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

                       ASSOCIATION HEALTH PLANS--




                               before the

                      COMMITTEE ON SMALL BUSINESS
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                             WASHINGTON, DC


                           FEBRUARY 16, 2000


                           Serial No. 106-43


         Printed for the use of the Committee on Small Business

                            WASHINGTON : 2000

                      COMMITTEE ON SMALL BUSINESS

                  JAMES M. TALENT, Missouri, Chairman
LARRY COMBEST, Texas                 NYDIA M. VELAZQUEZ, New York
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
DAVID M. McINTOSH, Indiana               Virgin Islands
RICK HILL, Montana                   ROBERT A. BRADY, Pennsylvania
JOSEPH R. PITTS, Pennsylvania        TOM UDALL, New Mexico
JOHN E. SWEENEY, New York            DENNIS MOORE, Kansas
JIM DeMINT, South Carolina           CHARLES A. GONZALEZ, Texas
EDWARD PEASE, Indiana                DAVID D. PHELPS, Illinois
JOHN THUNE, South Dakota             GRACE F. NAPOLITANO, California
MARY BONO, California                BRIAN BAIRD, Washington
                                     MARK UDALL, Colorado
                                     SHELLEY BERKLEY, Nevada
                     Harry Katrichis, Chief Counsel
                  Michael Day, Minority Staff Director

                            C O N T E N T S

Hearing held on February 16, 2000:                                   01


Wilson, Paul, Executive Director, North American Equipment 
  Dealers Association Group Insurance Trust......................    05
Baumgardner, James R., Acting Deputy Assistant Director for 
  Health Policy, Congressional Budget Office.....................    07
Lehnhard, Mary Nell, Senior Vice President, Blue Cross Blue 
  Shield Association.............................................    09
Joensen, Mark, Vice President and Director of Health Care 
  Analysis, Consad Research Corporation..........................    11
Kaplan, Arlene, CEO & Founder, Heart-to-Home.....................    13
Gallo, Richard, Owner, The Office Outlet.........................    15


Opening statements:

  Talent, Hon. James.............................................    45
  Christian-Christensen, Hon. Donna..............................    48

Prepared statements:

  Wilson, Paul...................................................    49
  Baumgardner, James R...........................................    56
  Lehnhard, Mary Nell............................................    60
  Joensen, Mark..................................................    82
  Kaplan, Arlene.................................................    86
  Gallo, Richard.................................................    92

Additional material:

  CBO Papers, ``Increasing Small-Firm Health Insurance Coverage 
    Through Association Health Plans and Healthmarts'', 
    Congressional Budget Office..................................    95



                      WEDNESDAY, FEBRUARY 16, 2000

                          House of Representatives,
                               Committee on Small Business,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 10:00 a.m., in 
room 2360, Rayburn House Office Building, Hon. James M. Talent 
[chairman of the Committee] presiding.
    Chairman Talent [presiding]. I am going to go ahead and get 
the hearing going. I congratulate the Committee on its 
wonderful attendance.
    As regular attendees of Small Business Committee hearings 
know, members come in as the hearing goes on, and I would hope 
we will have a good attendance before long.
    Unless there is a problem, I will go ahead, and then when 
the Ranking Member comes, be happy to allow her to give her 
opening statement at that time.
    Good morning ladies and gentlemen, and welcome. We meet 
today to continue our discussion on expanding access to health 
insurance for the small business community. The difficulty of 
purchasing quality, affordable health care continues to plague 
small business. In fact, small business owners, their 
employees, and their families represent over 60 percent of the 
44 million uninsured in the United States.
    I speak on a daily basis to small business owners who want 
to provide health benefits to their employees but cannot afford 
to do so. I hear from others who are able to offer insurance, 
but face the possibility of double-digit rate increases that 
would force them to cancel their plans. And still others 
complain that due to the high cost of their plan, they are 
forced to offer fewer benefits to their employees or raise 
their deductibles so high that many employees cannot afford to 
cover themselves and their families.
    These small business people want and need to offer high 
quality, affordable health benefits. For example, a small ``mom 
and pop'' hardware store must compete with Home Depot to 
attract and retain quality employees. In our tight labor 
market, health benefit packages are essential. It is unfair 
that a small ``Main Street'' hardware store cannot access the 
same economies of scale, administrative efficiencies, and 
purchasing clout that Home Depot and other large businesses 
enjoy when purchasing health insurance. If such things are good 
for big business, why are they not good for small business?
    To address these needs, Representative Harris Fawell 
introduced Association Health Plan legislation several years 
ago. AHPs empower small business owners, who cannot afford to 
offer health insurance to their employees, to access insurance 
through bona fide trade and professional associations. In other 
words, AHPs offer national trade and professional associations, 
from the National Restaurant Association, to the American Farm 
Bureau, to groups like the National Association of Women 
Business Owners, to respond to the needs of their membership 
and sponsor health care plans.
    The small business owners and farmers who are members of 
these associations can buy into these plans for themselves, 
their employees, and their dependents. These Association Health 
Plans would cover very large groups, enjoy economies of scale, 
and have the option to offer self-funded plans which would not 
have to provide any margin for insurance company profits.
    Since its inception, AHP language has been revised and 
improved to strengthen both solvency requirements and state 
enforcement provisions in response to concerns. I am confident 
that AHPs will allow associations the flexibility to design 
comprehensive, affordable benefit packages that meet the needs 
of their membership. They will promote health care 
accessibility for a segment of the population that is greatly 
underserved by our Nation's health care system--the small 
business community.
    Today's hearing will continue a productive dialogue which 
began at a hearing we held back in June. Since that first 
hearing, we have seen some progress in Congress' quest to 
improve our Nation's health care system and reduce the number 
of uninsured. In early October, the House passed H.R. 2990, 
legislation which contained several access provisions, 
including AHPs. Later this month, a Conference Committee, of 
which I am a member, will meet to discuss the Senate and House 
versions of the bill. I am committed to insuring that AHPs are 
included in the final conference report.
    Today we have assembled a knowledgeable panel of witnesses 
who will help us further explore the potential benefits of 
AHPs. We will hear testimony regarding recent data projecting 
the potential impact of Association Health Plans. Additionally, 
we will hear from an Association Health Plan administrator, a 
representative of the insurance industry, and two small 
business owners. I am looking forward to the testimony of all 
    Now would be the point at which I would recognize Ms. 
Velazquez for her opening comments. Since we have a vote anyway 
and since she is not here to give those comments, I think what 
I will do is adjourn the meeting, go vote, and then come back, 
and see if Ms. Velazquez is here to give her comments. 
Otherwise, we will go ahead with the witnesses.
    We are going to recess the meeting.
    Chairman Talent. All right. We will reconvene the hearing, 
and I will recognize the gentlelady from New York for her 
opening comments.
    Ms. Velazquez. Thank you, Mr. Chairman, for holding today's 
hearing on Association Health Plans.
    I would like to commend you for your continued efforts to 
help small businesses provide health insurance coverage for 
their employees. I am happy to work with you on this issue, and 
last year I was one of an original co-sponsor of your bill to 
provide an immediate 100 percent deduction for health care 
    This is a critical issue not only for the small business 
community but for millions of uninsured Americans. I hope that 
today's hearing will provide us with a greater understanding of 
this problem and possible solutions.
    Despite the booming economy and growth of the stock market, 
almost 43 million Americans are still without basic health 
insurance. Of these 43 million uninsured, almost 60 percent are 
either self-employed or have a family 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, 
42.6 million workers, obtained health insurance through their 
employer or their spouse's employer, but 28 percent are 
uninsured. These 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 often simply 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.
    Earlier this year, this Committee looked at one solution to 
address the cost and access to help small business with health 
care. That solution was 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. AHPs 
will be small business purchasing entities that could benefit 
from economies of scales and greater purchasing power. AHPs 
will reduce the number of uninsured workers, although it is 
unknown by exactly how many.
    Today, we continue that examination of AHPs as we hear from 
the Congressional Budget Office on a recent study it released. 
Despite the promise of reducing the number of uninsured, the 
CBO study paints a different picture and raises serious 
concerns on health plans that need to be addressed.
    The CBO study found that AHPs will only have a slight 
effect on insurance coverage nationwide, increasing the number 
of people insured through small firms by 330,000 individuals. I 
am interested in hearing from CBO on its findings and rationale 
as to the drastic contrast and comparison it reached while 
conducting the study's research.
    I also believe that the study brings up an important issue 
for this Committee to review. Concerns have been raised by a 
number of different groups that AHPs which seek out or attract 
employers with low-risk workers will weaken the equitable small 
business risk pools that States have spent years trying to 
    A result may be the firms with above average risks could 
find their insurance rates climbing steeply as low-risk, small 
firms join Association Health Plans. These are all issues that 
must be addressed in relation to Association Health Plans.
    In closing, I would like to thank the chairman for holding 
today's hearing and 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, and the gentlelady 
and I have an agreement. We normally follow that she and I will 
make the opening statements. However, as members know, when a 
member of the Committee feels strongly and wants to make brief 
remarks, I will deviate from that as long as it doesn't get to 
the point where it really slows down the hearing.
    And I understand Mr. Sweeney would like to make some brief 
opening statements.
    Mr. Sweeney. Yes. Thank you, Mr. Chairman.
    Chairman Talent. I would be happy to recognize him for 
    Mr. Sweeney. Let me commend you for conducting this 
hearing. Let me say that I apologize, but I will have to step 
out and go to another Committee markup, and that is why I would 
like to at least have a statement submitted for the record and 
recognize that the numbers here are pretty overwhelming, as my 
colleague from New York pointed out, that over 44 million 
Americans are uninsured, and 60 percent of that 44 million are 
small business owners. And we know that small businesses and 
self-employers put their money and their assets into their 
business, and the price of insurance for small companies is 
astronomical. This oftentimes really puts a small business 
owner between a rock and a hard place, and this is a particular 
concern to me, because 90 percent of the employment in my 
district is derived from small businesses.
    Let me finally just say that I strongly believe in a 
market-based system, and I look forward to the testimony of our 
witnesses to help us begin to look at opportunities to resolve 
this issue, and I again commend you and the ranking member for 
conducting this hearing.
    Chairman Talent. I thank the gentleman. We certainly 
understand. I have another hearing going on at the same time 
myself, a markup, and may have to step out for a few minutes 
from time to time.
    All right. We will go right to the first witness who is Dr. 
Paul Wilson, and I am very pleased to welcome Paul, in part, 
because he is so knowledgeable and, in part, because he comes 
from my district in Missouri. Dr. Wilson is a Certified 
Employee Benefit Specialist and is currently the Executive 
Director of the Association Health Plan for the North American 
Equipment Dealers Association located in St. Louis.
    And I just want to say for the members that Association 
Health Plans do operate sporadically on a State-by-State basis 
around the country, notwithstanding that there is no provision 
for them under Federal law. And Dr. Wilson is the executive 
director of such an association.
    Dr. Wilson.


    Mr. Wilson. Thank you, Mr. Chairman.
    I am Dr. Paul Wilson, and for the last 23 years I have 
served as executive director of the Association Health Plan for 
the North American Equipment Dealers Association, which has 
been located in St. Louis since the year 1900.
    I am here today in my position as vice president of The 
Association Health Care Coalition--I will refer to that later 
as TAHC--which exists for the purpose of preserving the ability 
of bona fide trade and professional associations to provide 
high-quality health insurance coverage to American workers.
    Today, I will briefly describe how Association Health Plans 
have been serving small business for the last 50 years and why 
the reforms of H.R. 2990 are so badly needed in order to 
protect the health coverage of workers. I will also comment on 
the recent report by the Congressional Budget Office.
    I first want to commend you, Mr. Chairman, for your 
outstanding leadership on this issue of health insurance reform 
for small business. There is an immediate threat to bona fide 
association plans and their insured workers. NAEDA--that is the 
organization that I mentioned earlier, the North American 
Equipment Dealers--is representing TAHC today because of the 
immediacy of the circumstances which confront our Association 
Health Plan. These circumstances apply to many of TAHC's 
    NAEDA established an Association Health Plan in 1949 to 
provide farm and construction equipment dealers in mostly rural 
communities with affordable health benefits. This was 
necessary, because many insurance companies then seemed more 
interested in serving urban and suburban areas rather than 
rural communities.
    We now face a very serious situation which jeopardizes the 
health insurance coverage of the workers covered by our plan. 
The proliferation of State regulations and mandates have made 
it likely that our association plan will end July 1, 2000. We 
have recently been informed by ourinsurance carrier, UniCare, 
that our association policy will not be renewed on that date as it 
applies to small group health coverage for employers with less than 50 
employees. Rather, UniCare wants to transition our business now to 
small group lines of theirs which will reduce health plan options to 
our members in all but six States.
    We have contacted more than 50 insurance carriers, but none 
want association business. They tell us it is just too costly 
to comply with regulations and mandates which differ in each 
    Assuming that our 50-year association plan comes to an end 
July 1, we are now faced with a very burdensome question: Will 
the employees and families currently served by our health plan 
be able to obtain similar high-quality coverage at rates their 
workers can afford by negotiating directly with the insurance 
companies, on their own, and without the assistance of an 
association plan and staff? My experience has shown that when 
insurance carriers underwrite new accounts, roughly 40 percent 
of the firms do not get the lowest quotation due to the health 
status of employees. In our situation, each of the carriers 
will likely rate-up or rate-down our members based on new 
account underwriting case characteristics which often include 
individual employee health statements.
    NAEDA strongly believes that our members would have more 
affordable coverage if we were able to continue as an AHP. 
Prompt enactment of H.R. 2990 is our only chance to continue as 
an AHP.
    Many years of experience of TAHC's membership puts us in a 
good position to comment on the CBO report. We believe the CBO 
report dramatically underestimates the value of AHP's to small 
business, and therefore underestimates the number of uninsured 
people who could gain coverage if AHP reforms were enacted.
    Attached to my written statement is a short peer review of 
the CBO study by Dr. Donald Westerfield, professor of 
Statistics and Economics at Webster University in St. Louis. 
Dr. Westerfield found that CBO did not account for wage 
differentials, health care package composition differentials, 
and premium contribution differentials between employers and 
employees, among other things, between large and--categories of 
large and small firms. Thus, CBO is comparing apples, oranges, 
and bananas. Dr. Westerfield concludes that a study normalizing 
the relevant data would much more effectively capture the cost 
savings that associations can provide to small business.
    We believe the report does not recognize the fact that bona 
fide AHPs have a long track record of reducing health insurance 
costs for small businesses through operating efficiencies, such 
as economies of scale, greater bargaining power to negotiate 
discounts, and regulatory uniformity.
    For example, at NAEDA, we know that we historically have 
provided savings of at least 8 percent of administrative 
expenses due to the economies of scale of our AHP. Associated 
Building and Contractors has a plan with administrative costs 
of about 13.5 percent compared with administrative costs of 20 
to 30 percent for similar coverage purchased through an 
insurance company.
    These are just two examples, and there are many others, but 
the CBO report simply does not acknowledge this reality, which 
we have seen demonstrated for 50 years.
    Second, CBO's statistical analysis does not reflect the 
dynamics of the market when it assumes that AHPs will attract 
mostly low-risk populations. This ignores the reality in 
today's economy that small employers must offer competitive 
benefit packages in order to compete for quality employees, 
especially when they compete against large employers.
    After working with small employers on a daily basis for the 
last 23 years, I can attest to the fact that they must offer 
high-quality benefit packages at the lowest possible cost out 
of economic necessity. AHPs that serve small businesses will be 
driven to offer affordable, attractive benefit options through 
operating efficiencies and offering innovative new products. 
Businesses with truly high-risk populations will be able to 
obtain savings on high-quality benefit packages due to the 
savings achieved. Again, the CBO report does not acknowledge 
this reality; rather, it assumes that small employers will 
always seek the smallest possible benefit package for their 
    To summarize, TAHC believes that CBO substantially 
underestimated the benefits of association group purchasing and 
an injection of healthy competition into health insurance 
    Finally, I must address comments by the Blue Cross Blue 
Shield Association in a statement released concerning the CBO 
report. They say that AHP legislation is merely a shell game. 
This is disingenuous coming from insurance companies which are 
engaged in their own shell games. Insurance carriers are 
actively target marketing to limited segments of the population 
while quietly avoiding the rest. Many other strategies 
practiced by insurance companies are described in my written 
report, and these amount to adverse selection against small 
business, and this is the real shell game going on today.
    It is incumbent upon policymakers to establish policies 
which promote ways of getting health insurance to those people 
in communities that insurance companies are not interested in 
serving. AHPs are already filling this role and can do a much 
better job if given the proper tools and regulatory 
environment. TAHC strongly urges Congress to enact the AHP 
reforms in H.R. 2990 towards this end.
    Thank you very much, Mr. Chairman.
    [Mr. Wilson's statement may be found in appendix.]
    Chairman Talent. Thank you, Dr. Wilson.
    Our next witness is Mr. James Baumgardner who is the Acting 
Deputy Assistant Director for Health Policy of the CBO.


