[House Hearing, 107 Congress]
[From the U.S. Government Printing Office]




 
                           NATION'S UNINSURED

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

                                HEARING

                               BEFORE THE

                         SUBCOMMITTEE ON HEALTH

                                 OF THE

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             APRIL 4, 2001

                               __________

                           Serial No. 107-23

                               __________

         Printed for the use of the Committee on Ways and Means


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                      COMMITTEE ON WAYS AND MEANS

                   BILL THOMAS, California, Chairman

PHILIP M. CRANE, Illinois            CHARLES B. RANGEL, New York
E. CLAY SHAW, Jr., Florida           FORTNEY PETE STARK, California
NANCY L. JOHNSON, Connecticut        ROBERT T. MATSUI, California
AMO HOUGHTON, New York               WILLIAM J. COYNE, Pennsylvania
WALLY HERGER, California             SANDER M. LEVIN, Michigan
JIM McCRERY, Louisiana               BENJAMIN L. CARDIN, Maryland
DAVE CAMP, Michigan                  JIM McDERMOTT, Washington
JIM RAMSTAD, Minnesota               GERALD D. KLECZKA, Wisconsin
JIM NUSSLE, Iowa                     JOHN LEWIS, Georgia
SAM JOHNSON, Texas                   RICHARD E. NEAL, Massachusetts
JENNIFER DUNN, Washington            MICHAEL R. McNULTY, New York
MAC COLLINS, Georgia                 WILLIAM J. JEFFERSON, Louisiana
ROB PORTMAN, Ohio                    JOHN S. TANNER, Tennessee
PHIL ENGLISH, Pennsylvania           XAVIER BECERRA, California
WES WATKINS, Oklahoma                KAREN L. THURMAN, Florida
J.D. HAYWORTH, Arizona               LLOYD DOGGETT, Texas
JERRY WELLER, Illinois               EARL POMEROY, North Dakota
KENNY C. HULSHOF, Missouri
SCOTT McINNIS, Colorado
RON LEWIS, Kentucky
MARK FOLEY, Florida
KEVIN BRADY, Texas
PAUL RYAN, Wisconsin

                     Allison Giles, Chief of Staff

                  Janice Mays, Minority Chief Counsel

                                 ______

                         Subcommittee on Health

                NANCY L. JOHNSON, Connecticut, Chairman

JIM McCRERY, Louisiana               FORTNEY PETE STARK, California
PHILIP M. CRANE, Illinois            GERALD D. KLECZKA, Wisconsin
SAM JOHNSON, Texas                   JOHN LEWIS, Georgia
DAVE CAMP, Michigan                  JIM McDERMOTT, Washington
JIM RAMSTAD, Minnesota               KAREN L. THURMAN, Florida
PHIL ENGLISH, Pennsylvania
JENNIFER DUNN, Washington


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





                            C O N T E N T S

                               __________
                                                                   Page
Advisories announcing the hearing................................  2, 4

                               WITNESSES

Etheredge, Lynn, George Washington University....................    40
Fronstin, Paul, Employee Benefit Research Institute..............    10
Gabel, Jon R., Health Research and Educational Trust.............    20
Larsen, Steven B., Maryland Insurance Commissioner, and National 
  Association of Insurance Commissioners.........................    52
Pauly, Mark V., University of Pennsylvania.......................    43
Singer, Sara J., Stanford University.............................    48

                                 ______

                       SUBMISSIONS FOR THE RECORD

Advanced Medical Technology Association, statement...............    67
American College of Physicians--American Society of Internal 
  Medicine, statement............................................    69
American Hospital Association, statement.........................    74
Blue Cross and Blue Shield Association, Employee Benefit Research 
  Institute, and Consumer Health Education Council, joint 
  statement......................................................    75
Consumers Union, Gail Shearer, statement.........................    82
Healthcare Leadership Council, statement.........................    85
National Association of Health Underwriters, Arlington, VA, Janet 
  Stokes Trautwein, statement and attachments....................    89
Washington MSA Project, Issaquah, WA, Stephen Barchet, letter....   104


                           NATION'S UNINSURED

                              ----------                              


                        WEDNESDAY, APRIL 4, 2001

                  House of Representatives,
                            Subcommittee on Health,
                               Committee on Ways and Means,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 10:05 a.m., in 
room 1100 Longworth House Office Building, Hon. Nancy L. 
Johnson [Chairwoman of the Subcommittee] presiding.
    [The advisory and revised advisory announcing the hearing 
follow:]

ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

                         SUBCOMMITTEE ON HEALTH

                                                CONTACT: (202) 225-3943
FOR IMMEDIATE RELEASE
March 29, 2001
No. HL-4

                      Johnson Announces Hearing on

                         the Nation's Uninsured

    Congresswoman Nancy L. Johnson (R-CT), Chairman, Subcommittee on 
Health of the Committee on Ways and Means, today announced that the 
Subcommittee will hold a hearing on the uninsured population and 
solutions for expanding health insurance coverage. The hearing will 
take place on Thursday, April 5, 2001, in the main Committee hearing 
room, 1100 Longworth, beginning at 10:00 a.m.
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from invited witnesses only. 
Witnesses will include experts on the uninsured population and on 
policies to increase health insurance coverage. However, any individual 
or organization not scheduled for an oral appearance may submit a 
written statement for consideration by the Committee and for inclusion 
in the printed record of the hearing.
      

BACKGROUND:

      
    This hearing will focus on the 42 million uninsured Americans. In 
1999, for the first time in more than a decade, the percentage and 
number of Americans with health insurance increased. However, one in 
six Americans remains uninsured.
    These uninsured Americans are a diverse group. More than four out 
of five uninsured are full-time workers and their families, and one out 
of five uninsured work for employers who offer coverage but choose not 
to take it. The primary reason cited for these uninsured workers was 
the cost of insurance premiums. Others in the uninsured category 
consist of lower income individuals who are either ineligible or fail 
to enroll in existing public programs.
    President Bush has proposed a comprehensive plan to assist 
uninsured individuals, including offering refundable tax credits to 
lower and middle-income individuals. The hearing will provide a 
framework for the development of legislation to begin to examine the 
President's proposal and address the barriers faced in accessing health 
insurance coverage.
    In announcing the hearing, Chairman Johnson stated: "Addressing the 
problem of the uninsured is absolutely critical because those without 
health coverage often go without quality health care. There are a lot 
of new and innovative ideas circulating to address this problem. This 
hearing will bring those ideas forward for the Committee to evaluate 
and act upon if appropriate. I look forward to working with the Bush 
Administration on reducing the number of Americans without health 
insurance.''
      

FOCUS OF THE HEARING:

      
    The hearing begins the Subcommittee's consideration of the issues 
on why many Americans lack affordable access to health insurance. The 
first panel will discuss trends in health insurance coverage and 
witnesses will help Members identify who has coverage and who does not. 
The second panel will turn to examining potential options for 
increasing coverage for the 42 million uninsured Americans, and focus 
on tax relief ideas, in particular.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Any person or organization wishing to submit a written statement 
for the printed record of the hearing should submit six (6) single-
spaced copies of their statement, along with an IBM compatible 3.5-inch 
diskette in WordPerfect or MS Word format, with their name, address, 
and hearing date noted on a label, by the close of business, Thursday, 
April 19, 2001, to Allison Giles, Chief of Staff, Committee on Ways and 
Means, U.S. House of Representatives, 1102 Longworth House Office 
Building, Washington, D.C. 20515. If those filing written statements 
wish to have their statements distributed to the press and interested 
public at the hearing, they may deliver 200 additional copies for this 
purpose to the Subcommittee on Health office, room 1136 Longworth House 
Office Building, by close of business the day before the hearing.
      

FORMATTING REQUIREMENTS:

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

    Note: All Committee advisories and news releases are available on 
the World Wide Web at ``http://waysandmeans.house.gov''.
      

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

                         NOTICE--CHANGE IN DATE

ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

                         SUBCOMMITTEE ON HEALTH

                                                CONTACT: (202) 225-3943
FOR IMMEDIATE RELEASE
March 29, 2001
No. HL-4

                Change in Date for Subcommittee Hearing

                       on Thursday, April 5, 2001

                        on the Nation's Uninsured

    Congresswoman Nancy L. Johnson, Chairman of the Subcommittee on 
Health of the Committee on Ways and Means, today announced that the 
Subcommittee hearing on the uninsured population and solutions for 
expanding health insurance coverage, previously scheduled for Thursday, 
April 5, 2001, will now be held on Wednesday, April 4, 2001, at 10:00 
a.m., in the main Committee hearing room, 1100 Longworth House Office 
Building.
    All other details for the hearing remain the same. (See 
Subcommittee press release No. HL-4, dated March 29, 2001.)

                                


    Chairwoman Johnson. Good morning. The hearing will convene.
    Today's hearing focuses on Americans who are uninsured and 
on solutions that in combination with the Commerce Committee 
policy initiatives and probably with the Education Committee 
actions can guarantee access to affordable insurance to every 
American.
    It was 2 years ago, in a similar hearing on the uninsured, 
the Health Subcommittee found that a record number of Americans 
were uninsured. This year, for the first time in more than a 
decade, the number of Americans with health insurance has 
increased. Almost 2 million more Americans no longer lack 
health insurance, primarily because the economy has been strong 
and unemployment low.
    However, 42 million Americans, more than one in six, 
remains uninsured. This is a problem that simply must be solved 
because those without health coverage often go without health 
care. Indeed, the uninsured are more than four times as likely 
to delay care, use 40-percent fewer services than insured 
individuals with similar health and experience a mortality rate 
25-percent greater than insured individuals with similar 
characteristics.
    Moreover, without affordable insurance, these Americans run 
the financial risk of catastrophic financial burdens and, in 
addition, impose an increasingly unbearable burden on providers 
and private payers.
    The uninsured are a diverse group. More than four out of 
five uninsured are full-time workers for their families, and 
one out of five uninsured individuals work for employers who 
offer coverage, but choose not to take it. The primary reasons 
cited for these workers being uninsured was the cost of 
insurance. Making insurance more affordable will clearly help 
people purchase insurance.
    Many of the uninsured, one-fourth of adults and two-thirds 
of children, are eligible for public programs, but fail to 
enroll, or there are many complex issues involved, reasons why 
eligible individuals do not enroll in public programs. 
According to the Commonwealth Fund, the majority of the insured 
would simply prefer not to have government as the main source 
of coverage.
    Today, we will hear testimony from researchers at the 
Employee Benefit Research Institute and the Health Research and 
Education Trust on trends in health insurance coverage and who 
has coverage and who does not, about who is uninsured in 
America and why they are uninsured. We will also hear their 
analysis about whether this favorable trend in insurance 
coverage will continue.
    The second panel will turn to examining potential options 
for increasing coverage for the 42 million uninsured Americans 
and focus on tax ideas in particular. The panelists will 
discuss their evaluation of the effect of tax credits as well 
as other options.
    President Bush has proposed a multi-pronged strategy to 
assist the uninsured, and two key components of his proposals 
to reduce the uninsured for which Ways and Means has 
jurisdiction are tax credits and medical savings accounts. In 
this vein, we will be examining tax credit ideas in this 
hearing. Second, Committee Chairman Bill Thomas will introduce 
the Medical Savings Account Availability Act today.
    In addition, we will be working with our colleagues and 
other committees of jurisdiction to attack this problem by 
seeking ways to make insurance more affordable through group 
purchasing structure, improving enrollment in Children's Health 
Insurance Program (CHIP) and expanding access to community 
health centers and linking them more effectively with hospital 
coverage.
    The hearing will provide a framework for the development of 
legislation to address the barriers faced in accessing health 
insurance coverage by the uninsured, and I look forward to 
working with the Bush administration and my Democrat colleagues 
on reducing the number of Americans without health insurance. I 
do consider that this Congress has a unique opportunity to 
attack this problem and pass the package of bills from a 
variety of Committees that are necessary to really create 
access for the uninsured to affordable health insurance.
    We have known what the components were now for several 
years. We have talked about them. Various committees have heard 
various things. Both Presidential candidates talked about this 
issue, and the time to act is now. This Subcommittee is going 
to do its work on the difficult issue of the role of tax policy 
in helping the uninsured gain access to insurance, but that 
will not be enough alone, and we are keenly aware of that.
    I also want to mention that one of the reasons why we have 
to deal with the issue of tax policy for the uninsured is 
because not only do they not get the help they need, but they 
suffer a discretionary impact that is just profoundly unfair. 
It is unfair to provide a subsidy to every single person in 
American who enjoys employer-provided insurance and not at 
least provide the same subsidy at the same level to those who 
have to buy insurance on their own.
    So this is not only about access to health insurance, but 
it is about fair, more even-handed tax policy, and I look 
forward to the inputs of those who are going to testify before 
us today.
    I would like to recognize my colleague, Mr. Stark.
    [The opening statement of Chairwoman Johnson follows:]
  Opening Statement of the Hon. Nancy Johnson, M.C., Connecticut, and 
                   Chairwoman, Subcommittee on Health
    Today's hearing focuses on uninsured Americans and solutions for 
expanding health insurance coverage. Two years ago, in a similar 
hearing on the uninsured, the Health Subcommittee found that a record 
number of Americans were uninsured. This year, for the first time in 
more than a decade, the percentage of Americans with health insurance 
has increased--almost two million more Americans no longer lack health 
insurance. The main source for the decline was a strong economy and a 
low unemployment rate.
    However, 42 million Americans--more than1 in 6 Americans--remain 
uninsured. The uninsured are a blight on the nation's health care 
system. This committee understands the importance of addressing this 
problem because those without health coverage often go without health 
care. Indeed, the uninsured are more than four times as likely to delay 
care, use 40 percent fewer services than the insured individuals with 
similar health, and experience a mortality rate 25 percent greater than 
insured individuals with similar characteristics. Moreover, without 
affordable health insurance, these Americans run the risk of financial 
catastrophe. Finally, their costs are often shifted to Medicare and 
private payors, creating distortions in the market.
    The uninsured are a diverse group. More than four out of five 
uninsured are full time workers and their families, and one out of five 
uninsured individuals work for employers who offer coverage but they 
choose not to take it. The primary reason cited for these workers being 
uninsured was the cost of insurance. Providing more resources to these 
people will clearly help them purchase insurance.
    Many of the uninsured--one-fourth of adults and \2/3\ of children--
are eligible for public programs but fail to enroll. While there are 
many complex issues involved reasons why eligible individuals do not 
enroll in public problems, according to the Commonwealth Fund, the 
majority of the uninsured would prefer not to have government be the 
main source of coverage.
    Today, we will hear testimony from researchers at the Employee 
Benefit Research Institute and the Health Research and Education Trust 
on trends in health insurance coverage and who has coverage and who 
does not; about who is uninsured in America and why they are uninsured. 
We will also hear their analysis about whether the favorable trend in 
insurance coverage will continue.
    The second panel will turn to examining potential options for 
increasing coverage for the 42 million uninsured Americans, and focus 
on tax ideas, in particular. The panelists will discuss their 
evaluation of the effect of tax credits as well as other options.
    President Bush has proposed a multi-prong strategy to assist the 
uninsured. Two key components of his proposals to reduce the uninsured, 
for which Ways and Means has jurisdiction, are tax credits and medical 
savings accounts. In that vein, we will be examining tax credit ideas 
in this hearing. Secondly, Committee Chairman Bill Thomas will 
introduce the Medical Savings Account Availability Act today.
    In addition, we will be working with our colleagues on other 
committees of jurisdiction to attack this problem, by seeking ways to 
make insurance more affordable through group purchasing structures, 
improving the enrollment in S-CHIP and expanding access to community 
health centers.
    The hearing will provide a framework for the development of 
legislation to address the barriers faced in accessing health insurance 
coverage by the uninsured. And I look forward to working with the Bush 
Administration and our Democratic colleagues on reducing the number of 
Americans without health insurance.

                                


    Mr. Stark. Thank you, Madam Chair, and thank you for 
today's hearing. I hope that we will be the first of many on 
this issue.
    As is my staff's suggestion, I have a long, wordy opening 
statement, which is more than you want to hear, and I would ask 
unanimous consent that I be allowed to place that priceless 
tome in the record in its entirety.
    Chairwoman Johnson. In its entirety.
    Mr. Stark. I also have, I think, a very useful article in a 
set of charts from the Center on Budget and Policy Priorities 
dealing with tax credits for individuals buying health 
insurance, and I would ask that that be made a part of the 
record.
    Chairwoman Johnson. So----
    Mr. Stark. Thank you.
    Having said that, let me summarize, that had I had 
unlimited time, what I might have wanted to read to you.
    We have the disgraceful distinction of being the sole 
industrialized nation in the world that does not assure or 
ensure access to health insurance for all its citizens, and we 
still, in spite of yesterday's stock market, are probably the 
richest nation in the world. The uninsured are a problem that 
has been with us as long as certainly I have been involved in 
health care legislation.
    It has gone up and it has gone down, but it has been 
hovering sadly around 40 to 42 million people. The number also 
depends on whether you count people who are insured all the 
time or only part of the time during the year. But a majority 
of uninsured are low-income, and while 80 percent of them are 
workers, more than 70 percent of those uninsured workers lack 
access to a job-based coverage which is where most Americans 
below the age of 65 get their health insurance.
    The good news is that this idea of expanding health care or 
access to health insurance is back on our agenda, right up 
there with pharmaceutical coverage, and that is good. But the 
bad news is that even carefully constructed Tax Code proposals 
will not achieve the goal of increased coverage in the absence 
of significant financial resources being applied to this 
problem and some, if you will pardon the expression, stringent 
regulations.
    I don't believe that just throwing a couple or even a few 
thousand dollars at this problem for each person will solve it. 
We could construct a refundable tax credit that would result in 
increasing health care coverage, but, if we are not careful, 
using the Tax Code could result only in our paying lip service 
to the issue while spending billions of dollars on tax breaks 
for those who already have insurance.
    I think there are four elements that we have to keep in 
mind. The tax credits must be refundable to get to the people 
who most need them. The tax credit has to be large enough to 
subsidize a significant portion of the cost of a meaningful 
policy.
    Sure, you can buy a policy for a thousand bucks a year, but 
it is not worth anything. It gives you 30 bucks a day if you 
get cancer in the hospital or something like that, but to get 
basic coverage that is at least as good as Medicare or 
Medicaid, you are going to need to spend a lot more than that. 
My guess is that the individual policies are around$2,500 and 
around $6,500 for a family policy, and a couple of thousand dollars 
toward that for a family with income of less-than-$30,000 doesn't get 
there.
    There must be a mechanism to deliver the credit directly to 
the insurer and make sure that the funds are there consistently 
during the year. There is also going to have to be some 
definition--call it regulation, if you will--of the health 
insurance marketplace.
    The tax credit would be worthless if the marketplace will 
not allow somebody to purchase a policy or if the insurers just 
raise the price to soak up that additional money.
    I have not seen a proposal this year from either side of 
the aisle that meets all of these criteria, but our job is to 
see if we can make comprehensive insurance affordable and 
accessible, and subsidize it for those who can't afford it.
    I have often said that in this country, there is only a 
very small group of Americans, a small percentage, that have a 
constitutional right to health insurance, and I will bet even 
the chairlady doesn't know who they are, but under Article IV, 
they are prisoners. I have always said what is good enough for 
Haldeman, Erlichman, and Rostenkowski is good enough for me. 
Therefore, I would like to see us move toward a right for every 
American to have health care coverage under the Constitution.
    Thank you.
    [The opening statements of Mr. Stark and Mr. Ramstad 
follow:]
   Opening Statement of the Hon. Fortney Pete Stark, M.C., California
    Madam Chairwoman, thank you for having today's hearing. I hope it 
is the first of many on this important issue.
    We hold the disgraceful distinction of being the sole 
industrialized country that fails to assure access to health insurance 
for all its citizens. With record surpluses at our disposal, it is 
inexcusable to not make a major down-payment toward health insurance 
for all.
    The majority of the uninsured have incomes under 200 percent of the 
federal poverty level ($17,180 for an individual, $35,300 for a family 
of four). While approximately 80 percent of the uninsured are either 
workers or dependents of workers, more than 70 percent of uninsured 
workers lack access to job-based coverage. According to a 1999 
Commonwealth Fund study on workers' health, most uninsured employees 
work for an employer that does not offer insurance or they are 
ineligible for the insurance that is offered, often because they work 
part-time or have not worked at the firm long enough. Just 12 percent 
of eligible uninsured workers actually decline coverage.
    The combination of income and workplace variables is particularly 
harmful to low-wage workers. For example, only 55 percent of low-wage 
workers who earn $7 or less per hour are even offered coverage, 
compared to 96 percent of workers who earn more than $15 per hour. In 
the age of incrementalism, successful efforts to increase health 
insurance rates must take all of these issues--and more--into 
consideration.
    There has been a lot of discussion in the past few years about 
using tax credits to expand access to health insurance. It seems to be 
particularly attractive in certain circles this year. The good news is 
that expanding access to health insurance is back on the national 
agenda. I welcome the discussion. The bad news is that even carefully 
constructed tax code proposals will fail to achieve the goal of 
increased coverage in the absence of significant financial resources 
and stringent government regulation. I believe expanding existing 
public programs would bring the biggest bang for the taxpayer's buck.
    Don't get me wrong. We can theoretically construct a refundable tax 
credit proposal that would result in a meaningful increase in health 
insurance coverage. But, if we are not careful, using the tax code to 
try to improve access to health insurance could result in Congress 
paying lip service to the issue of the uninsured while spending 
billions of dollars on tax breaks for those who already have insurance.
    As I have mentioned, using tax credits to improve health insurance 
coverage is not cheap and it requires heavy government regulation to be 
effective. There are at least four required elements of an effective 
health insurance tax credit proposal, and I would argue that no plan 
introduced to date meets all the criteria.
    1. First, tax credits must be refundable. More than half of the 
uninsured either pay no taxes or have tax liabilities below the levels 
proposed by most tax credit proponents. If the credit isn't refundable, 
it's simply a hollow promise for these individuals. President Bush 
campaigned on a refundable tax credit, and Republicans and Democrats 
alike in Congress have sponsored legislation that use refundable tax 
credits.
    2. Second, the tax credit must be large enough to subsidize a 
significant portion of the cost of a meaningful policy. A typical 
individual policy can cost $2,400 and the average family policy in 2000 
was nearly $6,400. Last year, the average employer contribution was 74 
percent of the premium. Even at this level, many low-wage workers are 
unable to afford coverage for which they are eligible. Thus, in order 
to put coverage within reach of the targeted population--low-income 
families who must balance competing needs with limited funds--the tax 
credit should cover at least 75 percent of the cost. Indeed, some 
research has shown that a subsidy in excess of 80 or 90 percent is 
needed to induce low-income families to participate. A tax credit of 
$2,000 or even $3,000 does little to put a $6,400 policy within reach 
of a family living on $30,000 a year. Finally, it is important that the 
coverage be comprehensive. Using an inadequate tax credit to buy an 
inadequate high-deductible policy simply moves individuals and families 
from the uninsured column to the under-insured column. This will 
exacerbate an undesirable trend already percolating.
    3. Third, there must be a mechanism to deliver the tax credit 
directly to the insurer or make sure that the funds are available more 
consistently than once a year. The costs of purchasing insurance are 
generally incurred on a monthly basis. Lower income families will not 
be able to front the cost of the full premium throughout the year with 
the promise of a refund the following April. However, fewer than one 
percent of individuals eligible for a monthly EITC option participate 
because they fear unpredictable income fluctuations will result in 
their owing the government at the end of the year. In addition, it is 
administratively cumbersome for a beneficiary to receive the credit and 
pass it on. The policy should allow for the credit to be transmitted 
directly to the insurer or employer.
    4. Fourth, there must be significant regulation of the health 
insurance marketplace. Any size tax credit is still worthless if the 
marketplace won't allow someone to purchase a policy. Without creating 
a marketplace that assures the offering of community-rated policies 
without any medical underwriting, millions of uninsured individuals 
with pre-existing health conditions will remain locked out of the 
private marketplace even with a sizeable tax credit in their pocket. 
This is a vital, but often overlooked component.
    These are the tools by which I will measure tax credit proposals. I 
have yet to see a proposal this year that meets the test. I urge my 
colleagues to use extreme caution when considering tax credit proposals 
as a real means to expand health insurance coverage. We need solutions, 
not lip service.
    Our job is to make comprehensive insurance more affordable and 
accessible to every uninsured individual and family. An argument can be 
made for increasing the equity of our current tax subsidies, but with 
the surplus fading fast, we cannot afford to focus scarce resources on 
those who are already covered. Our efforts should focus on methods 
proven to help low-income populations obtain insurance. Expansion of 
public programs, and mechanisms to improve beneficiary outreach, 
enrollment and retention are key approaches that deserve at least as 
much consideration and funding as changes to the tax code.

                                


       Opening Statement of the Hon. Jim Ramstad, M.C., Minnesota
    Madam Chairwoman, thank you for calling this important hearing 
today to examine the issue of the uninsured.
    Our health care system is the finest in the world, with the highest 
quality of care found anywhere. However, we still suffer today and 
incur increased costs to our healthcare system because 42 million 
Americans do not have health insurance.
    Uninsured Americans are a diverse group with more than four out of 
five employed full--time. One out of five of these workers choose not 
to purchase the coverage offered by their employers, citing the high 
cost of the insurance premiums. Others in the uninsured category are 
lower income individuals who are either ineligible or fail to enroll in 
existing public programs.
    As we consider reforming and modernizing health care, I strongly 
believe that adding a host of new federal mandates will have the effect 
of increasing premiums and ultimately reducing the number of people 
with coverage.
    Instead, I support reforms to the insurance market that expand 
access to health care and take steps to stem the rise in costs, while 
preserving our existing high-quality delivery system.
    I believe the best way to help families afford insurance is to 
reduce the cost of health care services and insurance policies through 
market-oriented alternatives. To this end, I believe we need to give 
individuals and the self-employed the same health-insurance tax 
benefits enjoyed by corporations. This way, individuals can afford to 
shop the marketplace for the highest quality at the best price.
    I also strongly support expanding Medical Savings Accounts (MSAs) 
so more uninsured people are covered and have incentives to 
``comparison shop.'' Lastly, I believe we must look at reforming the 
medical malpractice regime to reduce, if not eliminate, the wasteful 
practice of ``defensive medicine.''
    Madam Chairwoman, thanks again for calling this hearing. I look 
forward to hearing from today's witnesses on how we can best address 
this critical issue.

                                


    Chairwoman Johnson. I would like to call the first panel 
now. Paul Fronstin, senior research associate, the Employee 
Benefit Research Institute; and Jon Gabel, the vice president 
of Health System Studies at the Health Research and Education 
Trust.
    Dr. Fronstin, we have had a vote called, and my intention 
is to hear from Dr. Fronstin. We may have time to also hear 
from Mr. Gabel within the five minutes--I am not sure--and then 
come back for questions. Otherwise, we will have to break 
between the two speakers.
    Dr. Fronstin.

