. Millender-McDonald. So the difference you are 
suggesting is that the Department of Labor should not be the 
one to oversee AHPs as opposed to the State?
    Ms. Lehnhard. That is the other issue. The associations 
represented at this table are legitimate associations. Their 
products are regulated by the state now. We are talking about a 
sea change where the entities, essentially insurance companies 
that are behind the AHPs running the product, are not going to 
be regulated by the State. They are going to be regulated by 
DOL, which means no regulation.
    Ms. Millender-McDonald. Are you suggesting that?
    Ms. Lehnhard. That is what the legislation does.
    Chairman Talent. The legislation permits the DOL to give 
the job to the State of doing the regulation if the DOL feels 
they can't do it. There are 140 million people covered by ERISA 
plans regulated by the Department of Labor. If they are not 
regulating them, I think we need to know that for purposes far 
beyond this bill.
    Ms. Lehnhard. A large employer is very different than a 
collection of small employers which is essentially running an 
insurance company because you have all of the issues that an 
insurance company has. When you are insuring groups of small 
businesses, that is an insurance company function.
    Ms. Millender-McDonald. Not to be gender biased, but I 
suppose I am at this juncture, Ms. Neese, Ms. Lehnhard, and Ms. 
Gagne, are you locally located where I can get back and talk 
with you three perhaps at another time?
    Ms. Neese. I am in the District about 2 weeks out of every 
month.
    Ms. Millender-McDonald. I want to see how this falls on the 
side of women.
    Ms. Gagne. I am not local, but the Boys & Girls Workers 
Association is in full support of this bill and would make me 
available.
    Ms. Millender-McDonald. Thank you, Mr. Chairman.
    Chairman Talent. Does the gentlewoman from New York have 
any other questions?
    Ms. Velazquez. No.
    Chairman Talent. I want to work with people on this mandate 
issue. I am a big believer that ERISA ought to cover basic, 
good quality care. I don't think that is the basic issue here. 
In fact, I think if we create these things nationally, we are 
going to see on balance the sicker people tending to go into 
these plans.
    So the mandate, I believe, is a discrete issue that we can 
deal with. We ought to be able to draw this law so we can have 
some reasonable mandates in here without including everything 
that drives up cost without achieving much, and I am happy to 
work with anybody who wants to try to do that.
    I am reminded that I should without objection keep the 
record open for 10 days of additional questions or statements 
that members of the Committee would like to make. I thank the 
gentlewoman from New York and appreciate all of the witnesses, 
especially those who came a long way for this. Thank you.
    [Whereupon, at 1:30 p.m., the committee was adjourned.]



    [GRAPHIC] [TIFF OMITTED]60579.001
    
    [GRAPHIC] [TIFF OMITTED]60579.002
    
    [GRAPHIC] [TIFF OMITTED]60579.003
    
    [GRAPHIC] [TIFF OMITTED]60579.004
    
    [GRAPHIC] [TIFF OMITTED]60579.005
    
    [GRAPHIC] [TIFF OMITTED]60579.006
    
    [GRAPHIC] [TIFF OMITTED]60579.007
    
    [GRAPHIC] [TIFF OMITTED]60579.008
    
    [GRAPHIC] [TIFF OMITTED]60579.009
    
    [GRAPHIC] [TIFF OMITTED]60579.010
    
    [GRAPHIC] [TIFF OMITTED]60579.011
    
    [GRAPHIC] [TIFF OMITTED]60579.012
    
    [GRAPHIC] [TIFF OMITTED]60579.013
    
    [GRAPHIC] [TIFF OMITTED]60579.014
    
    [GRAPHIC] [TIFF OMITTED]60579.015
    
    [GRAPHIC] [TIFF OMITTED]60579.016
    
    [GRAPHIC] [TIFF OMITTED]60579.017
    
    [GRAPHIC] [TIFF OMITTED]60579.018
    
    [GRAPHIC] [TIFF OMITTED]60579.019
    
    [GRAPHIC] [TIFF OMITTED]60579.020
    
    [GRAPHIC] [TIFF OMITTED]60579.021
    
    [GRAPHIC] [TIFF OMITTED]60579.022
    
    [GRAPHIC] [TIFF OMITTED]60579.023
    
    [GRAPHIC] [TIFF OMITTED]60579.024
    
    [GRAPHIC] [TIFF OMITTED]60579.025
    
    [GRAPHIC] [TIFF OMITTED]60579.026
    
    [GRAPHIC] [TIFF OMITTED]60579.027
    
    [GRAPHIC] [TIFF OMITTED]60579.028
    
    [GRAPHIC] [TIFF OMITTED]60579.029
    
    [GRAPHIC] [TIFF OMITTED]60579.030
    
    [GRAPHIC] [TIFF OMITTED]60579.031
    
    [GRAPHIC] [TIFF OMITTED]60579.032
    
    [GRAPHIC] [TIFF OMITTED]60579.033
    
    [GRAPHIC] [TIFF OMITTED]60579.034
    
    [GRAPHIC] [TIFF OMITTED]60579.035
    
    [GRAPHIC] [TIFF OMITTED]60579.036
    
    [GRAPHIC] [TIFF OMITTED]60579.037
    
    [GRAPHIC] [TIFF OMITTED]60579.038
    
    [GRAPHIC] [TIFF OMITTED]60579.039
    
    [GRAPHIC] [TIFF OMITTED]60579.040
    
    [GRAPHIC] [TIFF OMITTED]60579.041
    
    [GRAPHIC] [TIFF OMITTED]60579.042
    
    [GRAPHIC] [TIFF OMITTED]60579.043
    
    [GRAPHIC] [TIFF OMITTED]60579.044
    
    [GRAPHIC] [TIFF OMITTED]60579.045
    
    [GRAPHIC] [TIFF OMITTED]60579.046
    
    [GRAPHIC] [TIFF OMITTED]60579.047
    
    [GRAPHIC] [TIFF OMITTED]60579.048
    
    [GRAPHIC] [TIFF OMITTED]60579.049
    
    [GRAPHIC] [TIFF OMITTED]60579.051
    
    [GRAPHIC] [TIFF OMITTED]60579.052
    
    [GRAPHIC] [TIFF OMITTED]60579.053
    
    [GRAPHIC] [TIFF OMITTED]60579.054
    
    [GRAPHIC] [TIFF OMITTED]60579.055
    
    [GRAPHIC] [TIFF OMITTED]60579.056
    
    [GRAPHIC] [TIFF OMITTED]60579.057
    
    [GRAPHIC] [TIFF OMITTED]60579.058
    
    [GRAPHIC] [TIFF OMITTED]60579.059
    
    [GRAPHIC] [TIFF OMITTED]60579.060
    
                                