    Mr. Baumgardner. Thank you, Mr. Chairman and members of the 
Committee. I am pleased to be here today to discuss the 
provision of employer-sponsored health insurance by small 
firms. The Congressional Budget Office recently completed a 
paper on that topic entitled ``Increasing Small-Firm Health 
Insurance Coverage Through Association Health Plans and 
HealthMarts,'' and I ask that that report be included in the 
    My comments today will focus on three aspects of CBO's 
report: First, the circumstances that contribute to the 
relatively low rates of health insurance coverage through small 
firms; second, a summary of the rules that would apply to the 
proposed association health plans and HealthMarts, and finally, 
CBO's estimate of how the introduction of AHPs and HealthMarts 
would affect the number of people insured through small firms 
and the premiums they face.
    Employees of small firms are less likely to have health 
insurance than are employees of large firms. For 1996, data 
from the Medical Expenditure Panel Survey indicate that about 
40 percent of employees in small firms--those with fewer than 
50 workers--obtained health insurance through their employer. 
In contrast, almost 70 percent of workers in firms of 100 or 
more employees obtained coverage through their job.
    Several factors appear to play a role in the lower rate of 
insurance coverage through small employers. Workers in small 
firms, on average, have lower wages and lower family incomes 
than workers in large firms. As a result, small-firm employees 
are less able to afford comprehensive health insurance, and 
less of a tax incentive exists for providing health insurance 
through their employer.
    Small firms typically face higher costs for providing a 
given benefit package than do larger firms because of higher 
administrative expenses per enrollee and less purchasing power.
    Small firms generally purchase insurance that is subject to 
State benefit mandates and other regulations, which tend to 
increase average premiums. Firms that self-insure--mostly large 
firms--are exempted from those State insurance rules by the 
Employee Retirement Income Security Act, ERISA.
    Recent proposals would establish federally certified AHPs 
and HealthMarts, entities that would offer health plans to 
participating employers. Trade, industry, or professional 
associations that had been in existence for at least 3 years 
could sponsor an AHP, which would have to offer its insurance 
products to all member firms. HealthMarts, in contrast, would 
have to be available to all small firms in a specific 
geographic area rather than be offered in conjunction with an 
    To explore the effects of AHPs and HealthMarts, CBO 
constructed an analytical model using assumptions based on the 
relevant economics literature. We estimate that about 4.6 
million small-firm employees and their dependents would receive 
coverage through the new insurance vehicles, but most of those 
individuals would have obtained insurance even if current law 
remained unchanged. On balance, about 330,000 more people would 
be covered through small-firm employment than would otherwise 
have been the case. That represents a 1.3 percent increase in 
coverage through small firms.
    Because of lower premiums, some small firms would begin to 
offer their employees coverage through AHPs and HealthMarts, 
and others would shift from coverage obtained in the 
traditionally regulated market to the new entities. Firms that 
moved to the new plans would, on average, pay premiums that 
were about 13 percent lower than they would have faced in the 
traditional market under current regulations. They would be 
paying less money for less insurance, however, since some of 
those premium savings would be the result of a less generous 
benefit package.
    Introducing AHPs and HealthMarts would be likely to lead to 
some selection. For plans that were fully State regulated, the 
proportion of firms with higher expected health costs would 
rise after the new AHPs and HealthMarts became established. 
Consequently, firms remaining in the traditional insurance 
market would see an average increase in premiums of about 2 
    The impact of AHPs and HealthMarts would vary from State to 
State, depending on the extent of State insurance regulation. 
In general, States that were more highly regulated would be 
riper markets for the new entities, as would areas with greater 
concentrations of small firms. The actual outcome of the 
proposed legislation would also depend on the activities of the 
regulatory authorities responsible for AHPs and HealthMarts.
    That concludes my statement. I will be happy to answer any 
    [Mr. Baumgardner's statement may be found in appendix.]
    Chairman Talent. And, without objection, your report will 
be entered into the record.
    Our next witness is Mary Nell Lehnhard who is the senior 
vice president of Blue Cross and Blue Shield Association.
    Ms. Lehnhard.


    Ms. Lehnhard. Mr. Chairman, members of the Committee, I 
appreciate the opportunity to testify on this legislation.
    Blue Cross and Blue Shield Plans share your commitment to 
small employers and their employees. We want to assure that 
small employers have coverage options that are as affordable as 
possible, of high quality, and responsive to the employer-
employees' needs. We are actively supporting Federal 
legislation to make coverage more affordable for small 
employers through a system of tax credits.
    I would like to make two points today. The first one is 
that States have enacted legislation to stop the most egregious 
and most destructive practice in the small group market--
insurers reducing premiums by selecting or as they call it 
``cherry picking'' the best risks and avoiding those employer 
groups who are sick. This practice was rampant in the eighties, 
and the States effectively stopped it with their small group 
    The bottom line then was that if your group had even one 
sick employer family member, your coverage was unaffordable, no 
one wanted your business. The States are now telling Congress 
that the AHP legislation would take us back to the days of 
competition based on risk selection and coverage for the 
sickest groups costing multiples of the coverage for the 
healthy groups.
    I would like to submit for the record letters from the 
Republican Governors Association, the National Governors 
Association, the National Council of State Legislators, and the 
National Association of Insurance Commissioners, all urging the 
Congress not to enact this legislation.
    My second point is that credible research reports what Blue 
Cross and Blue Shield Plans have been telling us and what the 
States are saying, that exempting some insurers or health 
plans, which is what AHPs are, from State law and oversight is 
bad public policy and will completely pull the rug out from 
under their success and stopping ``cherry picking'' at the 
State level. We have brought this research to you before from 
Barents and others confirming this, but I would highlight the 
key findings of the recent CBO report.
    First, AHPs will not significantly affect the number of 
insured. Yes, for the 330,000 people that get coverage it is 
very significant, but the proponents have been alleging that 
AHPs would result in up to 8.5 million people receiving 
coverage that were previously uninsured. Again, CBO's estimate 
is 330,000.
    Second point, CBO found that the slight increase in 
coverage would result from two things: AHPs selecting the 
better risks, for one, and this would happen in two ways: Self-
funded AHPs would pull better risks out of the State insured 
market, the State regulated pool, and an insurer that offered 
an insured AHP product would not have to pool that product with 
the rest of its business, which is what the States currently 
require. The other way they would reduce coverage is to drop 
the State-mandated benefits.
    The third point from CBO is that AHPs would not reduce 
overhead costs. The CONSAD study states the benefit of State 
preemption would be found in administrative cost reductions. 
The CBO found, quote, ``no substantial evidence,'' end quote, 
that joining a purchasing cooperative reduced insurance costs. 
And in fact a study by William M. Mercer Inc. found that 
administrativecosts would in fact increase because of 
duplication and members having to pay membership fees.
    Very important point: The States that have done the most to 
pool the risks in the small group market to make coverage more 
affordable for older, sicker groups would see the most damage. 
These are States like New York, Pennsylvania, most of the New 
England States, some of the large Midwestern States. ``Cherry 
picking'' in these States would be rampant because of the State 
reform laws, and the State laws would quickly become unworkable 
and meaningless. The Federal Government would then have to step 
in and redo what the States did in the eighties.
    Fourth and most important point, CBO found that four out of 
five workers would be worse off. Twenty million workers would 
see a premium increase, only 4.6 would see a decrease, and this 
will vary tremendously by State. As I said, the States that 
have done the most to encourage cross-subsidization, which is 
what you want from insurance, will see the biggest premium 
swings. Finally, I would point out research by the Urban 
Institute that exempting AHPs from State reforms would actually 
reduce overall coverage.
    We believe the warnings are clear, and we believe they are 
credible. The States knew what they were doing when they 
enacted these reforms. They live in these markets, and they 
understand these markets. Blue Cross and Blue Shield offers 
coverage in every State, urban, rural areas. We do no 
redlining, we are in every part of the State, and we, along 
with the States, ask Congress not to return to the days where 
there was no meaningful pooling of risks and thus no meaningful 
cross-subsidy in the small group market. We urge you not to 
enact these provisions.
    [Ms. Lehnhard's statement may be found in appendix.]
    Chairman Talent. Thank you.
    Our next witness is Dr. Mark Joensen who is the vice 
president and director of Health Care Analysis of CONSAD 
Research Corporation in Pittsburgh, Pennsylvania.
    Dr. Joensen.


    Mr. Joensen. Good morning, Mr. Chairman and members of the 
Committee. I thank you for the opportunity to speak to you this 
morning about the effects of Association Health Plans on 
insurance coverage in the United States. I believe that some 
research that I have been involved with may be helpful to you 
as we deliberate these issues. I will keep my presentation 
short to leave ample time for questions later on.
    My name is Mark Joensen. I am vice president of CONSAD 
Research and director of Health Care Analysis. CONSAD is a 
public policy research firm based in Pittsburgh. For nearly 40 
years, we have provided Federal Government agencies, 
foundations, private enterprises, and others with impact 
analysis and other research designed to inform policy-making. 
We have performed numerous analyses of different health care 
reform proposals over the years.
    In 1997, the National Federation of Independent Business 
Research Foundation commissioned a study from us to analyze the 
potential impacts of the proposed Expanded Portability and 
Health Insurance Coverage Act of 1997 on the number of 
Americans with insurance. This act included provisions to allow 
the creation of Association Health Plans. We completed that 
study in July 1998, and I have provided the Committee with 
copies of this report for your review.
    Based on our analysis, we estimate that the creation of 
Association Health Plans would result in an increase in 
employer-sponsored insurance coverage of approximately 2.3 
million workers employed with small firms. In addition, we 
estimate that an additional 2.2 million dependents would gain 
insurance coverage as a result of AHPs. In total, we estimate 
an increase of approximately 4.5 million newly insured workers 
and their families.
    This estimate represents our best single point estimate of 
changes in insurance coverage. We also conducted sensitivity 
analyses of our results using ranges of assumptions for 
important model variables. This sensitivity analysis produced a 
range of estimates that vary from 2.1 million to 8.5 million 
newly insured individuals.
    I am happy to answer any questions you may have about our 
research and results, but I would like to spend my remaining 
time comparing our analyses and results with those of the 
recently released CBO report. This CBO analysis projects that 
the creation of AHPs and HealthMarts would increase the number 
of people with insurance by 330,000 individuals--that would be 
both workers and dependents. The study gives a range of 
estimated increases that vary from 10,000 up to 2 million.
    As is usual with projections of this kind, the results of 
the analyses depend highly on model assumptions and data. I 
believe that the different analytic frameworks used by CBO and 
CONSAD are quite similar. Based on my review of the CBO report, 
I believe that a large portion of the differences in estimates 
result from the selection of a single model parameter. The 
individuals from CBO may have a different view on where the 
main part of the differences are, but that is what I am going 
to talk about this morning.
    This parameter, the price elasticity of demand for 
insurance of small firms, is a measure of how much small firms 
would react to changes in the price of insurance. If the price 
of insurance decreases, we expect more firms to offer insurance 
to their employees. The price elasticity of demand depicts the 
percentage change in insurance coverage that would result from 
a given percentage change in insurance prices.
    The value of the price elasticities used by both CBO and 
CONSAD were taken from the economics literature. The CBO 
analysis uses a price elasticity equal to -1.1 to produce its 
estimates. For their sensitivity analysis, the CBO uses a range 
of -0.6 to -1.8. However, in the CBO report, other estimates of 
price elasticity of demand by small firms are presented, 
including estimates by Roger Feldman and others that would give 
a price elasticity ranging from -3.9 to -5.8.
    In our analysis, we use a price elasticity equal to -2 to 
-3. This range of values is derived from the economics 
literature and are cited in our report. I believe that the 
larger value for the parameter explains the numerical 
differences between our results.
    There are several reasons why I believe that it is 
appropriate to use the numbers that we did. First and most 
importantly, a majority of the pertinent studies in the 
literature support the values that CONSAD used. The additional 
reason I am going to present is a little bit more subtle. All 
of the available studies of price elasticities describe changes 
in insurance rates that result from price changes in the 
existing market for insurance. However, I believe that allowing 
for the creation of AHPs fundamentally changes a segment of the 
insurance market.
    CONSAD's numerous studies of the insurance market indicate 
that a number of factors affect a small business' decision to 
offer insurance to employees. Price is obviously an important 
factor. But small businesses also face impediments to offering 
insurance that are due to a lack of trust between themselves 
and insurance brokers, incomplete access to information 
describing available health plans and the plan benefits, and a 
lack of resources to understand and manage the terms of 
available health plans.
    AHPs will overcome these barriers to insurance coverage. 
AHPs will be administered by organizations in which small 
businesses already belong, and thus have existing relationships 
and communication links. Thus, even if there was no price 
reduction associated with the creation of AHPs, I believe that 
there would be an increases in insurance coverage, because they 
overcome some of these non-price barriers. And for any given 
change in insurance prices, I believe that an insurance market 
that includes AHPs would produce larger increases in coverage 
than the existing insurance market. There are several 
additional differences that we can discuss later.
    Irrespective of the differences and the absolute values of 
the CBO and the CONSAD results, both analyses indicate that 
insurance coverage will be increased as a result of the 
creation of AHPs. Clearly the benefits associated with AHPs 
will outweigh potential costs. Although AHPs will not provide 
the complete solution to the problem of Americans without 
insurance, I believe that they are part of the solution.
    This concludes my prepared testimony, and I invite any 
questions you might have for me after all the panelists present 
their remarks. Thank you.
    [Mr. Joensen's statement may be found in appendix.]
    Chairman Talent. Thank you, Dr. Joensen.
    Our next witness is Ms. Arlene Kaplan, CEO and founder of 
Heart-to-Home of Great Neck, New York. Thank you for coming 
here, Ms. Kaplan.