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

    Dr. Fronstin. Thank you.
    Chairwoman Johnson. You have to talk right into the mic, 
and be sure it is on.
    Dr. Fronstin. OK, thank you. Thank you, Madam Chairwoman 
and Members of the Committee. I do appreciate the opportunity 
to be here before you today.
    My name is Paul Fronstin. I am a senior research associate 
at the Employee Benefit Research Institute. EBRI is a private, 
non-profit, non-partisan public policy research organization 
based in Washington, D.C.
    Data from the Census Bureau show that for the first time 
since at least 1987, the number of Americans without health 
insurance coverage recently declined.
    In 1998, the number of uninsured Americans under age 65 had 
reached 43.9 million. By 1999, the number of uninsured declined 
to 42.1 million. The percentage of non-elderly Americans, those 
under age 65, without health insurance declined from 18.4 
percent in 1998 to 17.5 percent in 1999.
    The main reason for the decline in the number of uninsured 
was a strong economy and low unemployment. As a result, more 
workers and their dependents were covered by employment-based 
health insurance. The likelihood that a worker was covered by 
employment-based health insurance increased from 72.8 percent 
in 1998 to over 73 percent in 1999. The likelihood that a 
worker was uninsured declined from over 18 percent in 1998 to 
17.5 percent in 1999. The likelihood that a child was covered 
by employment-based health insurance increased from 60 percent 
in 1998 to 61.5 percent in 1999, and between 1998 and 1999, the 
percentage of children without insurance coverage declined 
dramatically, from nearly 15.5 percent down to 13.9 percent.
    Simply providing access to public programs, even free 
programs, does not guarantee that individuals will leave the 
ranks of the uninsured. Prior research based on family 
circumstances and income has found that over 25 percent of all 
uninsured adults and nearly two-thirds of uninsured children 
appear to be eligible for some type of public coverage. This 
accounts for about 15 million of the uninsured.
    It is notable that the decline in the uninsured occurred at 
the time when health benefit costs were going up. When health 
benefit costs increase, the percentage of Americans covered by 
employment-based health benefits is expected to decline, but as 
I already mentioned, more workers and their dependents were 
covered by employment-based health benefits in 1999 than in 
1998.
    Despite rising health benefit costs, small employers are 
increasingly offering health benefits to workers, and as Jon 
Gabel will show in his testimony.
    According to a survey conducted by EBRI, the Consumer 
Health Education Council, and the Blue Cross/Blue Shield 
Association last year, most small employers report that 
offering health benefits helps with recruitment and retention 
and keeps workers healthy, which ultimately reduces absenteeism 
and increases productivity. Clearly, many employers realize 
there is real business value in providing health benefits to 
their workers.
    As long as health benefit costs continue to increase, 
employers will seek ways to reduce those costs. However, as 
long as unemployment remains low, employers likely will be 
unable to modify existing health benefit programs. With low 
unemployment, the cost of not providing health benefits, such 
as the cost of recruiting and retaining employees, often 
outweighs the cost savings that can be attributed to cutting 
back on health benefits.
    Whether the slowing economy will have an impact on 
employment-based health benefits depends on a number of 
factors. Massive layoffs have yet to have a substantial impact 
on the unemployment rate, which is still at 4.2 percent. 
However, the combination of a slowing economy, rising health 
benefit costs, and worker uncertainty about the future may make 
it easier for employers to modify health benefit programs. Even 
with low unemployment, if employees feared that they could lose 
their job or would have difficulty finding other jobs, 
employers may have more flexibility to reduce health benefits.
    The release of the March 2001 CPS this fall may add to the 
confusion over the impact of rising health benefit costs on the 
uninsured. When those findings are released, the data for 2000 
are expected to show that the number of uninsured Americans 
continued to decline. The combination of more employers adding 
health benefits and more children being covered by the CHIP 
program in 2000 likely resulted in continued expansion of 
health insurance coverage.
    More than 42 million Americans were uninsured in 1999. Even 
if the number drops again later this year when the 2000 data 
are released, it is likely that 40 million Americans will still 
be uninsured. As long as the economy is strong and unemployment 
is low, employment-based health insurance coverage will expand 
and the uninsured will decline. However, if the economy 
continues to weaken and health benefit costs continue to 
increase, the uninsured will start to increase again.
    For example, if the downturn in the economy was severe and 
the uninsured represented 25 percent of the non-elderly 
population, there would be 63 million uninsured just 4 years 
from now.
    Thank you, again, Madam Chairwoman and Members of the 
Committee for the opportunity to appear before you today. My 
colleagues and I at EBRI look forward to working with you in 
the future on this important issue.
    Thank you.
    [The prepared statement of Dr. Fronstin follows:]
  Statement of Paul Fronstin,* Ph.D., Senior Research Associate, and 
   Director, Health Security and Quality Research Program, Employee 
                       Benefit Research Institute
    Madam Chairwoman, and members of the Committee, I am pleased to 
appear before you today to discuss uninsured Americans. My name is Paul 
Fronstin. I am a senior research associate and director of the Health 
Security and Quality Research Program at the Employee Benefit Research 
Institute (EBRI), a private, nonprofit, nonpartisan, public policy 
research organization based in Washington, DC. EBRI has been committed, 
since its founding in 1978, to the accurate statistical analysis of 
economic security issues. Through our research we strive to contribute 
to the formulation of effective and responsible health and retirement 
policies. Consistent with our mission, we do not lobby or advocate 
specific policy solutions.
---------------------------------------------------------------------------
    * The views expressed in this statement are solely those of the 
author and should not be attributed to the Employee Benefit Research 
Institute, its officers, trustees, sponsors, or other staff. The 
Employee Benefit Research Institute is a nonprofit, nonpartisan, public 
policy research organization.
---------------------------------------------------------------------------
Health Insurance Coverage
    Data from the Census Bureau collected in March 2000, shows that for 
the first time since at least 1987, the number of Americans without 
health insurance coverage has declined. In 1998, the number of 
uninsured (nonelderly) Americans had reached 43.9 million (chart 1). In 
1999, the number of nonelderly Americans without health insurance 
coverage declined to 42.1 million. The percentage of nonelderly 
Americans without health insurance coverage declined from 18.4 percent 
in 1998 to 17.5 percent in 1999 (chart 2).
    The main reason for the decline in the number of uninsured 
Americans was the strong economy and low unemployment. Since 
employment-based health insurance benefits are by far the most common 
source of health coverage in the United States, it is not surprising 
that the low rate of unemployment translated into lower rates of 
uninsured. As a result of the strong economy, more workers and their 
dependents were covered by employment-based health insurance benefits: 
Between 1998 and 1999 the percentage of nonelderly Americans covered by 
employment-based health insurance increased from 64.9 percent to 65.8 
percent (chart 3).
    Employment-based health insurance coverage increased substantially 
for adult workers between 1998 and 1999. In 1998, 72.8 percent of 
workers were covered by an employment-based health plan (chart 4). By 
1999, 73.3 percent were covered. The likelihood that an adult worker 
was uninsured declined from 18.1 percent in 1998 to 17.5 percent in 
1999 (chart 5). Even nonworking adults experienced an increase in the 
likelihood of having employment-based health insurance coverage, 
increasing from 40.5 percent in 1998 to 41.7 percent in 1999 (chart 6).
    The likelihood that a child is covered by employment-based health 
insurance has been increasing since 1994 (chart 7). In 1994, 58.1 
percent of children were covered by employment-based health insurance. 
By 1999, 61.5 percent were covered. Because of declining enrollment in 
Medicaid (chart 8), the percentage of children without health insurance 
coverage has actually been growing over most of this period. However, 
between 1998 and 1999, the percentage of children without health 
insurance coverage declined dramatically from 15.4 percent to 13.9 
percent (chart 9).
    Despite the State Children's Health Insurance Program (S-CHIP), 
public health insurance coverage did not increase during this time 
period. Between 1998 and 1999 the percentage of nonelderly Americans 
covered by Medicaid and other government-sponsored health insurance 
coverage did not change (chart 10)-- remaining at 10.4 percent in 1999. 
While the Census Bureau's March Current Population Survey (CPS) does 
not allow researchers to count the number of children enrolled in S-
CHIP, it does appear that some children benefited from expansions in 
government-funded programs. Findings from the CPS indicate that the 
percentage of children in families just above the poverty level without 
health insurance coverage declined dramatically, from 27.2 percent 
uninsured in 1998 to 19.7 percent uninsured in 1999. Some of the 
decline can be attributed to expansions in Medicaid and S-CHIP. Between 
1998 and 1999, the percentage of near-poor children covered by these 
programs increased from 39.3 percent to 40.5 percent. However, it 
appears that expansions in employment-based health insurance had an 
even larger effect. Specifically, the percentage of near-poor children 
covered by an employment-based health insurance plan increased from 
30.5 percent to 34.5 percent.1
---------------------------------------------------------------------------
    \1\ The CPS (and most other surveys) are well known for under-
reporting Medicaid coverage and coverage from other government 
programs. In the case of the CPS, it may not be picking up all Medicaid 
recipients because some states do not call the program Medicaid. In 
fact, there is strong evidence that the CPS under-reports Medicaid 
coverage, based on comparisons of these data with enrollment and 
participation data provided by the Health Care Financing Administration 
(HCFA), the federal agency primarily responsible for administering 
Medicaid. See Paul Fronstin, ``Counting the Uninsured: A Comparison of 
National Surveys,'' EBRI Issue Brief no. 225, Employee Benefit Research 
Institute, September 2000, for more information.
---------------------------------------------------------------------------
Health Insurance Costs and Benefits
    It is notable that the decline in the uninsured occurred at a time 
when health insurance benefit costs were going up. Since 1998, health 
insurance cost inflation has been increasing. According to data from a 
recent study (Gabel et al., 2000), health insurance costs increased 8.3 
percent for all firms between spring 1999 and spring 2000, and they 
increased 10.3 percent for smaller firms (with between three and 199 
workers). When health care costs increase, the percentage of Americans 
covered by an employment-based health insurance plan is expected to 
decline, with employers shifting the cost of coverage onto workers, or 
even dropping coverage completely. But as shown above, more workers and 
their dependents were covered by employment-based health insurance 
coverage in 1999 than in 1998. Employers have not been shifting the 
cost onto workers. An annual survey by William M. Mercer indicates 
thatthe worker share of the premium has been unchanged since 1993 
(William M. Mercer, 2001). In contrast, an annual survey by the Kaiser 
Family Foundation and the Health Research and Educational Trust found 
that there was a slight reduction between 1996 and 2000 in the 
percentage of the premium workers were required to pay (Gabel et al., 
2000).
    Despite rising health insurance costs, employers have been 
increasingly offering health benefits to workers. Between 1998 and 
2000, the percentage of small firms offering health benefits increased 
from 54 percent to 67 percent, with much of that increase occurring 
among the smallest of the small firms. Most small employers report that 
offering health benefits helps with recruitment and retention, and 
keeps workers healthy, which ultimately reduces absenteeism and 
increases productivity (Fronstin and Helman, 2000). Clearly, many 
employers realize there is real business value in providing health care 
coverage to their workers.
    Also worth mentioning is that American workers clearly identify 
health insurance coverage as far and away the single most valued work-
place benefit. When asked to rank the importance of all employee 
benefits, health benefits are by far the benefit most valued by workers 
and their families. Sixty-five percent of workers responding to a 
recent EBRI survey rated health benefits as the most important employee 
benefit (Salisbury and Ostuw, 2000).
Outlook
    As long as health benefit costs continue to increase, employers 
will seek ways to reduce those costs. However, as long as unemployment 
remains low, employers will likely be unable to modify existing health 
benefit programs. With low unemployment, the cost of not providing 
health benefits, such as the cost of recruiting and retaining 
employees, often outweigh the cost savings that can be attributed to 
cutting back on health benefits.
    Whether the slowing economy has an impact on employment-based 
health benefits depends on a number of factors. First, massive layoffs 
have yet to have a substantial impact on the unemployment rate. While 
the unemployment rate has jumped from a 30-year low of 3.9 percent in 
October 2000 to 4.2 percent in January 2001, it has remained at 4.2 
percent in February and 4.2 percent is still a very low level of 
unemployment for the nation. Second, the combination of a slowing 
economy, rising health care costs, and worker uncertainty about the 
future may make it easier for employers to modify health benefit 
programs. Even with low unemployment, if employees feared that they 
could lose their job, employers may have more flexibility to reduce 
health benefits (and other components of total compensation) in order 
to control costs in a slowing economy.
    Adding to the confusion over the impact of rising health benefits 
costs on employment-based health benefits may be the release of the 
March 2001 CPS in the Fall 2001. When those findings are released, the 
data for 2000 are expected to show that the number of uninsured 
Americans continued to decline. The drop may even be larger than the 
1.7 million decline experienced between 1998 and 1999. As mentioned 
above, between 1998 and 2000, the percentage of firms with three to 199 
employees offering health benefits increased (Gabel et al., 2000). In 
addition, S-CHIP will continue to expand health insurance coverage. 
This combination of more employers adding health benefits, along with 
more children covered by S-CHIP, will result in continued expansion of 
health insurance coverage. However, it should be noted that the delay 
in collecting and reporting data often adds to the confusion on health 
coverage and the uninsured: The data are often misinterpreted as 
applying towards the current time period, rather than the nearly two-
year period prior to the release of the data, when it was collected.
    It is also worth noting that while the uninsured declined between 
1998 and 1999, it did not drop by 44 million. More than 42 million 
Americans continue to be uninsured. Even if the number drops again 
later this year, when the 2000 data are released, it is likely that 40 
million Americans will still be uninsured--more than 15 percent of the 
population. As long as the economy is strong and unemployment is low, 
employment-based health insurance coverage will expand and the 
uninsured will gradually decline. However, even if the United States 
experienced five more years of declines in the uninsured similar to 
that which occurred between 1998 and 1999, 34 million Americans would 
still be uninsured in 2005 (chart 11). In contrast, if the economy 
continues to weaken and health benefit costs continue to increase, the 
uninsured would quickly start to increase again. Even for those who 
keep their jobs, small employers would likely drop health benefits, and 
large employers would likely shift the cost of coverage onto workers, 
resulting in fewer workers accepting coverage. If the uninsured 
returned to its 1999 level of 17.5 percent of the nonelderly 
population, 38 million Americans would be uninsured in 2005. In 
contrast, if the downturn in the economy was severe and the uninsured 
represented 25 percent of the nonelderly population, 63 million 
Americans would be uninsured.
    Madam Chairwoman, this concludes my statement. It has been my 
pleasure to appear before the Committee today. I offer the Committee 
the assistance of the Employee Benefit Research Institute as you 
continue your work, which is vital to the economic security of all 
Americans.
Bibliography
    Fronstin, Paul. ``Children Without Health Insurance: An Analysis of 
the Increase in Uninsured Children Between 1992 and 1993.'' Inquiry. 
Vol. 32, no. 3 (Fall 1995): 353-359.
    ----------------. ``Trends in Health Insurance Coverage.'' EBRI 
Issue Brief no. 185 (Employee Benefit Research Institute, May 1997).
    ----------------. ``Employment-Based Health Insurance: A Look at 
Tax Issues and Public Opinion.'' EBRI Issue Brief no. 211 (Employee 
Benefit Research Institute, July 1999).
    ----------------. ``Employment-Based Health Insurance: A Look at 
Who is Offered Coverage and Who Takes It.'' EBRI Issue Brief no. 213 
(Employee Benefit Research Institute, September 1999).
    ----------------. ``Employment-Based Health Insurance For Children: 
Why Did Coverage Increase In the Mid-1990s?'' Health Affairs. Vol. 18, 
no. 5 (September/October 1999): 131-136.
    ----------------. ``The Working Uninsured: Who They Are, How They 
Have Changed, and the Consequences of Being Uninsured.'' EBRI Issue 
Brief no. 224 (Employee Benefit Research Institute, August 2000).
    ----------------. ``Health Insurance Coverage and the Job Market in 
California.'' EBRI Special Report no. 36 (Employee Benefit Research 
Institute, September 2000).
    ---------------- ``Counting the Uninsured: A Comparison of National 
Surveys.'' EBRI Issue Brief no. 225 (Employee Benefit Research 
Institute, September 2000).
    ----------------. ``Sources of Health Insurance Coverage and 
Characteristics of the Uninsured: Analysis of the March 2000 Current 
Population Survey.'' EBRI Issue Brief no. 228 (Employee Benefit 
Research Institute, December 2000).
    Fronstin, Paul, and Rachel Christensen. ``The Relationship Between 
Income and the Uninsured.'' EBRI Notes, no. 3 (Employee Benefit 
Research Institute, March 2000): 1-4.
    Fronstin, Paul, and Lawrence G. Goldberg, and Philip K. Robins. 
``Differences in Private Health Insurance Coverage for Working Male 
Hispanics.'' Inquiry. Vol. 34, no. 2 (Summer 1997): 171-180.
    Fronstin, Paul, Lawrence G. Goldberg, and Philip K. Robins. ``An 
Analysis of Trends in Private Health Insurance Coverage, 1988-1992.'' 
Social Science Quarterly. Vol. 78, no. 1 (March 1997).
    Fronstin, Paul, and Ruth Helman. ``Small Employers and Health 
Benefits: Findings from the 2000 Small Employer Health Benefits 
Survey.'' EBRI Issue Brief no. 226 (Employee Benefit Research 
Institute, October 2000).
    Fronstin, Paul, and Sarah C. Snider. ``An Examination of the 
Decline in Employment-Based Health Insurance Between 1988 and 1993.'' 
Inquiry. Vol. 33, no. 4 (Winter 1996/97): 317-325.
    Gabel, Jon, et al. ``Job-Based Health Insurance In 2000: Premiums 
Rise Sharply While Coverage Grows.'' Health Affairs. Vol. 19, no. 3 
(September/October 2000): 144-151.
    Health Care Financing Administration (HCFA). The State Children's 
Health Insurance Program Annual Enrollment Report (October 1, 1998-
September 30, 1999).
    Salisbury, Dallas L., and Pamela Ostuw. ``Value of Benefits 
Constant in a Changing Job Environment: The 1999 WorldatWork/EBRI Value 
of Benefits Survey.'' EBRI Notes, no. 6 (Employee Benefit Research 
Institute, June 2000): 5-6.
    William M. Mercer. Mercer/Foster Higgins National Survey of 
Employer-sponsored Health Plans. 2000. New York, NY: William M. Mercer, 
Inc., 2001.
      
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    Chairwoman Johnson. Mr. Gabel, if you would proceed, 
please.

STATEMENT OF JON R. GABEL, VICE PRESIDENT, HEALTH RESEARCH AND 
                       EDUCATIONAL TRUST

    Mr. Gabel. Thank you, Madam Chairman and Members of the 
Committee.
    I am Jon Gabel, vice president of Health Research and 
Educational Trust. The trust is a non-profit research 
organization sponsored by the American Hospital Association. 
The views I express today are mine alone.
    Let me begin with my overall conclusion. I believe job-
based insurance will cover a smaller share of working families 
in the future.
    Public opinion studies suggest the public has two major 
misconceptions about the uninsured. First, the public is 
unaware of the close link between employment benefits and 
uninsurance. They are unaware that 80 percent of the uninsured 
are from working families. The uninsured are cab drivers, 
retail clerks, waters and waitresses, construction workers and 
hotel workers.
    The second misconception of the public is this: the 
uninsured get the same care as everyone else. This is utterly 
wrong.
    The uninsured are four times as likely to delay care. The 
uninsured use 40-percent fewer services than comparable people 
with insurance. When admitted to the hospital, they are sicker. 
While in the hospital, they get fewer high-tech services. They 
are more likely to die in the hospital, and they have a 25-
percent higher mortality rate than similar insured individuals.
    About one-half of the uninsured work for firms with 25 or 
fewer workers. These same firms only employ 15 percent of the 
work force.
    Recently, there has been an increase in coverage, and this 
coverage was driven by the robust economy of the 1990's. Which 
small employers don't offer coverage? I refer to Exhibit 1 and 
Exhibit 2.
    Earning of the work force largely determine whether a firm 
will offer coverage. This stresses that benefits are part of 
the total benefit package.
    A key element in understanding the uninsured is the 
employer exclusion. I do not pay taxes on my employer 
contributions for health insurance. If my employer contributes 
$6,000 per year and my marginal tax rate, including State, 
Federal, and local government is 50 percent, then I receive a 
subsidy of $3,000.
    Turning to Exhibit 3, we show that our employer-based 
system today is highly regressive. We give the greatest 
financial help to those who need the least assistance and the 
least help to those who need the most assistance.
    A family earning less than $15,000 a year gets a tax 
subsidy of $71. Those making over $100,000 get nearly $2,500.
    When we ask employers why they do not offer insurance, year 
after year, the overwhelming reason is it costs too much. I 
refer to Exhibit 4.
    The implication is that employers would buy lower-priced 
bare-bones policies. The real-world experience of these 
policies is they do not sell.
    Now let me turn to short-run forces. We have two adverse 
developments. The first is the return of health care inflation. 
I refer to Exhibit 4.
    Premiums have increased by 8.3 percent last year, the 
highest increase since 1993, and the situation looks worse for 
the future. Higher prices mean fewer small employers will 
purchase coverage.
    Second is the slowing of the overall economy. Over the past 
5 years, a tight labor market has shielded American workers 
from rising health care cost. A slowing economy will enable 
employers to pass on higher costs to workers. Higher 
contributions will induce more low-income workers to decline 
coverage.
    Now let me turn to long-term forces. Please refer to 
Exhibit 8. Job-based health insurance covers a smaller 
percentage of working Americans today than in 1977. The decline 
in coverage is concentrated among those Americans least able to 
compete in a global information-based economy.
    Note, there was no decline in coverage among families with 
college graduates, but among families headed by individuals 
without a high school diploma, coverage fell from 52 to 34 
percent.
    I see globalization and the information revolution bringing 
about greater disparities in health coverage in the future.
    Madam Chairman and Members of the Committee, I welcome your 
questions. Thank you.
    [The prepared statement of Mr. Gabel follows:]
    Statement of Jon R. Gabel, Vice President, Health Research and 
                           Educational Trust
    Thank you Madam Chairman and committee members for inviting me to 
testify about trends in uninsurance. I am Jon Gabel, Vice President of 
the Health Research and Education Trust (HRET). HRET is a non-profit 
501(c)(3) research organization affiliated with the American Hospital 
Association (AHA) and funded largely by grants from charitable 
foundations and government research agencies. Today, I speak to you as 
an independent analyst who has conducted an annual survey of employer-
sponsored health benefits since 1986.1 The views expressed 
are my own. In my testimony, I examine current and long run changes in 
job-based insurance. The evidence presented suggests that job-based 
insurance will provide benefits to a smaller share of American workers 
in the future.
---------------------------------------------------------------------------
    \1\ From 1986-1990, the Health Insurance Association of America 
sponsored the annual survey. From 1991-1998, KPMG Peat Marwick was the 
sponsor, and today the survey is sponsored by the Kaiser Family 
Foundation and Health Research and Educational Trust.
---------------------------------------------------------------------------
Misconceptions about the Uninsured
    Employee health benefits and uninsurance are closely intertwined. 
Unfortunately, public opinion polls indicate that the majority of 
American voters are unaware of this close link. The American public, 
particularly those who are college graduates and enjoy higher levels of 
income, are subject to two major misconceptions about the uninsured. 
First, the public is unaware that roughly 80 percent of the uninsured 
come from working families.2 The uninsured include cab 
drivers, retail clerks, waiters and waitresses, construction laborers, 
and hotel workers.
---------------------------------------------------------------------------
    \2\ Kaiser Family Foundation and Lehrer Newshour, www.pbs.org/
Newshour/Health/Uninsured/highlights.pdf.
---------------------------------------------------------------------------
    Second, according to public opinion polls, the majority of 
Americans believe that the uninsured get similar care as everyone 
else.3 In fact, an overwhelming body of scientific research 
published in leading medical journals, such as the New England Journal 
of Medicine and the Journal of the American Medical Association, says 
this is utterly wrong. The uninsured are four times as likely to delay 
care,4 use 40 percent fewer services than insured 
individuals in similar health,5 have more avoidable 
hospitalizations,6 enter the hospital sicker, receive fewer 
high cost discretionary services, are discharged from the hospital 
sooner, are more likely to die in the hospital,7 and 
experience a mortality rate 25 percent greater than insured individuals 
with similar characteristics.8
---------------------------------------------------------------------------
    \3\ R.J. Blendon, J.T. Young, and C.M. DesRoches, ``The Uninsured, 
the Working Uninsured, and the Public,'' Health Affairs, November/
December 1999, Vol. 18, No. 6, pp. 203-211.
    \4\ K. Donelan, R. Blendon, C. Hill, C. Hoffman, D. Rowland, M. 
Frankel and D. Altman, ``What Happened to the Health Insurance Crisis 
in the United States?: Voices from a National Survey,'' Journal of the 
American Medical Association, Vol. 276(16), October 23/30, 1996, pp. 
1346-1350.
    \5\ S. Long and S. Marquis, ``The Uninsured Access Gap and the Cost 
of Universal Coverage,'' Health Affairs, Supplement 1994, 13:2, pp. 
211-220.
    \6\ J. Weissman, C. Gatsonis, and A. Epstein, ``Rates of Avoidable 
Hospitalization by Insurance Status in Massachusetts and Maryland,'' 
Journal of the American Medical Association, November 4, 1992, 268:17, 
pp. 2388-2394.
    \7\ K. Davis, ``The Uninsured in an Era of Managed Care,'' Health 
Services Research, February 1997, pp. 641-649; J. Hadley, E. Steinberg, 
and J. Feder, ``Comparison of Uninsured and Privately Insured Hospital 
Patients: Condition on Admission, Resource Use, and Outcome,'' Journal 
of the American Medical Association, Volume 265, No. 3, January 16, 
1991, pp. 374-379.
    \8\ P. Franks, C. Clancey, and M. Gold, ``Health Insurance and 
Mortality: Evidence from a National Cohort,'' Journal of the American 
Medical Association, August 11, 1993, 270, pp. 737-741.
---------------------------------------------------------------------------
Who Offers Coverage and the Employer Exclusion
    About 50 percent of the uninsured are from families where the head 
of household works for a firm employing 25 or fewer 
workers.9 Due to the robust economic expansion of the 1990s 
and the resulting tight labor market, the percentage of small firms 
(firms with fewer than 200 workers) offering health benefits increased 
from 54 percent to 67 percent from 1998 to 2000. (Exhibit 1)
---------------------------------------------------------------------------
    \9\ P. Fronstin, ``The Working Uninsured: Who They Are, How They 
Have Changed, and the Consequences of Being Uninsured--with 
Presidential Candidate Proposals Outlined,'' EBRI Issue Brief, August 
2000, 224, pp. 1-23.
---------------------------------------------------------------------------

                               Exhibit 1

Percentage of Firms Offering Health Benefits, by Firm Size: 1996, 1998-
                                  2000
[GRAPHIC] [TIFF OMITTED] T4217A.012

    Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits, 
1999, 2000; KPMG Survey of Employer Sponsored Health Benefits, 1996; 
1998.

    With even unskilled workers in short supply in some labor markets, 
many small firms offered health benefits to attract scare workers. The 
earnings of workers at the company largely predict whether or not a 
small firm offers health benefits to its workers. Exhibit 2 shows that 
among firms where fewer than 35 percent of workers earn less than $10 
per hour (or $20,000 per year), 85 percent of such small firms offer 
health benefits. When more than 35 percent of workers earn less than 
$10 per hour, only 35 percent of small firms offer coverage.

                               Exhibit 2

Percentage of Small Firms (3-199 Workers) in Which Workers Are Offered 
 Health Insurance, by Percentage of Workforce that is Low Income, 2000
[GRAPHIC] [TIFF OMITTED] T4217A.013

Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits, 2000
    These statistics demonstrate that health benefits are part of the 
overall compensation package, and that employer contributions for the 
cost of health benefits represent compensation that could have been 
dedicated to wages.
    The preceding statement is subject to an important caveat. 
Employees do not pay taxes on employers' contributions for health 
benefits. ``This employer exclusion,'' grew not from any legislative 
act but from rulings by the executive and judicial branches of 
government to shore up labor shortages during World War II. If my 
employer contributes $6000 per year for my insurance, and my marginal 
tax rate (including state and local government) is 50 percent, then I 
receive a tax subsidy of $3000 per year. In so doing, the United States 
has created an ``accidental system'' that is highly regressive, giving 
the greatest assistance to those who need the least financial help, and 
the least assistance to those who need the most financial assistance. 
Exhibit 3 displays the average tax subsidy in 1998 for employer-based 
insurance according to family income. Families earning less than 
$15,000 per year received an average subsidy of $71 whereas families 
with income above $100,000 received about $2400.10
---------------------------------------------------------------------------
    \10\ J. Shiels and P. Hogan, ``Cost of Tax-Exempt Health Benefits 
in 1998,'' Health Affairs, March/April 1999, Vol. 18, No. 2, pp. 176-
181.
---------------------------------------------------------------------------

                               Exhibit 3

Average Federal Health Benefit Tax Subsidy for Job-Based Insurance, Per 
                       Household, by Income, 1998
[GRAPHIC] [TIFF OMITTED] T4217A.014

    Source: J. Shiels, Health Affairs

    Among firms who offer health benefits, about 79 percent of workers 
are eligible to participate in the company plan; of those eligible to 
participate, about 84 percent take-up coverage, and hence, about 65 
percent of company workers are enrolled in the firm's health plan. In 
1988, 73 percent of workers were enrolled in the company plan. Thus, 
since 1988, employer-based coverage has declined, not because fewer 
firms offer coverage, but because fewer employees in firms offering 
coverage participate in the company health plan.11
---------------------------------------------------------------------------
    \11\ P. Ginsburg, J. Gabel and K. Hunt, ``Tracking Small Firm 
Coverage, 1989-1996,'' Health Affairs, January/February 1998, Vol. 16, 
No. 7, pp. 167-171; B.S. Schone and P.F. Cooper, ``More offers, fewer 
takers for employment-based health insurance: 1987 and 1996,'' Health 
Affairs, November/December 1997, Vol. 16, No. 6, pp. 142-149.
---------------------------------------------------------------------------
    In our national survey of employers, we have asked employers not 
offering coverage why they don't provide health benefits. Consistently, 
employers answer that health insurance costs too much. (Exhibit 4)

                               Exhibit 4

                                                       21
                          Small Firms' Reasons For Not Offering Health Insurance, 2000
----------------------------------------------------------------------------------------------------------------
                                                     Very       Somewhat     Not Too     Not At All
                                                  Important    Important    Important    Important    Don't Know
----------------------------------------------------------------------------------------------------------------
High Premiums..................................          76%          12%           0%          11%           0%
High Turnover..................................           29            9           12           41            9
Employees Covered Elsewhere....................           34           12           24           26            4
Administrative Hassle..........................           17           13           22           42            7
Obtain Good Employees Without Offering A Health           22           22           17           23           15
 Plan..........................................
Company Can't Qualify For Group Rates..........           25           32           11           26            6
Firm Too Newly Established.....................            3            0            9           88            0
----------------------------------------------------------------------------------------------------------------
Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits, 2000.

    In 2000 76 percent of firms not offering coverage cited costs as a 
``very important'' reason, far outpacing any other reason. By 
implication, if insurers could offer bare bones, low-priced coverage, 
many more small firms would provide health benefits. Unfortunately, 
that has not been the real-world experience. For example, the State of 
Illinois enacted legislation allowing bare-bones policies. When the 
legislation was repealed in 1997, only 20 employers had purchased bare-
bones products.12
---------------------------------------------------------------------------
    \12\ State of Illinois Grant Proposal to the Health Resources and 
Systems Agency, 2000.
---------------------------------------------------------------------------
Short-Term Trends
    Two unfavorable developments suggest that the recent expansion over 
the past two years in employer-based coverage will come to an end. 
First, inflation in the cost of health insurance has returned (Exhibit 
5).

                               Exhibit 5

       Premium Increases Compared to Other Indicators, 1988-2000
[GRAPHIC] [TIFF OMITTED] T4217A.015

    Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits, 
1999, 2000; KPMG Survey of Employer-Sponsored Health Benefits: 1988, 
1993, 1996, 1998; Bureau of Labor Statistics, 2000.

