[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]
ASSOCIATION HEALTH PLANS--
PROMOTING HEALTH CARE ACCESSIBILITY
=======================================================================
HEARING
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
65-217 U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 2000
COMMITTEE ON SMALL BUSINESS
JAMES M. TALENT, Missouri, Chairman
LARRY COMBEST, Texas NYDIA M. VELAZQUEZ, New York
JOEL HEFLEY, Colorado JUANITA MILLENDER-McDONALD,
DONALD A. MANZULLO, Illinois California
ROSCOE G. BARTLETT, Maryland DANNY K. DAVIS, Illinois
FRANK A. LoBIONDO, New Jersey CAROLYN McCARTHY, New York
SUE W. KELLY, New York BILL PASCRELL, New Jersey
STEVEN J. CHABOT, Ohio RUBEN HINOJOSA, Texas
PHIL ENGLISH, Pennsylvania DONNA M. CHRISTIAN-CHRISTENSEN,
DAVID M. McINTOSH, Indiana Virgin Islands
RICK HILL, Montana ROBERT A. BRADY, Pennsylvania
JOSEPH R. PITTS, Pennsylvania TOM UDALL, New Mexico
JOHN E. SWEENEY, New York DENNIS MOORE, Kansas
PATRICK J. TOOMEY, Pennsylvania STEPHANIE TUBBS JONES, Ohio
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
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Page
Hearing held on February 16, 2000: 01
WITNESSES
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
APPENDIX
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
HEARING ON ASSOCIATION HEALTH PLANS
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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
witnesses.
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.
[Recess.]
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
costs.
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
build.
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
that.
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.
STATEMENT OF PAUL WILSON, EXECUTIVE DIRECTOR, NORTH AMERICAN
EQUIPMENT DEALERS ASSOCIATION GROUP INSURANCE TRUST
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
members.
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
State.
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
employees.
To summarize, TAHC believes that CBO substantially
underestimated the benefits of association group purchasing and
an injection of healthy competition into health insurance
markets.
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.
STATEMENT OF JAMES R. BAUMGARDNER, ACTING DEPUTY ASSISTANT
DIRECTOR FOR HEALTH POLICY, CONGRESSIONAL BUDGET OFFICE
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
record.
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
association.
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
percent.
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
questions.
[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.
STATEMENT OF MARY NELL LEHNHARD, SENIOR VICE PRESIDENT, BLUE
CROSS BLUE SHIELD ASSOCIATION
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
reforms.
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.
STATEMENT OF MARK JOENSEN, VICE PRESIDENT AND DIRECTOR OF
HEALTH CARE ANALYSIS, CONSAD RESEARCH CORPORATION
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.
STATEMENT OF ARLENE KAPLAN, CEO AND FOUNDER, HEART-
TO-HOME
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
protections.
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.
STATEMENT OF RICHARD GALLO, OWNER, THE OFFICE OUTLET
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
impossible.
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
employees.
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
rest.''
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.
[Recess.]
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,
right?
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
reason.
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
reason.
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
alone.
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
mandates?
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
this.
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
firms.
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
business.
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
associations.
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
purchasing?
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
arrangements.''
Mr. Baumgardner. And that is under current law where States
can regulate these plans, and they have to comply with benefit
mandates.
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
market.
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
savings?
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
average.
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
analysis?
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
uptake.
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
benefits----
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
benefits?
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
less.
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
employees?
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
cross-subsidize.
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
population.
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
they?
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,
two?
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
administrator.
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
have----
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
people?
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
worked.
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
more----
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
people----
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
that?
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
who----
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
power.
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
employees.
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
premium.
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
help.
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
level.
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
children.
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
there.
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
yet.
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,
right?
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
money----
Ms. Lehnhard. I said it is not as relevant as rating. It is
about----
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
that?
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
that?
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
exemption.
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
there.
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
survive.
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
follow-up.
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
members.
The hearing is adjourned.
[Whereupon, at 1:08 p.m., the Committee was adjourned.]
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