    Ms. Kaplan. Good morning, Mr. Chairman, members of the 
Committee. Thank you for the opportunity to appear before you 
today to discuss Association Health Plans and their importance 
to women-owned businesses.
    My name is Arlene Kaplan, and I have been in the health 
care field for over 40 years. I was once a laboratory 
technologist, working in some of New York's finest hospitals. 
Then for almost 20 years I worked with 1199, the Hospital 
Workers Union in New York, as an organizer and a vice 
president. In 1984, I opened my first company called Heart to 
Home, a New York State licensed home care agency. I also own a 
New York State licensed adult home, Heartland on the Bay, and 
Workplace CPR, a company that provides CPR training and first 
aid to corporations and the community.
    In addition I am a past national officer of the National 
Association of Women Business Owners and have been a member 
since 1985. My principal focus for NAWBO has been in the health 
care and health insurance reform arena. My remarks today are on 
behalf of NAWBO. NAWBO is a non-profit organization 
representing the interests of over nine million women business 
owners. NAWBO has over 78 chapters across the United States.
    While working with Local 1199, I was involved in the 
union's plans for a National Health Care Program. As part of my 
responsibilities, I testified in December of 1978 before the 
Senate Health Subcommittee regarding a comprehensive national 
health plan. I was also very lucky to be part of the union's 
wonderful health and disability plan. We were self-insured and 
could and did create our own programs. As a union that was 
predominately female, we provided benefits that did not exist 
with insurance companies. We provided maternity disability 
before it became law, and we provided prenatal and delivery 
benefits regardless of your marital status. We provided well-
baby care long before insurance companies. To the best of my 
knowledge, the union's benefit plan always exceeded the State 
mandate of benefits.
    I touch on this only to show what can be done when people 
with a community of interest come together and design programs 
that fit their needs. That doesn't mean that NAWBO would set up 
an Association Health Plan, but we would certainly like to 
explore the possibility. We believe that we have needs that 
could be best addressed if we were permitted, as the union was, 
to design plans that meet those needs.
    That is what happened with my union. The union existed for 
the purpose of representing members in collective bargaining, 
and the establishment of our benefit plan was an outgrowth of 
those goals.
    NAWBO exists for the purpose of representing the needs of 
and furthering the goals of women business owners. To be able 
to develop an Association Health Plan would be a step in the 
furthering those goals.
    Small businesses are the backbone of the American economy. 
The majority of these businesses do not offer health care 
benefits to their employees, not because they don't want to, 
but cost, access, and the ability to remain with a carrier has 
been a detriment. For example, Wanda Goetz, a NAWBO member and 
owner of an information management consulting service in 
Florida, cannot afford to give her employees health insurance 
benefits, because most of them are older, 50 plus. The premium 
cost was estimated at $7,000 a month for small business. As 
someone who has benefited from the legislation that allowed the 
union to be self-insured, I think that as a woman business 
owner I should have the same rights.
    NAWBO strongly believes that the Association Health Plans 
would benefit our membership. Any plan that we design we 
certainly would want to be superior. We have grown our 
businesses by being better and more efficient, and that is how 
we would treat our health plan.
    Association Health Plans give small businesses and the 
self-employed the freedom to design more affordable health 
options and offer their workers access to health care coverage. 
NAWBO members believe that these new coverage options would 
promote greater competition, lower costs, and new choices in 
health insurance markets. By allowing individual and small 
employers to join together, AHP's promote the same economies of 
scale and purchasing clout that workers in large companies 
currently realize.
    The Quality Care for the Uninsured Act, H.R. 2990, includes 
the language supported by virtually the entire small business 
community to expand Association Health Plans. We must reach 
those small business owners without health insurance, and AHP's 
are the market-oriented private sector solution to the small 
business problem. We believe that the language in the Quality 
Care for the Uninsured Act would provide the necessary 
    I would like to share just one more story with you. 
Christine Bierman, owner of Colt-Safety in St. Louis, Missouri 
tells her own story. Quote, ``I own a small fire and rescue 
distribution company in St Louis, Missouri. I founded the 
company in June of 1980. Through the years, we have had up to 
25 employees at any given time. We currently have 15.
    My mother worked for the company from 1987 till her death 
in 1994. In 1989, she was diagnosed with breast cancer and had 
a mastectomy. The cancer recurred in 1992. We were one of the 
lucky companies that did not have to fight their insurance 
company to cover bone marrow transplant. The unfortunate and 
most unfair situation was that for the next 6 years of my 
mother's life, the insurance company rates escalated between 15 
and 25 percent each year. In about year 3, I began questioning 
about getting into another insurance company. We could go 
nowhere else due to my mother's preexisting condition.
    The escalating costs came at a time when we were also 
losing market share due to integratedsuppliers and mega-mergers 
in our industry. This is usually when a small company can show their 
entrepreneurial skills by cutting costs and moving quicker than the 
mega companies. We were forced to cut our 100 percent employee coverage 
to 80 percent, and now only cover 60 percent of employee benefits.''
    What we see happening if my association, NAWBO, is 
permitted to form an Association Health Plan is that our 
members in each State will be able to provide for their 
employees' health benefits so that all of our stories have a 
good ending not a sad one.
    Thank you.
    [Ms. Kaplan may be found in appendix.]
    Chairman Talent. I thank you, Ms. Kaplan.
    What we will do is we will go to Mr. Gallo for his 
statement and then adjourn for the vote which is on a rule, and 
then come back. And I would urge members to return. This is the 
only panel, and we will go right to questioning, and then we do 
have to vote out our views and estimates of the SBA's budget 
submission for the Budget Committee.
    Our next witness is Mr. Richard Gallo, owner of the Office 
Outlet of Indiana, Pennsylvania.
    Mr. Gallo.