    From spring 1999 to spring 2000, the cost of job-based insurance 
increased 8.3 percent, the highest increase since 1993. In 2000, the 
average monthly cost of single coverage was $202, and the average cost 
for family coverage was $529 (Exhibit 6).13
---------------------------------------------------------------------------
    \13\ J. Gabel, ``Job-Based Health Insurance in 2000: Premiums Rise 
Sharply While Coverage Grows,'' Health Affairs, September/October 2000, 
Vol. 19, No. 5, pp 144-151.
---------------------------------------------------------------------------

                               Exhibit 6

 Average Monthly Premium Costs for Covered Workers, Single and Family 
                             Coverage, 2000
[GRAPHIC] [TIFF OMITTED] T4217A.016

    Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits, 
2000.

    All indications are that premium increases will be even higher in 
2001. From 1994-1998, America enjoyed the lowest premium increases 
since we have been keeping statistics on job-based insurance. The 
return of inflation is due not merely to the health insurance 
underwriting cycle,14 but to a surge in underlying health 
care costs, driven by prescription drug expenses. The surge in 
underlying health care claims expenses suggests, unlike the insurance 
cycle, that the problem will not correct itself. Higher premiums mean 
fewer small employers can afford coverage, that some of the costs will 
be shifted to workers, and more workers, especially low-earning workers 
will decline coverage.
---------------------------------------------------------------------------
    \14\ The ``insurance cycle'' is the historic pattern of 
profitability and pricing in the health insurance industry. When 
insurers are earning underwriting profits (profits before investment 
income), then insurers fight for market share through fierce price 
competition. Claims expenses rise faster than premiums, and eventually, 
most insurers realize underwriting losses. By 1996, about three-
quarters of insurers had underwriting losses. Many insurers then exited 
from local markets. The insurance industry next enters a phase of 
catch-up pricing, where the objective is to restore profitability 
rather than gain market share. Currently the industry is in the catch-
up phase of the underwriting cycle.
---------------------------------------------------------------------------
    The second unfavorable development is the slowing of the overall 
economy. Over the past four years, record low unemployment has shielded 
workers from rising costs. In fact, today workers contribute less in 
monthly nominal dollars for single coverage than they did in 1996 
(Exhibit 7).15
---------------------------------------------------------------------------
    \15\ Ibid., p. 147.
---------------------------------------------------------------------------

                               Exhibit 7

  Average Monthly Worker Contribution for Single and Family Coverage, 
                               1988-2000
[GRAPHIC] [TIFF OMITTED] T4217A.017

 Percentage of Premiums Paid by Covered Workers for Single and Family 
                          Coverage, 1988-2000
[GRAPHIC] [TIFF OMITTED] T4217A.018

    Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits, 
1999, 2000; KPMG Survey of Employer-Sponsored Health Benefits: 1988, 
1993, 1996, 1998

    Low-paid workers are highly sensitive to the cost of health 
insurance. A softening of the labor market will enable employers to 
pass on rising costs to workers, and as a result, more workers will 
decline coverage.
Long-Term Developments
    Even after nine years of economic expansion, the employer-based 
health system covers a lower percentage of the U.S. population today 
than it did in 1977 (70.5 vs. 66 percent). The decline in coverage is 
concentrated among those segments of our population least able to 
compete in a global, information-based economy. The percentage of 
college graduates with job-sponsored coverage remained statistically 
unchanged (79 to 80 percent) while coverage fell among high school 
graduates from 68 to 63 percent (Exhibit 8).

                               Exhibit 8

     Percentage of Persons Under Age 65 with Employer-Based Health 
                Insurance, by Education Level, 1977-1996
[GRAPHIC] [TIFF OMITTED] T4217A.019

    The most dramatic decline occurred among Americans without high 
school diplomas, where coverage fell from 52 percent in 1977 to 34 
percent in 1996. It is noteworthy that real hourly wages for non-
graduates fell 17 percent from 1973 while real wages increased 18 
percent for college graduates. Hence, the twin forces of economic 
globalization and the information revolution are likely to bring about 
not only great economic wealth, but also greater disparities in future 
income and health benefits.16
---------------------------------------------------------------------------
    \16\ J. Gabel, ``Job-Based Health Insurance, 1977-1998: The 
Accidental System under Scrutiny,'' Health Affairs, November/December 
1999, pp. 62-74.
---------------------------------------------------------------------------
    Madam Chairman and members of the Ways and Means Committee, I thank 
you for the opportunity to discuss the uninsured, and welcome any 
questions you may have.

                                


    Chairwoman Johnson. Thank you very much.
    Mr. Gabel, do you have any information about the number of 
employers that provide only partial of premium coverage?
    In my district, I run across a lot of employers that 
provide only 50 percent of the premium cost, and those people 
in particular are very interested in the tax subsidy to help 
them stay in the plan. Although the kinds of employments that 
you point to in your testimony, I understand are uninsured, but 
there are many others out there. For instance, the examples in 
my district are small manufacturers, and they are doing their 
best to provide coverage, but it does require the employee to 
provide 50 percent of the premium and that is unaffordable to 
many of the workers industry.
    Do we know much about this? Do we know much about what 
percentage of the employers do cover only 50 percent of the 
premium? Because I think whether or not tax credits keep people 
in and bring them in depends a lot on the vitality of that 
particular type of plan.
    Mr. Gabel. Yes, we do have such data. In fact, the data 
goes all the way back to 1988. I know for each employer how 
much the employer contributes for each plan.
    We have also analyzed how the out-of-pocket contribution 
for the employee affects the take-up rate. We find that if a 
firm has many higher-income workers, the contribution 
requirement does not reduce the take-up rate. If there are many 
low-income workers--and by that, I mean workers making less 
than $20,000 a year--these workers are very sensitive to the 
out-of-pocket contribution.
    Chairwoman Johnson. Could you look at your data and get 
back to me on what the cyclical impact of rising and falling 
premiums has on that type of employer plan and whether that 
shows any difference, movement in and out, you know, employers 
dropping it earlier or later than more costly plans, if you can 
determine that. Thank you.
    Mr. Stark.
    [No response.]
    Chairwoman Johnson. Mr. McCrery.
    Mr. McCrery. I would like to ask both of you what you think 
the outlook is for employer-provided health insurance coverage. 
Do you think more employers in the future will be offering 
health insurance, or do you think fewer employers?
    Dr. Fronstin. I think it depends. It depends on a lot of 
factors.
    Mr. McCrery. Like what?
    Dr. Fronstin. One, if we have a recession and unemployment 
does go up--it has not yet, despite the fact that we have 
slowed down considerably--if unemployment goes up, employees 
will be able to cut back, I think it will take two forms. One, 
I think we will see small employers dropping coverage.
    Because of the rate at which premiums have been going up 
for those employers, as Jon Gabel shows in his study, he 
mentioned about 8.3 percent in 2000. It was actually higher. It 
was over 10 percent in 2000 for small employers, and that is 
expected to continue.
    I think we will see large employers not necessarily drop 
coverage. Just about all of them offer it today, and just about 
all of them have always offered it, but you will see them 
change the benefits package around. You will see them ask their 
employees to pick up a greater share of the premium.
    The one thing that small employers do not always have 
flexibility on is how much of the premium they can ask their 
employees to pay. Because insurance companies often require a 
certain percentage of employees to be covered, in order for the 
employer to get that high minimum participation rate, they wind 
up paying 100 percent of the premium.
    If you look at employee data, if you look at employees and 
ask them whether or not they pay anything, you find that more 
employees in large firms pay something than employees in small 
firms.
    This does not mean that there are not employees in small 
firms that do not pay anything. There is probably two pools 
there depending upon whether or not they are subject to minimum 
participation requirements. So I think certainly if the economy 
slows down, we can see employers pulling back from this 
benefit, like they did in the late 80's and early 90's when we 
had rising health care costs.
    Mr. McCrery. So two things could reduce the employer 
coverage in the country: number one, economic downturn which 
would reduce earnings for the businesses; number two, increases 
in health care costs which would increase the premiums that 
they would have to pay. Is that correct?
    Dr. Fronstin. I think you would need both to happen at the 
same time. I do not think that health benefit costs going up 
without a recession is going to translate into more workers 
leaving coverage because we have already seen--Jon Gabel's data 
show this--between 1998 and 2000 more small employers started 
offering coverage. The percentage offering coverage, he has in 
Exhibit 1.
    I hate to steal your thunder, Jon.
    But it went up by 11 percentage points. I do not remember 
the number for the increase in cost between '98 and '99, but 
between '99 and 2000, it was over 10 percent for these 
employers.
    So I think if you have a strong economy, coupled with 
rising health benefit costs, there is going to be some give-
and-take, and if you have a strong economy, I think employers 
are in a better position to pay the higher health costs. So you 
may not see employers cutting back so fast.
    Mr. Gabel. I am pessimistic. I am pessimistic because I 
believe we are in an economic downturn. We will have a 
softening labor market.
    I am pessimistic because we know beyond a doubt that health 
inflation is back. What is most disturbing is that we have had 
a surge in underlying health care expenses for health plans in 
the last years. It has been particularly driven by higher 
prescription drug expenses. We know from historical data that 
when you put those two forces together, you have declining 
coverage.
    My third reason for being pessimistic has to do with long-
run earnings of low-income workers. Health benefits are a form 
of income. When we examine the experience of low-skilled 
workers, particularly those who are not high school graduates, 
we see a real decline in wages of about 17 percent since 1973. 
I believe that is why there has been a decline in coverage 
among non-high school graduates.
    Of course, when I was in school, you could get a very good 
job if you graduated from high school. There were manufacturing 
jobs with health coverage. Today, those graduates are in the 
service industry and do not get coverage.
    So, for those three reasons, I am pessimistic about the 
future.
    Mr. McCrery. How did we get started with this--oh, my time 
is up. That was a quick 5 minutes.
    Chairwoman Johnson. Mr. Stark.
    Mr. Stark. Thank you, Madam Chairman, and I would like to 
thank the witnesses.
    Mr. Gabel, you show the average policy at about $2,400 and 
a family policy at about $6,400, suggesting that employers pay 
somewhere between 70 and 90 percent; 73 to 86 percent I think 
is the exact figure.
    Does it then follow that if we are going to subsidize 
insurance and expect people to pick up insurance in the market, 
then we have to talk about subsidizing the insurance at about 
those rates for people to pick it up? Does that make sense?
    Mr. Gabel. I think what the research would indicate is that 
the subsidies have to be very substantial.
    I just went to a conference, and if I can recall the 
number--the subsidy must constitute more than 50 percent of the 
costs.
    The other point I want to make is these are employer-based 
figures. Those figures will be about 8-to-10-percent higher in 
2001. Second, if we are talking about buying insurance in the 
individual insurance market, you are not going to get this kind 
of a buy. It is just not an efficient market.
    Mr. Stark. I will come back, if I can, to that in a minute.
    I wanted to ask, Dr. Fronstin, if you have any information 
for us. Somehow your testimony missed, I was going to say, what 
is a fact, but I think it is correct, that the employers are 
dropping coverage for retirees, and if these retirees are under 
65, it seems to me there is a large chunk of the ``uninsured'' 
who are in that 50-to-65 range. Do you have any statistics on 
what has happened to them, or can you comment?
    Dr. Fronstin. Congressman Stark, our data would indicate 
that there was a dropping of the retiree coverage during the 
late 80's and early 90's, going up the FASB, Federal Accounting 
Standards Board, and then after that, our numbers seem to go up 
and down. That is for the early retirees.
    Mr. Stark. Yes.
    Mr. Gabel. For the Medicare-eligible retirees, there does 
seem to be a decline.
    Dr. Fronstin. I could submit this data when I return to the 
office, but what we have found is that since 1994 through1999, 
the percentage of early retirees with coverage from a former employer 
have not changed at all. We hear the anecdotes about employers cutting 
back on retiree health benefits. We are trying to find out whether 
these cutbacks are for current retirees or future retirees. We need a 
better interpretation of the types of questions that are being asked of 
employers because, as of this point, it does not appear to have 
affected where retirees get their coverage from or whether or not they 
are uninsured.
    Mr. Stark. Thank you. That would be useful information.
    I want to come back to Mr. Gabel for a minute. You 
mentioned the Illinois experience with the bare-bones policies. 
Tell me, what is the difference between somebody, say, with an 
income of $15-or $17,000 and a $5,000 deductible policy and 
someone with no policy at all.
    Mr. Gabel. Not much.
    Mr. Stark. So that, I think that is key, and I do not know 
whether Dr. Fronstin's figures can be extrapolated. At some 
point, the coverage does not amount to much, and I wanted to 
note that.
    The only other question is whether or not these figures 
include--and whether there is a difference--the folks off the 
books, both illegal, recent immigrants who are non-citizens, 
citizens who choose not to report or collect Social Security 
and working, as I say, off the books. I would presume your 
research does not cover them because they are sort of below the 
radar scope. Any estimates of how many that would add to the 
pot?
    Dr. Fronstin. We are using data from the Census Bureau.
    Mr. Stark. So you would include that?
    Dr. Fronstin. If they included it, we would include it, but 
I do not know that there is any way to distinguish between the 
two in their data.
    Mr. Stark. Thank you both very much. Thank you, Madam 
Chair.
    Chairwoman Johnson. Mr. Crane.
    Mr. Crane. Dr. Fronstin, as you know, the current Tax Code 
provides an open-ended subsidy through the employer exclusion; 
that is, one receives a greater benefit for buying a more 
generous benefit package, particularly if that individual is 
wealthier and in a higher marginal tax bracket.
    What has been the impact of this policy on health care, and 
has this resulted in over-consumption?
    Dr. Fronstin. I think the question is whether or not the 
subsidy has resulted in over-consumption of insurance, more 
people being insured than we would have had without the 
subsidy. If we are talking about a higher level of income 
receiving a greater subsidy, even without the subsidy, they may 
have the means to buy insurance. So I am not sure. I think 
there have been some studies on this that have tried to 
quantify it. We could take a look through them, but I am not 
really sure exactly which direction it goes in.
    Mr. Crane. Do you think workers would be choosing different 
types of health care packages if a dollar of wages equals a 
dollar of benefits?
    Dr. Fronstin. I'm sorry. Could you repeat that?
    Mr. Crane. Do you think workers would be choosing different 
types of health care packages if a dollar of wages equalled a 
dollar of benefits?
    Dr. Fronstin. Well, I guess the question really is will 
employers offer a different type of benefit because employees 
often do not have choice. So, if employees demand less 
benefits, it is possible, but I think--you know, it is often 
said that we are over-insured because of the tax treatment and 
people are not sensitive to the cost of health care. I think it 
is because people are sensitive to the cost of health care that 
they have over-insured, and now that they have had experience 
understanding what health care really costs, they would rather 
stay with the insurance. I think even if we change the tax 
treatment, given people are more risk-averse, they will 
probably, to some degree, stay with the insurance they already 
have.
    Mr. Crane. In your testimony, you tell us that the delay in 
collecting and reporting data often adds to the confusion on 
health coverage and the uninsured. What can we do about this? 
It is frustrating to those of us trying to understand the 
current dynamics of an always changing market; that the best 
data we have available is already 2 years old.
    Dr. Fronstin. It will take more money, first of all, but if 
you think about it, the way that the current population survey 
is collected, it is in March of every year. The Census goes out 
and interviews about 150,000 people and asks them about their 
health insurance coverage for the entire prior year. So they 
are not waiting that long between the end of calendar year 2000 
and 2001 before they go out in the field to collect this data, 
and then they do a very good job in turning this data around in 
6 months.
    I do not see much room for improvement there. There are 
other studies that may be able to fill some gaps, but they face 
the same issues of the cost of going into the field at a 
certain time and speeding up the process of collecting the data 
and cleaning the data. Certainly, they are not going to get as 
large a sample size as the Census Bureau will.
    Mr. Crane. Thank you. I yield back the balance of my time.
    Chairwoman Johnson. Congresswoman Thurman.
    Mrs. Thurman. Thank you, Madam Chairman. Thank you all for 
being here today.
    I think, Dr. Fronstin, you must have mentioned something 
about the CHIP program. One of the things that I have followed 
over the last couple of years and particularly some of the 
issues in Florida that have come to bear on us is that when we 
decoupled the welfare Medicaid program that we had an increase 
of uninsured children, and I do not believe that CHIP has 
picked that all up. That is actually being reflected more in 
the cost of the hospitals of who they are seeing in emergency 
rooms and bad debt and some of those things.
    What kind of information do you have, and is there anything 
in that area that we should be looking at?
    Dr. Fronstin. Right now, there is very little information.
    There is some information from Health Care Financing 
Administration (HCFA) on the number of children enrolled in 
CHIP. That data really is not reflected in the Current 
Population Survey yet because it is only as of 1999 and you did 
not have that many children. There were about 2 million 
children enrolled in 1999, and there is no separate question 
for CHIP. So it is hard to identify them, and it is hard to 
track people in the CPS over time. You just cannot do that.
    Concurrent with the decline in Medicaid coverage for 
children and the increase in the uninsured, there was also an 
increase in percentage of children covered by employment-based 
plans between 1994 and 1997. So there is a lot going on there 
that we do not quite understand yet, and I think as the data 
becomes available, we will get a better sense of the dynamics 
behind the program.
    Mrs. Thurman. Do you want to comment on that as well, Mr. 
Gabel?
    Mr. Gabel. I will pass.
    Mrs. Thurman. Let me ask another question. In the middle to 
the late 80's, there was a concerted effort, I think, by a lot 
of States to try to put some programs together called CHIP and 
some of these organizations, and what we have found is that at 
the beginning there seemed to be a lot of interest in those and 
people actually signed up. Then what happened was their costs 
began to rise, and, quite frankly, then the private market 
started to come in and offer all of these new plans and 
actually keeping costs down.
    What has happened with those alliances to try for people to 
buy into those markets? We kind of don't hear about that much 
more when we kind of try to group folks together to keep the 
costs down and some of those issues. What is going on in that 
market today?
    Dr. Fronstin. Well, in general, the alliances have not 
taken off. As you indicated, in Florida, they have been closed 
down.
    Mrs. Thurman. Pretty much.
    Dr. Fronstin. I think generally regarded as the most 
successful one is the one in California, but even the one in 
California--even that, as I recall, only enrolls a very small 
percentage of the State's population. I think one problem is 
many small employers do not even know that these purchasing 
alliances exist.
    A second problem has been that they have, in many cases, 
met the resistance of the broker community which is so 
important in the purchasing of health insurance for small 
employers. The third problem is the HIPCS needed a big volume 
in order to get big discounts to be effective. Since they have 
never achieved that volume, they have never reached that 
critical threshold point to really be successful.
    Mrs. Thurman. So part of it was marketing, people knowing 
about it, having the ability to fall into those alliances?
    Mr. Gabel. That is very important.
    Chairwoman Johnson. The other area that--and just, I guess, 
probably because of the part of the area that I represent--and 
I have to tell you, this issue is a growing issue and it is 
probably going to grow even more over the next couple of years, 
is this 55-to 64-year-old that is not on Medicare. Do tax 
credits help them?
    I mean, I do not know how that helps.
    Mr. Gabel. Well, if coverage purchased in the individual 
insurance market, the cost would be prohibitively high for a 
55-64 year old. So it would require a very substantial tax 
credit.
    On the other hand, these people do want coverage--we are 
not talking about the 21-year-old who thinks they are immortal. 
These individuals are very serious and concerned about the cost 
of health care.
    Mrs. Thurman. What we are hearing from our constituents is 
that they may not be sick right now, they do not know that they 
will not be sick before they get on Medicare, and part of what 
we are doing to them is because of the prohibitive costs that 
they are not going in to see their doctors, they are not doing 
their preventive care, and at some point, they end up very 
sick. It has really created a problem in the district. I can 
say that we hear about this every day. So I hope we can come up 
with some solutions here for those folks, and all of them.
    Chairwoman Johnson. Mr. English.
    Mr. English. Madam Chair, insofar as I was profiting from 
the line of question being advanced earlier by the gentleman 
from Louisiana, I will yield my time to Mr. McCrery.
    Chairwoman Johnson. Thank you, Mr. English.
    Mr. McCrery. I thank the gentleman for yielding.
    Dr. Fronstin, what is your Ph.D. in?
    Dr. Fronstin. Economics.
    Mr. McCrery. Good.
    According to the Kaiser Family Foundation, workers paid 
only 14 percent of the cost of self-only plans provided by 
their employers, and those getting family coverage only pay 27 
percent of the cost of that coverage.
    As an economist, tell me, if my employer gave me 86 percent 
of the cost of a new car, do you think the market for Cadillacs 
might go up?
    Dr. Fronstin. As an economist, I would say that the money 
that the employer is providing them for coverage really comes 
off their cash wages.
    Mr. McCrery. Well, of course, it does. I did not ask that.
    Dr. Fronstin. So are they really giving them the money for 
benefits, or can they take it as cash wages? Plus, they are 
actually not paying 14 percent because of the tax treatment.
    Mr. McCrery. You have answered my question, even though it 
did not sound like you wanted to.
    Of course, Cadillacs, you would need more demand for 
Cadillacs. If somebody is going to pay 86 percent of the cost 
of my new car, I am not going to go get a Yugo. I am going to 
go get a Cadillac because I can afford it, because you pay 86 
percent of the tab. You do not have to be an economist to 
figure that out.
    Dr. Fronstin. But I am questioning whether or not the 
employer is----
    Mr. McCrery. But if you gave that employee wages, if you 
gave that employee the equivalent in wages, instead of buying 
his health insurance, and you were asked this question before--
I am going to ask it more directly. If you cashed out that 
employee and, instead of spending $10,000 on health insurance, 
you gave him $10,000 in wages and the employee then could go 
out and buy health insurance, do you think he would buy exactly 
the same coverage, first dollar of coverage that a single 
employee might----
    Dr. Fronstin. Some will and some won't. Some will and some 
won't. It depends upon the person. It depends upon their income 
level. It depends upon what they can get in the individual 
market.
    Mr. McCrery. Well, of course, individuals vary, but, 
generally speaking, do you think that employee might go shop 
around for a different product that would not cost him 
$10,000----
    Dr. Fronstin. I think generally----
    Mr. McCrery. So he could use some of that money for----
    Dr. Fronstin. They will go shopping around. Certainly, they 
will go shopping around, but I think they will do their best to 
try and find the same product before they settle for something 
with less benefits.
    Mr. McCrery. Mr. Gabel, can you give us some background on 
how this employer coverage started and what was the rationale 
for it?
    Mr. Gabel. Our employer-based system is an accidental 
system. Other countries will point to a legislative act such as 
the National Health Care System in Britain. Ours grew out of 
wartime shortages during World War II where wages were capped 
due to wage and price controls. An executive decision was made 
to allow health benefits not to be covered by this cap. Once 
that occurred, a very strong growth in employer-based health 
insurance followed.
    Mr. McCrery. Exactly. There was no public policy thought 
into this. It was just kind of an accident, and as a result 
now, we have this system that leaves out a lot of people 
because their employers do not provide coverage or they are in 
a type of work where they are in and out of work and they do 
not get coverage, whatever, and if you are a high-income 
worker, you get a big subsidy from the government through the 
tax system, but if you are a low-income worker, even if your 
employer provides coverage, you get a little bitty subsidy from 
the Government. That makes a lot of sense, doesn't it?
    Mr. Gabel. No. What if we could start all over again? I 
have met very few economists, liberal or conservative, who 
would say an employer-based system like ours is the right 
system. In fact, I do not know if I have ever met any economist 
who believes our employer-based system is the right system.
    Mr. McCrery. Well, as policy-makers, why do we continue to 
fiddle with the current system around the edges instead of 
offering comprehensive solutions to health care?
    Getting back to the cost issue, I guarantee you if costs 
continue to rise, employer-provided coverage is going to drop, 
and the more uninsured we have in this country, the greater the 
cry for us policy-makers to do something about it. The only 
thing you will hear, I am afraid, is let the government do it. 
We will just pay for it, and then you may as well just have the 
Government pay for everybody. We already pay for Medicare, 
Medicaid, CHIPs, and now we are going to do the uninsured, a 
new tax credit. We may as well just make it easier and pay for 
everybody's health care and then tax everybody.
    If somebody, Dr. Fronstin, does not start worrying about 
costs in the health care system and how to control those costs, 
we are going to be in a world of hurt because we will be 
controlling the costs through a universal budget, and a lot of 
people will not like the result of that, mostly me.
    Chairwoman Johnson. I am going to recognize Mr. Pomeroy, 
who is a visiting guest from the larger Ways and Means 
Committee, for his background in this, in insurance.
    Mr. Pomeroy.
    Mr. Pomeroy. Madam Chairperson, you are very kind to allow 
me to ask questions.
    I was a State insurance commissioner in a prior life and 
sat where you are testifying to this Subcommittee. This is the 
first time as a Member of the Ways and Means Committee I have 
had a chance to participate even as a guest on this 
Subcommittee, and I really appreciate it.
    I very much enjoyed Mr. McCrery's questions and commend him 
for his creative and very sincere thinking on how we can do 
this better.
    I have a different notion, and that is that the erosion of 
employer-based health care insurance will rapidly fuel cause 
for a full-blown public insurance system as opposed to private 
coverage.
    In 1993, as we debated the Clinton health reforms, through 
'94, it appeared in looking at my own constituency that the 
momentum shifted significantly when those with employer-based 
coverage began to have questions as to whether the reforms 
would change, and change in a negative way, the kind of 
employer-based coverage that gave them security for their 
health insurance needs.
    Dr. Fronstin or Mr. Gabel, do you have any observations in 
terms of whether or not employer-based coverage does achieve 
for our population critical mass of quality health care 
insurance, thereby being a mainstay for the ongoing support for 
private insurance?
    Dr. Fronstin. Well, certainly employment-based coverage 
provides insurance for 90 percent of the population with 
private insurance, and it covers 160 million people. We know 
most of those people are satisfied with what they have, and are 
probably afraid of what they may lose under a new system and 
there is a lot of uncertainty about what that new system may 
bring. It is a lot of people to put into a new system and 
experience some type of potential disruption.
    Mr. Pomeroy. They were very risk-averse when they began to 
really perceive a threat, I believe, is what the Clinton, say, 
health experiment would show us.
    Mr. Gabel.
    Mr. Gabel. I think public opinion polls would show that 
most people who have employer-based insurance like their health 
plan. They are satisfied with it, and, of course, in general, 
their coverage, they generally want to keep.
    Mr. Pomeroy. Mr. McCrery's point about an unacceptable 
level of insured that will probably, inevitably, rise and that 
is totally unacceptable is completely correct. I have come to 
the conclusion that keeping that which works in our system and 
building reforms for the rest of it is better than scrapping 
everything and starting anew. It is just too much of an 
undertaking.
    That does get me to a second point, and that is a critical 
feature within the employer-based coverage is the risk-pooling 
that takes place. Some of the reforms would seem to pick away 
at risk-pooling. I would cite specifically the effort by some 
to have small employers self-insure or do it in an association 
context. I think this raises questions that you will inevitably 
return to, times in small group coverage where you have almost 
a churning, people coming in and out of insurance pools for 
very short durations of time. You also have questions in terms 
of whether there is an adequate solvency oversight on self-
insurance associations of very small employer entities.
    Dr. Fronstin and Mr. Gabel, do you have thoughts on that?
    Mr. Gabel. Well, having studied the small employer market 
and talking to employers for many years, my belief is we know 
one thing for certain. The small employer market will never be 
an efficient market until we make major changes in it. 
Specifically, in a small employer market, so much of the 
premium dollar to the sales force, to the brokers.
    Small employers might be paying 30 to maybe even 40 percent 
of their premium dollars for administrative expenses.
    We do not have, as you noted, Congressman, the risk-
spreading in the small employer market that we do among large 
employers.
    Mr. Pomeroy. My time is about out. I want Dr. Fronstin to 
also reply.
    North Dakota, just for an example, is largely insured by 
Blue Cross/Blue Shield and operates under an administrative 
component under 15 percent, and by pooling all of the small 
employers in this insured program they have, they do achieve a 
significant spread of risk, although there is rating variables 
based upon the unique circumstances to a degree.
    Dr. Fronstin.
    Dr. Fronstin. We already have two systems now. Even if all 
the small employers were pooled into that, pooled together, we 
have the large employers pooled together in the sense that they 
are all self-insured and have pulled out of the fully insured 
market. That has implications for premiums and the way we 
spread risk as well, but I think the issues you raise are 
important issues. They could be addressed in legislation.
    Chairwoman Johnson. We will have good testimony to both of 
those points in the next panel.
    Before I move on to the next panel, however, I want to 
pursue the questioning of my colleague from Louisiana in a 
little different light.
    First of all, I do absolutely agree with your fundamental 
point, and that is that cost is important and that, if you 
cannot pay for insurance, you do not get insurance. I think 
that was clearly demonstrated by President Clinton's effort to 
cover early retirees by opening up Medicare, and the result was 
that only one in five would be able to take it because it was 
too costly.
    On the other end of the spectrum, your Exhibit 3 does not 
show it. It says it is only looking at employer-covered 
benefits. We do actually cover health insurance for 40 million 
Americans. That is more than the entire current retired 
population through Medicaid. We provide them with complete 
health coverage, a very generous plan, and 2.5 million children 
at this time. So, if you can afford it, you can have good 
health coverage, and tax credits are about affordability. That 
is, I think, important, as we move forward, to remember.
    On this issue of who gets the subsidy, is it correct that 
if I am an employer and I buy the same plan for everyone, low 
income and high income, I get the same Government deduction for 
the premiums of every one of those participants?
    Mr. Gabel. You get the same deduction whether you paid for 
insurance or gave it to them as cash wages----
    Chairwoman Johnson. Right.
    Mr. Gabel. With the exception of----
    Chairwoman Johnson. Correct.
    Mr. Gabel. How it is treated by Social Security.
    Chairwoman Johnson. But you get the same deduction for the 
premium for the high earner as the premium for the low earner, 
assuming the plan is the same?
    Mr. Gabel. Yes.
    Chairwoman Johnson. Right. So, from the employer's point of 
view, they get the same deduction.
    Now, from the employee's point of view, they get the same 
health care, assuming it is the same plan for everyone, 
correct?
    So, when your chart here shows on Exhibit 3 that low 
earners receive this very low subsidy, all that is saying is 
that because he is a low earner and he pays very low taxes that 
his marginal tax benefit, were he to get that as income, would 
not be great, but his health benefit is enormous. So this chart 
is only looking at, in a sense, economic impact on him of the 
Government-subsidized employer system. But it is not 
reflecting--if it were reflecting the health impact, then all 
the bars would be equal, recognizing that most plans are the 
same for all employees, most company plans are the same for all 
employees, would it not?
    Mr. Gabel. What you are saying is correct. But I would add 
that if you are a low-income worker, you are far less likely to 
work in a firm that offers health insurance. If the firm has 
many low-income workers, predominantly low-income workers, they 
probably do not have health insurance or they probably have 
very meager health insurance.
    Chairwoman Johnson. I certainly appreciate that, that most 
of the uninsured are working for small firms or self-employed 
like cab drivers, but if you are in a firm and many, many firms 
do provide the same plan for everyone, if that were translated 
into income, you would have a very marginal tax benefit. But if 
it is not translated into income, you get a very big benefit. 
So, if we are talking about health benefits as opposed to 
salary--and that is why this issue of translating this into 
dollars is a problem because not only is the income impact 
different, but the health quality access is different.
    One of the reasons tax credits are so important is that it 
gives the employee more buying power, and many of those small 
firms could buy a better plan, but this bill cannot be 
considered in isolation.
    I think if you hear the next panel and some of the new work 
that has been done in how we cut marketing costs, how we put 
more affordable policies out there, which, of course, the 
Commerce Committee will be responsible for discharging that 
kind of information, but we also can have an opportunity here 
to do it, then you can see that there is an opportunity to 
really enhance health benefits through a combination of 
policies. I just do not want this chart to hang out there with 
its impression of variability when the impact on health benefit 
availability is very great for low-income workers, especially 
low-income workers who work for a company that has a good plan.
    Chairwoman Johnson. Thank you so much for your testimony, 
Dr. Fronstin and Mr. Gabel, and I look forward to hearing a 
little bit more information back from you on these employers 
that I understand to be a rather small number of plans in the 
market, relatively speaking, where the employee takes a much 
higher responsibility for the premium. Thank you.
    The next panel will be Lynn Etheredge, who is with the 
Health Insurance Reform Project at George Washington, 
University; Mark Pauly, a professor of Health Care Systems, 
Wharton School, University of Pennsylvania in Philadelphia; 
Sara Singer, the Executive Director of the Center for Health 
Policy, Stanford University; and Steven Larsen the Commissioner 
of the Maryland Insurance Administration, Baltimore, Maryland.
    Welcome to all of our panelists, and, Lynn, thank you for 
your thoughtful conversations with me over many months now, and 
look forward to your testimony.

   STATEMENT OF LYNN ETHEREDGE, CONSULTANT, HEALTH INSURANCE 
          REFORM PROJECT, GEORGE WASHINGTON UNIVERSITY

    Mr. Etheredge. Thank you, Mrs. Johnson. For the past 
several years, there has been increasing discussion about how 
to use tax policy to accomplish a number of important 
objectives: reducing the number of Americans, now 42 million, 
who are uninsured, for health insurance; expanding retirement 
plans and savings to assist half the workers who lack employer-
provided pensions; raising the national savings rate, which is 
now at a 40-year low; and expanding higher tax credits for 
education, first-time home purchase and many other needs.
    This morning I want to share with the Committee a new 
approach that might be useful to accomplish all of these 
objectives, a flexible benefits tax credit. Let me first 
describe how it might work, and then some of its major 
advantages.
    For example, let's assume that the Congress were to provide 
a $1,000 to $1,500 flexible benefits tax credit for workers as 
part of this year's tax legislation. For workers without health 
insurance, this tax credit would go to pay for health 
insurance, usually a private plan chosen at the work place or 
maybe through a State safety net program if the worker declined 
the credit in writing. In this way, all workers would be 
covered for health insurance, financed by the tax credit and 
their own contributions. So for workers without health 
insurance, the tax credit goes to health insurance. For workers 
who have health insurance but don't have an employer retirement 
plan, the $1,000 to $1,500 could be elected by them as a 
payment to their retirement or savings plan, like an IRA. IRAs 
can now be used for higher education, first-time home purchase 
and catastrophic medical expenses. So these flexible benefits 
credits could help to finance those purposes, as well as 
retirement. And then, finally, the workers who have health 
insurance and retirement plans already, could elect to take 
their $1,000 to $1,500 flexible benefits credit as cash income.
    This example makes clear, I think the most important point 
about a flexible benefits approach. It adapts, or more 
accurately, it allows the American worker to adapt the tax 
credit assistance to the family's needs at one point in time. 
When a worker is without health insurance--and that is usually 
short term, 6 or 12 months--the credit pays a health insurance 
premium. When the worker has health insurance, a flexible 
credit helps with other needs like savings for a home, or 
higher education, or retirement savings, or if working have 
health insurance and a retirement plan already, they could take 
the credit as cash income.
    The second important point about flexible benefits is that 
not only does it offer a menu for American families, it makes 
very efficient use of taxpayer dollars compared to many stand-
alone health credit proposals. In a typical health insurance 
tax credit, for example, the designers have to worry a lot 
about unraveling employer group coverage, so we usually add 
billions of dollars, sometimes tens of billions of dollars, for 
people who already have health insurance, even for employers. 
That just makes the current health insurance subsidies more 
expensive. In some bills more than half the costs go to people 
who already have health insurance.
    Now, with a flexible benefit approach, the workers who 
already have health insurance can elect new benefits in a form 
of cash, either cash payment into their pension retirement 
account, which they will be able to spend, or as cash income. 
So the workers themselves get the cash income, not employers.
    And, third, another important aspect of flexible benefits 
is that adding this flexibility to new options doesn't really 
increase government's costs. With a $1,000 to $1,500 credit per 
worker, the government's cost is still $1,000 to $1,500 per 
worker, even if the American family has more options for 
spending it. For example, to put it into a tax favored pension 
plan if they have that need.
    Finally, one last point, and that is that this flexible 
benefits approach, which I lay out more in the testimony and 
the attached paper, is a concept that is compatible with a 
large number of health insurance tax credit ideas. And I think 
it broadens the potential support and the potential usefulness 
of those ideas. It would fit with many of the ideas that other 
people on the panel will be describing.
    In summary, I would suggest that the Committee think about 
a flexible benefits tax credit as a new approach for helping 
people meet health insurance, and also retirement and other 
needs. It has important advantages, as part of a legislative 
strategy. And most importantly, I think the American families 
and workers would welcome these types of benefits, as well as 
the ability to make choices that meet their needs. Thank you.
    [The prepared statement of Mr. Etheredge follows:]
   Statement of Lynn Etheredge, Consultant, Health Insurance Reform 
                 Project, George Washington University
    Chairman Nancy Johnson and Members of the Committee, Good morning. 
My name is Lynn Etheredge. For the last several years, I have been 
working on issues of health insurance, retirement policy, and tax 
credits at George Washington University. My background includes more 
than thirty years of work, with the public and private sectors, on 
health care and related issues. I am appearing today as an independent 
witness.
    Thank you for the invitation to participate in your discussions 
this morning. The focus of my presentation will be on the idea of a 
``flexible benefits'' tax credit. A flexible benefits tax credit offers 
Congress a means to achieve health insurance coverage for most 
uninsured workers and children, as well as to close large gaps in 
retirement/savings plan coverage and offer a future with real economic 
security for American families.
    Separate tax credits for health insurance, retirement/savings 
plans, higher education, first-home purchase and other purposes have 
been discussed for a number of years. A ``flexible benefits'' tax 
credit is a new approach. In this statement, I will outline major 
features of this approach and its advantages. A recent paper (attached) 
provides additional material.
    To start with a basic example, let us assume that the government 
makes available a $1,000-$1,500 per worker ``flexible benefits'' tax 
credit for low to moderate income workers. Here's how the flexible 
benefits provisions could work:
    * A worker without employer provided health insurance would be 
expected to use this credit to purchase health insurance, via automatic 
enrollment and payroll withholding at his/her workplace. If a worker 
did not elect to use a credit to purchase private health insurance, by 
declining in writing, the tax credit would be assigned to state 
government for safety net coverage (a ``default'' option). Thus all 
eligible workers would have health insurance coverage, either through a 
private health insurance plan of his/her selection or a public program. 
A $1,500 premium (e.g. a $1,000 tax credit plus about a $10/week worker 
contribution) would support a Medicare-level benefit for workers.
    * A worker who has health insurance coverage, but does not have an 
employer-provided retirement/savings plan, could elect to have his/her 
$1,000- $1,500 flexible benefits tax credit paid into a retirement/
savings plan (such as an IRA). With a $1,500 tax credit (and $500 
worker contribution) annually, a worker could anticipate savings of 
$150,000 or more at retirement (in current dollars). A two-worker 
family could invest twice the amount and have twice the total account 
balance. IRA funds can now be withdrawn for higher education, first-
time home purchase, and catastrophic medical expenses. Early 
distributions from retirement/savings plans that use flexible benefits 
tax credits could similarly be made available for these purposes.
    * A worker who already has employer-provided health insurance and a 
retirement/savings plan could elect to receive his/her $1,000-$1,500 
flexible benefits tax credit as cash income.
    For American families, a flexible benefits tax credit would thus 
offer a menu of assistance options from which they could choose 
depending on their differing circumstances, as well as on how their 
needs change over time. While 42 million Americans now lack health 
insurance coverage, measured at a point in time, lack of health 
insurance coverage is most often a short-term problem--for example, six 
months to a year. At other times, a family's financial needs may 
include higher education or first-time home purchase. For older 
workers, such as baby-boomers, retirement savings becomes an important 
issue. About one-half of the workforce now lacks employer-offered 
retirement/savings plans.
    A flexible benefits tax credit could also be used to provide 
incentives for coverage of uninsured children, particularly the 94% of 
uninsured children below 200% of poverty--6.7 million children--who are 
already eligible for Medicaid or SCHIP but are not signed up. Workers 
could be required to have health insurance for their children (signing 
them up for SCHIP or Medicaid, or purchasing private coverage) as a 
condition for receiving flexible benefits tax credits for their own 
health insurance coverage. The flexible benefits tax credit would be an 
incentive, e.g. $2,000/couple, for childrens' coverage.
    As illustrated by the above example, a flexible benefits tax credit 
design can broaden benefits (and potential political support) without 
additional budget costs. If there were a $1,000-$1,500 per worker 
single-purpose tax credit, for example, expanding it into a flexible 
benefits tax credit (to include such benefits as retirement savings, 
higher education, first-home ownership, etc.) would not increase 
government's budget costs (which would still be $1,000-$1,500 per 
worker). But it would offer workers more opportunities to use such 
credits and would appeal to advocates for more causes.
    A flexible benefits tax credit also maintains incentives for 
employer group health insurance. Stand-alone health insurance tax 
credits often include higher subsidies for employers' health insurance 
to lessen the chances of unravelling employer group coverage. This just 
makes current subsidies more expensive. A flexible benefits tax credit 
handles these issues directly and with potential public appeal. It 
provides the same tax credit for workers with and without employer 
health benefits, and this maintains the existing tax advantages for 
employer group insurance. Workers who now have employer group health 
insurance could elect to receive their flexible benefits tax credit as 
cash (a retirement/savings plan contribution or immediate income). This 
gives these workers, rather than employers, the additional income.
    A flexible benefits tax credit offers a means to close the major 
gaps in health insurance coverage--which are mostly among workers and 
their families--and in retirement/savings plans. The national savings 
rate, for example, is now at its lowest rate in more than 40 years, and 
many in the baby boom generation are not saving enough for retirement. 
Increasing savings thus can be a prudent investment in the economy's 
growth, as well as in the financial security of American families.
    A flexible benefits tax credit would be compatible with a number of 
different tax reform ideas. The attached paper provides a more detailed 
discussion, including two examples, and estimates for increased 
coverage and federal budget costs. A $1,000 per worker tax credit 
targeted for about 2/3 of the workforce, for example, would cost about 
$70 billion annually, or $785 billion (inflation adjusted) over 10 
years, less than 30% of the available $2.7 trillion surplus. The paper 
also considers topics such as Medicare benefits as a benchmark, the 
role of employers, automatic enrollment, flat credits for lower-income 
workers, direct payment of credits to health and retirement/savings 
plans, and federal-state regulatory roles.
    In closing, let me return to my opening observations. A flexible 
benefits tax credit offers a new approach to accomplish many of the 
goals that this Committee has been considering in separate legislative 
proposals. A flexible benefits tax credit could achieve health 
insurance coverage for most uninsured workers (with Medicare-level 
benefits) and children, and offer a future with real economic security 
for American families (several hundred thousand dollars of retirement 
savings). These would be important benefits for many millions of 
American families, and a flexible benefits tax credit would give them 
new choices to elect such benefits. I believe they would welcome these 
benefits and these choices.

                                


    Chairwoman Johnson. Thank you, Mr. Etheredge. Dr. Pauly.

   STATEMENT OF MARK V. PAULY, PH.D., PROFESSOR, HEALTH CARE 
     SYSTEMS, WHARTON SCHOOL, UNIVERSITY OF PENNSYLVANIA, 
                   PHILADELPHIA, PENNSYLVANIA

    Dr. Pauly. Thank you, Madam Chairman and Members of the 
Committee for inviting me today. I am Mark Pauly, Professor of 
Health Care Systems and Economics in the Wharton School at the 
University of Pennsylvania. I am happy to be here today to 
discuss the results of my research and policy analysis with 
Bradley Herring, now at Yale, that appeared in a recent issue 
of Health Affairs.
    We analyzed options for the design of refundable tax 
credits intended to assist people in buying health insurance. 
We focus on the most numerous population group among the 
uninsured, those who are not poor, but have family incomes too 
low to allow everyone to afford health insurance. If you define 
this group as people with incomes between 125 and 300 percent 
of the poverty line, 40 percent of the uninsured fall into this 
category.
    There are three important characteristics about this group 
of uninsured people. First, there is general agreement that 
they are uninsured primarily because the premiums for insurance 
are high relative to their incomes. The problem is 
affordability, and there is no better solution to this problem 
than a subsidy that lowers the net premium for insurance. 
Hence, critics of this approach who say it will be ineffective 
cannot at the same time maintain that the problem is lack of 
affordability.
    Second, people in this group can nevertheless afford to pay 
something for their insurance, just not the whole premium. In 
fact, most people in this income bracket do obtain private 
insurance, and even the uninsured on average pay substantial 
amounts out of pocket for medical care. For them, even a 
partial credit, what some critics of this approach call a ``10-
foot rope for someone in a 30-foot hole'' is of considerable 
value because they do have some resources. They have some rope 
down in the hole themselves, and the trick is to figure out how 
to tie the pieces together.
    Finally, as we emphasized at great length in the article, 
all estimates of the impact of tax credits are fraught with 
uncertainty, and therefore it is important to build in 
flexibility in any policy design, rather, I think, than 
regulating to prevent anything possible that could go wrong.
    The most important design feature of any credit plan is how 
generous it will be to the target population. There is more 
here though than just the general observation, if you spend 
more money, you are going to get more effect. Our research 
suggests that there is a very pronounced notch or threshold 
below which credits have small effects, and above which effects 
become much larger.
    For example, we estimate that a credit of half of the 
premium for an average policy will reduce the number of 
uninsured by about half, whereas a 25 percent credit will only 
affect a few people, primarily those who are not wage workers. 
Here is why. Take a worker who has not taken an insured job and 
who is in the lowest marginal income tax bracket. The value of 
the exclusion is about 30 percent, combining the payroll and 
the income tax, and the loading for individual insurance is 15 
to 20 percent higher than for group insurance. So someone in 
this situation would need a credit of at least 45 to 50 percent 
just to be as well off, tax wise and cost wise, as they would 
have been had they taken a job that offered the insurance 
options they rejected. The punch line here is: credits will 
work.
    Second, another design feature is the specification of the 
policies that qualify for a partial credit. At one extreme the 
required policy might be very comprehensive. At the other 
extreme, there might be minimal restrictions in terms of 
coverage and cost sharing, effectively requiring only that the 
premium be at least as large as the credit. Then there should 
be virtually universal take-up of a policy that many will 
regard as parsimonious. The punch line here: some insurance, 
even if incomplete, is better than none.
    The third design feature is whether the credit is offered 
to everyone who obtains a qualified insurance policy at a given 
income level, or whether those who are currently insured or who 
are offered insurance in an employment-based group plan should 
be ineligible. If the credit is fairly generous, but is 
restricted to those not in groups, there will be an incentive 
to employers and employees to drop coverage in order to claim 
the larger credit. There will be crowd-out. The economically 
efficient policy here is somewhat counter-intuitive. The best 
credit is a neutral one made available to all, regardless of 
how they obtain coverage, and the higher budgetary cost for 
such a plan, relative to a targeted one, is not a real cost to 
the economy, but only a tax reduction, and one that to boot 
improves both equity and efficiency. It is, after all, 
manifestly unfair to offer a credit to someone who has 
neglected thus far to obtain insurance, while denying it to 
someone at the same income level who already made the 
sacrifices needed to take the job that provided coverage. The 
punch line: tax credits or tax cuts are for the lower-middle 
class, and should be offered to all.
    The final design feature is the form of administration. The 
punch line here, I think, is: arm millions of people with 
credits and private insurers will find them.
    My own preferences in this matter are to suggest an 
adequately funded minimally restrictive credit plan, and be 
prepared to learn from the experience with such a program, and 
especially the experience with a transformed individual 
insurance market. In particular, I would suggest credits on the 
order of $1,500 for self-only coverage, and $3,500 for family 
coverage, and permit those credits to be used for health 
insurance offered either by a private or a public insurer. 
These credits could be made available in the form of a 
redeemable coupon, $1,500 off your next insurance policy.
    All people with incomes in the target range would be 
eligible for credits even if they obtained employer-paid 
coverage, but the value of the tax exclusion will be netted out 
of the credit in the latter case. It would also be desirable 
eventually to offer larger credits, equal approximately to the 
premium for a comprehensive policy, for people with incomes 
below 125 percent of poverty. They could use these credits for 
CHIP, Medicaid, a government-contracted plan, or for a private 
plan of equivalent coverage. The most fundamental point, 
however, is that after years of talking about helping the 
uninsured, tax credits provide us a way to do something, and we 
ought not to make the unattainable perfect the enemy of the 
feasible good. Thank you.
    [The prepared statement of Dr. Pauly follows:]
  Statement of Mark V. Pauly, Ph.D., Professor, Health Care Systems, 
 Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania
    Thank you, Madame Chairwoman, and members of the committee for 
inviting me today. I am Mark Pauly, Professor of Health Care Systems 
and Economics in the Wharton School of the University of Pennsylvania. 
I am happy to be here today to discuss the results of my research and 
policy analysis. Much of the background for my remarks was published in 
a recent issue of Health Affairs and represents joint work with Bradley 
Herring.
    We analyzed options for the design of refundable tax credits 
intended to assist people in buying health insurance. We focus on the 
most numerous population group among the uninsured: those who are not 
poor but have family incomes too low to allow everyone to afford health 
insurance. In our analysis we defined this target group as families 
with incomes between 125 percent and 300 percent of the poverty line; 
more than 40 percent of the uninsured fall into this category. We also 
offer some comments on the uninsured with lower family incomes.
    There are three important characteristics of information about this 
group of uninsured people. First, there is general agreement that they 
are uninsured primarily because the premiums for insurance--either 
explicit premiums they pay directly or implicit premiums they (like 
most of us) pay by making a sacrifice in cash income to take a job that 
carries health insurance--are high relative to their incomes. The 
problem is ``affordability,'' and there is no better solution to this 
problem than a subsidy that lowers the net premium for insurance. Hence 
critics of this approach who say it will be ineffective cannot at the 
same time maintain that the problem is lack of affordability. Second, 
people in this group can nevertheless afford to pay something for their 
insurance, just not the whole premium. Most people in this income 
bracket do obtain private insurance, and even the uninsured on average 
pay substantial amounts out of pocket for medical care, money they 
could better use for health insurance premiums. For them, even a 
partial credit--what some critics of the refundable credit approach 
have called ``a ten foot rope for someone in a thirty foot hole''--is 
of considerable value because they do have some resources; they have 
some rope themselves, and the trick is to figure out how to tie the 
pieces together. Finally, as we emphasize at great length in the 
article, all estimates of the impact of various tax credit plans on 
insurance purchasing behavior (including our own) are fraught with 
uncertainty; there is a wide range of plausible values, and no valid 
way to narrow it. To us, this means that any tax credit plan should be 
designed to deal with uncertainty, not (as is sometimes the case) by 
trying to regulate every possible thing that could go wrong, but rather 
by designing policies that will work reasonably well (though not 
perfectly) no matter what happens, and by planning to make adjustments 
in the program as it is phased in and information begins to be 
generated.
    The most obvious and most important design feature of any credit 
plan is how generous it will be to the target population. In this case, 
however, there is more than just the general observation that offering 
larger credits for a given insurance policy will get more people to 
take it. Our research suggested that there is a very pronounced 
``notch'' or ``threshold,'' below which credits have small effects and 
above which effects become much larger. For example, we estimate that a 
credit of half the premium for an average policy will reduce the number 
of uninsured by half, whereas a 25 percent credit will only affect a 
few people, primarily those who are not wageworkers. There are two 
reasons why the credit has to be moderately large. First, all wage 
workers would be eligible for a subsidy associated with exclusion of 
employer provided premiums if they chose to take a job at a firm that 
offered coverage. For people who choose a job that does not pay all or 
most the premium, the value they attach to insurance must fall short of 
the group premium by an amount greater than the exclusion subsidy. 
Moreover, if they are to use the credit for a nongroup policy, the 
insurance premium will be higher than that of the rejected group 
option, because the administrative cost associated with that individual 
insurance is higher. Take someone in the lowest marginal income tax 
bracket. The value of the exclusion is about 30 percent (combining the 
payroll tax and the income tax), and the loading for individual 
insurance is 15 to 20 percent higher than for group insurance. So 
someone in this situation would need a credit of at least 45 to 50 
percent just to be as well off as they would have been after taking the 
option they rejected. However, a credit of 50 percent for a policy with 
a loading of 30 to 40 percent means in effect that one pays less for 
the premium than the coverage of out of pocket payments the person 
expected to get back: for the person of average risk, insurance is a 
no-lose proposition. (The availability of charity care may temper this 
motivation).
    A second important design feature is whether the credit is a fixed 
dollar amount (e.g., $1500 for self-only coverage) or pays a 
proportional share of the premium. In the individual market, premiums 
vary to some extent with risk--primarily with age and location, though 
not with health levels if the person did not wait to become insured 
before becoming sick. A fixed dollar credit will equal the premium for 
lower risk young people, but become a smaller proportion of the premium 
for higher risk middle-aged people. So the tradeoff, for a given 
average per person subsidy, is between covering a large number of lower 
risks or a smaller number of higher risks. Our estimates suggest that, 
at credits at about the 50 percent level, the same amount will cover up 
to 20 percent more of the uninsured if made available as a fixed dollar 
credit, although this difference shrinks as the credit grows. A 
possible design, present in the plan suggested by President Bush during 
the campaign, is to define the credit as the lesser of a fixed dollar 
amount or a proportional credit. At the modest $1000 level he proposed, 
the program would effectively provide a fixed dollar credit to almost 
everyone who bought a comprehensive plan.
    Another design feature is the specification of the policies 
qualified for the credit. At one extreme, the required policy might be 
very comprehensive--assuring adequate (if not excessive) access to 
care, but imposing on any buyer a substantial payment, large enough to 
discourage many from purchasing. At the other extreme, there might be 
minimal restrictions in terms of coverage and costs sharing, 
effectively requiring only that the premium be at least has large as 
the credit. Then there should be virtually universal take-up, but of a 
policy that many will regard as parsimonious. We think it also 
important that qualified policies could be purchased either from 
private insurers or from a publicly contracted or operated plan.
    A third design feature is eligibility for the credit by income 
level. For both fiscal and administrative reasons, it seems sensible to 
offer large credits to lower income families, and smaller or zero 
credits to others (e.g., people with incomes above the median). The 
latter group currently are rather generously subsidized by the 
exclusion, so modest credits for them would rarely be taken up. But 
reducing credits with income does offer some disincentive to earning 
more income, and may be complex to administer. These observations 
suggest that any credit should not phase down too rapidly, and that 
perfect targeting by income might be compromised in favor of 
administrative simplicity.
    The fourth design feature is whether the credit is offered to 
everyone who obtains a qualified insurance policy at a given income 
level, or whether those currently insured in an employment-based group 
plan should be ineligible. If the credit is fairly generous but is 
restricted to those not in groups, there will be an incentive to 
employers and employees to drop group coverage in order to claim a 
larger credit (as long as the qualified insurance is reasonably priced 
relative to group insurance); there will be ``crowd out.'' The 
economically efficient policy here is somewhat counterintuitive: the 
best credit is a neutral one made available to all regardless of how 
they obtain coverage, and the higher budgetary cost for such a plan 
(relative to one targeted only to those not offering or taking 
employment-based coverage) is not a real cost to the economy, but only 
a tax reduction, and one that improves both equity and efficiency. It 
is, after all, manifestly unfair to offer a credit to someone who has 
neglected to obtain insurance while denying it to someone else at the 
same income level who already made the sacrifices needed to take the 
job that provided coverage. The correct economic view of a credit as a 
tax cut is to be distinguished from the erroneous ``target efficiency'' 
view that is often taken of this problem.
    The final design feature is the form of administration, 
encompassing mechanisms for identifying who is eligible for credits, 
making them aware of the program, getting the credit to them in a way 
that minimizes cash flow problems when they buy insurance, and assuring 
that they do take advantage of the program for which they are eligible. 
For people who pay federal taxes, both income taxes and payroll taxes, 
a credit can be applied to those liabilities. Since such taxes are 
withheld periodically from wages, the net effect of such credits would 
be increase cash wages, thus furnishing the disposable income needed to 
pay any remaining premiums. Since all workers are required to make an 
estimate of their tax liability when they fill out a W-4 form for 
employment, the Treasury Department does have this information. In the 
interest of simplicity, it is probably better to offer credits of only 
one or two different dollar amounts to people within a given income 
range. Once the W-4 form is used to identify those eligible for 
credits, they need to be informed of the program. It should be easy for 
them to participate. Existing Medicaid and CHIP programs involve 
complex processes of eligibility determination that cause more than a 
third of eligibles to fail to apply. One simple device would be to 
offer workers not already covered annual ``$1500 off'' coupons, which 
could be redeemed by insurers or insureds for periodic credit payments. 
Any deviations in end-of-year income from the original estimated income 
could be adjusted as part of the income tax process. Private insurers 
would be expected to seek out people who have a substantial subsidy for 
the purchase of their product.
    The most problematic feature of proposals to make credits available 
for private insurance is the current rather unimpressive state of the 
private individual insurance market in the United States. As already 
noted, the main problem in this market is that administrative costs are 
high. There is also some risk rating, though the presence of guaranteed 
renewability features and other protections required by the HIPAA law 
mean that few in this market pay higher premiums because of chronic 
illness. One reason why the product is expensive is that it is bought 
only by a small fraction of the overall insurance market, only by about 
6 percent of all private insurance purchasers. The small scale which 
makes the breakeven premium high and the need for substantial selling 
efforts for a costly product would both be much changed if a large-
scale program of credits were available. If 18 million new buyers, 
armed with substantial credits, entered this market, it is very likely 
that product quality would improve, selling costs would fall, and such 
riskscreening as there is would diminish greatly. Putting in place a 
high-risk pool should allow the few high risks who fall through the 
cracks to be supported.
    What do these issues imply for policy design? The most obvious need 
is to have some serious considerations of the tradeoffs just outlined--
between the size of the credit and the extent of effect, between 
covering many low risks or fewer higher ones, between being fair in 
treatment of employment based insurance and treating credits as 
government expenditures rather than taxes, and between requiring 
comprehensive but unaffordable coverage and incomplete but affordable 
insurance. Our article provides some empirical estimates to help with 
these tradeoffs, but the data do not uniquely anoint a single best 
plan, so that some policy debate and decision making is needed.
    My own preferences in this matter are to suggest an adequately 
funded, minimally restrictive credit plan and to be prepared to learn 
from experience with such a program. In particular, I would suggest 
credits on the order of $1500 for self-only coverage and $3500 for 
family coverage, and permit those credits to be used for health 
insurance offered either by a public or a private insurer. These 
credits could be made available in the form of redeemable coupons, with 
reconciliation with total income at the end of the tax year. All people 
with incomes in the target range would be eligible for credits, even if 
they obtained employer-paid coverage, but the value of the tax 
exclusion would be netted out of the credit in the latter case. It 
would also be desirable to offer larger credits, equal to the premium 
for a comprehensive policy, for people with incomes below 125 percent 
of poverty; they also could use these credits either for a CHIP, 
Medicaid, or government contracted plan, or for a private plan of 
equivalent coverage.
    Before fully opening the private market to the poor, it would 
probably be best to wait to see if the improvements in functioning we 
expect that follow from substantial credits to lower middle income 
people do materialize. It would also be desirable to encourage (or at 
least not obstruct) the emergence of alternative group purchasing 
arrangements for individuals and small employers, such as ``Health 
Marts'' and the like.
    The most fundamental point, however, is that, after years of 
talking about helping the uninsured, tax credits provide a way to do 
something. They furnish a vehicle that can be kept free of regulatory 
restrictions, that does not require public decisions about exactly what 
insurance people should have, and that gives people the wherewithal to 
afford the health insurance that they feel is best. We ought not to 
make the unattainable perfect the enemy of the feasible good.