    Mr. Gallo. Chairman Talent, members of the Committee, good 
morning, and thank you for giving me this opportunity to come 
to you today and give my testimony concerning health care 
reform and how it affects my small business and my family.
    Just a little background about myself, first. I am from 
Indiana, Pennsylvania, the hometown of the late, great actor 
Jimmy Stewart. We have a very nice museum and a statue of Mr. 
Stewart, so please come and visit us. Centered in our community 
is a fine educational institution, Indiana University of 
Pennsylvania. We are also known as the ``Christmas Tree Capitol 
of the World.'' But, we are not quite as famous as our 
neighboring town of Punxsutawney, PA which has the famous 
weather forecaster, Punxsutawney Phil, which reminds me, we 
have six more weeks of winter here.
    I was born and raised in Indiana, Pennsylvania, population 
of 15,000. I have been married to my wife, Wendy Bechtel Gallo, 
for the last 16 years. We have 4 children, 6, 8, 10, and a 12-
year old. My wife and I were blessed when we were able to 
purchase our first business, the Office Outlet, an office 
products store. We have owned the Office Outlet since 1995.
    Previously, I had managed an office product store for over 
16 years. I was employed there a total of 22 years. I found 
that being employed was very different than owning your own 
company. I had high hopes of being able to provide benefits, 
like health care insurance, to our employees. To my shock and 
surprise, I found out it would cost me over $40,000 per year 
for a small company to give every employee, including my 
family, health care insurance. This was looking at the lowest 
priced health care plans and group rates around. For a small 
business, just starting out, meeting this figure would be 
    So for now, my wife and I go without health care insurance, 
and my employees must take care of their own by whichever means 
they can.
    I recently had to see a specialist for health reasons. I 
had no idea what expense would be--what it would be or how I 
was going to come up with the extra cash for payment. With four 
children, a mortgage, bills, and other expenses, there is not 
much cash in the savings account. With all the tests and 
medicine it was quite expensive, and I may yet have to have 
surgery. This motivates me even more to travel to Washington, 
DC, and speak out concerning this very important issue before 
you--affordable and accessible health care insurance plans for 
small businesses.
    I feel for the many others in my situation, and now I 
personally know the frustrations of not having health care 
insurance. This can become a financial nightmare. I was blessed 
to have a family member who helped me with the expenses, but a 
lot of others may not have someone to turn to for help.
    I ask this Committee: Who are the people going to turn to 
for health care insurance? The Government cannot pay for 
everyone to have insurance. My answer: The only way that this 
can be resolved is that we, as employers, must have available 
affordable health care plans to give our employees or at least 
offer them as co-pay plans.
    I was blessed to have worked for a company that paid my 
insurance for the 22 years I was employed there. I appreciated 
that benefit, and it is one of the reasons I remained with that 
company at that length of time. It gave me a sense of security 
and appreciation for my job. I would like to be able to offer 
that same benefit for my valuable employees. I strongly 
encourage this Committee to continue their efforts with AHPs. 
This will help small business employers like myself by giving 
us the same access and choice of affordable health care for our 
    The Fortune 500 companies, like Ford, Chrysler, and Wal-
Mart have the ability to offer health benefits to their 
employees under the one unified Federal statute, known as 
ERISA, the Employee Retirement Income Security Act. This saves 
the big guys from the cumbersome task of having to comply with 
the different rules, regulations the benefits mandates that 
exist in each 50 States. We, the small businesses, have no such 
opportunity. This is why Associated Health Plans are an 
absolute necessity.
    I see that many small employers are faced with the same 
problem. We must make enough profit to be able to employ good 
workers and offer them benefits that will keep them with our 
companies. As employers, we need good workers that are going to 
stick with us, to help build our companies as well as their 
futures. Without benefits, they look elsewhere for jobs. In 
Pennsylvania, we have lost thousands of young people for this 
reason each year. Our fine representatives from Pennsylvania 
can attest to that.
    AHP will allow us, as small business owners, the 
opportunity to band together across State lines through 
memberships and bona fide trade or professional associations, 
enabling us to purchase affordable health coverage for our 
families and our employees.
    For example, many of us are members of national 
associations, such as the NFIB, the Chamber of Commerce, 
realtors, builders, and restaurant associations. If AHPs would 
become law, small business owners and employees will benefit 
from the same economics of scales, purchasing clout, and 
administrative efficiencies as our big business counterparts. 
This will result in lower health care costs and new coverage 
options for the working uninsured, like myself, who are 
currently faced with no options other than the high priced, 
overregulated plans that exist in our individual States.
    I close with this summation and advice: Please work 
together as one Committee and come to a true assessment of what 
is needed. Work with the insurance companies to come up with 
reasonable legislation that is fair for all and enables the 
insurance companies to provide health care for the millions 
that need it at affordable rates.
    I will end with a quote from Mark Twain, ``Do the right 
thing, it will gratify some of thepeople and astonish the 
    Thank you, Mr. Chairman and Committee members, may God be 
with you.
    [Mr. Gallo's statement may be found in appendix.]
    Chairman Talent. Appreciate your testimony, Mr. Gallo.
    We will adjourn--or recess the Committee, excuse me, while 
we vote and then come right back.
    Chairman Talent. We will reconvene the hearing, if the 
witnesses will have a seat. If we can have order in the room. 
Thank you for not making me break my pledge never to use the 
gavel during my time as chairman.
    Looks like the ping pong game will be over for awhile, so 
maybe we can all get our questions in.
    Mr. Baumgardner--There were parts of your report that I 
agreed with, and I want to start with those. On page 4 of your 
report, you talked about the reasons why the cost of health 
insurance for small firms is generally greater than that for 
bigger firms. I just want to go over that for a minute, and I 
certainly agreed with what you were saying.
    You mentioned that, first of all, a larger firm is likely 
to have more purchasing power, because they represent bigger 
groups. That is one reason, isn't it? And then another is they 
can spread their administrative costs out over more employees. 
So, if you have got $1 of administrative costs and you spread 
it over two employees, that is 50 cents a person, but over 100 
employees that is 1 cent a person. That is another reason, 
    Mr. Baumgardner. Right.
    Chairman Talent. And then also, I don't know if you 
mentioned this or not specifically, but a firm that is big 
enough to be able to self-fund has savings also, doesn't it, 
over firms that can't, because it doesn't have to pay the 
marketing costs of the insurance company or the profit margins 
of the insurance company. That is an advantage too, isn't it?
    Mr. Baumgardner. Yes.
    Chairman Talent. Okay. So, that much I agreed with.
    I want to cut right to the chase and get to the part that I 
disagreed with and I think is really the crux of all the 
aspects of the report that I didn't agree with. And that is--
your assertion that AHPs, if they were formed, would in effect 
``cherry pick;'' in other words that healthier groups would 
tend to go into AHPs. And as I understand it, you believe that 
because AHPs would be exempt from state benefit mandates and, 
therefore, would have the ability to offer employees less 
extensive coverage and so would offer employees less extensive 
coverage. Is that the sum and substance of your opinion?
    Mr. Baumgardner. Yes, sir. First of all, we never used a 
term as inflammatory as ``cherry pick.'' I know others have 
used that. But there are really two reasons why we think there 
would still be some selection: One is the issue of the 
exemption from mandates--that is, by not offering certain 
mandated benefits, you would be relatively more attractive to 
groups that had a lower expected cost, because their employees 
would see themselves as less likely to want to use those 
benefits. So, that was one point.
    I think the second reason we would expect some selection is 
what in economics we call the survivor principle. Basically, if 
you can offer lower prices, on average, you are going to get a 
bigger market share. And in the case of States, especially 
those that have had tighter premium compression regulations, 
the lower-cost firms are doing a lot more cross-subsidizing of 
the higher-cost firms.
    In essence, the availability requirements on the AHPs would 
allow them to slice the market in a different direction. The 
AHPs have to make their coverage available to everyone in the 
association, whereas the State-regulated plans have to adhere 
to the Statewide availability rules. So, in essence, the plans 
that are going to survive in the longer run are the AHPs that 
are able to offer a better price break relative to plans in the 
regulated market. The groups doing the cross-subsidizing in the 
regulated market are these with lower expected costs. We think 
lower cost groups would gravitate toward the AHPs for that 
    Chairman Talent. But the second reason is really a function 
of the first, as I understand it. In other words, because AHPs 
offer less--in your theory, because they are exempt from state 
benefit mandates, would offer less extensive coverage, cost 
less, therefore draw in the healthier firms who would be 
attracted to the lower price. And the effect would then 
magnify, because as those healthy firms left the small group 
market, there would be fewer healthy firms to cross-subsidize 
the sicker firms in the small group market, so that insurance 
would go up, and the effect would tend to magnify for that 
    Let me just read what you said: ``Exempting AHPs and 
HealthMarts from offering mandated benefits might substantially 
affect selection. With the exemption, AHPs and HealthMarts 
could design benefit packages that had fewer benefits and were 
relatively unattractive to firms whose employees had costly 
health care needs. Those firms would want more extensive 
benefit packages and would probably maintain their enrollment 
in traditional, fully regulated plans. As a result, their high 
health care costs would not affect the premiums offered by AHPs 
and HealthMarts, which might allow those plans to lower their 
costs by more than the savings from the mandate's exemption 
    Lower price plans with leaner benefit packages would appeal 
more to healthy firms, both those that offered no coverage to 
their employees and those that already offered insurance. In 
other words, the effect magnifies. The more they draw in the 
healthier firms, the better is their pool, the more competitive 
they are vis a vis the small group market, and therefore the 
more they draw in from the small group market, and the 
selective impact magnifies.'' That is what your report says.
    Mr. Baumgardner. Yes, that is basically correct.
    Chairman Talent. The crux of the whole thing is the 
assumption that firms that are exempt from state benefit 
mandates would, for that reason, offer less comprehensive 
health insurance, insurance that would be less attractive to 
firms that had sick employees.
    Mr. Baumgardner. That is a lot of it. I think that if AHPs 
had to face the same guaranteed availability statewide that the 
firms in the state-regulated market did, the guaranteed 
availability would play a role as well.
    Chairman Talent. Do you know of any other entities besides 
AHPs that currently are exempt under the law from State benefit 
    Mr. Baumgardner. Well, of course, as I said in my 
testimony, a self-insured, single-employer firm is exempt.
    Chairman Talent. Big companies that can self-fund, right? 
Now, have we observed this effect in the big company market? I 
mean, would you say that self-funded, large corporate plans 
offer insurance that is lower quality than you can get on the 
small group market?
    Mr. Baumgardner. Well, I think there are two things--I 
think you raise a good point, and it is an interesting point.
    Chairman Talent. I agree. Maybe you would like to answer 
it. I mean, do big firms--this is important, Mr. Baumgardner. I 
have been working on this for a long time, and you come in here 
and say, on the basis of an assumption that I think is just 
unsound, that AHPs are going to adversely select, and they are 
going to take healthy firms out of the market, and I don't 
think they will.
    See, they are made to operate very similarly to big 
corporation health insurance practices, including self-funded 
practices. So, tell me, do you think that big companies with 
self-funded plans, on balance, offer less comprehensive and 
less poor quality insurance than is available in the small 
group market? I can read you what you said in the report.
    Mr. Baumgardner. I would like not to be held to a yes-no on 
    Chairman Talent. Well, I will be happy to give you an 
opportunity to explain. The premiums themselves do not differ 
consistently on the basis of firm size. That means big firms, 
small firms pay the same premium. But the benefit packages that 
large firms offer their employees are more generous than those 
offered by small firms. That is on page 4 of your report.
    Mr. Baumgardner. Right. And I totally agree with that 
statement. I think the important thing that also needs to be 
recognized is that, as we said in today's testimony, larger 
firms, on average, have higher paid workers, higher income 
folks who are going to tend to want a higher quality package.
    I think it is also the case, as we mentioned, the tax 
exemption from employer-sponsored insurance that, in essence, 
lowers the price more when you have workers in a higher tax 
bracket. So, I think--and also the large firms facing lower 
administrative costs for a given benefit package, it is cheaper 
for them to provide it.
    So, for reasons that their costs are lower, their workers 
tend to be higher income, their workers tend to get greater 
incentives through the current tax system, those are all 
reasons we would expect larger firms to be offering more 
generous benefit packages.
    Chairman Talent. Those are reasons why larger firms can 
save money on health insurance. They don't usually save money--
they don't save the money by cutting the benefits. They put the 
money into increased benefits, and the reason is not the 
generosity of people like ``Hacksaw'' Jack Welch over at 
General Motors; it is because they want good employees. Now, 
don't you think small businesses will want good employees as 
much as big businesses want good employees?
    Mr. Baumgardner. Well, again, I think it is a function of 
the workforce in these different size firms. On the other side, 
let me take--go down to the small firms. Precisely because they 
have lower income workers, they probably would prefer a less 
generous package so as to have less of their earnings offset by 
the cost of that package to the employer. In fact, it is 
exactly in the small firm market that these mandates probably 
are certainly more binding since the group that--because of the 
interaction of ERISA with state law, the group that probably 
would want a less generous package, to some extent, can't get 
it because of the mandates, and in fact that is why we do 
estimate in the end some increase in coverage among small 
    Chairman Talent. I appreciate that. Did you talk to any 
small business people who told you their employees want the 
poorer quality health insurance?
    Dr. Wilson, you run Association Health Plan, okay? Do your 
members and their employees want lower quality health insurance 
than the big companies?
    Mr. Wilson. They want the same benefits. An example of that 
is a Virginia equipment dealer that I am quite familiar with 
just last month. His costs went up, he got a rate increase from 
his carrier, and he wanted to eliminate that little drug card 
that you take to your pharmacy with a co-pay. He said, ``Well, 
I can't really afford the rate increase, so I will just remove 
that drug card from his plan.'' So, he announced it to his 
employees that in the effort to--and these are mostly garage 
mechanic type employees--told them that he was going to remove 
the drug card, and he had an uproar on his hands. In fact, his 
accounting manager called me up and said, ``Paul, you are going 
to have to help my boss. He is in the doghouse with all the 
employees. He is taking their drug cards away.''
    So, this notion of small employers being able to change 
those benefit levels and have that be accepted by their 
employees, I have not witnessed that.
    Chairman Talent. Mr. Gallo, you used to work for a bigger 
firm, right, and you had health insurance.
    Mr. Gallo. That is correct.
    Chairman Talent. And then you opened up your own small 
    Mr. Gallo. Yes, sir.
    Chairman Talent. Now, did your preferences for health 
insurance change? When you opened up your own small business, 
did you want poorer quality health insurance at that point?
    Mr. Gallo. No, sir. In fact, I look at my employees as my 
company, and they are very important to me, and my employees 
deserve a good health care plan. I don't think dumping to down 
would be the answer.
    Chairman Talent. Plus you have to compete with the bigger 
firms, don't you?
    Mr. Gallo. Right, that is correct.
    Chairman Talent. Kind of what I figured, and I emphasize 
this point to the Committee, because this whole analysis that 
attacks Association Health Plan rests on the assumption that 
because Association Health Plans would be exempt from state 
benefit mandates that therefore they would offer poorer quality 
health insurance to their people, which causes then--that 
supports the whole argument that they would ``cherry pick'' by 
drawing in healthier people.
    As a matter fact, Dr. Wilson, you run an Association Health 
Plan. Do the members of your association with the healthier or 
the sicker people tend to go into your plan? Or does it make 
any difference?
    Mr. Wilson. Well, we really don't--since HIPPA, we don't 
really select that out to that extent, but I do know this: Our 
association plan is a member of TAHC, and it has had 70 members 
since 1992, since it began, 70 bona fide association plan 
members--only bona fide association plan members.
    Last night at dinner, I read some of the materials and 
wondered, are these people really using adverse selection? We 
went through our membership, and I brought our list with me, 
and last night we went through and we sorted by blue collar and 
white collar. And we came up with the fact that these bona fide 
trade associations, we are probably the best cross-section of 
them that exists, these 70. They are 90 percent blue collar. We 
have contractors, car dealers, equipment dealers, builders, 
telephone workers, bottlers, lumber growers all across what you 
consider the service sector in blue collar. We only had 10 
percent--we did have 10 percent of our members who were in 
professional, what some people think are the low-cost 
    Chairman Talent. Just emphasize again to the Members, the 
point is to recreate for pools of small businesses the same 
economies and efficiencies of scale that big businesses have, 
so, Association Health Plans will operate an awful lot like the 
big corporate plans, which don't result in healthier people 
going to work for corporations. As a matter of fact, all of us 
know, as a matter ofexperience, that people who have a history 
of illness, if they can get a job with a big company that has good 
coverage generally tend to do it, because it is more secure. So, if 
anything, the Association Health Plans will draw in sicker people, not 
healthier ones.
    I want to make one other point, Mr. Baumgardner. We talked 
before about the extra costs that small businesses have to pay 
relative to big firms in terms of buying of health insurance. 
Because big firms can spread the administrative costs over more 
employees, because they are larger purchasing pools, because 
they can self-fund, they don't have to pay as much for profit 
margins or marketing costs. And yet your report assumes that 
the cost savings arising from the group purchasing features of 
AHPs and HealthMarts would be negligible. Isn't that right?
    Mr. Baumgardner. Yes, that is correct.
    Chairman Talent. Now, that is an assumption; that is not a 
conclusion you make. It is an assumption, and notwithstanding 
the diseconomies for small firms, if they could join into an 
AHP and make one big purchasing group, they would not have cost 
savings arising from that feature. That is an assumption you 
make on page 22.
    Now, as a basis for that assumption--you do drop a footnote 
here--a study by Stephen Long and Susan Marquis about pool 
    Mr. Baumgardner. Yes, that is correct, sir. They looked 
at--and that is one thing I would like to say is we are always 
careful about receiving selected data from folks who of course 
are going to let you know how much they were able to save costs 
within their particular plan.
    To us, the Long and Marquis data had the advantage that it 
was a random sample of firms that were selected regardless of 
were they in the regular small group market or where they were 
purchasing, say, as an individual small group or were they 
purchasing from a cooperative arrangement of some sort? Some of 
those were alliances that were not AHPs. Others were 
Association Health Plans under current law.
    And, essentially, the Long and Marquis paper came to the 
conclusion that they were not seeing any premium differences 
between the small firms purchasing as an individual firm versus 
people purchasing through the pools. What they did find is that 
the choice of plans was bigger if you were with an alliance or 
a cooperative, and there was also more information often 
conveyed to the employees comparing the health plans offered 
within the cooperative. But the premium differences they didn't 
find. So, that was the basis of the assumption we made there.
    Chairman Talent. Well, let me direct you. The staff should 
have given you a copy of that article. I agree it is a pretty 
good study. They reached some very interesting conclusions. I 
have marked it, handwritten different pages on it. So, if you 
will go to what I have marked as page 3, and I will be happy to 
provide this to members of the Committee if they want. If you 
look at the bottom of page 3 where it says, ``We did not see 
evidence of differential risk selection in pool purchasing 
    Mr. Baumgardner. And that is under current law where States 
can regulate these plans, and they have to comply with benefit 
    Chairman Talent. Yes, exactly. In other words, they weren't 
studying the kinds of Association Health Plans that the bill 
would create, were they? They were studying all different kinds 
of pooled arrangements, including state-sponsored, pools that 
the government had put together, right? It would not surprise 
me at all, Mr. Baumgardner, if pools the government had put 
together did not achieve any economies or efficiencies of 
scale, the same kind of people who pay $500 for an ashtray over 
at the Department of Defense.
    Now, if you will go back to the end of the article, page 7, 
because they allowed for the fact that they were looking at a 
whole lot of different kinds of pools and not specific ones. 
And here is what they say, this is the last paragraph, 
``Clearly, there is a need for more research beyond what this 
first descriptive study can do. The pool purchasing we examined 
comprised a broad range of agreements. We found some evidence 
that the outcomes may differ substantially under different 
forms. But further work is needed to desegregate the types of 
pooling and to do more carefully constructed studies within 
markets of the participants and non-participants.''
    So, actually, this study, which as far as I can tell is the 
sole support for your assumption that Association Health Plans 
would not have cost savings from premiums, stands for, if 
anything, the opposite proposition, because they say, ``We 
found some evidence that the outcome may differ substantially 
under different forms.'' So, at best, we really don't know what 
would happen if somebody studied just Association Health Plans, 
do we?
    Mr. Baumgardner. I think that is fair, and certainly as 
research is updated we will look at those studies.
    Chairman Talent. Well, I appreciate your candor. I think 
that is fair too, and I will recognize the gentlelady from New 
York for any questions she may have.
    Ms. Velazquez. Thank you, Mr. Chairman.
    Mr. Baumgardner, the CBO analysis indicates that 20.3 
million Americans will actually see rate increases for health 
coverage due to the passage a law creating AHPs and 
HealthMarts, does it not?
    Mr. Baumgardner. Ms. Velazquez, I would like to speak to 
that point, because I think perhaps it is taken slightly out of 
context in that basically that 20 million, we really can make--
with our analysis, we really can only speak on average what is 
going to happen. So, within that pool that stays in the 
traditional regulated plans, we feel those firms, on average, 
are going to see a 2 percent increase.
    I think it is going to depend on State law. There are a 
number of States that allow fairly wide ranges of premiums to 
be charged to different firms. You can see like 5 to 1, 2 to 1 
as what is allowed. A lot of firms probably won't see any 
change in those less regulated States. So, it is really an on 
average statement of a 2 percent increase within that 20 
million group that stays within the traditional regulated 
    Ms. Velazquez. One of the arguments used by the proponents 
of HealthMarts and AHPs is that this plan will enable small 
businesses to pool resources through group purchasing and 
obtain significant administrative cost savings through these 
new arrangements. What proportion, if you can tell us, of the 
premium reduction estimated by CBO is related to administrative 
    Mr. Baumgardner. Well, as the chairman pointed out, we 
assume zero for that. We assume 5 percent for the mandate 
exemption savings. So, the answer would be zero with the 
assumptions we use, as far as the administrative savings. And, 
again, that was--the Long and Marquis study suggested and the 
Chair made reasonable points that there will be more research 
in the future, but based on what we could see now, we went with 
zero as the assumed savings there.
    Again, I think a big coop still is not the same as one 
large firm. You don't control the benefits office. They don't 
work solely for you. They work for a lot of distributed small 
firms. Yegian and others in a study in California, for 
instance, found that the--and they are looking at a particular 
health purchasing alliance; yes, it is not an Association 
Health Plan. But they found that the premiums charged to these 
small firms through this cooperative arrangement those premiums 
were larger than what large firms saw. So, I think even small 
firms as a group are never going tohave some of the economies 
that a large firm can have. Again, the benefits office and all the 
employees are yours in a large firm.
    Ms. Velazquez. Are you telling us that the CBO study has to 
be revisited?
    Mr. Baumgardner. Well, when more research comes up--these 
studies often are slow in coming through the academic 
literature--there could be an update someday. I couldn't say I 
would foresee one any time soon, though.
    Ms. Velazquez. Dr. Joensen, the CONSAD report implies that 
small employers will be better off under AHP legislation. 
However, the CBO report estimated that four out of five small 
businesses will face higher health insurance premiums if AHP 
legislation were enacted.
    Please explain why the CONSAD analysis came to such a 
different conclusion regarding the value of this legislation 
for the average small employer.
    Mr. Joensen. That is a good question. The purpose of our 
study was simply to estimate the increase in insurance 
coverage, and in fact we did not focus on the impact of the 
creation of Association Health Plans on the premiums of other 
firms. And in fact I think that the estimate provided by CBO of 
a 2 percent increase is probably a reasonable estimate.
    What are we seeing? We are seeing that firms that have 
higher--the actuarial value of the health care services being 
used by those firms are higher than average, and in fact that 2 
percent increase means they are going to be paying of their own 
health care costs. In exchange for that, these individuals who 
are able to join AHPs we believe will be seeing a decrease in 
costs, and as a result of that decrease----
    Ms. Velazquez. Why so?
    Mr. Joensen. Why? Because for a number a reasons, including 
the reasons that we heard from Mr. Baumgardner. They include 
the reduction in benefits because of mandates, the relaxation 
of mandates. We believe, in fact, that there will be a 
administrative savings due to the grouping independent of what 
the Long and Marquis study presents. It is just one study.
    We believe that it is reasonable to expect savings, but it 
is important to note that our results estimate--the results 
that our study estimates are based on a 10 percent decrease in 
premiums for those small businesses that currently do not offer 
insurance. And I believe that the result presented by CBO is 
associated--they estimate that there will be a 13 percent 
decrease, is that correct, for the firms that join the AHPs?
    Mr. Baumgardner. Right, for the firms joining the AHPs, on 
    Mr. Joensen. Right, right. So, I think we are talking about 
estimated reductions that are very similar.
    Ms. Velazquez. Mr. Joensen--Dr. Joensen, a primary concern 
raised by the CBO's report is that AHPs will pool the healthy 
from the small group market, causing premiums to increase for 
the majority of small employers. Unlike the CBO report, the 
CONSAD analysis does not consider that AHP legislation will 
have on employers purchasing coverage in the traditional small 
employer insurance market. I would like you to explain why the 
effects on the traditional market were not considered in that 
    Mr. Joensen. Again--very good question--again, the focus of 
our study was simply to look at the pool of businesses that 
currently do not offer insurance, not the impact on those that 
currently do. I believe that, as I said before, that the CBO's 
analysis of those effects on those businesses that currently 
offer insurance is a reasonable one. They see a 2 percent 
increase, on average, in premiums and a decrease in insurance 
coverage for those people that is negligible compared to the 
    So, yes, we could have increased the scope of our study and 
focused on the impacts on the currently insured. We chose not 
to do that. We believe that our estimate of the number of 
individuals that will receive insurance for the first time due 
to the AHPs is correct, and we should--we can change or we can 
add to our study to look at the decrease in those firms that 
currently offer insurance, but I believe it will also be a 
negligible number compared to----
    Ms. Velazquez. Why?
    Mr. Joensen. I am just basing that estimate on the results 
that CBO produced. They saw an increase of 340,000 in the firms 
that currently do not offer insurance and a decrease of only 
10,000. So, I am saying that if we assume the same percentage 
of people losing insurance, it really is a small percentage.
    Ms. Velazquez. Ms. Lehnhard, you state that the CONSAD 
report is not credible. Could you please elaborate on that?
    Ms. Lehnhard. Well, we commissioned the Barents group of 
KPMG to look at that study, and some of the things that they 
raised as concerns, for example, were, first, the universe of 
the population used was, in their terms, exaggerated. They used 
Medicare eligibles, for example, and Medicaid eligibles and 
some populations that don't belong in the base.
    Secondly, they assume that for every 5 percent decrease in 
premiums, you have a 6.5 percent decrease in the number of 
uninsured, and that extraordinarily high by any of the 
literature. CBO won't even accept a 3 percent increase, I don't 
believe, for every 1 percent decrease in premiums.
    They didn't look at the effect on the rest of the insurance 
markets, what would happen to people who weren't in AHPs, their 
premiums. Those are some of the kinds of concerns that we have.
    Ms. Velazquez. Would you like to respond?
    Mr. Joensen. Yes, I would, in fact. The issues that the 
representative of Blue Cross just mentioned were presented to 
me in February of 1999 in a letter that had been written by 
their consultant, I think it was the Barents Group, and they 
issued a number of criticisms after reading the report. I, 
unfortunately, didn't realize that we would be discussing those 
points today, but in response to those criticisms I produced a 
letter refuting each and every one of their criticisms, and I 
will make a copy of that letter available to the Committee, 
because I think it is quite important.
    With regard to the two specific criticisms that we just 
heard they are both absolutely incorrect. The base of 
population that we used in our study was simply the currently 
uninsured. We did not look at people who are receiving 
Medicare, Medicaid insurance, insurance from other private 
sources, or insurance from the Federal Employment Benefit Plan. 
So, in fact, the base of individuals we used in our 
calculations was the currently uninsured.
    In addition, this notion that we used an elasticity of 60 
is--an elasticity of 6.5, we did not use an elasticity of 6.5. 
We used an elasticity of between two and three, which is, I 
believe, supported by results of literature, economics 
literature studies.
    Ms. Velazquez. Yes, Ms. Lehnhard?
    Ms. Lehnhard. One other concern we had, and I think it was 
mentioned earlier today that they didn't take into account the 
income of workers for small employers, which CBO says is the 
largest single factor in their not taking up insurance.
    But could I make one comment on the exchange, very quickly, 
we have heard between the two studies? With all due respect to 
the chairman, I think this whole debate has been about an 
exemption from State-mandated benefits so small firms could 
lower their costs by not offering State-mandated benefits.
    Ms. Velazquez. What type of mandated benefits do you think 
would be most likely dropped?
    Ms. Lehnhard. The most expensive mandated benefits are 
mental health, substance abuse. The most numerous benefits are 
women's issues--breast mastectomy coverage, in vitro 
fertilization--those are the most numerous. But we work with 
small employers everyday, and they are desperate to get the 
costs down, and we have worked very successfully with State 
legislators to get streamlined packages. But we know they 
want--it is not a quality issue; it is a cost issue. Can we 
offer anything to our employees?
    But I put that aside. The biggest issue is not mandated 
    Ms. Velazquez. Ms. Lehnhard, I just would like for Dr. 
Wilson to comment on those benefits that Ms. Lehnhard said will 
be dropped, will be most likely dropped. Are you providing 
those AHP that you are in----
    Mr. Wilson. Yes, all of the mandates. But with all due 
respect, I think she is just guessing that. I don't know that 
there is any reason----
    Ms. Velazquez. Do you provide your AHP those mandated 
    Mr. Wilson. Yes, ma'am. But I also know that the notion of 
bare bones plans has never worked for my association plan, no 
matter what the price was. Our dealers would be interested in a 
quote on that. What if you gave me a plan that was really 
stripped down, had a high deductible, it had a high out-of-
pocket maximum to where--and they get the quotation, and then 
they look at it, and it is a lot less. Bare bones plans are 
    And then they have to go back and convince their employees, 
because we can't overlook the fact that most small employers do 