                                


    Chairwoman Johnson. Thank you, Dr. Pauly. Ms. Singer, a 
pleasure to welcome you to Washington.

  STATEMENT OF SARA J. SINGER, EXECUTIVE DIRECTOR, CENTER FOR 
     HEALTH POLICY, SENIOR RESEARCH SCHOLAR, INSTITUTE FOR 
     INTERNATIONAL STUDIES, STANFORD UNIVERSITY, STANFORD, 
                           CALIFORNIA

    Ms. Singer. Thank you. Good morning. Chairwoman Johnson and 
Members of the Committee, thank you for inviting me here this 
morning to discuss potential solutions to the problem of the 
uninsured. It is very nice to be back.
    My name is Sara Singer. I am a senior research scholar at 
Stanford University, and Executive Director of the Center for 
Health Policy.
    As I left home yesterday to come here, I explained to my 
almost-2-year-old daughter, Audrey, that I was invited to 
Washington by some very important people, to help them find a 
way to make sure that when she grows up, she will always be 
able to see a doctor when she needs to. In very simple terms, 
this is my hope and my purpose here today.
    To reduce the number of people who lack insurance requires 
both subsidies to make coverage affordable, and cost 
containment to keep it affordable. This cost containment could 
be achieved by providing multiple choices, structured 
competition, and incentives to select high-value plans.
    Only a small minority of purchasers today have created 
these conditions. They include the Federal Employees Health 
Benefits Program, the California Public Employees Retirement 
System and Stanford University. Though these are prominent 
purchasers, alone they have not transformed the health care 
delivery system. Transforming health care delivery will require 
that providers actively seek ways to cut costs without harming 
quality, and this in turn requires that a significant portion 
of their patients demand value.
    I would like to share with you some ideas for creating the 
necessary conditions for effective health care reform. These 
have been generated through discussions with colleagues, Alan 
Garber and Alain Enthoven at Stanford, at the invitation of the 
Economic and Social Research Institute, and with sponsorship of 
the Robert Wood Johnson Foundation. Our plan has six key 
elements.
    First, insurance exchanges for individuals and groups, to 
offer choice and promote competition among plans based on price 
and plan quality.
    Second, a United States Insurance Exchange, USIX, a Federal 
insurance exchange program like the Federal Employees Health 
Benefits Program, to serve as a backup for individuals and 
firms with fewer than 50 employees.
    Third, refundable tax credits for low to middle income 
individuals to purchase insurance through an exchange.
    Fourth, a default plan that would support safety net 
providers. Those eligible for subsidies who do not choose a 
plan would be automatically enrolled in the default plan.
    Fifth, a phased-in cap on the exclusion of employer or 
individually paid health benefits to encourage value-based 
purchasing.
    And, finally, sixth, a new Insurance Exchange Commission, 
like the Securities and Exchange Commission, with narrow, 
specific powers to oversee the exchange market and to 
distribute the tax credits and the default plan payments.
    The President's proposal, like ours, would use tax credits 
to expand coverage, but his proposal offers considerably 
smaller subsidies targeted to low-income individuals and 
employment groups without coverage. These small tax credits are 
unlikely to reduce substantially the number of uninsured due to 
low take-up rates and crowding out of employer-provided 
coverage. Even for those who receive tax subsidies, there may 
not be a viable market to purchase coverage due to adverse 
selection.
    Insurance exchanges can create a structured and competitive 
market, and facilitate expanded coverage at little cost. They 
can increase insurance coverage whether subsidies are large or 
small, and they would require little change if subsidies start 
small and are expanded later.
    The simplest approach to creating an insurance exchange at 
the national level is to form a USIX, like the Federal 
Employees Health Benefits Plan (FEHBP) available to Federal 
employees. USIX could encourage development of high-quality 
coverage, priced within reach of those eligible for subsidies, 
and it could structure the market to create competition and 
combat adverse selection.
    I also suggest that you consider default plans, that is, 
automatic enrollment in default plans for subsidy-eligible 
individuals who do not enroll themselves, and default payments 
tied to performance. This mechanism would subsidize safety net 
providers and would create incentives for preventive care, that 
should reduce hospital costs, and for expansion of coverage.
    In conclusion, any serious proposal for reform of health 
care financing should include elements of competition that 
encourage consumers to seek value, and subsidies for lower 
income individuals. I urge you to support a proposal that would 
do both. Thank you very much.
    [The prepared statement of Ms. Singer follows:]
  Statement of Sara J. Singer, Executive Director, Center for Health 
 Policy, Senior Research Scholar, Institute for International Studies, 
               Stanford University, Stanford, California
    Forty-three million Americans without health insurance is a serious 
and complex problem. I would like to thank Chairwoman Johnson and the 
other Members of the Subcommittee for this opportunity to discuss 
potential solutions.
    To reduce the number of people who lack insurance requires both a 
health care system that delivers good value health insurance products 
given the dollars available and makes them accessible to all, as well 
as subsidies for individuals for whom the price of coverage is out of 
reach. Competitive models like the Federal Employees Health Benefits 
(FEHB) Program, the California Public Employees Retirement System 
(CalPERS), or Stanford University contribute to the first of these 
goals by offering multiple choices, structuring the competition among 
them, and providing incentives for individuals to select high-value 
plans (e.g., defined contributions). Though prominent and important 
examples, these purchasers represent a small minority of the health 
insurance market so by themselves they cannot be expected to transform 
the delivery system. Most employers offer one or few choices and pay 
more for more expensive health care plans thus weakening or eliminating 
incentives to choose economical health plans. Transforming health care 
delivery will require that providers actively seek ways to cut costs 
without harming quality. This, in turn, requires that a significant 
portion of their patients demand value.
    My colleagues Alan Garber and Alain Enthoven and I, at Stanford 
University's Center for Health Policy, recently formulated a proposal 
to achieve near-universal health insurance by satisfying both 
requirements. We carried out this work as part of a project organized 
by the Economic and Social Research Institute and sponsored by the 
Robert Wood Johnson Foundation. In doing so, we sought to make a wide 
range of health insurance choices available to all Americans, to 
encourage consumers to seek high value coverage through improved 
competition and personal economic responsibility for choices, to 
increase support for care to those who remain without insurance, and to 
accomplish this without mandates on employers.
    Our plan would provide near-universal coverage among the non-
Medicare population by making private plans more affordable. It would 
do so by using insurance exchanges to promote competition among plans. 
The exchanges would provide information about plan prices and plan 
quality, enabling consumers to make informed choices and obtain good-
value health insurance. Our proposal includes the following key 
features:
      Insurance exchanges (public or private entities or 
employers) would offer individuals a choice of at least two health 
plans (one that provides some coverage for treatment by most providers, 
and a low-priced alternative) in every geographic region. Considerably 
more choices would be desirable, including point-of-service (POS) or 
preferred provider organization (PPO) products as well as closed-panel 
health maintenance organizations (HMOs) and newer alternatives such as 
defined-contribution ``care groups.'' Non-employer exchanges would 
accept all individuals not eligible for Medicare and groups in their 
service area (guaranteed issue) at a flat premium rate (community 
rating), with adjustments only for covering additional people, such as 
a spouse or dependents. Exchanges would perform at least minimal risk 
adjustment (initial risk adjustment would be based on age) and/or rely 
on other mechanisms to limit the financial rewards to plans for 
engaging in practices that encourage risk selection, to preserve choice 
among plan types and create incentives for plans to enroll and care for 
high-cost patients. Exchanges would also participate in risk adjustment 
between insurance exchanges in a region or state. Exchanges would 
require quality measurement and would make available comparative 
information to help members make informed choices. Substantial 
incentives would encourage development of private exchanges. These 
include tying new subsidies to purchase of insurance coverage through 
an exchange, preemption from state insurance mandates (i.e., ERISA 
protection), and protection from adverse selection.
     The U.S. Insurance Exchange (like the Federal Employees 
Health Benefits Program) would serve individuals and firms with fewer 
than 50 enrollees in areas in which private exchanges do not emerge.
     Refundable tax credits for health insurance valued at 70% 
of the median cost plan for lower- and middle-income Americans 
(individuals with incomes up to $31,000/families up to $51,000, phased 
out for individuals with incomes between $31,000 and $41,000/for 
families with incomes between $51,000 and $61,000) who purchase 
insurance through an exchange.1 In contrast to families in 
higher tax brackets, today such households have limited financial 
incentives for purchasing private health insurance plans.
---------------------------------------------------------------------------
    \1\ Any phase-out of subsidies will create high marginal tax rates 
in the phase-out zone. This is a problem that must be addressed. We 
recommend beginning the phase-out at income levels above the phase-out 
of earned income tax credits and other means-tested benefits. Extending 
the phase-out range would further alleviate the problem, but would also 
be more costly.
---------------------------------------------------------------------------
     Individuals, eligible for tax credits, who do not enroll 
in a health plan, will be automatically enrolled in a default plan 
designated by the state to provide basic health care services. Default 
plans will be federally funded through performance-based grants 
initially equal to 50% of the tax credit. They will enable states to 
provide new financing for public hospitals, clinics, and other 
providers who meet standards of open access, as part of their default 
plan. States will receive incentive bonuses or reductions based on the 
extent to which they improve performance on a set of preventive care 
measures (e.g., childhood vaccinations, first-trimester pregnancy 
visits, hypertension control) and reduce the percentage of the 
population that remains uninsured. The goal is to ensure that every 
eligible individual is enrolled in a health plan.
     Other individuals would continue to exclude from taxable 
income their employer--or individually-paid health insurance, but a 
phased-in cap would limit this exclusion from taxable income for 
employer--or individually-paid health insurance benefits to encourage 
value-based purchasing. Individuals eligible for both the exclusion and 
the subsidy could choose which of the two tax benefits to use. The 
dollar value of the cap would be set high enough to represent a 
substantial subsidy, yet low enough to provide substantial new 
financing for expanding health insurance coverage and other purposes.
     A new, independent Insurance Exchange Commission (IEC) 
with narrow, specific powers, similar in function and structure to the 
Securities and Exchange Commission, would be created to distribute new 
subsidies and default plan payments, accredit insurance exchanges, 
conduct risk adjustment across insurance exchanges, and serve as a 
clearinghouse for public information on the quality of health plans. 
This agency would have an appointment procedure and organization 
structure similar to that of the Securities and Exchange Commission, 
and would have a similar function--to encourage smooth information flow 
and functioning of insurance exchange markets.
    This proposal contains many similarities with the proposal offered 
by President Bush as a candidate. The President's proposal, like ours, 
would use tax credits to expand coverage. The President's proposal 
differs from ours in that it offers smaller subsidies, targeted to 
lower-income individuals in employment groups without coverage. Unless 
they are larger, tax credits are unlikely to reduce substantially the 
number of uninsured due to low take-up rates and crowding out of 
employer-provided coverage. Even for individuals who receive tax 
subsidies, there may not be a viable market for these individuals to 
purchase coverage.
    Adverse selection has made it nearly impossible to guarantee access 
to coverage and choice of plans to unaffiliated individuals in a system 
of voluntary health insurance. This is true despite attempts by the 
federal and state governments to ameliorate the problem through 
legislation providing for continuity of coverage for those who leave or 
change jobs and programs such as high-risk pools. The low level of 
subsidy proposed by President Bush would likely do little to improve 
the selection problem in an unstructured market.
    The creation of a structured and competitive market through 
insurance exchanges can facilitate expanded coverage at little cost. 
Further, it can be an important part of any strategy to increase 
insurance coverage, whether subsidies are large or small. In addition, 
a system based on insurance exchanges would require little change if 
subsidies were expanded in the future to include more people.
    The simplest approach to creating the benefits of an insurance 
exchange at the national level is the creation of one similar to the 
one available to federal employees. In our proposal, USIX would be a 
national exchange that would serve as an entry point for low-income, 
uninsured individuals, who would become eligible for new subsidies to 
purchase coverage. Like the FEHB Program, CalPERS, and Stanford 
University, USIX would offer competitive insurance choices. USIX could 
encourage development of high-quality coverage priced within reach of 
those eligible for subsidies. USIX would mitigate many of the market 
imperfections that plague the individual market (for example, through 
risk pooling, community rating, guaranteed issue, and competition). 
USIX could also determine limited benefit standards to provide 
reasonable comparability among plans and to prevent risk selection and 
segmentation. USIX would achieve economies of scale in brokering plans 
and would be capable of providing information about plan quality to 
individuals. Tax credits would promote higher-value health insurance 
options offered through USIX by exposing consumers to price 
differences.
    A second feature of our original proposal worth consideration is 
automatic enrollment in default plans for subsidy-eligible individuals 
who do not enroll in a health plan. States would receive a payment 
initially equal to 50% of the new tax credits for these individuals and 
would apportion these funds to providers, such as public hospitals and 
clinics that they designate as default providers. States will receive 
bonuses or reductions based on performance. This mechanism would 
provide needed financing for safety net providers to care for those 
automatically enrolled in default plans as well as incentives for 
preventive care that should reduce hospital costs and expansion of 
coverage among subsidy-eligible individuals.
    Any serious proposal for reform of health care financing should 
include elements of competition that encourage consumers to seek good 
value given the dollars available and subsidies for lower-income 
individuals. Our plan, like several similar plans, offers both and 
provides a path for further expansions in coverage in the future.

                                


    Chairwoman Johnson. Mr. Larsen.
    Mr. Pomeroy. Madam Chairman, if I just might say a salutary 
word about Mr. Larsen. He comes to the position of Insurance 
Commissioner with extensive prior experience, both as 
legislative aid to the Insurance Committee in Maryland, as well 
as private practice work for USF&G. He has been--my brother was 
formerly the Insurance Commissioner of North Dakota and a 
colleague of Commissioner Larsen, so I know personally of his 
good work and very high credibility with the Nation's insurance 
regulators.
    Chairwoman Johnson. Thank you, Mr. Pomeroy. Mr. Larsen.

STATEMENT OF STEVEN B. LARSEN, MARYLAND INSURANCE COMMISSIONER, 
 BALTIMORE, MARYLAND, AND CHAIR, HEALTH INSURANCE AND MANAGED 
     CARE (B) COMMITTEE, NATIONAL ASSOCIATION OF INSURANCE 
                         COMMISSIONERS

    Mr. Larsen. Thank you very much.
    Chairwoman Johnson. Now, you see, you must be very good.
    [Laughter.]
    Mr. Larsen. Thank you for those comments from one 
commissioner to another, and I am very glad to be here. Thank 
you for the opportunity to testify.
    As was mentioned, I am current Commissioner/Chair of the 
Health Insurance Committee at the NAIC and also cochair of a 
Maryland task force to study the individual market, and I would 
like to just provide a few comments about the current 
characteristics of the individual market, which I think will be 
most important. That is the market into which recipients of a 
tax credit would be going to purchase their coverage. And I 
think many of us think about insurance companies and their job 
being that of paying claims, but I think companies would view 
their job as managing risk. And the way they do that is through 
pricing policies and underwriting policies, high risks high 
prices, bad risks frequently excluded from coverage.
    And I think the most vivid example of those types of 
practices was when the small group market became dysfunctional 
in the late 1980s and early 1990s, in which pre-existing 
condition exclusions, non-renewals, price spikes were 
characteristic of the market at that time and that is what led 
to the enactment of almost nationally across all the States, 
small-group market reforms, which include guaranteed issue, 
guaranteed renewability, and modified or full community rating.
    Importantly, the individual market shares the same 
characteristics that the small group market did back when these 
reforms were initiated. Insurers today use the same types of 
risk management techniques, pricing and aggressive 
underwriting, in the individual market. But currently the 
individual market is much less regulated and has much fewer 
consumer protections than does, for example, the small group 
market today. Only 19 States have any rating restrictions. That 
means that insurers can determine rates based on health 
conditions when they issue policies, with no upper limits on 
the initial rate or rate increases upon renewal. Only 12 States 
have some form of a guaranteed issue. I know that you all 
passed Health Insurance Portability and Accountability Act of 
1996 (HIPAA) a few years ago, but HIPAA provides limited 
protection for those who are moving from group coverage into 
individual coverage.
    I would just like to share with you some statistics that I 
think highlight some of the problems that you see today in the 
individual market. As part of our task force review in 1999, we 
did a survey, and we found, for the largest carrier in 
Maryland, the Blue Cross plan, Care First, that 32 percent of 
the individuals who applied for individual coverage were 
rejected under their medical writing standards. Now, those 
individuals had the option of going into an open enrollment 
product that we have in Maryland, but that product was 
substantially inferior with fewer benefits than the medically 
underwritten product. Last year the legislature tried to remedy 
that by making a richer benefit package for the open enrollment 
products, and immediately Care First came in with a rate 
increase of 100 percent for the product.
    Recently, the Kansas Insurance Commissioner had the 
opportunity to compare rates between the individual and small-
group market in her State. And just to give you an example, she 
looked at a small group plan with $1,000 deductible, and for an 
individual the rate ranged from $73 to $122 a month. She then 
looked at a comparable individual market policy, and the rates 
were almost double the rates that you got in the small group 
market. And it was only by increasing the deductible five-fold 
that you end up with comparable rates. So you would have ended 
up with a policy, to get comparable rates in the group market, 
the deductible would have gone up to $5,000.
    And I think clearly, the higher deductible policy premiums 
are lower. It is difficult to imagine with some of the target 
population, the uninsured could afford such a high deductible 
to get comparable rates.
    It is also very difficult to shop currently in the 
individual market because there is little standardization, 
products vary by age, gender, health and many other factors. 
And the individual market is very fragile. There have been a 
number of States in which the individual market has collapsed 
because of a number of different factors. Both in Kentucky and 
Washington, I think, every carrier at one point had withdrawn 
from the individual market. Many States do have high-risk 
pools, but again, rates are frequently very high and the 
coverage varies in those pools.
    In conclusion, I would just like to say, of course it is 
very important that we look at every option for expanding 
access and coverage to individuals who do not have health 
insurance, but I would just caution you that looking currently 
to the individual market as a way to accomplishing that, I 
think, at this point is a risky proposition. And with that, I 
would be happy to take any questions.
    [The prepared statement of Mr. Larsen follows:]
    Statement of Steven B. Larsen, Maryland Insurance Commissioner, 
 Baltimore, Maryland, and Chair, Health Insurance and Managed Care (B) 
       Committee, National Association of Insurance Commissioners
I. Introduction
    Good morning, Mr. Chairman and Members of the Subcommittee. My name 
is Steve Larsen. I am the Insurance Commissioner for the state of 
Maryland. I would like to thank you for providing me with the 
opportunity to testify about the characteristics of group and nongroup 
health insurance markets, and how any federal legislation might impact 
those markets. Also, I am the chair of the National Association of 
Insurance Commissioners' (NAIC) Health Insurance and Managed Care (B) 
Committee. Although the NAIC 1 does not have an official 
position on the variety of proposals being discussed to combat the 
problem of the uninsured and I am not testifying on behalf of NAIC, as 
chair of the NAIC's health committee I have been privy to numerous 
discussions on health policy issues affecting the insurance markets 
across the country. In 1999 I also served as Co-Chair of the Maryland 
Task Force to study the Non-Group Health Insurance Market.
---------------------------------------------------------------------------
    \\1\\ The NAIC, founded in 1871, is the organization of the chief 
insurance regulators from the 50 states, the District of Columbia, and 
four of the U.S. territories. The NAIC's objective is to serve the 
public by assisting state insurance regulators in fulfilling their 
regulatory responsibilities. Protection of consumers is the fundamental 
purpose of insurance regulation.
---------------------------------------------------------------------------
    One of the proposals Congress is considering is the use of tax 
credits to encourage the purchase of insurance in the nongroup (or 
individual) market. Without commenting on the adequacy of any 
particular tax credit to buy such a product, I think it is important 
that Congress understand the differences between and characteristics of 
group and nongroup markets before deciding on whether tax policy will 
be effective as a method of addressing our nation's uninsured problems.
II. Insurance Markets
    The purpose of insurance is to spread risk among as large a group 
of people as possible (``pooling''). By creating larger pools, insurers 
reduce the uncertainty of the occurrence of insurable events and can 
more accurately predict the losses the group will suffer. Groups are 
better able to absorb increased claims costs of individuals within the 
group among the group as a whole. As such, insurance is the ``law of 
large numbers.''
    Insurers manage risk through pricing policies and underwriting. 
Higher risks are priced at higher levels, and particular risks, 
individuals with particularly costly diseases, may be declined by 
insurers seeking to manage their risk.
    Large groups, because of the law of large numbers, have never been 
a particular regulatory problem in group health insurance. However, in 
the late 1980s and early 1990s, small group reform was initiated in the 
states to combat the aggressive pricing and underwriting practices 
insurers were using. These techniques included long pre-existing 
condition limitations, large annual rate increases, and nonrenewal of 
policies due to claims experience, also called claims underwriting. 
State reforms included making small group policies guaranteed 
renewable, requiring insurers to issue policies to all small groups, 
limiting or doing away with any preexisting condition exclusion when a 
job is changed but coverage is seamless, and limits on preexisting 
condition exclusions, typically six or 12 months, or less. The Congress 
later adopted many of these concepts in the Health Insurance 
Portability and Accountability Act of 1996 (HIPAA).
    One of the most important consumer protections the states have 
adopted to protect small groups is to limit the rates an insurer can 
charge to a small group. Today, 46 states have enacted some form of 
rating restrictions for small group insurers. The most typical 
arrangement is a limitation from the highest rate charged to the lowest 
rate charged based on an index rate. These types of limitations can 
still result in considerable variation from one small group to another, 
even up to 100% variation from the lowest to the highest rate. But it 
is a limit. A smaller number of states (approximately 17), Maryland 
included, have taken stronger steps to restrict rates in this market by 
enacting adjusted community rating provisions. These provisions 
generally prohibit the use of health status and claims experience in 
setting rates for particular small groups.
    The individual market is subject to the same pressures as the small 
group market. In fact, many believe that ``adverse selection'' is more 
likely in the individual market because those who are willing to shop 
for and purchase a policy on their own are the individuals most likely 
to access benefits under the policy. Insurers use the same techniques 
in the individual market as they did in the small group market to 
manage risk.
    The individual market, however, is far less subject to the types of 
consumer protections that have been applied to the small group market. 
Only 19 states have rating restrictions of any kind. That means 
insurers can determine rates based on health conditions when they issue 
the policies, with no upper limits on the initial rate or on rate 
increases upon renewal. Only 31 states have limitations on the use of 
preexisting condition exclusions. That means insurers can permanently 
exclude named conditions--the insured will never have coverage for 
those conditions. Only 12 states have some form of guaranteed issue. 
That means insurers can reject coverage entirely based on health 
status. And it is important to remember that HIPAA provides none of 
these protections. The only protection HIPAA provides for the 
individual market across the board is guaranteed renewability of 
policies. (HIPAA also provides guaranteed issue for persons coming off 
group health coverage of at least 18 months, but it provides no 
protection regarding how much individuals can be charged for the 
coverage).
    Some statistics are enlightening. A survey done by the Maryland 
Insurance Administration showed that the Maryland BlueCross/Blueshield 
plan, CareFirst of Maryland, rejected 32% of the 18,000 people who 
applied for individual coverage in 1998. Those who were rejected, up 
until this year, had as an option to buy an open enrollment product, 
without medical underwriting, that had substantially fewer benefits 
than the underwritten product, even though the open enrollment product 
is subsidized by the state. This year, when benefits of the open 
enrollment product were increased, Carefirst sought an increase in some 
age bands of over 100%.
    The Kansas Insurance Commissioner recently had occasion to compare 
premium rates in the small group and individual markets. The monthly 
premium rate for a small group plan ($1,000/$2,000 deductible; $1,000/
$2,000 80%/20% coinsurance maximum) from one insurer was:
    Insured: $73-$122
    Insured/Dependent(s): $196-$326
    A comparable individual plan offered by the same carrier had the 
following rates:
    Insured: $58-$215
    Insured/Dependent(s): $176-$652
    Only by increasing the deductible five-fold do the rates become 
comparable. An individual plan with a $5,000/$10,000 deductible lowers 
the premium range to:
    Insured: $34-$120
    Insured/Dependent(s): $90-$322
    While the small group market does contain rate fluctuations, there 
is an upper limit because of rating restrictions, and the fluctuation 
is not nearly as dramatic as that in the individual market. 
Importantly, generally people in small groups cannot be refused 
entrance into the market for medical reasons. Although the higher 
deductible policy premiums are much lower, it is difficult to imagine 
that the targeted market, the uninsured, could afford such a deductible 
or would find what is essentially catastrophic coverage, rather than 
comprehensive coverage, attractive.
    Also, ``shopping'' for individual health coverage is quite 
complicated for consumers. While most insurance departments have 
consumer representatives, web sites and printed materials, the 
individual market varies so dramatically with a consumer's age, gender, 
health, and other factors that many people are very confused about what 
to buy and how to find the best buy.
    These facts suggest that efforts to direct individuals to the 
individual market as a way to address all uninsured problems should be 
undertaken with caution. In addition, the individual market is a 
fragile one. One need only remember the crisis that befell Kentucky and 
Washington State when they attempted reforms of the individual market: 
they were left with virtually no companies as insurers left the market 
in droves. States have been understandably cautious ever since.
    Larger groups provide buying clout in the market, spread the risk, 
and protect individuals against fluctuations of smaller pools. It is 
for this reason that many states have looked to strategies to pool 
groups together, using high-risk pools for adverse risks, expanding 
public programs such as SCHIP and Medicaid, and even opening public 
employee groups. By the same token I am not aware of any state that has 
looked to the individual market as the solution for uninsured citizens.
III. Beware of Association Health Plans
    While Congress is considering how to reduce the number of uninsured 
persons, I want to strongly caution you against looking to Association 
Health Plans (AHPs) as a ``magic bullet.'' As consistently expressed in 
the past by the National Governors' Association, the National 
Conference of State Legislatures and the NAIC, the creation of AHPs 
outside the state regulatory structure may very well result in hurting 
the very small business employees that you are trying to help. If 
exempted from state regulation, AHPs would ``cherry pick'' the 
healthiest people from state risk pools. Premiums for those remaining 
in the state-regulated market would rise as the coverage base declined. 
Those groups unable to join an AHP will be priced out of insurance. In 
addition insurers, who are under an obligation to ``guarantee issue'' 
all products to any small group, will be forced to cover groups that 
leave the AHP for more comprehensive coverage when a group member 
becomes ill. Insurers will then abandon the small group market as it 
loses its necessary proportion of healthy workers. Thus, AHPs will lead 
to the ultimate outcome of deregulation or collapse of the small group 
market. Such a result does not serve consumers very well. As the 
numbers show, there is no real evidence that an unregulated market 
(individual) is more cost-effective than a regulated market (small 
group), except for the healthiest risks.
    States have enacted substantial reforms to the small group market 
in order to make insurance more accessible and affordable. In a report 
last year, the Congressional Budget Office (CBO) confirmed this 
analysis. CBO found that 80 percent of workers in small employers would 
see their health insurance premiums rise if AHPs were exempted from 
state regulation.
    In addition, let us not forget the past and be destined to repeat 
it. In the 1980s, inadequate oversight of multiple employer welfare 
arrangements (MEWAs) resulted in rampant fraud and abuse, leaving 
consumers in nearly every state responsible for millions of dollars in 
unpaid medical bills. Congress and the Department of Labor subsequently 
addressed this issue by clarifying that MEWAs fall under state 
regulatory authority. Current AHP proposals would again grant 
regulatory authority to federal regulators who lack the necessary 
experience and resources to oversee these plans, thus recreating the 
same circumstances that caused the 1980s MEWA nightmare.
    It is important to remember that the states, not the federal 
government, have pioneered improvements in the health insurance market. 
Long before debate about a national Patients' Bill of Rights or access 
reforms began, states were developing innovative insurance market 
reforms to address consumer needs. Exempting AHPs from state regulation 
will deny states the opportunity to maintain the important consumer 
protections they created.
IV. Conclusion
    While it is vitally important that we continue our efforts to 
increase access for those millions of American consumers who do not 
have health insurance, care should be taken to ensure that any 
solutions provide meaningful options to those we are trying to assist. 
Currently the individual market is characterized in many states by 
higher prices, more limited access and stricter underwriting than group 
markets. Thank you for the opportunity to testify.