not pay 100 percent of the cost for their plans. They do not 
have total control over these plans. The employees often pay 50 
percent of the cost, and if the employer decides he is just 
going to arbitrarily go out and do a bare bones plan, he has 
almost got to take that to a vote to his employees or he could 
have a real disruption among his business. This can cause a 
very negative--and I think it is being overlooked, the fact 
that the employees do pay a whole lot of the cost, and they 
should have a lot to say about what the benefit levels are.
    Ms. Velazquez. Would you like to comment?
    Ms. Lehnhard. The point I would make is that the biggest 
issue is not mandated benefits. That is a relatively small part 
of the cost. We do think that some employers, many employers 
will drop benefits. The biggest issue is who is going to 
crosssubsidize whom, and that is what the States have tried to 
address with the rating reform laws.
    And, again, what the States are telling us is if groups can 
get out from having to cross-subsidize other groups in the 
State, if they are relatively healthy, they will do that. If 
they are not healthy, they will stay in the cross-subsidized 
pool. That is where the big premium swings will come, 
particularly in Northeastern States where they have really 
compressed the rates to achieve maximum cross-subsidies between 
older, sicker groups and younger, healthier groups. That is the 
big issue, and that is the big disruptive issue.
    Ms. Velazquez. Mr. Baumgardner, based on your findings, how 
would the introduction of AHPs into a market like my home State 
of New York, a State that has very tight compressed premiums, 
and it is dependent on a strong and highly crossed subsidized 
market, be affected? Specifically, what will be the result on 
low-cost firms?
    Mr. Baumgardner. Well, we don't have specific results 
State-by-State and I think would hesitate to do that. But 
certainly based on our analysis and what drives the results, 
clearly, in States where you have got tighter rate compression, 
and I think New York is number one in that category, as well as 
a fair number of mandated benefits, I believe, we would expect 
more action in that State both ways.
    The potential premium reduction to those firms who do take 
advantage of the AHPs is likely to be greater in New York than 
in other States. Proportionally to population, you would have 
more of a decrease in the uninsured in that State. By the same 
token, on the other hand, for the firms staying in the 
traditional regulated market, we would expect them to see a 
relatively higher premium increase in New York. So, all the 
effects one would expect would be more magnified in a more 
regulated State.
    Ms. Velazquez. Dr. Joensen, would you like to comment?
    Mr. Joensen. I agree with that analysis.
    Ms. Velazquez. Thank you, Mr. Chairman.
    Chairman Talent. That analysis rests on the assumption, 
doesn't it, that healthier people would tend to go into the 
AHP? Because what I said before the whole chain of reasoning 
rests on your assumptions that AHPs ``cherry pick,'' which 
rests on the assumption that if the smaller firms pool together 
as AHPs, had a resulting economies of scale or economies 
because they weren't subject to mandates, or whatever, that 
they would offer lower quality health insurance.
    Now, I will ask you all again. Let us take the big firms, 
because they can function right now the way AHPs do. Do big 
firms tend to employ people who are relatively healthier than 
the rest of the market? Is there any data to suggest that?
    Yes, Ms. Lehnhard.
    Ms. Lehnhard. Let me give you the answer this way: If the 
only issue in this bill were exemption from rating rules, your 
AHPs still had to provide mandated benefits, you would still 
have a horrendous problem. It is not the mandated benefit, it 
is the fact that they can get out from under a deliberate 
decision by the State to require some cross-subsidy in the 
market. It is really not a mandated benefit issue as much as a 
rating issue. And I think that is what CBO is saying, that two-
thirds of their savings----
    Chairman Talent. Well, forgive me for thinking it was a 
mandated benefit issue given that the CBO report said exempting 
AHPs and HealthMarts from offering mandated benefits might 
substantially affect selection. You can see why I might have 
thought that exemptions from mandates might be part of what was 
driving this. We are now disavowing this?
    Mr. Baumgardner.
    Mr. Baumgardner. I have not disavowed anything in the 
report, sir.
    Chairman Talent. I didn't think so.
    Now, regardless of the reason why it costs a bigger firm or 
a pool of small employers less to buy health insurance, your 
whole case rests on the assumption that they will buy less 
insurance instead of using that margin to buy better insurance 
for their people. So, I will ask you again.
    Ms. Lehnhard. No.
    Chairman Talent. Big firms already operate that way. Now, 
do they buy poorer quality health insurance for their 
    Ms. Lehnhard. I am saying something very different. I am 
saying that if you neutralize the mandated benefit issue by 
requiring everybody in your world after AHPs are passed to 
provide mandated benefits, you are still going to get 
selection, because people who are healthier know they don't 
have to stay in a State pool and cross-subsidize sicker people. 
So, they will move to an environment where they don't have to 
    Chairman Talent. But if the AHP, the cross-section of 
healthy and sick people in the AHP isroughly the same as in the 
small group market, then they are still cross-subsidizing if they go 
into the AHP, aren't they, and there is no incentive to do it. So, you 
have to show that AHPs will draw healthier people that will stay in the 
small group market.
    So, I will ask you again: Do big firms, which can do 
everything that we want AHPs to do, tend to have healthier or 
sicker people working for them?
    Either one of you want to answer? I mean, we all know 
anecdotally, because we probably all have friends who work for 
a big firm and don't want to leave, why? Because they have a 
history of illness or they have a child who has a history of 
illness, and they are afraid if they leave the big firm, they 
won't get as good a health insurance in the small group market. 
Anybody else here have friends like that?
    Now, I didn't go through the study that CBO went through, 
but common sense tells me that sicker people will tend to go 
into larger pools, which an AHP is.
    Dr. Wilson, do you want to make any comment?
    Mr. Wilson. This is one of the items in the CBO report when 
you started talking about high-cost firms and low-cost firms. 
To a great degree here with small employers, we are talking 
about firms with maybe half a dozen or maybe two dozen 
employees, and I just wonder what a high-cost firm and low-cost 
firm is, what a sicker firm is versus a healthy firm?
    Last--maybe today, we have a perfectly healthy firm ce--
nobody has been in the hospital for 20 years, and now somebody 
has a serious auto accident. Does that immediately change that 
firm into a sicker firm or a healthy firm? I think not. I want 
to quibble a little bit with the rationale that the ``cherry 
picking'' is done, and there is resistant to changing these 
plans by employees who are paying----
    Chairman Talent. Now, I will just say that the bill we 
filed requires that the associations exist for purposes other 
than providing health insurance. You can't form just to offer 
health insurance. So, it has to be like the National Restaurant 
Association or the National Association of Women Business 
Owners or the Chamber of Commerce.
    They have to accept any small employer into the association 
who is in that line of work. They can't, Ms. Lehnhard, say, 
``Oh, no, no. You have sick people working for you, so you 
can't join the association.'' They must offer health insurance 
to everybody in the association. I will tell my concern, Mary 
Nell, is that the things won't work, because the sick people 
will go into the AHPs. This is my concern.
    Because my brother has--everybody who attends these 
Committee hearings regularly--if you attend them regularly, by 
the way, and you are not on the Committee or a staff member, 
okay, get a life. Never mind.
    My brother is a tavern owner, okay? Right now, he buys it a 
bare bones plan in the small group market for himself. He can't 
offer it to his employees. Now, if my niece, his little girl, 
got sick, it would be a substantial incentive for my brother to 
join an Association Health Plan like the National Restaurant 
Association's plan, because he would be able to get better 
health care.
    So, tell me why--what frustrates me--maybe I am doing this 
for Harris Fawell who carried this bill for six years and 
fought against this prejudice for six years--why do you think 
that sick people would prefer to remain in the small group 
market rather than in a bigger pool? It is not rational, it is 
anti-intuitive in my mind.
    Ms. Lehnhard. I think what the States have done is maximize 
the pooling. In a Blue Cross and Blue Shield Plan, say, in 
Missouri, all of our small business is pooled. We have one 
pool. It used to be we could have 36 different categories and 
move people into different categories as they got sicker. And 
there are sick and healthy groups. I would say, for example, in 
the large group market, Microsoft has a very young, healthy 
population. The auto workers probably have an older, sicker 
    You are going to have the same variations in the small 
group market, and a lot of associations, you know, associations 
of young, high-tech manufacturers won't want to offer mental 
health benefits, substance abuse, and people will gravitate to 
that benefit package when they don't need those benefits.
    I would counter that your brother, if their child got sick, 
wouldn't go into an AHP; they would go into the State-mandated 
benefit package and get as many benefits as they could. And 
HIPPA let--one more point--HIPPA lets you do that.
    HIPPA is going to let people hop constantly from health 
plan to health plan based on the benefits they need. And we 
have worked very hard to have what is called a retention 
strategy, that you keep people in the plan, you keep them over 
time, you don't have disruption, you don't have churning, price 
war competition. It is very disruptive and confusing to people, 
and we think that is exactly what is going to happen, that 
people are going to hop when they see a better opportunity or 
their family members get sick.
    Chairman Talent. Well, Mary Nell, let us address the 
mandated thing. A little while ago you said even if you 
equalize the mandated issue it wouldn't make any difference.
    Ms. Lehnhard. No, it will make a difference. You will still 
have a problem.
    Chairman Talent. You will still have a problem, okay.
    And the reason for that, isn't it, that mandates by their 
nature tend to affect pretty small sections of the population. 
In other words, if you take 10 people who are ill, okay, or 100 
people who are ill, 95 of them have illnesses that are not 
affected by State mandates, because State mandates--and I used 
to be in the state legislature. You pass a State mandate, 
because there is a particular, discreet, usually small fraction 
of the population that has a serious problem. It is not big 
enough that the market would on its own provide insurance to 
that person. And, so the State has to come in and say, ``Look, 
we know that not enough people need in vitro that is probably 
going to be offered in most plans, but we think it is so 
important that people have this, we are going to require that 
you have it.''
    So, this idea that mandates make a big difference to the 
average person who is sick making a decision about where they 
are going to go, because they are not--the treatment for their 
illness doesn't depend on a mandate. Mandates don't--they only 
cover illnesses that affect small fractions of the populations. 
I am not saying they are not important.
    And if you want to say, ``We don't want AHPs because we 
don't want more plans that are subject to state mandates, I 
understand that argument. But don't say that affects ``cherry 
picking,'' because the overwhelming majority of people who are 
sick don't need the mandates to get the coverage. They just 
need good, quality insurance.
    Ms. Lehnhard. But if you look at--any actuary will tell you 
that I think it is about 6 percent of the population, any 
population--this room, Washington, DC--generates about 20 
percent of health care costs. Twenty percent of the population 
generates 80 percent of the health care costs. If you can avoid 
that 6 percent or part of that 6 percent, you make a bigger 
dent in your premium than the most aggressive cost management.
    Chairman Talent. If they are sick with emphysema or 
leukemia or diabetes or renal failure or cancer----
    Ms. Lehnhard. No, this is mental health, substance abuse, 
those are our big items.
    Chairman Talent. Yes, mental health is an expensive one, I 
will grant you that, okay? But most of the people that we are 
talking about aren't moving, and most of the States don't have, 
unlimited anyway, mental health or substance abuse mandates, do 
    Ms. Lehnhard. Some States mandate special treatment for 
disabled and mentally ill children. It is extensive.
    Chairman Talent. I have looked at the mandates. The 
expensive ones are only in a few states. The ones that all the 
states tend to have are the ones for mammograms or in response 
to a special interest that wanted to get covered--the 
psychologists so you have to pay for the psychologist. I think 
this is mandate argument is a red herring.
    I mean, you are in a lot of states, Blue Cross, right?
    Ms. Lehnhard. Every State.
    Chairman Talent. Yes, every state. And you were talking 
about the effect of small group reforms. Now, while the States 
have been doing all this compression, all these reforms, has 
the number of uninsured been going up or going down?
    Ms. Lehnhard. The number of overall workers with insurance 
has been going up. The number of workers in the small employer 
market with coverage has been going down. They are very price 
sensitive, and as premiums go up, very low-wage workers in the 
small group market they can't afford the coverage.
    Chairman Talent. Exactly. Now, you also mentioned the 
possibility of turbulence or ping ponging in and out of AHPs 
and back to them. And let us examine where you could go. Now, 
how many markets are you in where there is less than five 
competitors in the small group market?
    Ms. Lehnhard. Probably not very many.
    Chairman Talent. Well, how many are you in where you are 
the only one?
    Ms. Lehnhard. The only competitor?
    Chairman Talent. Yes. Quietly offering health insurance.
    Ms. Lehnhard. We are the only competitor in one State, and 
that is because they had small group reform and let the amoebas 
out, and everybody left the State.
    Chairman Talent. Okay. How many states are you one of, say, 
    Ms. Lehnhard. I doubt anywhere.
    Chairman Talent. How many States--in how many states do you 
control, say, 50 percent of the market share?
    Ms. Lehnhard. I don't know. I would have to get back to 
you. We do have large market shares in some states.
    Chairman Talent. Yes, because, Mary Nell, I have to get to 
one thing. The ping-ponging is another way of looking at that, 
which is that Association Health Plans would be another pretty 
effective competitor in the market, wouldn't they?
    Ms. Lehnhard. Not at all. Our plans will not--they are not 
worried about that at all. First of all, an AHP can be an 
insured product, and we have got a lot of these--we have a 
tremendous--I think we have 60 percent of the association 
business now, and one of the AHP models is insured, we will be 
there with insurance. The other model is self-funded. We do a 
tremendous amount of third party administration for self-funded 
groups. They are not worried about the competition. They are 
worried about the public policy.
    Chairman Talent. I know you do a tremendous amount of third 
party administration for self-funded plans, but you don't 
insure those people, do you? You are hired as an administrator.
    Ms. Lehnhard. That is right.
    Chairman Talent. And if those people are currently employed 
in the market or insured in the small group market, markets, 
which let us say, Blue Cross has a very significant share in, 
and AHPs are created, and they do self-fund, and I would expect 
many of these national AHPs would self-fund. Anybody who goes 
into that self-funded plan is not going to be available for 
Blue Cross to insure.
    Ms. Lehnhard. But we might be there as a third party 
    Chairman Talent. For a flat fee or something. I grant you--
no, I take what you are saying on face value. I don't want to 
suggest otherwise.
    Who is next here? Ms. Kelly.
    Mrs. Kelly. Thank you.
    Dr. Wilson, the CBO study assumes that the administrative 
costs generated by AHPs is going to really be negative. In the 
last hearing, we heard testimony that AHPs would generate 
considerable savings in administrative costs and marketing 
costs. Do you think that savings for your AHP, if this 
legislation was enacted, would be there and would stay there?
    Mr. Wilson. Well, yes, I do, and primarily for one reason 
is that if this H.R. 2990 wording is included, it will keep the 
insurance companies involved with associations. I mentioned 
earlier that we went out to 50 insurance companies, including 
almost all of the Blue Cross' companies, and asked them if they 
wanted to work or even talk about working with our association, 
and not one responded.
    Now, if this wording were to--my opinion is if this H.R. 
2990 leveling the playing field for associations with large 
unions and large corporations were to occur, I believe you 
would see the insurance carriers then coming back into the AHP 
market and providing more competition.
    Mrs. Kelly. Ms. Lehnhard, I am interested that you said 
when you were testifying earlier that your New York mandates 
are the only reason Blue Cross--I think I got your words 
right--are New York's mandates the only reason that you said 
that Blue Cross and Blue Shield provide good insurance to New 
York? You implied that by what you said, and I wrote this down, 