                                


    Chairwoman Johnson. Thank you very much. Thank you very 
much. Ms. Singer, do your health exchanges--your insurance 
exchanges, would they overcome the kind of problem that Mr. 
Larsen is describing? Would they serve individual buyers, 
enable them to get group rates, and for society to manage the 
risk issues involved that have already increased cost in the 
individual market?
    Ms. Singer. That is the idea, and I think that would be the 
result. They would act like large employers do, and so the 
individuals who have subsidies, purchasing through the 
exchange, would have all the benefits of large employment 
groups: guaranteed issue and renewability, community-rated 
premiums, multiple choices, information about those choices, 
and et cetera.
    Chairwoman Johnson. And in California is there experience 
with this kind of mechanism that also involves risk--management 
of risk across plans?
    Ms. Singer. Yes, in the small group market, the Pacific 
Business Group on Health manages Pac Advantage, which used to 
be called the Health Insurance Plan of California (HIPC), which 
was previously managed by the State. PBGH risk adjusts premiums 
across plans within that marketplace to accommodate for plans 
that get different risk mixes.
    Chairwoman Johnson. And that is the largest HIPC in the 
country, is it not?
    Ms. Singer. Yes, it is.
    Chairwoman Johnson. Mr. Etheredge, why do you think $1,000 
is going to make a difference, when the average cost of family 
coverage is over 3,000?
    Mr. Etheredge. Well, I think $1,000 is probably the lowest 
number you ought to consider. I get to $1,000 by starting with 
the Medicare benefit package. These are estimates done by 
Gordon Trapnell, of the Actuarial Research Corporation. A 
Medicare benefit package for the working population will now 
average about $1,500 per worker. That is much less than the 
typical policy that is sold, but we all know Medicare has a lot 
of things it doesn't cover, like prescription drugs, and has 
very high deductibles--I guess we are getting close to $1,000 
now in Part A and Part B. And then I look at the fact that we 
ask Medicare enrollees to pay over $600 a year, and they are on 
an average Social Security benefit of $10,000. So, at a bare-
bones level, I am thinking we should try to assure at least the 
Medicare benefit. That is what we have had as a national 
standard, and ask workers to pay something, maybe comparable to 
what we ask elderly people to pay. And that logic leads me from 
a $1,500 premium, and I subtract out about $10 a week, $500, as 
a reasonable contribution from the worker. So, a $1,000 tax 
credit per worker, as a national average, could support a 
Medicare-level benefit.
    That isn't the national average health plan, but I think if 
you told uninsured people that they could get a Medicare 
benefit, and the government will be paying two-thirds of the 
cost, that is probably a viable proposal. So that is how I got 
to $1,000. I would be happier personally with a more generous 
policy, but I think it is an interesting exercise to reason 
that through.
    Chairwoman Johnson. Thank you. I am going to limit my 
questions. You are just an excellent panel, very good, and I 
appreciate it.
    And if each Member takes about 3 minutes, and then if we 
have time, we will come back for a second round, but you all 
get to question before we vote. Mr. Stark.
    Mr. Stark. Thank you, Madam Chair. I would like to thank 
the panel. In the brief time we have, I guess I would like to 
ask Mr. Larsen two questions. One, what is the experience in 
the States in general, regarding the sale of very high-
deductible policies? Are they popular? In your opinion, do they 
provide a meaningful assistance?
    And before you answer that, I am going to recall the 
experience we had back in the nineties with kid's health 
insurance. The companies came forth with a lot of policies that 
offered $50 a day if they were hospitalized, and almost what I 
would classify as meaningless insurance. So, what does an 
insurance commissioner do in terms of protecting the consumers 
from paying for a policy where the benefits won't really 
provide health care? I mean, they will provide little pieces of 
it, but not a broad coverage?
    Mr. Larsen. Well, ultimately the consumers have the choice. 
I think as a practical matter, high-deductible policies are not 
the preferences of many consumers, and in fact, consumers often 
aren't able to have the foresight to understand that they are 
paying a low premium now, but actually when it comes time to 
need the coverage, they are sometimes surprised to learn that 
the coverage is low or they don't have the coverage until they 
have spent 5,000 or 10,000 out of their own pocket. So I think 
conceptually there may be appeal for that. I think as a 
practical matter, I don't think those are attractive to many 
consumers.
    Mr. Stark. Ms. Singer, welcome back. It appears that Mr. 
Enthoven has had an epiphany judging by the HIPCs that are 
missing from your testimony, which I can only suggest is the 
best thing I can say. You do suggest that unless there are 
larger tax credits, it is unlikely to reduce the number of 
uninsured, and you also suggested there may not be a viable 
market for individuals to purchase coverage. Do you have a 
figure in mind as a ballpark figure of where these credits 
would have to go, or the subsidy would have to go in terms of 
dollars, to provide an adequate coverage for individual or 
family today?
    Ms. Singer. Well, I haven't done the type of research that 
Professor Pauly has done, but I am working with a nonprofit 
organization in California, to look at what they could provide 
at a much-reduced price to serve those receiving a low level of 
subsidy. The issue we are struggling with is that this managed 
care organization is used to providing first-dollar coverage. 
They are considering increasing levels of cost sharing, as 
opposed to implementing high deductible.
    From the perspective of a consumer, who would be a subsidy 
recipient, the notion that they would be covered for 
catastrophic care, but not for first-dollar coverage, is 
probably not terribly attractive.
    Mr. Stark. But how do you get that dollar figure? You don't 
have it?
    Ms. Singer. My point is that plans could offer a lower-
priced product to accommodate a low level of subsidy. I don't 
have a dollar figure. I am sorry.
    Mr. Stark. And the last thing--because my time is up--is, 
Mr. Larsen, would you expound a little bit, in layman's 
language, on the real dangers to the new rise in the 
association health plans, and how they can really harm small 
businesses rather than help them?
    Mr. Larsen. Well, I think whenever you set up a system of 
insurance that is outside State regulation, you do a couple 
things. One, you get rid of all the consumer protections that 
are in place for the small businesses, guaranteed issue, 
guaranteed renewability. You essentially, I think, end up 
destroying, as we saw previously under the Multiple Employer 
Welfare Arrangement (MEWA) example, the existing insurance 
market, all the, quote, good risks end up going to the 
unregulated market. It leads to so-called bad risk, people with 
sicker employees in the insured market, and then you get into 
what even laymen call an actuarial death spiral, where rates go 
up and up and up, and you drive people out. At least laymen 
that I hang around with use that term.
    So, you know, we had that model many years ago, and I think 
from a regulatory and consumer perspective, it was a failure.
    Mr. Stark. Thank you. Thank you, Madam Chair.
    Chairwoman Johnson. Mrs. Thurman. And you have as much time 
as you--we have 5 minutes to vote, and they hold it open 2 
minutes, so 6 minutes left? 6 minutes left. Mr. McCrery is 
coming back.
    Mrs. Thurman. OK. I won't take that long. Mr. Larsen, you 
had said in your opening things that there were consumer issues 
that needed to be addressed, and if you could get those to me, 
I would really appreciate that. That is the only question, 
because I think this is a very important issue if we are 
looking at any kind of--I don't want to spend $1,500 on a tax 
credit and find out that it has all been spent on 
administrative costs, quite frankly. I want something that is 
actually going to do what it was intended to do, and that is to 
take care of the uninsured in this country, and I think we need 
to really look at some of those issues out there. So if you 
could get some of that to us, I would appreciate it. Thank you, 
Madam Chairman.
    Chairwoman Johnson. Thank you. Now, Mr. McCrery is going to 
come back, if you could hang around and--actually, I have a 
minute, so I am going to ask Ms. Singer if you could respond to 
Mr. Larsen's comments? In other words, are there and maybe 
Mr.-- either one of you might have some comment on this, 
because the problems he points to are the current problems with 
the individual market, and what we have to look at is if we 
provide a tax credit to individuals to increase their buying 
power, can we also provide them with a way of buying? Now, you 
can through some of the new proposals, reduce the cost of 
marketing very clearly, and certainly both of your proposals do 
that, so that reduces cost considerably. And we had earlier 
testimony that 30 or 40 percent of the premium is marketing. So 
that is really a big bust. And then ERISA has demonstrated that 
ERISA protection can provide lower cost plans in the market, so 
you can drive cost down that way. And can you then also deal 
with this issue of risk in such a way that the individual 
market doesn't look at medically underwriting every individual? 
Ms. Singer, and then Mr. Etheredge and Dr. Pauly?
    Ms. Singer. Yes. I think that you can address the issues 
that the individual market is experiencing through pooling 
those individuals into groups. I think it helps a lot that they 
are subsidized individuals and would lose those subsidies if 
they don't purchase something in the market so they have a 
strong incentive to purchase something. But I think that giving 
them the opportunity to purchase through a group is a key 
element, and I don't think that it has to be necessarily an 
employment group, but some other mechanism and that is why we 
have proposed---
    Chairwoman Johnson. Dr. Pauly.
    Dr. Pauly. I think it is wrong to look at today's 
individual insurance market and imagine that is what it would 
look like, even without additional regulation, if you offered 
substantial subsidies. The reason why administrative costs are 
so expensive in the individual insurance market, paradoxically, 
is because individual insurance is so expensive. So the 
companies have to offer substantial commissions to persuade 
people to take this over-priced insurance.
    If, on the other hand, you offer a tax credit of 50 or 60 
percent of the premium, the stuff will sell itself. And there 
has actually been experience in States that have cross-
subsidized individual coverage. When the cross-subsidy is 
generous, the administrative cost for the individual coverage 
falls down to the 15 percent level, so that is sort of the 
first point. I think it is a mistake to look at today's 
individual insurance market and imagine that is what it would 
be like if you transformed the financing.
    The second point I want to make is I think it is a mistake 
to obsess about risk segmentation in that market. What we know 
is, if we community rate, maybe that is more just, but it 
doesn't get more people insured. It leaves the number of 
uninsured the same. The real problem with the individual 
insurance market, as I have written, is not that it is 
expensive for high risks, it is that it is expensive for 
everybody. And one way to get that down is to offer the subsidy 
itself, and the other is to offer the opportunity of group 
insurance purchasing, although I am somewhat skeptical about 
how much you can lower costs there. A custom suit is a lot more 
expensive than an off-the-rack suit, and even if I buy my 
custom suit from Sears, it is still going to cost a lot of 
money. If you sell things on a one-on-one basis, it does cost 
more. But I think there is some real opportunity to get those 
costs down, many of which--many of the opportunities which 
would be caused by the availability of subsidies.
    Chairwoman Johnson. Mr. Etheredge, 1 minute.
    Mr. Etheredge. Sure. I think there are two sets of 
regulations that would be useful, assuming we want a Federal/
State framework where most regulation still rests with the 
State government. The first is HIPAA type regulation of no 
preexisting condition or medical underwriting, and that could 
be applied to the group of people eligible for the tax credit. 
So simply extending HIPAA to people eligible for tax credit 
will solve that medical underwritingproblem.
    The second set of rules you need after availability is 
rating rules. There I would say you could have a fairly 
straightforward Federal rule which says if the State uses 
something other than community rating, it has to adjust the 
credits to match the factors that are used by the insurance 
plans. So you want to make sure the credit matches what the 
premium variations will be.
    Chairwoman Johnson. In other words, there are 
possibilities. I do think it is significant that Maryland is 
one of the highest--the States with the highest number of State 
mandates, and of course, the individual market is controlled by 
State mandates, and part of the goal would be to provide a 
buying option that would allow people to get out from under 
State mandates like most employer plans are under State 
mandates.
    Unfortunately, my time is expired, so that I really do have 
to go, but Mr. McCrery is returning within minutes. So I will 
recess the hearing, but as soon as he gets back, he will begin 
his questioning. Thank you very much for your testimony, and we 
will be back in touch with you, and if you care to add comment 
from hearing the comments of your co-panelists or those that 
preceded you, we would be happy to receive those. Thank you.
    [Recess.]
    Mr. McCrery. [Presiding.] The hearing will come back to 
order. Thank you all, members of the panel, for waiting for us 
to get back from the vote. I am sorry I missed the questions 
from the other Members of the Subcommittee, and forgive me if I 
cover some of the areas that they have already covered.
    First of all, let me say I am very appreciative of the time 
that all of you have given us. I know that you all are very 
well-respected experts in the field of health care and 
insurance, and so it is very nice of you to come all the way 
from California or Penn or Maryland to be here with us today.
    I have a lot of questions, and some comments. I guess I 
will start with Dr. Pauly. You said that the perfect shouldn't 
be the enemy of the good, and we will do what we can, and you 
proposed a tax credit scheme. What good will your plan do? What 
is the good that your plan does?
    Dr. Pauly. I think there is a number of things. The most 
obvious one, at least according to our estimates, is it would 
cause a substantial number of the currently uninsured to 
purchase or obtain insurance because it would make it 
affordable for them. Second, it would put in place--at least 
the version we have that would offer this credit to people who 
got insurance, no matter how they got it--it would put in place 
the appropriate neutral incentives for people to decide how to 
get their insurance. If their employer can arrange insurance in 
an attractive way, then that is an appropriate way for people 
to obtain their insurance in a group, and group insurance is 
actually one of the greatest inventions known to mankind.
    On the other hand, particularly small groups and distracted 
small employers don't do a very good job of arranging 
insurance, and when they do buy the insurance, their employees 
hate it. And I guess our thought here is that by giving those--
instead of under the current situation, offering a tax-related 
bribe to let your boss arrange your insurance, if you could get 
the same tax credit either way, then the harried small employer 
and the irritated workers might be better off going to a non-
group, at least a non-employment-base group setting or maybe an 
individual setting. So I think those are probably the two main 
advantages, that it would help everybody who needs serious help 
to get insurance, and it would set in place incentives for them 
to make the right choices about where to get that insurance.
    Mr. McCrery. About what percentage of the uninsured do you 
estimate would get insurance under this plan?
    Dr. Pauly. Well, our ballpark estimates would be for the 
kinds of credits we propose, it would be more than half of the 
uninsured, probably on the order of 60 percent or so because 
the credits are on the order of 55 to 60 percent of the 
premium.
    The other point though that I think is important to make, 
although I wish I could tell you more about it, we are 
convinced that above and beyond the design of the credit, the 
other absolutely most important thing is kind of the marketing 
of the insurance. If you follow the Medicaid and make the 
subsidy hard to get, if people have to have a face-to-face 
interview, as they do in New York, in order to establish 
eligibility, you will have the same experiences with Medicaid. 
And the simple thought, and my modest proposal, is if you mail 
people these coupons, you can use the power of private 
enterprise to market its product. After all, those coupons 
don't turn into money until an insurer sells a product. And I 
have hope--or maybe it is faith--that that would 
substantially--that would be a better way--a good way of 
getting to the uninsured and reminding them of the value of 
insurance as opposed to the sort of public service announcement 
approach, which we tend to do for Medicaid.
    Mr. McCrery. Have you estimated the cost of your proposal?
    Dr. Pauly. No, I have not. It will be high though if you 
offer credits of that order of magnitude to everyone, although, 
as I said in my remarks, I think the right way to look at that 
is as a tax cut, and it potentially could substitute for the 
less-directed tax cuts that are currently being contemplated, 
could be included in that.
    Mr. McCrery. Fine. Does your proposal do anything about 
cost and the health care system?
    Dr. Pauly. It would help to lower the administrative costs. 
If you subsidize insurance, then insurers have to put much less 
resources into persuading people to buy it. It will sell 
itself, and if it sells itself, you don't have to pay 
commission to an insurance agent.
    As to overall health care costs, there is, of course, the 
general belief that if you offer people neutral incentives, 
they may choose policies that are more cost containing, because 
there is no longer a subsidy at the margin, and so high-
deductible policies, medical savings accounts, or even fairly 
strict managed care plans, where you are being rewarded for the 
bother by having a lower premium. So I think that would be the 
main impact.
    My view of what is currently happening is that the rises in 
health insurance premiums are largely driven by the increased 
spending on new drugs, which I think the market has already 
told us--since most employers are not cutting back--workers 
really value that coverage. And so I think it is not important 
not to focus too much on cost, or spending growth, as if it 
were necessarily evil. What you want to do is get the right 
rate of spending growth--and here again, it is kind of the 
economists' perspective--if you get the incentives right, which 
what I am talking about would do, neutral tax credit proposals, 
then whatever rate of spending growth comes out of that you can 
feel reasonably confident is the right rate.
    Mr. McCrery. Well, let me just interject. I don't think 
costs are evil. I just think we need to do a better job of 
containing costs. Otherwise, we are going to find ourselves 
with public policy makers containing cost for the system, and 
that----
    Dr. Pauly. Well, I think we need to do a better job of 
convincing ourselves, if we can, that the costs we are 
incurring are worth the--the benefit is worth the cost.
    Mr. McCrery. Exactly. But that should be up to the 
marketplace and not up to government to decide how much we 
should spend on health care.
    Dr. Pauly. That is right.
    Mr. McCrery. If hundreds of thousands of individuals every 
day in the marketplace decide they want that drug, then they 
can pay for it. But for us to create a global budget and say 
everything has got to fit within this global budget, it is a 
recipe for dumbing down the health care system, in my opinion.
    Dr. Pauly. Yeah. I have been trying to get investors for my 
new HMO, whose slogan is going to be, ``Last year's technology 
at last year's premiums.''
    [Laughter.]
    And I haven't gotten very far, so I think there are worst 
things than growing premiums. It depends on what the money goes 
for.
    Mr. McCrery. Right. But again, if you allow those premiums 
to be generated by private decision-making, you are probably 
going to have more money spent on health care than if we create 
a budget for it, and the quality of health care is likely to be 
better as a result. Do you have a problem with that?
    Dr. Pauly. No, I don't.
    Mr. McCrery. Ms. Singer, welcome back. It is nice to see 
you again, both you and Dr. Pauly, who have been kind enough in 
the past to suffer through my questions and educate me a little 
bit about health care and health insurance.
    You propose a cap on the tax exclusion. Do you know where 
you would put the cap? Would it be $5,000 or the average cost 
of a policy, or where would you put the cap?
    Ms. Singer. What we propose more specifically in our plan 
is to phase down the current tax exclusion. We would start at 
double the price of the median plan, and we would reduce that 
over a 10-year period to the price of--essentially the price of 
a median plan, that is actually the price of last year's median 
plan plus 5 percent, which we assume will account for 
increasing premiums.
    Mr. McCrery. OK. So eventually you would get to allowing 
the tax exclusion for up to the cost of an average plan 
basically. And you would do that to foster the consumer seeking 
value?
    Ms. Singer. Well, actually, to encourage employers to offer 
employer contribution policies that would encourage consumers 
to seek value, yes.
    Mr. McCrery. Wouldn't it be more effective if consumers 
themselves were shopping for their own value? In other words, 
rather than having the employer do all the work in coming up 
and saying, ``Here is your product'', wouldn't it be more 
effective from a seeking value standpoint, if each consumer 
were out in the marketplace shopping for that product?
    Ms. Singer. Do you mean paying for 100 percent of the 
premium?
    Mr. McCrery. Sure.
    Ms. Singer. Actually, the important point is that the 
consumers pay the marginal cost--the difference between the 
prices of different plans. So it is important that consumers 
have choices, but absolutely every choice may be more 
detrimental if this creates a bewildering array of choices.
    Mr. McCrery. I understand that. But assuming that we could 
put in place a structure somewhat like you suggested so that 
consumers would have a marketplace kind of a store to go to to 
shop and choose from among a variety of plans,wouldn't it be 
more effective from a value standpoint and getting value in the 
marketplace, to have each of those consumers going and making those 
decisions themselves, rather than the employer doing it?
    Ms. Singer. Absolutely. Individual choice is very 
important.
    Mr. McCrery. Yes, I agree, individual choice is important, 
but isn't it also important in terms of cost in the system, 
making the consumer aware of the true cost of purchasing that 
health care?
    Ms. Singer. Yes, absolutely. If consumers are aware of the 
differences in the prices of plans, they are more likely to 
seek value when they choose their plans, and we hope that this 
will encourage consumers to begin to demand value. When the 
consumers demand value, then the providers who are providing 
services to those consumers see it in their interest to begin 
to try to provide value, and that is a big part of what is 
missing now. Both the consumers and the providers don't see it 
in their interest to seek value, and so the health care 
delivery system isn't cutting costs where it is possible to cut 
costs and still either improve quality, or at least not harm 
quality.
    Mr. McCrery. I couldn't have said it better myself.
    Ms. Singer. Thank you.
    Mr. McCrery. Very well stated. Mr. Larsen, you talked about 
some other--I don't know what State it was; maybe it was 
Maryland, maybe another State, and somebody went out in the 
market and bought a product in the small group market and it 
cost X, and then somebody went out in the individual market and 
bought essentially the same product, and it cost 2X. Is that--
--
    Mr. Larsen. Yes. That was a comparison done by one of the 
States for roughly a comparable policy between small group, 
individual market.
    Mr. McCrery. In that small group market, was that composed 
of employer groups?
    Mr. Larsen. Yeah. The small group markets generally is 
groups up to either 25 or 50, generally 50, with a number of 
reforms wrapped around that market to make sure that there is 
access, renewability.
    Mr. McCrery. Are the employers in that group under ERISA?
    Mr. Larsen. The small group is generally a regulated 
market, so that is the insured market that States can regulate, 
yes.
    Mr. McCrery. So they are subject to the same mandates that 
the individual market would be?
    Mr. Larsen. Yes.
    Mr. McCrery. Have you--do you have any studies that tell us 
the increase in cost due to State mandates?
    Mr. Larsen. I can get that to you. The Maryland Health Care 
Commission actually has done a study on the marginal cost of 
mandates, Maryland being, I guess, some would say for better, 
some would say for worse, the king of the mandates. That study 
demonstrated that it was actually a relatively small, meaning 
less than 5 percent marginal cost due to the mandates. I know 
there is a lot of generalized discussion that mandates add a 
lot of cost, but in fact, at least in Maryland we have found 
that that was not the case. And I would be happy to get that 
study to you.
    Mr. McCrery. Yes, I would like to see that. Did any of the 
other panelists say anything on the increased cost due to State 
mandates?
    [No response.]
    Mr. McCrery. No. And you mentioned some reforms in the 
small group market, and I believe one of the reforms was 
community rating within that market.
    Mr. Larsen. Yes. Some States have pure community rating, 
and some have modified community rating, right.
    Mr. McCrery. And I know some States, New York I guess being 
the best example, mandated community rating in their insurance 
industry, and you saw insurance companies leaving the State, 
and some say because of the community rating mandate. And while 
that is true, part of that, I suppose, was because they could 
go elsewhere, they could go to other States that didn't have 
community rating and sell their products and make more money. 
And so they left. What if we had community rating on a 
nationwide basis, wouldn't that solve a lot of the problems 
that we have in the insurance marketplace today?
    Mr. Larsen. Well, I think it might solve the particular 
problem that you are referring to, in that it then doesn't make 
sense to move to a neighboring State because the rules are the 
same. There are a lot of issues surrounding community rating, 
how to do it, what the particular characteristics of the 
marketplace are. I think that is why some States have pure 
community rating and some States have modified community 
rating. And I think it is why States regulate insurance, why we 
have a State system of regulation, is that marketplace do vary 
from State to State. But in answer to your question, if the 
particular problem you are trying to solve is leaving one State 
because I can get a better deal in the next State, I think that 
would address it, but it might raise a number of other issues.
    Mr. McCrery. Well, it would negate the need for assigned 
risk pools and all that that we do to try to cover people that 
can't get insurance in the regular market, wouldn't it?
    Mr. Larsen. I am sorry?
    Mr. McCrery. If you do nationwide community rating, it 
would solve the problem of assigned risk pools, trying to come 
up with some device to get products to people that can't get 
them in the marketplace today, they are too expensive?
    Mr. Larsen. Again, I think community rating has benefits 
and disadvantages, and there are some--there are definitely 
some advantages to it and some disadvantages to pure community 
rating. I guess it is hard for me to speculate what the effect 
of a national community rated system will be.
    Mr. McCrery. Anybody else on the panel have any thoughts 
before I give it to Mr. Pomeroy?
    Mr. Etheredge. I think where you are going is asking the 
question:--if government comes up with a tax credit, how much 
regulation do we need from the Federal level of this market? If 
you start with the assumption that you want as much regulation 
as possible left at the State and local level, rather than have 
the Federal government getting into that, there are two basic 
sets of rules I think are needed to make a tax credit work. One 
is availability of the product, and there I think you can 
extend the HIPAA rules and say no preexisting condition 
exclusion. So the tax credit eligible groups get the HIPAA 
protection. That makes the insurance available.
    The other set of rules is rating rules. There could be a 
community rating standard, since we have a level tax credit. 
You can add one more rule, and that is that, if a State is 
going to allow insurance companies to depart from community 
rating, it would need to provide subsidies that match those 
rating rules. So if a State allows age and sex variations, it 
has to come up with the money, maybe with a Federal matching 
equalization fund that adjusts the credits for those factors. 
If insurers have a geographic difference in premiums, a State 
has to provide for this difference in adjusting the credit.
    So HIPAA has to make available the policies, and basic 
rating rules so that the tax credit matches the premium. I 
think those are at least the two logical essentials.
    Mr. McCrery. OK.
    Dr. Pauly. I presume you would have to allow for some 
geographic variation in the premium. If you had a national 
uniform standard, you would reduce the number of insured in New 
York, but raise them in Louisiana. So some kind of modified 
community rating would probably not do a great deal of harm, 
although I personally think it wouldn't do a great deal of good 
for the number of uninsured. It would change the composition of 
the uninsured population to be more higher risks and fewer 
lower risks, and maybe some people would think that is an 
improvement, but I doubt it would affect the head count very 
much.
    My own belief is that an awful lot can be done to solve the 
problem of what happens to high risks by putting more emphasis 
on guaranteed renewability and on the idea that people should 
be subsidized to buy insurance while they are still low risk, 
and have that insurance contain the provision, as it required 
by HIPAA now, even for individual insurance, that if you remain 
insured, your premium cannot be increased by more than the 
average for your group, and that effectively protects you 
against the disaster of being a high-risk person and not being 
able to obtain insurance at reasonable premiums.
    So the problem with community rating, of course, in the 
extreme version, is people only buy insurance when they think 
they are going to be sick, which of course, then makes it very 
expensive for everyone. So, personally, I would rather see much 
more emphasis on guaranteed renewability and that type of 
device before we go to community rating, and then if it turns 
out--as I said in my remarks, you need to be flexible--if it 
turns out that there is still a substantial number of high-risk 
people without coverage, then we might think of what best to do 
for them. But in some sense, by definition, the number of 
people who are unusually high risk is bound to be a small 
fraction of the total population, and it does seem a bit 
disproportionate to me to want to restructure the whole 
insurance market just to deal with that small fraction. Perhaps 
they can be handled reasonably well with a properly run high-
risk pool, coupled with guaranteed renewability to make sure 
that most people don't get in that pool.
    Mr. McCrery. Well, thank you very much. I certainly 
wouldn't go to a community rating standard absent significant 
other reforms, such as an individual mandate to purchase and 
other things that would solve our problem. So I didn't mean to 
imply that we should just change that element of the market.
    Well, thank you all very much for your testimony and for 
responding to our questions, and we look forward to working 
with you as we try to solve the problem of the uninsured, and 
other problems in our health care system.
    Thanks.
    [Whereupon, at 12:36 p.m., the hearing was adjourned.]
    [Questions submitted by Mr. Crane, and Dr. Pauly's response 
follow:]
                 Wharton School, University of Pennsylvania
                      Philadelphia, Pennsylvania 19104-6218
                                                     April 12, 2001
    1. It is my understanding that a non-refundable tax credit can 
achieve the same tax result produced by an appropriately tailored tax 
deduction. Would you elaborate more on this similarity?
    Both a tax credit and a tax deduction can reduce taxes by the same 
amount for a given individual, so in that sense both can produce the 
same result. For example, if I am in the 28% marginal income tax 
bracket, my taxes would be equally affected by a $1000 credit or 
permission for me to take a $3571 deduction. However, the difference is 
that a given dollar tax credit produces a uniform tax reduction to all 
who are eligible, whereas a given dollar deduction produces different 
amounts of tax reduction depending on the person's marginal tax rate. 
If one wanted to reproduce the credit's effect with a deduction, one 
would have to have limits on the deduction that varied inversely with 
the marginal tax rate, which would be complicated. More generally, 
deductions tend to offer lower tax reductions to lower income tax 
payers who pay lower marginal rates, while credits can be made uniform 
or made to increase as income falls. Deductions also are often limited 
to those who itemize on the individual income tax return, while credits 
need not depend on how a person calculates their income taxes.
    2. Are there differences in the cost associated with providing a 
tax credit vs. a tax deduction?
    If a tax deduction and a tax credit both provided the same tax 
reduction to a given individual for the same activity (e.g., obtaining 
a specific health insurance policy), both devices would have the same 
budgetary cost and the same real resource cost.
    3. Can you discuss more the differences between refundable and non-
refundable tax credits?
    Refundable tax credits provide a money refund to individuals whose 
credit exceeds the value of their tax obligations. Compared to a non-
refundable credit, refundable credits permit larger subsides to be 
directed to people with low tax liabilities.
    4. Isn't it true that a refundable tax credit could yield a 
negative income tax, which would be the equivalent of an appropriation?
    A refundable credit could produce a negative tax balance to an 
individual whose credit exceeded that person's income and payroll tax 
liabilities. The Treasury treats this as an appropriation. There is, 
however, an economic difference between ``appropriations'' which simply 
transfer income to individuals and appropriations which go to pay for 
public expenditures that draw real resources out of the private sector 
for public purposes.
    5. In your opinion, are there instances where refundable tax 
credits could become a mandatory entitlement program?
    Since any tax credits I have considered have been defined in dollar 
terms and are under the control of the legislature, I find it hard to 
see how they could become entitlement programs--unless the Congress 
wanted to set up an entitlement program.
            Sincerely Yours,
                                              Mark V. Pauly
                                                              Chair

                                