because I wrote this down as a question to ask you. You said 
you are in the market in New York, and the mandates hold you to 
a certain level.
    Basically, my question is, you know, you are out there, you 
are trying to insure those of us in New York, and we need you 
there, but I am wondering if our State mandates are the reason 
that you are doing as well as you are in New York or would you 
be doing this on your own?
    Ms. Lehnhard. I think without question what we would be 
doing in the absence of mandates is offering small employers 
the choice of those benefits, not requiring it for everyone. We 
    Mrs. Kelly. So, you would step in basically in the same way 
that this law would step in by offering choices, is that right?
    Ms. Lehnhard. We typically have a very broad choice of 
products for small employers.
    Mrs. Kelly. What keeps you providing good coverage? What is 
it out there that is pushing you to keep good coverage on your 
    Ms. Lehnhard. I think there are two levels of response, and 
let me respond for the industry, not Blue Cross and Blue 
Shield. The first level of response is the State insurance 
commissioner. The State insurance commissioner makes sure you 
have a decent lifetime limit, not $10,000; it is usually at 
least $1 million. They make sure you don't have co-insurance 
and deductibles in fine print that are misleading. That is not 
a mandated benefit; that is just oversight of the State 
thatwould be missing in a self-funded--nobody would be looking at that. 
There is nothing in the bill to that.
    The other issue is mandated benefits, and we provide what 
our customers want. The customers drive our product.
    Mrs. Kelly. In other words, you are saying that market 
forces are the things that are pushing you to provide what your 
customers want.
    I want to go to you, Ms. Kaplan, because I think you 
brought that out in your testimony. You said that in your 
union, your mostly women union, you were offering better 
benefits at a lower price than you could purchase through any 
other way; is that correct?
    Ms. Kaplan. That is correct. We were a Taft-Hartley Fund. 
The money came from the employers, but the union essentially 
was designing the plan for the benefit of the people who were 
participating. And if I might, that is how our association sees 
it. The women business owners who belong to NAWBO would join 
the insurance part of it, because they are members, because 
they would be the people--we are a membership driven 
organization, so the members would be deciding the range of 
benefits that would be offered to all of our members across the 
country, and that would be the range of benefits that the 
members would buy into. It is not that some small group would 
decide within the organization that, ``Well, we are only going 
to have 21 days of hospitalization and some doctor bills.'' 
That is not what members are looking for. They are looking for 
broad insurance, enough coverage so that they are protecting 
their businesses by the business not having to foot bills for 
illnesses directly, which they may be doing now.
    Mrs. Kelly. So, back to you, Ms. Lehnhard. What makes you 
think that the Association Health Plans wouldn't do the same 
thing? Why in the world wouldn't they at least meet their State 
mandates and go beyond them, as Ms. Kaplan just gave us an 
example of?
    Ms. Lehnhard. As I said, I think this whole debate, for the 
most part, has been about the cost of State-mandated benefits 
and the need to get out from under that cost. And if you go 
back to earlier----
    Mrs. Kelly. She was in a situation where she wasn't 
involved with worrying about State-mandated benefits. She was 
just doing what she needed to do for her members, and it 
    Ms. Lehnhard. If you go back to the earlier testimony of 
the groups primarily supporting this, the debate has been about 
the cost of State-mandated benefits and how much cost that 
means for employers. With all due respect, I just can't imagine 
if it is not an issue, why push this to be passed?
    Mrs. Kelly. What makes you think market forces wouldn't act 
to allow the Association Health Plans to--why wouldn't they act 
to allow the Association Health Plans to get better coverage at 
lower cost? As a matter of fact, on page 14 in the CBO study it 
says that there would--and I have got to read this here--``The 
firms that continue to purchase traditional health insurance 
plans would pay an additional $800 million in premiums. That 
increase would be more than offset by the $1.2 billion in net 
premium savings that would result because firms face lower 
premiums in AHP and HealthMart plans.'' What do you say to 
that? That is the CBO study.
    Ms. Lehnhard. Back to your question what small employers 
would do, CBO assumed a third of their savings, I believe, from 
dropping State-mandated benefits, but we live in the State 
markets. There is a reason, first of all, providers lobby for 
State-mandated benefits, and it is because the market is not 
providing them. And, secondly, if you look at the biggest 
opponents of State-mandated benefits, it is the small employers 
who don't want to have to provide those benefits.
    Mrs. Kelly. Whose hide is the $1.2 billion coming out of?
    Ms. Lehnhard. I am sorry?
    Mrs. Kelly. Whose hide is the $1.2 billion coming out of?
    Ms. Lehnhard. CBO is very clear on that. It is coming out 
of the sicker, older people who are paying higher premiums, 
because the younger, healthy people have left the insured 
market. It is a cost-shifting. It is a lack of cross-subsidy. 
You are asking older, sicker to pay more as the younger and 
healthier have lower premiums.
    Mrs. Kelly. You are assuming that everybody in an AHP would 
be older and sicker? Is that what you are saying?
    Ms. Lehnhard. They won't join it unless they get a better 
price than they are getting in the State regulated market. That 
is an assumption that CBO makes. Why would they join it and pay 
    Mrs. Kelly. Well, you are assuming--wait, wait. You have 
been talking about--a lot about ``cherry picking'' here. You 
are assuming that a--for instance, I am just going to use Ms. 
Kaplan, because she has got an example here that worked. You 
are assuming she is not going to include any of her younger 
    Ms. Lehnhard. No.
    Mrs. Kelly [continuing]. Younger members. I mean, I am 
sorry, maybe I just don't get it here, but why do you assume 
she is only going to take----
    Ms. Lehnhard. I think the States are assuming that the 
types of associations that will get out from under the cross-
subsidies required by the States are the associations that 
have, by definition, younger, healthier people in them. That is 
what the States are worried about. They may not be worried 
about Ms. Kaplan's----
    Mrs. Kelly. Well, I don't know if you have attended enough 
of these hearing to know, but I used to be a florist, and I had 
no way of insuring my employees, because I simply couldn't 
afford it. And I can tell you, had I had that opportunity--I 
had employees that were fully across the age range, and some of 
them were sicker, some of them were healthy. And I can tell you 
that if I had the opportunity to join an AHP, I would have done 
so, because my folks needed that. And I don't see why you would 
see that an AHP that is formed to cover people in a small 
business would decide they are only going to ``cherry pick'' 
with younger people. And who would then have to insure the 
older, sicker people? Are you worried that you would have to do 
    Ms. Lehnhard. The question is not that the association 
would treat people differently. They would have to insure 
everybody in their association. It is the question of whether 
an association starts up in the first place. An association of 
older mine workers is not going to set up an AHP. They are 
going to stay in the State-insured market where they know they 
are fully cross-subsidized by younger, healthier people. They 
are just not going to start a union--I mean, an AHP, and that 
is what CBO says.
    Mrs. Kelly. And CBO, from what I understand, I had a 
question about----
    Chairman Talent. Will the gentlelady yield?
    Mrs. Kelly. Yes, sure.
    Chairman Talent. Where does CBO say that?
    Mrs. Kelly. That is exactly what I was going----
    Mr. Baumgardner. I have lost which quote.
    Chairman Talent. Well, Mary Nell said that only 
associations that have healthier peoplewill start AHPs, and 
that is why they will only have healthier people in there. Now, where 
do you say that in your report?
    Mr. Baumgardner. I doubt that we said that.
    Chairman Talent. Yes, you don't say that, do you? Mary 
Nell, you want to find a different source?
    Ms. Lehnhard. They don't say it like that. I can absolutely 
provide it for you. It is not that blunt. It is the question of 
    Chairman Talent. Well, I don't want to be mistaken. Does 
staff know where that might be in the report, because as I 
recall, I read, I think, from page 8 where Mr. Baumgardner 
said, ``No, no, the way that only the healthy people get in the 
AHPs is because they don't have to do the mandates,'' which we 
have disagreed about whether the mandates are important or not. 
You notice, sometimes the mandates aren't important, sometimes 
they are important.
    Mr. Baumgardner said on page 8--and I think I read this--
``that exempting AHPs and HealthMarts from offering mandated 
benefits might substantially affect selection.'' Then he goes 
on to say, ``It is because they won't be subject to the 
mandates. They will have lower costs. They will therefore buy 
less insurance. They will therefore attract the healthier 
people.'' It is not that they will start with healthier people.
    You can take a minute. I thank the gentlelady for yielding. 
I will let her have her time back, and if you can find it----
    Mrs. Kelly. I just have one question while we are waiting 
for a response from Ms. Lehnhard. I have the impression from 
reading your testimony and getting through as much as I looked 
at--I mean, I went through your report, but I perhaps didn't 
read it word for word, but I didn't get anything except that 
you based your CBO study on one study on the operating 
efficiencies of group purchasing arrangements. Did you use one 
study or did you use more?
    Mr. Baumgardner. Well, many studies went into----
    Mrs. Kelly. Did you use one study or did you use more? Just 
yes or no.
    Mr. Baumgardner. In preparing this study?
    Mrs. Kelly. In putting together this study.
    Mr. Baumgardner. Could you ask the question again, please. 
I want to get my yes or no right.
    Chairman Talent. If it is okay with the gentlelady, I like 
witnesses to be able to explain.
    If you will maybe answer yes or no and then explain if you 
want to, how is that?
    Mrs. Kelly. Okay, yes.
    Mr. Baumgardner. We used a number of studies----
    Mrs. Kelly. You used one model, is that correct? One study, 
one model. A study based on one model. I will rephrase that, so 
I hope you understand what I am asking.
    Mr. Baumgardner. We constructed a model at CBO that, among 
other things, uses the results from a number of studies in 
determining what assumptions to keep----
    Mrs. Kelly. Did you use just one model? It was your model.
    Mr. Baumgardner. Yes.
    Mrs. Kelly. A theoretical model, correct?
    Mr. Baumgardner. It is a multi-equation, yes, but we used 
one model----
    Mrs. Kelly. A multi-equation model is a theoretical model, 
isn't it?
    Mr. Baumgardner. Well, it uses parameters that--for the 
behavioral assumptions, one looks at various studies in the 
literature to decide what are reasonable assumptions and then 
feed into that.
    Mrs. Kelly. Right. But it was your model.
    Mr. Baumgardner. Yes.
    Mrs. Kelly. Thank you.
    Chairman Talent. Ms. Napolitano. Ms. Napolitano is next.
    Ms. Napolitano. Thank you, Mr. Chair.
    Listening to a lot of the conversation, it is just 
befuddling to me being from California and the many small 
businesses that I know that are unable to purchase insurance 
for their employees, especially the ``Mom and Pops,'' and the 
hardships they go through when they are hit by catastrophic 
illnesses. But it just does not equate in my mind that given 
the large numbers of small business that there isn't 
something--there are some minor ones; they can purchase some 
insurance--but that there isn't an AHP that will be able to 
consolidate all the power that these numerous businesses can 
afford in being able to join together and have that purchasing 
    And I know there is diverse plans. I retired from Ford. I 
was initially covered 100 percent, and in time, by the time I 
retired, there was only, I think, 50 percent match. But 
needless to say, things change; that is accepted. You go 
through transitions, things change, costs change, et cetera. 
But why is it that we have to really fight every step of the 
way to get adequate coverage for the small business person who 
essentially is providing a great service?
    And, certainly, they don't just go out and say, ``I just 
want to employ young people because the coverage, if I may want 
to buy it, I don't have to pay a higher premium for the people, 
if I cost share of 50 percent it, whatever.'' You employ people 
who are going to get the job done, whether it is an elderly or 
retiree, whether it is a young one or a family member. You 
don't sometimes have that choice.
    So, why does the insurance have the ability to red light--
to me, it is a red light--when you say, ``Well, sorry, but we 
don't really want you, because you have older employees that 
are going to be a drain on the pot, if you will.'' It is just 
inconceivable to me.
    Can somebody tell me what can be done to be able to 
actually bring together the pool, whether it is by the 
organizations' efforts or whether it is anybody, just explain 
that anomaly.
    Ms. Lehnhard. I would make two quick points. There isn't a 
State in the country where we can refuse coverage for a small 
group no matter how sick they are. We have to take every small 
group. And in terms of pooling for purchasing powers, in 
California--California Blue Cross, California Blue Shield--a 
small employer gets the power of the arrangements that Blue 
Cross and Blue Shield has negotiated, not only with small 
employers behind them but all other big accounts. When we go 
out and negotiate an arrangement with a hospital or provider, 
we are representing the groups of 2 and the groups of 10,000. 
They have maximum purchasing power. You couldn't find a pool in 
California as big as our Blue Cross and Blue Shield plans.
    Ms. Napolitano. I understand that, and I have retired a 
couple times. I am covered by PERS, Public Employees Retirement 
System. Guess what? I used to have Blue Cross Blue Shield. I 
now only have Blue Cross. So, if I have medical necessities 
that would put me in the hospital, I am not covered, and yet 
this is a $127 billion entity in PERS.
    Now, tell me about the purchasing power for the employees 
or the retirees.
    Ms. Lehnhard. I don't understand. You don't have 
hospitalization coverage?
    Ms. Napolitano. No, just Blue Cross.
    Ms. Lehnhard. Blue Cross is----
    Ms. Napolitano. Or Blue Shield. One or the other. I only 
have the medical. I do not havethe hospitalization.
    Ms. Lehnhard. Blue Shield offers and hospital and----
    Ms. Napolitano. I know it offers, but the employer is not 
offering it to the employees, whether it is a cost-based 
decision or not. That, again, is something that affects 
    Ms. Lehnhard. That is the employer's decision.
    Ms. Napolitano. Right, but we don't have a choice is what I 
am trying to say. And, unfortunately, that happens more often 
than not.
    My concern is the small business--if we are going to 
capitalize on the growth of the small business and the 
entrepreneurship and be able to afford then the ability to have 
employees maintain that economy, we need to be sure that we 
provide them with all the assistance we can. Part of it is the 
health coverage, and I would want to look into how we can work 
together to be able to provide the pooling of resources to be 
able to assist the employers in covering of their employees 
regardless of who they are.
    Ms. Lehnhard. One of things we have said is Congress needs 
to focus on the low-wage worker in the small-employer group 
with scarce resources. That is where to start.
    Ms. Napolitano. Most of the small businesses are low wage--
    Ms. Lehnhard. And we supported tax credits for that low-
wage worker, not the employer but where they have a low-wage 
worker to help them pay for coverage and a decent cost-sharing 
arrangement with the employee. Even if that employee is buying 
coverage now, it is probably out of money that should be used 
for food or rent or something for their children. And we said 
just go ahead and provide the tax credit even if the employer 
is already providing it, if they are low-income.
    Ms. Velazquez. Would the gentlelady from California yield 
for one second?
    Ms. Napolitano. Yes, certainly.
    Ms. Velazquez. Ms. Kaplan, how would you view--and this is 
based on what Ms. Lehnhard just brought up--how would you view 
a Federal tax credit aimed at covering your employee in low-
wage jobs?
    Ms. Kaplan. I would view any help that would enable the 
small business with low-wage employees--and you know, being 
from New York, we talk about health care workers doing home 
care. We are talking about low-wage workers, so that any time 
that they are asked to contribute to their own health care 
costs it is impossible. There is no way that an employee is 
going to make a choice between feeding their kids and paying a 
    And the only way we are going to provide a company like 
mine for everybody is if the employees contribute so that 
anything that would help to get the both of us into a situation 
where we could buy the insurance, they could contribute in some 
way but getting tax credits or other things, anything would 
    Ms. Velazquez. You would support that.
    Ms. Kaplan. Absolutely.
    Ms. Velazquez. Mr. Gallo?
    Mr. Gallo. I think of a tax credit as kind of a temporary 
fix there, because the cost is still going to rise in the 
health care insurance. So, that might help out that they have 
some credit there, but I don't think it is an answer to it.
    Ms. Velazquez. What about if you could comment in terms of 
giving employees of businesses that are unable to provide 