    [Submissions for the record follow:]
          Statement of Advanced Medical Technology Association
    AdvaMed is pleased to present this testimony on behalf of the 
world's leading medical technology innovators and the patients we 
serve. AdvaMed represents over 800 of the world's leading medical 
technology innovators and manufacturers of medical devices, diagnostic 
products and medical information systems. Our members are devoted to 
helping patients lead longer, healthier and more productive lives 
through the development of new lifesaving and life-enhancing 
technologies.
    AdvaMed shares the concerns of the Members of Congress, the 
Administration and millions of working Americans about the number of 
people in our country lacking access to affordable health insurance 
today. Our nation enjoys the best health care system in the world, and 
everyone should have full access to it. While today's market-based 
system provides insurance coverage to the majority of Americans, and 
along with it access to most of the latest, breakthrough technologies, 
some 43 million Americans are currently uninsured.
    To bridge the current gaps in insurance coverage, AdvaMed has 
consistently supported maintaining tax incentives to encourage 
companies to offer health benefits to their employees, as well as 
expanding tax incentives to allow individuals to more affordably 
purchase coverage. As supporters of market-based health care and 
competition, AdvaMed also believes consumers should have a wide choice 
of health plans and coverage options that allow them to select those 
that best fit their needs.
    To expand the number of choices available, AdvaMed supports the 
creation of Individual Membership Associations or Association Health 
Plans to allow groups to leverage size for more affordable health 
options, as well as the expansion of Medical Savings Accounts, which 
have already helped address the insurance needs of a select group of 
previously uninsured Americans. To address the many problems facing 
individuals with uninsurable medical conditions, AdvaMed also supports 
efforts to encourage states to offer ``risk pools'' that help them 
access insurance that will meet their complex and costly health care 
needs.
    America is on the cusp of a revolution in medical technology. 
Through advances in technology we can detect diseases earlier when they 
are easier and less costly to treat, provide more effective and less 
invasive treatment options, reduce recovery times and enable people to 
return to work much more quickly. Insurance coverage and adoption of 
medical advances is crucial not only for the health of America's 
insured workers, but also helps lower overall health care costs.
    Medical technology has advanced to the point where it is 
fundamentally transforming our health care system in ways that improve 
quality and reduce costs. For example:
     Three types of laparoscopic surgery have generated 
approximately $1.9 billion annually in increased productivity by 
enabling people to return to work more quickly, according to a study by 
DRI-McGraw Hill.
     Angioplasty and other minimally invasive heart procedures, 
for example, have greatly reduced the need for riskier, more expensive 
heart bypass procedures. An angioplasty procedure costs $20,960 on 
average, compared to $49,160 for open-heart surgery. Surgeons can 
complete an angioplasty procedure in 90 minutes compared to 2-4 hours 
for open bypass surgery. Patients can leave the hospital in one day 
instead of 5-6 days, and recovery only takes one week rather than 4-6 
weeks for bypass.
     Total knee replacement produces an average one-time health 
care cost savings of $50,000 per patient; a savings of $11.5 billion in 
1994 alone, according to the American Academy of Orthopedic Surgeon 
(AAOS).
    A recent article in the Washington Post highlights another of the 
many advances transforming health care delivery: a health care 
information system that alerts doctors at Brigham and Women's hospital 
to potentially dangerous medical decisions. The system has cut the 
medication error rate at Brigham by 86% compared to 10 years ago.
    Information systems like these can dramatically improve the safety 
and efficiency of health care delivery and help reduce health care 
costs. Automation in the insurance industry alone could save an 
estimated $20 billion. That is why both the President's Information 
Technology Advisory Committee and the Institute of Medicine in its 
recent report on health care quality have stressed the need for a new 
health information infrastructure.
    Steady declines in mortality rates, medical procedure times, 
hospital stays and patient recovery times all illustrate the emergence 
of the New Health Economy. Gains in workforce productivity and 
accelerating declines in disability rates point to this shift as well.
    In order to reap these benefits, advanced medical technologies must 
be rapidly assimilated into the health care system. The Institute of 
Medicine's recent report, ``Crossing the Quality Chasm,'' underscored 
this point, stating: ``Narrowing the quality chasm will make it 
possible to bring the benefits of medical science and technology to all 
Americans in every community and this in turn will mean less pain and 
suffering, less disability, greater longevity, and a more productive 
workforce.''
    In a recent statement on the Medicare Trustees' Report, Treasury 
Secretary and Medicare Trustee Paul O'Neill cited this IOM report in 
highlighting ``tremendous potential for improvements in the health care 
sector.'' AdvaMed shares this concern, as well as Secretary O'Neill's 
understanding of the importance of adopting new technologies and 
medical practices that can transform the health care sector by 
improving quality and reducing costs. As Chairman of Alcoa, O'Neill 
championed the adoption of so-called ``disruptive'' technologies as the 
solution to rising health care costs. In a recent Forbes article, 
O'Neill stated: ``It is possible to improve the health and medical care 
value equation by as much as 50%.''
    Again, AdvaMed applauds Congress for addressing the many needs of 
the uninsured in America. We look forward to working with the Congress 
and the Administration on efforts to help increase access to affordable 
coverage, as well as improve the quality, efficiency and cost 
effectiveness of the health care system through innovative medical 
technology.

                                


   Statement of American College of Physicians--American Society of 
                           Internal Medicine
    The American College of Physicians--American Society of Internal 
Medicine (ACP-ASIM or ``the College'') represents over 115,000 
physicians who specialize in internal medicine and medical students 
with an interest in internal medicine. ACP-ASIM's membership includes 
practicing physicians, teaching physicians, residents, students, 
researchers, and administrators who are dedicated to assuring access to 
high quality medical care for all Americans.
    We appreciate this opportunity to present our comments on the needs 
of uninsured Americans and we are pleased that the Subcommittee on 
Health is addressing specific steps to facilitate access to health 
insurance coverage for the nation's uninsured population.
    As physicians, the primary mission of our members is to care, to 
heal, to advocate for the sick, and to promote the good health of the 
individual and the nation. On a daily basis, internists see the delayed 
treatment and poorer health that results from a lack of insurance. The 
College believes that it is unconscionable for the United States to 
allow tens of millions of its citizens to go without health insurance 
simply because they cannot afford it.
    In 1999, ACP-ASIM launched a major campaign to address the problem 
of the uninsured. Our campaign has included athree-pronged effort of 
research, public education and advocacy: research on the health 
consequences of a lack of insurance; a public education campaign to 
inform policymakers, candidates, and the public about the adverse 
health consequences of being uninsured; and advocacy of core principles 
and a sequential plan on how the health care system should be reformed 
to achieve affordable access to care for all Americans.
    The College's plan to expand health insurance coverage includes the 
expansion of public programs, the implementation of a refundable tax 
credit, and other measures. ACP-ASIM will continue to press for 
solutions until we have achieved affordable, accessible health 
insurance for all Americans.
                     America's Uninsured Population
    The latest statistics from the Census Bureau indicate that roughly 
one out of every six non-elderly Americans or nearly 43 million people 
in the United States--have no health insurance. Millions more have some 
health insurance, but lack adequate coverage to provide financial 
access to needed health care or sufficient protection from catastrophic 
medical expenses.
           Nearly two-thirds of the nation's uninsured persons 
        live in a family with an income less than 200% of the federal 
        poverty level (FPL). Thirty percent live in a family with an 
        income between 100 and 199% FPL and another 35% live in a 
        family with an income less than 100% FPL. In 2000, FPL for a 
        single person was $8,959 and $17,761 for a four-person family.
           More than 80 percent of the uninsured are in working 
        families, but 60% are not offered employer-based health 
        insurance coverage. These families must choose between a 
        doctor's appointment and feeding their families, buying 
        medicine or paying the rent.
           Not all low-income persons are eligible for public 
        coverage. Even with an income as low as $4,000 per year, adults 
        with no children do not qualify for Medicaid coverage. In 11 
        states, no non-disabled adult without a child can qualify for 
        Medicaid.
           Hispanic Americans comprise more than one-quarter of 
        the total uninsured population, though they account for only 
        12% of the total population. Hispanics have been consistently 
        over-represented in the uninsured population. Given the current 
        projected growth in the Hispanic population, the number of 
        uninsured and the proportion of the U.S. population that is 
        uninsured are also expected to increase through 2050.
           Ten million children under age 18 are uninsured, 
        including 2.8 million poor children living in families with an 
        income below 100% FPL. Over seven million children under age 
        19, living in families with an income at or below 200% FPL, are 
        uninsured.
    A combination of strategies is required in order to adequately 
provide insurance coverage to America's uninsured population. Poor 
children may benefit from expanded outreach efforts for Medicaid 
enrollment. Poor adults (with or without children) may benefit from an 
expanded Medicaid program, including a broader definition of 
eligibility. Working near-poor persons may benefit from a properly 
designed health tax credit. It is unlikely that any one specific 
proposal will work best for each person included in the diverse 
population of uninsured Americans.
               Health Consequences of a Lack of Insurance
    The lack of health insurance has important health and financial 
consequences for both the individual and the nation. Millions of 
Americans are unable to receive the care they need, which endangers the 
health and lives of all patients, adds cost to the health care system, 
and reduces productivity. Missed or delayed care may result in 
unnecessary morbidity or mortality and greater severity of illness. 
Delays in seeking care are particularly damaging in diseases such as 
cancer and diabetes for which diagnosis and treatment during early 
stages may prevent further complications and prolong survival.
    Medical treatment for the uninsured is often more expensive than 
preventive, acute, and chronic care of the insured because the 
uninsured are more likely to receive medical care in the emergency 
department than in a physician's office. According to the National 
Center for Health Statistics, non-urgent cases accounted for more than 
50% of the 90 million visits to U.S. hospital emergency departments in 
1992. These increased costs are absorbed by providers as free care, 
passed on to the insured via cost shifting and higher health insurance 
premiums, or paid by taxpayers through higher taxes to finance public 
hospitals and public insurance programs.
    The inability of the uninsured to access preventive care also 
increases the nation's health care costs. For example, uninsured 
pregnant women typically seek prenatal care late in the pregnancy, if 
at all, and this increases the probability that newborn care will occur 
in a neonatal intensive care unit. Another example is the failure to 
detect and treat hypertension in its early states, which increases the 
likelihood of hospitalization and care in the intensive care unit for 
stroke, myocardial infarction, or congestive heart failure. The failure 
to prevent these complications results in loss of productivity and 
increased costs of medical care. In consideration of these facts alone, 
it is clear that insuring the uninsured is in everyone's best interest.
    Making preventive medicine and existing treatment therapies 
accessible to uninsured people will not only increase overall access to 
health care but may also substantially contribute to a reduction in the 
total burden of illness facing the United States.
                    Evidence of Health Consequences
    ACP-ASIM conducted an extensive literature search to document the 
evidence of a relationship between a lack of health insurance and a 
reduced access to care and poorer medical outcomes. We identified more 
than 100 scientific studies that adjusted for factors other than 
insurance in order to focus on the link between the lack of health 
insurance and access to care and medical outcomes.
    The results of these studies confirmed what doctors know from their 
own practice experiences: people without health insurance tend to live 
sicker and die younger than people with health insurance. Our results 
were published in our first report called, ``No Health Insurance: It's 
Enough to Make You Sick.'' (All College reports mentioned in this 
statement are available at www.acponline.org/uninsured.)
    Evidence from the available medical and scientific literature 
suggests that:
           Uninsured Americans are three times more likely than 
        the insured to experience an avoidable hospitalization for 
        diabetes and two times more likely for hypertension.
           Uninsured people are more than three times more 
        likely to die in the hospital than the insured.
           Uninsured men are one and one-half times more likely 
        than the insured to be diagnosed with prostate cancer at a late 
        stage.
           Uninsured adolescents between the ages of 10 and 18 
        are four times more likely to have unmet health needs, four 
        times less likely to get dental care, four times less likely to 
        get needed prescriptions, and four times less likely to get 
        needed eyeglasses.
           Uninsured children under 17 are nearly two times 
        less likely to receive medical treatment for common childhood 
        illnesses, such as sore throat or tonsillitis, acute or 
        recurrent earache, or asthma.
           Uninsured children are up to 40% less likely to 
        receive medical attention for a serious injury.
    Our second report, ``No Health Insurance? It's Enough to Make You 
Sick: Latino Community at Great Risk'' focused on the evidence of the 
unmet health needs of America's Latino population, the nation's fastest 
growing minority group and the largest uninsured population:
           Uninsured Latino women with breast cancer are more 
        than twice as likely to be diagnosed at a later stage compared 
        to uninsured non-Latino women.
           Uninsured Latino men with prostate cancer are almost 
        four times more likely to be diagnosed at a later stage than 
        uninsured non-Latino men.
           Uninsured Latino children with asthma are six times 
        more likely not to receive standard medical treatment than 
        uninsured non-Latino children.
    Our third and most recent report, ``No Health Insurance? It's 
Enough to Make You Sick: Uninsured Women at Risk'' highlighted evidence 
of consequences experienced by uninsured women:
           Uninsured women are up to five times more likely 
        than the insured to report unmet health needs.
           Uninsured women aged 50-64 are two times less likely 
        to have had a recent mammogram, two times less likely to have 
        had a recent Pap test, and two times less likely to have had a 
        recent clinical breast examination.
           Uninsured women with breast cancer, compared with 
        the insured, have a 49% higher adjusted risk of death.
           Uninsured women, ages 18 to 64, experience nearly 
        twice the risk of in-hospital death than all insured patients.
           Uninsured pregnant women are three times more likely 
        than insured women to report not receiving the recommended 
        number of prenatal visits and have a 31% higher likelihood of 
        an adverse hospital outcome at childbirth.
    Arguments that uninsured Americans receive the same levels of 
medical care as insured Americans, despite their lack of coverage, are 
contradicted by these studies. Research has clearly demonstrated that 
having health insurance makes a difference in health care for 
Americans. The uninsured--even those who are sick, chronically ill, or 
who have special health care needs--get less health care than those who 
have insurance. Many studies have shown that increasing coverage 
improves access to care.
    Evidence from the available medical and scientific literature also 
clearly demonstrates that uninsured Americans experience poorer medical 
outcomes. A lack of insurance is associated with a delay in seeking 
care, disease progression, and reduction of the likelihood of a 
favorable outcome or survival. It is also associated with the increased 
probability of avoidable hospitalizations for manageable illnesses 
(some of which are risk factors for the leading causes of death), a 
generally higher mortality level, and specifically higher in-hospital 
mortality.
    Uninsured children are particularly vulnerable to reduced levels of 
medical care for normal childhood illnesses such as a sore throat, 
earache (which, left untreated, can lead to hearing loss and speech and 
language deficits), and asthma, in addition to reduced levels of 
medical care for serious injuries or acute illnesses such as 
appendicitis.
    Lack of insurance contributes to the endangerment of the health of 
each uninsured American as well as the collective health of the nation. 
Because lack of insurance is as much a risk to the public health as 
smoking, alcoholism, and obesity, this national crisis merits the 
nation's immediate attention.
            Strategies for Reducing the Number of Uninsured
    The College understands that it is not enough just to educate 
voters and policymakers on why it is important that everyone have 
access to affordable healthcare, we must also suggest how to improve 
access to care for all uninsured Americans.
    Early in 1999, the College released a package of proposed reforms 
that sought to use the federal tax code, existing government programs, 
and some new subsidies to help reduce the number of uninsured. During 
the past decade we have identified a number of steps that could be 
taken to improve access to health insurance. ACP-ASIM urges the 
Subcommitee on Health to consider ways to achieve the long-term goal of 
assuring that all Americans can obtain affordable, accessible health 
insurance coverage.
    The following proposals should be considered as part of a 
comprehensive, sequential plan of action that will lead to coverage for 
all Americans:
           Enact refundable tax credits to expand coverage for 
        lower-income Americans;
           Expand Medicaid to cover all individuals at or below 
        100% of the poverty level;
           Increase funding for outreach to encourage eligible 
        children and families to enroll in Medicaid and the S-CHIP 
        (Child Health Insurance Program);
           Provide subsidies for those individuals who are 
        eligible for COBRA coverage but cannot afford it;
           Establish a defined timeframe for achieving 
        affordable coverage for all Americans; and
           Include an ongoing plan of evaluation to assure 
        progress.
    This multi-faceted approach recognizes that there is not just one 
way to expand health insurance coverage for all Americans. Expansion of 
Medicaid and the S-CHIP program will work well for certain segments of 
the population. Refundable tax credits will work well for individuals 
whose income is above poverty but not sufficient to purchase insurance 
in the marketplace.
          Tax Credit Legislation to Purchase Health Insurance
    There are several important considerations on how a tax credit 
should be designed to assure that it is effective in reaching the 
targeted population of low-to-moderate income Americans.
           The tax credit should include an advance payment 
        option, which would enable taxpayers to receive monthly 
        payments to offset premium costs, rather than having to wait 
        until their taxes are filed to obtain credits.
           The credit should be refundable, meaning that 
        individuals who have no federal income tax liability would 
        still be able to qualify for the credit.
           The credit needs to be high enough to subsidize 90% 
        or more of the costs of purchasing health insurance coverage, 
        since a smaller credit will not be enough to make coverage 
        affordable for many lower-income individuals.
    The College is pleased that President Bush has proposed an income 
tax credit for the purchase of health insurance for individuals under 
age 65 that is refundable. The College also supports the advance 
payment option, which would make the tax credit available at the time 
the individual purchases health insurance. In addition, ACP-ASIM 
supports the proposal that the tax credit equal 90% of the health 
insurance premium. We hope, however, that the maximum credit will be 
raised above the current proposal of $1,000 per individual covered by a 
policy and $2,000 per family.
    The Commonwealth Fund reports that the median family income of 
those with an income less than 100% FPL is $5,636 and those with an 
income 100-199% FPL is $18,324. If an average insurance policy covering 
a single employee under 65 cost $2,424 and a family policy cost $6,348 
in 2000 (as reported by Gabel et al, ``Job-Based Health Insurance in 
2000: Premiums Rise Sharply While Coverage Grows,'' Health Affairs 19, 
Sept./Oct. 2000: 144-151), it would be nearly impossible for these 
individuals and families to purchase health insurance coverage on their 
own with the President's proposed maximum credit. On average, health 
insurance premiums would consume 25% of the family income for poor and 
near-poor families; however, the premiums may take even 40% or more of 
the family's income.
    ACP-ASIM recommends that the Subcommittee consider reporting a tax 
credit bill that is modeled after the provisions in the Relief, Equity, 
Access, and Coverage for Health (REACH) Act (S. 590), introduced by 
Senator James Jeffords (R-VT), Chair of the Health, Education, Labor 
and Pensions (HELP) Committee. The REACH bill includes refundable and 
targeted tax credits with an advance payment option. The College 
suggests, however, that a higher premium subsidy than is currently 
proposed be recommended by this Subcommittee.
    Making the credit refundable means that even those individuals with 
no federal income tax liability would still qualify for the full tax 
credit. REACH targets those who face the greatest financial barriers to 
purchasing insurance, thereby using federal funds judiciously and 
avoiding ``crowding out'' or substitution of employer-provided 
insurance for insurance purchased by individuals using the tax credit. 
``Crowding out'' becomes a danger when individuals make more than 200% 
of poverty and are more likely to have employer-provided insurance.
    Implementing an advance payment option that means the value of the 
credit would be available at the time the premium is paid by the 
employee, e.g., when payments are due, not at the end of the year. ACP-
ASIM believes that a tax credit bill modeled after the REACH proposal 
will minimize disruption in both public--and employer-provided coverage 
by building on, rather than replacing, the current system.
    The REACH Act provides a $2,500 tax credit for couples that make up 
to $55,000 a year and have no access to employer-provided insurance. 
Individuals who earn up to $35,000 would receive a $1,000 credit. 
Smaller credits are available to individuals and families whose 
employers provide health insurance. ACP-ASIM is concerned, however, 
that the amount of the tax credit provided by the REACH bill may still 
be too low to make coverage affordable to many low-income families. 
Therefore, ACP-ASIM strongly encourages this Subcommittee to report a 
bill, modeled after the REACH proposal, that would include a higher 
premium subsidy to assure that the tax credit is sufficient to make 
insurance affordable for those most in need.
            Expansion of Access through Medicaid and S-CHIP
    Tax credits will be more effective if combined with expansion of 
Medicaid and the S-CHIP program. Congress should recognize that a tax 
credit, by itself, would still leave millions of Americans without 
access to affordable health insurance coverage. Tax credits may be 
useful to many Americans whose incomes are between 100 and 200% of the 
federal poverty level, but other strategies to increase access to care 
work better for the population below poverty.
    The College therefore recommends a combined approach of tax 
credits, public program expansions, and increased funding for outreach 
to make coverage available to all Americans with incomes up to 150% of 
the federal poverty level.
           ACP-ASIM believes that Medicaid and S-CHIP programs 
        should be expanded to include all adults with incomes below the 
        federal poverty level.
    The College will soon be publishing a policy monograph that 
proposes a strategy for expansion of Medicaid and S-CHIP programs. The 
recommendations include: establish a uniform income-based eligibility 
limit for enrollment in Medicaid (equal to 100% of the federal poverty 
level); increase in the federal contribution level to make it possible 
for states to enroll all low income persons; initiate a process to 
establish a uniform nationwide floor on benefits covered under Medicaid 
and S-CHIP; eliminate administrative barriers that inhibit enrollment 
and participation; and increase Medicaid reimbursement to physicians to 
assure adequate access to physician services. A copy of the monograph 
will be provided to this Subcommittee.
           ACP-ASIM also recommends increased funding for 
        outreach since the numbers enrolled in both Medicaid and S-CHIP 
        fall short of those eligible.
    Outreach programs are designed to make already-eligible individuals 
aware of their eligibility for coverage under either the Medicaid or S-
CHIP program. Lack of knowledge concerning coverage options is one of 
the principal reasons that millions of Americans who are eligible for 
Medicaid or S-CHIP coverage remain uninsured. The ability of states to 
educate potential enrollees about their options has been hampered by 
inadequate funding for outreach programs.
           ACP-ASIM also advocates that states and the federal 
        government institute administrative changes to make enrollment 
        in Medicaid and S-CHIP a simpler option for potential 
        enrollees.
    Complex and lengthy enrollment procedures and forms serve as a 
significant barrier to enrollment in the Medicaid and S-CHIP programs. 
Congress could increase enrollment by providing states with funding and 
direction to develop ways to simplify the process of enrolling 
individuals in both the Medicaid and S-CHIP programs.
                               Conclusion
    The 107th Congress will have a unique opportunity to finally tackle 
the issue of lack of health insurance. This Subcommittee on Health is 
to be praised for taking the initiative now to pave the way for 
constructive action next year.
    ACP-ASIM believes that a combination of approaches, including 
refundable tax credits for low-wage workers, expansion of Medicaid and 
S-CHIP programs to all individuals below the federal poverty level, 
increased funding for outreach, and simplified enrollment procedures, 
would represent a major step forward in making affordable health 
insurance coverage available to those most at risk of being uninsured.
    However, ACP-ASIM believes that such reforms be included as part of 
an overall sequential package that will lead to coverage for all 
Americans by a defined date, rather than being treated as stand-alone 
incremental measures. Later this year, ACP-ASIM will be providing the 
Subcommittee with further ideas on making coverage available to all 
Americans, in a series of steps, starting with low-wage workers and the 
poor.
    As a nation we are capable of great things. When we muster our 
collective will, no enemy or obstacle can withstand our collective 
might. If we all recognize the health risks associated with the lack of 
health insurance and if we can all agree that it is a problem that must 
be solved, we believe that we can achieve health coverage for all in 
the near future. Concern for the health risks of the uninsured is not 
an issue for one party or another. The health risks of the uninsured 
can and must be addressed by all.

                                


             Statement of the American Hospital Association
    The American Hospital Association, on behalf of its nearly 5,000 
hospital, health system, network and other health care provider 
members, submits this statement for the record regarding the hearing on 
the uninsured. We applaud the committee's efforts to search for a 
solution to the plight of 43 million people living in the United States 
without health care coverage. Every day in America's hospitals, 
caregivers experience firsthand how the absence of health care coverage 
acts as a significant barrier to care, reducing the likelihood that 
these patients will receive appropriate and timely preventive, 
diagnostic and chronic care services.
    As a nation we continue to enjoy a robust economy, despite recent 
stock market fluctuations. The Congressional Budget Office is 
forecasting a bright outlook for the economy, with federal budget 
surpluses projected for the next 10 years. However, a robust economy 
and historic lows in the number of unemployed Americans contributed to 
only a slight reduction in the numbers of uninsured between 1998 and 
1999.
    Expanding health insurance coverage and sustaining access to 
essential health care services for the uninsured as well as those with 
coverage must be at the top of the national public policy agenda. The 
American Hospital Association believes that every American deserves 
access to basic health care services, services that provide the right 
care, at the right time, in the right setting.
    To generate greater public attention to the plight of the 
uninsured, the AHA has partnered with the Robert Wood Johnson 
Foundation and other national associations with diverse interests but a 
similar goal: getting health care coverage to the uninsured. Among the 
many activities we have participated in are an advertising campaign, 
and ``Expanding Health Coverage: Make it America's Priority,'' a 
national town meeting broadcast by satellite to more than 200 hospital 
sites across the country. This subcommittee's chairman, Rep. Nancy 
Johnson, participated in the broadcast, effectively setting the stage 
for the congressional debate on the uninsured.
    One of the first steps that should be taken to reduce the number of 
uninsured is to improve access to coverage for low-income workers and 
their families. Eighty-four percent of the uninsured live in families 
headed by workers.
    Refundable tax credits would give individuals and families the 
means and the flexibility to purchase the type of coverage that meets 
their needs. Tax credits targeted to low-income families and 
individuals will ensure that federal subsidies will benefit those most 
in need. The AHA supports legislation such as the Fair Care for the 
Uninsured Act of 2001 and the Relief, Equity, Access, and Coverage for 
Health (REACH) Act of 2001--both approaches that use refundable tax 
credits to make insurance more accessible.
    Because the high cost of health premiums is the number one reason 
workers decline coverage that is made available by their employer, the 
AHA supports tax code changes that would provide employers with a tax 
credit to help subsidize the purchase of health care coverage for their 
low-wage workers. In addition, the AHA supports allowing the self-
employed to deduct the full amount of their health insurance premiums, 
and providing tax credits so small employers can afford to provide 
insurance.
    While these tax code changes are important steps, more needs to be 
done. Coverage expansions should also build on the current successes of 
public programs such as Medicaid and the State Children's Health 
Insurance Program (S-CHIP). The AHA supports expanding Medicaid and S-
CHIP to single adults and families, including legal immigrant children 
and pregnant women.
    Still, placing an insurance card in the hands of every American 
does not guarantee access to services. The AHA urges that, as attempts 
are made to tackle the problem of the uninsured, the committee also 
recognize the critical importance of making sure key health care 
services remain available. This requires investment in America's health 
care facilities, technology and workforce.
    The AHA looks forward to working with the committee to expand 
health care coverage to the uninsured, and to ensure that high-quality 
health care services are accessible to all Americans.

                                


 Statement of Blue Cross and Blue Shield Association, Employee Benefit 
       Research Institute, and Consumer Health Education Council
     2000 Small Employer Health Benefits Survey Summary of Findings
    This summary presents findings from the 2000 Small Employer Health 
Benefits Survey (SEHBS). The survey examines a number of issues related 
to small employers (between two and 50 workers) and their decision to 
offer--or not offer--health benefits to workers. The goal of the survey 
was to gather information to better understand what would make more 
small employers offer health benefits. It is a well-known fact that 
small employers are less likely than large employers to offer health 
benefits. In 1999, 40 percent of employers with between three and 49 
workers did not offer health benefits to their employees. In contrast, 
nearly all employers with 200 or more employees offered coverage.
    Since the vast majority of large employers offer health benefits, 
but many small employers do not, small businesses are seen as perhaps 
the most crucial factor in efforts to reduce the growing number of 
uninsured Americans. There are many reasons why small employers do not 
offer health benefits. While small employers report that cost is the 
primary reason they do not offer health benefits, many other factors 
may also contribute to their lower coverage rates (table 1). For 
example, small employers that do not offer health benefits often are 
not aware of the value of offering benefits, do not understand how the 
tax code provides incentives to offer benefits, and do not understand 
how insurance laws have addressed the accessibility and affordability 
of health benefits.
    The survey was conducted within the United States between May 16 
and June 30, 2000, through 20-minute telephone interviews with 506 
companies with health benefits and 449 companies without health 
benefits. The SEHBS was co-sponsored by the Blue Cross and Blue Shield 
Association (BCBSA), a federation of independent, locally operated Blue 
Cross and Blue Shield Plans that collectively provide health care 
coverage to 75 million Americans; the Employee Benefit Research 
Institute (EBRI), a private, nonprofit, nonpartisan public policy 
research organization; and the Consumer Health Education Council 
(CHEC), a health education organization formed to help the American 
public better understand, acquire, and utilize health insurance. Mathew 
Greenwald & Associates, Inc., conducted the survey.
    The following sections present the survey's findings on various 
topics concerning health benefits and small employers. These topics 
include the tax treatment of health benefits, knowledge of insurance 
regulations, the impact that offering health benefits has on employers, 
the difference between employers that do and do not offer health 
benefits, worker and family participation in health benefits, the 
likelihood that employers will offer health benefits in the future, and 
the impact of future costs and tax incentives on employer behavior.

 Table 1.--Small Employers Cite Affordability as the Primary Reason for
                      Not Offering Health Benefits
------------------------------------------------------------------------
                                      Major        Minor        Not a
                                      Reason       Reason       Reason
------------------------------------------------------------------------
The business cannot afford it....          53%          16%          30%
Employees have coverage elsewhere           43           18           35
Revenue is too uncertain to                 40           16           43
 commit to a plan................
Owner has coverage elsewhere.....           40           13           45
Employees cannot afford it.......           37           17           43
Large portion of workers are                34           15           49
 seasonal, part time, or high
 turnover........................
Employees prefer wages and/or               30           20           47
 other benefits..................
Company does not need to offer a            18           17           63
 plan to recruit and retain good
 workers.........................
Setting up a plan is too                    11           20           68
 complicated and time consuming..
Employees are healthy and do not            10           17           71
 need it.........................
Do not know where to go for                  8           21           71
 information on starting a plan..
------------------------------------------------------------------------
Source: EBRI/CHEC/BCBSA 2000 Small Employer Health Benefits Survey.