health care the ability to deduct 100 percent?
    Mr. Gallo. Well, that would be good for the business in 
helping the business out. I look at the, again, the employees 
where we are talking co-pays. They still have to--and I think 
it was the Doctor that made the comment about they want good 
benefits, and if they are partners in that program or that 
plan, that rise in cost is still going to be there, and they 
are going to be paying part of that.
    Ms. Velazquez. Thank you.
    Thank you, Ms. Napolitano.
    Ms. Napolitano. Thank you, Nydia.
    One of the things that comes to mind is that a small--a 
low-wage earner without insurance but with a family would 
rather insure the children, because if they get sick, they need 
to have the child taken care of before anything else. And any 
plan, I don't care what plan it is, only offers the employee, 
spouse, and then family. Has any thought been given to be able 
to provide families with children coverage for children? Is has 
really--in my case, I had five children. I would have rather 
covered them than myself, because I knew I had to go to work, 
and I kept myself healthy or at least reasonably so. But if any 
of my children--I would go bananas, I'd be desperate.
    Ms. Lehnhard. I think this is what the CHIP Program is 
designed to do, and the States can take it to quite a high 
income level relative to the----
    Ms. Napolitano. But you have to have a certain income 
    Ms. Lehnhard. But I think you are talking about----
    Ms. Napolitano. But many of them do not--not necessarily. 
You have two people working. Sometimes you will not be 
eligible. So, what happens to those families who have a husband 
and wife working, even at a minimal that are at that wage line?
    Ms. Lehnhard. I would have to check on it, but it may be 
that you are eligible even if both parents are working as long 
as you meet the income level. It is a tremendous program, and 
we are working with CHIP Program----
    Ms. Napolitano. I am well aware of the CHIP Program.
    Ms. Lehnhard [continuing]. To try to get coverage for 
    Ms. Napolitano. Right. But it is still a small business 
owner that sometimes will be facing the absence of a mother if 
the child is sick. So, it costs the company in the long run.
    Thank you, Madam Chair--Mr. Chair.
    Chairman Talent. I thank the gentlelady.
    Ms. Lehnhard, I haven't found in the CBO report any 
statement that they think only the healthier associations will 
start Association Health Plans. Have you been able to find it 
or your staff?
    Ms. Lehnhard. It is a question of who is most apt to--if 
you are an association, are you going to look at your 
enrollment and say, ``Am I going to be successful?''
    Chairman Talent. Right. I understand the point, but you 
said CBO relied on it, and I haven't been able to find it.
    Ms. Lehnhard. Page 10, ``In the long run, one would expect 
the most successful AHPs to be sponsored by association whose 
members had lower than average health care costs.''
    Chairman Talent. Okay, where is that?
    Ms. Lehnhard. The top of the page.
    Chairman Talent. That is a statement about which are likely 
to be successful in the long run, not which are likely to go in 
    Ms. Lehnhard. And it is the premium relative to what you 
can get in the State-insured market. If you can't offer a 
cheaper premium, you are not successful.
    Chairman Talent. If you can't insure at less cost, you are 
not successful. In other words, you may charge the same premium 
and provide more insurance and provide a competitive advantage 
for that reason, right?
    Ms. Lehnhard. I think the point is risk selection. This is, 
I believe, in the context----
    Chairman Talent. No, we haven't gotten past the problem 
here with risk selection then. Unless you can show that the 
employers in the Association Health Plans will use any 
economies to save money and buy less insurance rather than 
provide better insurance, you haven't got your risk selection 
issue. And every time I have asked you guys about it, you kind 
of looked at me, and I haven't forced you to say yes or no, 
because I don't want to be mean. But, you haven't shown that 
    Ms. Lehnhard. I think I have said pretty clearly that I 
think this whole debate is about small employers wanting out 
from under State-mandated benefits and their costs when the 
choice is between basic primary care and hospitalization versus 
additional benefits.
    Chairman Talent. Okay. Let us go back then, Mary Nell. Big 
firms, right now, they are not subject to State mandates, 
    Ms. Lehnhard. Big firms don't, on average, have low-income 
workers like the small groups.
    Chairman Talent. Okay. So, small firms do. Have you ever 
heard of the Western Growers Association?
    Ms. Lehnhard. They offer a very stripped down benefit.
    Chairman Talent. Who are their workers? They are migrant 
workers, right?
    In comparison--this is testimony from our last hearing--the 
least expensive comparable health plan offered by the 
government-run Health Insurance Plan of California for the 
comparable age range is $273.75 per month. This is comparable 
plans. However, the HIPC Plan is only available in certain 
parts of the state. Western Growers Association's least 
expensive family health plan is $149 per month for employees of 
any age.
    Ms. Lehnhard. I think the point, though, is they have asked 
the State, and the State has agreed, they are out from under 
State-mandated benefits. They asked to be out, and they have a 
yearly cap of $20,000 a year on spending.
    Chairman Talent. Well, the question is not whether they are 
subject to state mandates or not.
    Ms. Lehnhard. They asked to be out from under them.
    Chairman Talent. You keep going back to that after you say 
it is not relevant. The question is however they save the 
    Ms. Lehnhard. I said it is not as relevant as rating. It is 
    Chairman Talent. Because big employers aren't subject to 
state mandates either, right? And big employers do not use 
those savings to offer poorer quality health insurance. We are 
agreed on that, aren't we? Big employers don't offer poorer 
quality health insurance than small employers. Are we agreed on 
    Ms. Lehnhard. In general, I agree. They have richer 
benefits; they can afford it.
    Chairman Talent. Okay, good. So, that is no longer a 
question in the debate. So, now the only issue what your 
statement is that it is because they have healthier people 
working for big employers?
    Ms. Lehnhard. No, they have higher-income employees. That 
is the CBO's point. The employees can afford--when employees 
are paying 50 percent of the premium, they can--higher-income 
employees can afford that.
    Chairman Talent. I am trying to follow this.
    Ms. Lehnhard. The employees have to pay----
    Chairman Talent. Is there any data, Mr. Baumgardner? Do you 
have any data to support that?
    Mr. Baumgardner. Which part of the----
    Chairman Talent. The point that they have employees who 
want better health insurance as opposed to small businesses.
    Ms. Lehnhard. No, the employees can afford the coverage 
more than employers in small groups.
    Chairman Talent. All right. Do they have people who can 
afford it and who want it more? Do you have data to support 
    Mr. Baumgardner. Certainly, there is evidence that with 
higher income people generally in a lot of markets choose a 
higher quality product.
    Chairman Talent. Dr. Wilson, do you have a point you wish 
to make.
    Mr. Wilson. I didn't want to interrupt, but----
    Chairman Talent. Well, go ahead.
    Mr. Wilson [continuing]. I would like to say, again, to 
emphasize Dr. Westerfield's view, which is included in my 
paper, and he is a statistician also, but I asked him to put 
this in English so that I could understand it. And I would ask 
that everybody look at that.
    But he really--we are almost using the CBO study, because 
it is the only study we are talking about today as some kind of 
baseline where he feels that it did not, in their model, 
address wage differentials that you are talking about, in the 
model. There should be another line on that table 1 for wage 
differentials between the three different category of size of 
employers. He feels that there should be a line having to do 
with plan differentials--full-board plans or bare bones. And 
then the employer-employee contribution. We are not talking--
the study doesn't address who is actually paying for these 
benefits and the differences between large and small employers.
    I am a little--I am totally uncomfortable that we have a 
very valid report here at this moment.
    Chairman Talent. Well, Ms. Kaplan testified that when she 
was in a union, which was, of course, exempt from mandates, 
that she felt she got better health care insurance.
    Ms. Kaplan. There was no question that we were and still 
are--the union is still a majority of women, and so the 
benefits that the union was dealing with were geared towards 
the population that was covered under the plan. We were 
providing maternity benefits for single women before those 
benefits were available, because the insurance companies sold 
programs that said you had to be a family to get maternity 
benefits. We provided maternity disability before it became a 
mandate. We provided well baby care, because that is what was 
necessary for the people who participated in that plan. Now, 
that was on top of whatever other general benefits there were.
    And that is how NAWBO perceives that it would create a plan 
based on the needs of the small women business owners. So, the 
women business owners of our organization, would look at what 
are their needs, what are they looking for, and create a plan 
that would, for the most part, be concerned with the kinds of 
benefits these women want. I am going to say, right off the 
bat, it is going to be--have to include coverage for 
mammographies, for routine pap smears, for mastectomies, for 
child care, for maternity benefits where--we are not going to 
create a plan that says you can go in the hospital, have your 
baby, and you are going to leave today. We have experienced it. 
We are not going to do that to ourselves, at least I don't 
think so. We never have in the past. We are going to look out 
for us.
    Chairman Talent. I appreciate that very much. Here is what 
I am going to do. I am going to try and be fair here, because I 
have interrupted a few times. I feel strongly about this. So, I 
am going to state the case as I see it, and then I will let Ms. 
Lehnhard or Mr. Baumgardner have the last word, how is that? 
So, you all get to trump me this time.
    I am going to quote from the written testimony of Joe 
Rossman, with the ABC, and they have an association plan, and 
this was from the last hearing on this: ``The ABC plan has 
total expenses of 13.5 cents for every dollar of premium. These 
costs include all marketing, administration, and insurance 
company risk claim payment expenses and premium taxes. 
Alternatively, small employers who purchase coverage directly 
from any insurance company can experience total expenses of 30 
cents for every dollar of premium or more.''
    As CBO indicated in its report--I don't think there is any 
question that if small employers pool; they get economies of 
scale. They have higher purchasing power; they have lower 
administrative costs; they can spread the administrative costs 
among more employees; they don't have to pay--if they can self-
fund, they don't have to pay the insurance companies profit 
margin; they don't have to pay the insurance companies 
marketing costs, because they are not trying to make a profit 
on the plan. They may be using it as a recruiting tool to get 
people in the association, but they are not trying to make a 
profit. And they don't have any marketing costs, because they 
simply send the flyer out to their members. Therefore, they are 
able to buy insurance and provide insurance at less cost.
    Because they are able to provide insurance at less cost, 
more small employers will be able to afford insurance, and we 
will have fewer people who are uninsured, and more people who 
currently are insured but only have a few choices will have 
more choices, because there will be more money to buy them 
insurance with.
    Now, the alternative argument, it seems to me, to the 
extent it is still standing here, that somehow Association 
Health Plans will only attract healthier people, and that 
therefore this will have a negative impact on the small group 
market. I don't see it. I think it will tend to attract sicker 
people. I don't think people who work for small employers are 
necessarily healthier. I think the tendency may be for them to 
be sicker. I don't think they have any less need or desire for 
health insurance if they are sick than people who work for big 
employers. And I don't see any reason why it wouldn't operate 
very similarly to the way big companies' self-funded plans or 
big company plans do.
    So, now I will let you two offer the response.
    Mr. Baumgardner. I would like to touch a couple points. One 
is the issue of mandates. There is some evidence from the 
Journal of Public Economics paper by Gruber. Looking at small 
firms, comparing States that had a mandate and States that 
didn't, roughly they found about a 5 percent less offering of 
drug abuse treatment in the States without the mandates, 8 to 9 
percent less offering of out-patient mental illness coverage, 
about 6 percent less offering of in-patient mental illness 
coverage. So, we believe there is some binding effect for some 
plans of these State mandate benefit restrictions. And, again, 
to the extent the legislation exempts one from complying with 
those mandates, we think some plans are going to take advantage 
of it.
    Let me also point out they are clearly not going to take 
advantage of all mandated benefits. GAO did a study, looked at 
the actuarial cost--that is sort of the claims cost--of per 
paid claims for the areas where there were mandated benefits. 
They found estimates in the range of, say, 5.4 to I believe it 
was 22 percent as the actuarial cost of those mandated 
benefits. One of the reasons we in fact assumed only a 5 
percent mandate savings was a recognition that not all these 
benefits are going to be dropped simply because you have an 
    And in fact that leads to why is the coverage result 
relatively small? It is small, in part, because there doesn't 
appear to be a big advantage taken of being exempt from the 
mandates. A lot of those benefits would stay in the package. We 
are just saying, on average, there would be fewer benefits in 
these packages.
    And then on this other point, on selection, a couple 
observations. One is that there is some evidence, and we would 
be happy to look for that for your staff, on packages and 
selection. The ones I am aware of, Medigap, people who choose 
the benefit that has prescription drug coverage do tend to be 
sicker. There have been some studies of university health plans 
where the more generous package started to attract the older 
workers in those plans. So, there is some evidence of that out 
    Again, a final point on the--that kind of covers both: I 
think what are the key elements in the legislation that these 
new plans don't have to comply with that plans under current 
law do? Basically, it is the State-mandated benefits and the 
availability rules, not complying with State availability rules 
but just availability within the association. So, those are 
really the two things that are different, and in fact they are 
the source of the effects that we have calculated.
    Again, on this selection thing, it need not even be active 
selection. I think the point is, again, I call it economic 
selection--I referred to the survivor principle earlier. If you 
are in a situation where you are allowed to price lower for the 
same thing, you are going to tend to do better, and given the 
premium compression rules that are State regulations, the 
associations that do end up with an average risk that is lower 
than the average in the State pool will indeed be able to offer 
lower premiums on that count, and we would expect them to 
    Again, we are not making any judgment on are the State 
rules a good idea, are these rules a good idea? I am really 
just trying to explain sort of the source of the effects within 
our study.
    Thank you.
    Ms. Lehnhard. I don't want to be redundant to what he said, 
so I will focus on a different point: The non-selection 
savings. You mentioned that 13 percent administrative cost is 
about what our Blue Cross and Blue Shield administrative cost 
is for small group coverage. And I would just point out that 
when you have an Association Health Plan, you will have some 
marketing costs. You have got to tell them about the product; 
you have got to send out enrollment forms; you have got to 
    But the biggest cost difference between a large employer 
and a small group market is enrollment. It is very expensive to 
enroll a plan, get people's names, addresses, social security 
numbers, their family members, do the family members have other 
coverage, is anybody on COBRA? It is a very expensive process 
to enroll, and when you enroll a big company, you have the 
economy of scale of dealing with that one company. When you 
enroll 50 companies, you don't have economies of scale on 
enrollment, and that is the major marketing cost.
    Putting all that aside, though, I don't want to leave the 
impression that Association Health Plans are bad or, as I said, 
it is active ``cherry picking.'' I think it would be 
inadvertent selection. We do a lot with Association Health 
Plans, and you do get a lot from it. You get the trust, the 
communication, all of those things that you mentioned, but they 
are regulated by the State. You can do that and keep that 
without changing the law, and that would be my final point.
    Chairman Talent. Do you have anything else?
    Ms. Velazquez. No.
    Chairman Talent. Okay. Appreciate you all being here. We 
have a little more business in the Committee to conduct, but I 
will adjourn the hearing, and I do appreciate everybody's 
input. I think it has been a very useful hearing.
    Thank you very much.
    Without objection, we will leave the hearing record open 
for 10 days for any additional written questions from the 
    The hearing is adjourned.
    [Whereupon, at 1:08 p.m., the Committee was adjourned.]