Tax Treatment
    Many small employers make decisions about whether to offer health 
benefits to their workers without being fully aware of the tax 
advantages that can make this benefit more affordable (chart 1)
     57 percent of small employers do not know that health 
insurance premiums are 100 percent tax deductible.
     65 percent of small employers do not realize that health 
insurance premiums are treated like general business expenses with 
regard to taxes.
[GRAPHIC] [TIFF OMITTED] T4217A.020

    Small employers not offering health benefits are less aware of the 
tax treatment than those that do offer health benefits.
     59 percent of small employers offering health benefits do 
not know that health insurance premiums are treated like general 
business expenses, compared with 73 percent of employers that do not 
offer health benefits.
    Many small employers are not knowledgeable about the tax treatment 
of health benefits as it affects their workers (chart 1).
           48 percent are not aware that employees who purchase 
        health insurance on their own generally cannot deduct 100 
        percent of their health insurance premiums.
           37 percent do not know that employees do not pay tax 
        on the share of their premiums that are paid by their employer.
    Small employers offering health benefits are much more likely to be 
aware of the tax treatment of employee contributions to health 
benefits.
           69 percent of small employers offering health 
        benefits understand that the employer share of the premium is 
        not included in an employee's taxable income, compared with 53 
        percent of employers not offering health benefits.
Insurance Regulation
    Small employers are largely unaware of the laws that nearly all 
states and the federal government have enacted to make health insurance 
more accessible and more affordable for many small employers (chart 2).
           61 percent do not know that insurers may not deny 
        health insurance coverage to small employers even when the 
        health status of their workers is poor.
           80 percent do not realize that states have, in 
        effect, required insurers to spread the cost of insuring small 
        employers with sick employees across a large pool of workers 
        through the use of rating restrictions.
           65 percent are not aware that there are limits on 
        what insurers can charge employers with sick workers compared 
        with employers that have healthier workers.
        [GRAPHIC] [TIFF OMITTED] T4217A.021
        
Impact of Benefits
    Most small employers offer sound business reasons for offering 
health benefits to workers.
           80 percent report that it helps with recruitment and 
        retention.
           70 percent report that it increases productivity by 
        keeping employees healthy.
           69 percent report that employees demand it.
           68 percent report that it reduces absenteeism by 
        keeping workers healthy.
           88 percent report that they offer health benefits 
        because it is the right thing to do.
    When specifically asked whether offering health benefits has an 
impact on their business, most small employers with benefits agree that 
it does (chart 3).
           78 percent report that offering this benefit has had 
        an impact on employee recruitment.
           75 percent indicate it has had an impact on employee 
        retention, attitude, and performance.
           67 percent report an impact on the health status of 
        their employees.
           58 percent state that offering health benefits has 
        had an impact on absenteeism.
        [GRAPHIC] [TIFF OMITTED] T4217A.022
        
    In contrast to the value perceived by respondents from small firms 
with health benefits, most of those from companies that do not offer 
benefits tend to think that not offering them has had no impact on 
their business.
           72 percent report that not offering coverage has had 
        no impact on employee recruitment.
           78 percent report that not offering coverage has had 
        no impact on retention, attitude or performance, or the health 
        status of their employees.
           85 percent report that not offering health benefits 
        has had no impact on absenteeism.
Employer Profiles
    Small employers that offer health benefits tend to be distinctly 
different from those not offering health benefits.
           48 percent of employers not offering health benefits 
        pay annual wages of less than $15,000 per year to 50 percent or 
        more of their employees, compared with 12 percent of companies 
        that do offer health benefits.
           43 percent of small employers not offering health 
        benefits report that 100 percent of their workers are employed 
        full time. In contrast, 56 percent of small employers offering 
        health benefits report that 100 percent of their workers are 
        employed full time.
           Of the employers that do not offer health benefits, 
        83 percent employ fewer than 10 workers. In contrast, of the 
        employers that do offer health benefits, 66 percent employ 
        fewer than 10 workers.
    Small employers not offering health benefits are more than twice as 
likely to have annual gross revenues of less than $500,000.
           60 percent of employers that do not offer health 
        benefits have annual gross revenue of less than $500,000, 
        compared with 27 percent of employers that do offer health 
        benefits.
           29 percent of companies offering health benefits 
        report gross revenues of $1,000,000 or more, while only 8 
        percent of employers not offering health benefits report this 
        level of revenue.
    Small employers not offering health benefits are more likely than 
those offering them to have a larger proportion of females, workers 
under age 30, or minority workers.
           6 percent of employers offering health benefits 
        report that 100 percent of their employees are female, compared 
        with 16 percent of employers not offering health benefits.
           17 percent of employers offering health benefits 
        report that at least 50 percent of their employees are under 
        age 30, compared with 30 percent of employers not offering 
        health benefits.
           11 percent of employers offering health benefits 
        report that at least 50 percent of their employees are 
        minority, compared with 21 percent of employers not offering 
        health benefits.
Employee Participation
    Not all workers are eligible to take advantage of the health 
benefits offered by their employers.
           61 percent of small employers offering health 
        benefits report that all workers are eligible for health 
        benefits.
           7 percent report that less than one-half of their 
        workers are eligible to participate.
           19 percent report that between 50 percent and 79 
        percent of their workers are eligible to participate.
           11 percent report that between 80 percent and 99 
        percent are eligible.
    Not all small employers that offer health benefits get full 
participation among those workers who are eligible (chart 4).
           Just over 60 percent of employers offering health 
        benefits had 100 percent participation among employees.
        [GRAPHIC] [TIFF OMITTED] T4217A.023
        
    Not all small employers offer health benefits to dependents.
           13 percent do not offer health benefits to 
        dependents.
    Among small employers that offer health benefits to dependents, 
take-up rates are much lower for dependents (chart 4).
           Only 16 percent report that all employees eligible 
        for dependent coverage actually include dependents in their 
        health benefits coverage.
    Small employers report a number of reasons why workers do not 
accept health benefits for dependents when this type of coverage is 
available (chart 5).
           48 percent of the employers offering dependent 
        coverage report that the workers do not take coverage for their 
        dependents because the dependents have coverage from somewhere 
        else.
           27 percent report their employees decline coverage 
        because they cannot afford the premiums.
        [GRAPHIC] [TIFF OMITTED] T4217A.024
        
    Small employers are more likely to make contributions toward the 
cost of employee-only coverage than they are to contribute to dependent 
coverage (chart 6).
           58 percent of employers pay the full premium for 
        employee-only coverage.
           30 percent pay the full amount of family coverage.
           3 percent require the worker to pay the full amount 
        of employee-only coverage
           40 percent require them to pay the full amount for 
        dependents.
        [GRAPHIC] [TIFF OMITTED] T4217A.025
        
    Dependent take-up is considerably higher in small firms that 
contribute at least some percentage toward the cost of the coverage 
than it is in firms where the employee is required to pay the full 
amount.
           The average take-up rate for dependents among 
        employers that contribute toward the cost of dependent coverage 
        is 56 percent, compared with an average take-up rate of 23 
        percent among employers that do not contribute toward the cost 
        of dependent coverage.
Likelihood of Offering Benefits
    Some small employers not currently offering health benefits have 
offered them in the past.
           12 percent of companies that do not currently offer 
        health benefits report their business has offered some type of 
        health benefits plan in the past five years.
    Nearly one-third of small employers that do not currently offer 
health benefits are potential purchasers.
           12 percent of employers not currently offering 
        health benefits say they are either extremely or very likely to 
        start offering a health benefits plan for employees in the next 
        two years.
           17 percent are somewhat likely to start a health 
        benefits plan.
    Small employers that are likely to start a health benefits plan 
differ from others not currently offering a plan in a number of ways.
           Nearly 70 percent of employers not offering a health 
        benefits plan, but who are extremely or very likely to offer 
        one in the next two years, report that they have been in 
        business for less than 10 years.
           35 percent of those not likely to offer health 
        benefits have been in business less than 10 years.
    A number of factors would increase the likelihood that a small 
business would seriously consider offering a health benefits plan. 
Affordability of health benefits is the dominant factor (chart 7).
           64 percent would seriously consider offering health 
        benefits if the government provided assistance with premiums.
           57 percent would consider offering health benefits 
        if there were an increase in profits.
           43 percent report that they would consider doing so 
        if insurance costs fell 10 percent.
           50 percent would be more likely to seriously 
        consider offering a health benefits plan as a result of 
        employee demand.
           36 percent would consider offering a health benefits 
        plan if it improved recruitment and retention.
    A large number of small companies not offering health benefits 
state they would need major government subsidies for them to provide 
health insurance coverage.
           20 percent would need to receive a subsidy of 
        between 25 percent and 49 percent of the premium.
           42 percent would need to receive a subsidy of at 
        least 50 percent of the premium.
           7 percent state they would not provide coverage even 
        if the government paid 100 percent of the cost.
           Among those that indicate they would require 
        subsidies of at least 50 percent to offer coverage, 76 percent 
        say they would be more likely to consider offering a health 
        benefits plan if they were able to receive cash from the 
        government for 50 percent of the premium costs on a quarterly 
        basis and would not have to repay this money.
        [GRAPHIC] [TIFF OMITTED] T4217A.026
        
Future Costs and Tax Incentives
    Many small employers with health benefits have recently switched 
health plans.
           34 percent report that they switched health plans 
        within the past year.
           63 percent report that they have switched plans 
        within the past five years.
           21 percent indicate that their business has always 
        had the same plan.
    Affordability for the small employer and the worker is clearly a 
critical factor affecting the likelihood of switching health plans.
           Nearly all employers who have switched health plans 
        within the past five years cite price or cost as a reason for 
        the change.
           33 percent of respondents from companies offering 
        health benefits think their firm would change coverage, and 5 
        percent think it would drop coverage, if the cost of health 
        insurance in general were to increase by 5 percent.
           If costs increased only 1 percent, 10 percent would 
        change coverage and 3 percent would drop coverage.
           If costs increased 10 percent, 46 percent would 
        change coverage, while 14 percent would drop coverage.
    Most small employers support tax breaks to reduce the health 
insurance costs of low-wage workers (chart 8).
           86 percent of all small employers favor tax breaks 
        that they could use to reduce health insurance costs for their 
        low-wage workers (56 percent strongly favor and 30 percent 
        somewhat favor).
           7 percent would somewhat or strongly oppose tax 
        breaks for health insurance.
    Companies that currently offer health benefits are slightly more 
likely than those that do not to strongly or somewhat favor tax 
credits.
           Nearly 90 percent of small employer offering health 
        benefits favor credits, compared with 82 percent of those not 
        offering health benefits.
        [GRAPHIC] [TIFF OMITTED] T4217A.027
        
                                


Statement of Gail Shearer, Director, Health Policy Analysis, Consumers 
                                 Union
Summary
    At a time of unprecedented budget surpluses and an uncertain 
economic outlook that could result in growing numbers of uninsured and 
underinsured Americans, it is critical that Congress move forcefully 
and expeditiously to make health insurance more affordable. Tax credits 
for health care coverage are increasingly discussed as a policy option 
for reducing the ranks of the uninsured. We are concerned that, 
unfortunately, most tax credit proposals are misguided: some are too 
small to make coverage affordable; some undermine employer coverage; 
some have inadequate protections for sick people who are shifted into 
the individual market. Because of the variation in proposals, they have 
dramatically different implications for the health care system. The 
following ten questions provide a framework for evaluating various 
health care tax credit proposals.
    1. What will be the impact on the number of uninsured?
    2. Will the credit cause employers to drop coverage?
    3. What will be the impact on the number of underinsured (i.e., 
those with coverage that is not comprehensive)?
    4. What will be the impact on the health insurance marketplace: 
will there be a shift from employer-based coverage to individual 
coverage?
    5. Will those people with higher health risks (e.g., chronic or 
pre-existing conditions) face higher premiums, exclusions in coverage, 
and/or denial of coverage?
    6. How cost-effective is the proposal?
    7. What is the total cost to the federal government (e.g., 
taxpayers)?
    8. Does the proposed tax credit make health insurance subsidies 
more equitable?
    9. Does the proposal target relief to those most in need, in 
particular those with low and moderate income?
    10. What marketplace reforms are included in the tax credit 
proposal?
    Below is an explanation of each question regarding tax credits for 
health care.
 Tax Credits for Health Insurance: Will They Be a Cost-Effective Tool 
             for Expanding Comprehensive Health Insurance?
    1. What will be the impact on the number of uninsured?
    Most tax credit proposals are at subsidy levels that represent one 
third or less of the cost of buying a health insurance policy. This 
means that for most of the uninsured, they will still face sizable out-
of-pocket payments for premiums. For many, health insurance will remain 
unaffordable.1 Researchers have developed models to estimate 
the impact of various tax credits on the uninsured. Most health 
insurance tax credits are estimated to reduce the uninsured by 1.5 to 
12.4 million people.2 The design details of the tax credit 
(e.g., does it apply only to those without employer-sponsored coverage? 
what is the size? is it refundable?) all affect the impact on the 
number of uninsured.
---------------------------------------------------------------------------
    \1\ See also Iris J. Lav and Joel Friedman, Center on Budget and 
Policy Priorities, ``Tax Credits for Individuals to Buy Health 
Insurance Won't Help Many Uninsured Families,'' February 15, 2001.
    \2\ See, for example, Jonathan Gruber and Larry Levitt, ``Tax 
Subsidies for Health Insurance: Costs and Benefits,'' Health Affairs, 
vol. 19, January/February 2000, p. 79. Some tax credits, such as that 
of the Heritage Foundation, would replace the existing tax deduction 
system and impose an individual mandate, which by definition would 
eliminate the uninsured. See also John Sheils, Paul Hogan, and Randall 
Haught, The Lewin Group, Prepared for The National Coalition on Health 
Care, ``Health Insurance and Taxes: The Impact of Proposed Changes in 
Current Federal Policy,'' October 1999, which estimates that tax 
credits without mandates will reduce the uninsured by 1.5 to 9.8 
million.
---------------------------------------------------------------------------
    2. Will the credit cause employers to drop coverage?
    Most tax credit proposals result in a modest net increase in the 
number of insured, but this results from a combination of an increase 
in the number of people with nongroup insurance, and a decrease in the 
number of people with employer based insurance.3 One tax 
credit proposal ($2,000 for individuals and $4,000 for families) for 
those not covered otherwise is estimated to result in a 10 percent 
reduction in employer based coverage.4
---------------------------------------------------------------------------
    \3\ See Gruber and Levitt, p. 79.
    \4\ See Gruber and Levitt, p. 79 and Guenther, p. CRS-21.
---------------------------------------------------------------------------
    3. What will be the impact on the number of underinsured (i.e., 
those with coverage that is not comprehensive)?
    The question of adequacy of health insurance coverage is rarely 
addressed in studies of tax credits. The issue of comprehensiveness of 
coverage is critical in light of the large and growing number of 
Americans whose health insurance does not adequately protect them 
against financial devastation caused by out-of-pocket health care 
costs. An estimated 31 million adults (in 1998) were underinsured, 
risking incurring out-of-pocket expenses (not including premiums) in 
excess of 10 percent of their income in the event that they faced 
catastrophic illness.5 Based on government surveys of actual 
health expenditures, about 16 million households (under 65) and an 
additional 12 million households over 65 actually spend more than 10 
percent of their income out-of-pocket on health care costs and 
premiums.6
---------------------------------------------------------------------------
    \5\ Consumers Union, The Health Care Divide, August 2000, p. 13. 
See also Pamela Farley Short and Jessica S. Banthin, New Estimates of 
the Underinsured Younger than 65, JAMA, 274: 1302-1306.
    \6\ Ibid., p. 14, 16.
---------------------------------------------------------------------------
    If tax credits are skimpy (e.g., $500 per individual) at a level 
less than half of the average cost of coverage, the marketplace may 
respond by designing skimpy benefit packages. If policies were designed 
with very high deductibles, high copayments, low stop-loss levels, and 
skimpy benefits (e.g., a cap on doctor visits, hospital days, a lack of 
prescription drug coverage), then it is possible that more people would 
be ``insured'' but at the same time more people would be 
``underinsured.'' It is important, therefore, that policymakers 
carefully consider not only the number of people with insurance 
coverage, but that they also measure the quality of the coverage that 
people have and the total financial burden of paying for health care.
    4. What will be the impact on the health insurance marketplace: 
will there be a shift from employer-based coverage to individual 
coverage?
    Some tax credit proposals (e.g., all but one studied by Gruber and 
Levitt) are expected to lead to an increase in the non-employer market 
at the same time that they lead to a decrease in employer-based 
coverage. This shift from the employer to individual market is 
troubling in light of the fact that state regulation varies 
considerably, and usually leaves high risk individuals and families 
vulnerable to facing barriers to access to affordable coverage in the 
individual market. Congress should not undermine the employer-based 
market which does a good job of pooling the healthy and the sick 
together, keeping premiums relatively low, unless there is in place a 
robust and stable individual health insurance market that protects the 
interests of those with pre-existing conditions.
    5. Will people with higher health risks (e.g., chronic or pre-
existing conditions) face higher premiums, exclusions in coverage, and/
or denial of coverage?
    Because of the varied and limited state regulation of individual 
health insurance markets, health care tax credits are likely to 
adversely affect the health insurance options that millions of high 
risk individuals and families face. The likely effects will include: 
denial of coverage, exclusions of coverage for pre-existing conditions, 
and high premiums (to reflect high risks). The issue of individual 
health insurance markets is very complicated, in part because state 
regulation varies substantially, and in part because these small 
(residual) markets--and their regulations--have not been examined as 
carefully as employer-based markets. Some studies assume that the 
individual marketplace will be regulated much more aggressively than is 
actually likely. For example, Gruber and Levitt analysis ``assumes that 
policies in the individual market are universally available (at health 
risk-adjusted prices).'' 7
---------------------------------------------------------------------------
    \7\ Gruber and Levitt, p. 84.
---------------------------------------------------------------------------
    6. How cost-effective is the proposal?
    What is the federal cost per newly insured person, and how does 
this compare with expanding public programs such as SCHIP and Medicaid? 
The measure of ``cost per newly insured person'' is used to rate the 
tax credit proposals for cost-effectiveness. Cost per newly insured of 
tax credit proposals ranges from about $2,200 (for a small tax credit 
targeted to those without health insurance currently) to $5,000 (for 
larger credits available regardless of prior coverage), in the Gruber 
and Levitt study.8 Sheils (et. al.) estimates of cost per 
newly insured range from about $1,250 to about $10,500.9 If 
expanding coverage of the uninsured is the primary objective, then 
alternatives such as Medicaid/SCHIP expansion are likely to be far more 
cost-effective. To extend Medicaid coverage (in 1998) to an additional 
child cost on average $1,225 and to an additional adult cost on average 
$1,312.10
---------------------------------------------------------------------------
    \8\ Gruber and Levitt p. 79.
    \9\ Sheils, Hogan, and Haught, p. iii.
    \10\ ``Medicaid Enrollment and Spending Trends, Kaiser Commission 
on Medicaid and the Uninsured,'' February 2001, www.kff.org.
---------------------------------------------------------------------------
    7. What is the total cost to the federal government (e.g., 
taxpayers)?
    The total annual cost (in 1999 dollars) to the federal government 
of proposals recently under consideration ranges from just under $1 
billion (for an above-the line tax deduction) to $62 billion (for a 
large credit available regardless of prior coverage), according to 
Gruber and Levitt.11 Sheils estimates range from annual 
costs of $3.3 billion to $55 billion.12
---------------------------------------------------------------------------
    \11\ Gruber and Levitt, p. 79.
    \12\ Sheils, Hogan, and Haught, p. iii.
---------------------------------------------------------------------------
    8. Does the proposed tax credit make health insurance subsidies 
more equitable?
    Current tax policy with regard to health insurance can hardly be 
described as equitable. Individuals without employer based coverage 
(other than the self-employed) do not get any federal income tax 
subsidy (and don't have access to lower cost group plans). Moderate 
income families in the 15% federal tax bracket get a $150 tax subsidy 
per $1,000 of premium paid by their employer, while those at the 39.6 
percent bracket get $396 of tax benefit per $1,000 of premium. Some tax 
credit proposals are designed to make the tax subsidy more equitable by 
including individuals who do not have employer based coverage.
    9. Does the proposal target relief to those most in need, in 
particular those with low and moderate income?
    Low--and moderate-income families have the most difficult time 
affording health insurance. They are much more likely to lack health 
insurance than higher income families. An estimated 85 percent of 
uninsured households have incomes that are below median household 
income for their family structure.13 Some proposals target 
the tax credits to people with low--and moderate--income. Tax credits 
are preferable to tax deductions (which give larger benefits to higher 
income tax payers).
---------------------------------------------------------------------------
    \13\ Gary Guenther, Congressional Research Service, ``Tax Subsidies 
for Health Insurance for the Uninsured: An Economic Analysis of 
Selected Policy Issues for Congress,'' December 12, 2000, citing 
Jonathan Gruber.
---------------------------------------------------------------------------
    10. What marketplace reforms are included in the tax credit 
proposal?
    Since tax credits are likely to shift coverage (to some degree) 
from the employer based market to the individual market, it is 
important that regulations be in place to protect the interests of high 
risk individuals and families so that coverage will be both 
comprehensive and affordable. The types of marketplace reforms that 
will be essential include: standard benefit packages, community rating, 
and guaranteed issue. In addition, to protect against adverse 
selection, some sort of individual mandate would be needed to assuring 
that the healthy and the sick remain in the same risk pool. These 
regulations are necessary to prevent marketplace incentives from 
separating individuals by their risk level, which drives premiums up 
for those considered to be high-risk.
    * Consumers Union is a nonprofit membership organization chartered 
in 1936 under the laws of the State of New York to provide consumers 
with information, education and counsel about goods, services, health, 
and personal finance; and to initiate and cooperate with individual and 
group efforts to maintain and enhance the quality of life for 
consumers. Consumers Union's income is solely derived from the sale of 
Consumer Reports, its other publications and from noncommercial 
contributions, grants and fees. In addition to reports on Consumers 
Union's own product testing, Consumer Reports, with approximately 4.5 
million paid subscribers, regularly carries articles on health, product 
safety, marketplace economics and legislative, judicial and regulatory 
actions which affect consumer welfare. Consumers Union's publications 
carry no advertising and receive no commercial support.

                                


               Statement of Healthcare Leadership Council
The Uninsured: Background
    Estimates on the number of those lacking health insurance in the 
U.S. ranged from 42 million to 47 million in 2000. This number has 
increased over the past decade, from 34.3 million in 1989.
    As the number of uninsured increases, so too does the number of 
failed attempts to address this problem. From market-based efforts that 
would provide incentives to purchase insurance, to government-based 
efforts that would create a single health coverage system for all--
abruptly or gradually--solutions for reducing the rolls of the 
uninsured have not been realized.
    Major Efforts. The most notable efforts in the past decade to 
increase coverage for the uninsured include President Clinton's Health 
Security Act of 1994, the Health Insurance Portability and 
Accountability Act signed into law in 1996, the State Children's Health 
Insurance Program signed into law in 1997, and the access provisions of 
the Patients' Bill of Rights passed in the House of Representatives in 
1999. Most of these proposals were rejected, and the ones that have 
passed have not resulted in significant reductions in the uninsured.
    The Health Security Act of 1994, which would have created regional 
health alliances and required employers to purchase health insurance 
for their employees through these alliances, was roundly rejected by 
the public and Congress as being too far-reaching and overly invasive 
by the government. Since this comprehensive reform effort collapsed, 
most lawmakers and policy experts have agreed that future efforts to 
solve the problem of the uninsured must proceed in an incremental, 
voluntary fashion.
    In 1996, Congress passed and the President signed the Health 
Insurance Portability and Accountability Act (HIPAA), which attempted 
to solve the problem of uninsurance known as ``job lock'' for people 
with pre-existing conditions. While HIPAA has helped some individuals 
with pre-existing conditions who change employment and move from one 
insurance group to another group, it has not helped to make insurance 
attainable for those with pre-existing conditions who must move from 
group coverage to individual coverage--as the law had originally 
intended. HIPAA also included two other provisions to try to increase 
health coverage: medical savings accounts and increased deductibility 
for the self-employed. Enrollment in medical savings accounts has been 
limited, mostly attributed to design problems resulting from political 
controversy as MSAs were developed. Deductibility for health insurance 
purchased by the self-employed would have increased to 80 percent by 
2006 and that has since been increased to 100 percent deductibility by 
2003 in subsequent legislation.
    The State Children's Health Insurance Program (S-CHIP), signed into 
law in 1997, was a revolutionary new public program that was 
anticipated to cover 10 million uninsured children. Unfortunately, 
though, the program has enrolled less than one third that many. 
Overall, the number of uninsured children has increased in a booming 
economy. The S-CHIP's failure has been largely attributed to the 
difficulty in educating and physically signing up the targeted 
population for this program.
    Access to health insurance provisions in the patients' rights 
legislation passed in the House of Representatives in 1999 included 
several provisions believed to make insurance more accessible. However, 
this bill failed in conference with its companion Senate bill late in 
2000, mainly because of the controversial liability and regulatory 
provisions also contained in that bill.
    Barriers to Legislative Solutions. The main barriers to a 
legislative solution for the uninsured continue to be financing, 
disparate political ideology, and superceding health care priorities 
such as preserving Medicare and regulating managed care. Financing 
coverage for the nation's uninsured has been considered prohibitive 
until the emergence of recent federal surpluses. Proposals range 
anywhere from $5 billion to $80 billion a year. Even President 
Clinton's Health Security Act, which would have cost $400 billion over 
five years, included a plan to fund this proposal through Medicare, 
Medicaid, and other federal program reductions, a tobacco tax, a 
corporate assessment, and other taxes. But recently, with an 
anticipated non-Social Security surplus of almost $850 billion through 
2005, greater willingness has been demonstrated by the Congress and 
President Bush to spend some of the nation's prosperity on solving the 
problem of the uninsured.
    Traditionally, finding solutions to the uninsured has been 
politically divisive because Republicans have preferred methods 
centering around tax credits and deductions and Democrats have 
advocated expanding existing public programs including Medicare, 
Medicaid and S-CHIP. More recently, however, there have been 
encouraging signs of more common ground. Over the past year tax credit 
proposals have been sponsored by members of Congress on both sides of 
the aisle.
    But increasing access to health coverage will require a strong 
commitment by lawmakers to make this issue a priority on the 
legislative calendar. Over the past several years, Congress and the 
former President dedicated a great deal of time and debate to improving 
insurance for those who already have it. Managed care regulation has 
received an inordinate amount of attention over the last three years 
without any resolution. And Medicare reform, including prescription 
drugs for Medicare, has and will continue to require thoughtful 
deliberation to ensure this program is preserved and improved for the 
future. But the uninsured is an equally important population that needs 
and deserves to be a top priority item on the 2001 agenda.
The Uninsured: The Future Envisioned by HLC
    The members of the Healthcare Leadership Council (HLC) have made 
accessible health care coverage for uninsured Americans its highest 
priority. We have commissioned in-depth studies to understand the 
makeup of the uninsured population, so as to better understand how to 
target effective policy solutions. We have surveyed the nation's small 
business owners--particularly those who do not currently offer health 
insurance coverage to their employees--to understand the reforms they 
need in order to make health insurance a viable option. And we have 
examined dozens of programs across the country, innovative initiatives 
striving to make coverage accessible.
    These examinations have led us to fundamental conclusions about 
this issue and how it should be addressed:
           Reducing America's uninsured rolls is not an 
        unresolvable problem. Our studies have shown that 16.7 million 
        (40 percent) of the uninsured are in families with an employer 
        offer of insurance that is declined. And an additional 17.3 
        million (41.2 percent) of the uninsured are in families with at 
        least one worker but no offer of insurance. In other words, a 
        total of 81 percent of the uninsured are in families connected 
        with the workforce. This data strongly indicates that the most 
        feasible solutions for the uninsured are to be found by working 
        within the existing employer coverage framework. In fact, the 
        most recent Census Bureau data released last October confirmed 
        that employer-provided health insurance was the driving factor 
        that caused uninsured rates to drop in the past
           We have the resources to get the job done. There is 
        an ongoing debate in this country about how the growing budget 
        surplus can best be utilized. We believe the nation has no 
        greater priority than the nearly 43 million Americans who are 
        without health insurance. This is a critical priority because 
        these individuals and families do not have access to the most 
        innovative care and preventive medicine that greatly enhances 
        and even saves the lives of those who do have coverage. And it 
        is a critical priority because of the severe toll uncompensated 
        care is taking on our nation's health care system. In every 
        state in this country, there are dozens of hospitals that are 
        in serious jeopardy because of health care provided--usually 
        expensive acute or emergency room care--for which there will be 
        no direct payment. For example, in 1998 alone, the nation's 
        hospitals provided over $18 billion in uncompensated care. If 
        we do not make progress in reducing the uninsured population, 
        the ramifications will be severe for all patients and health 
        care consumers.
           Employers want health insurance for their employees. 
        We know that the owners of America's small businesses--the 
        people who face the greatest challenge in providing health 
        coverage to their employees--want to offer insurance to their 
        employees, have a strong desire to provide that coverage, and 
        believe that solutions are within reach. Our survey of small 
        employers told us this, and it also revealed that if we don't 
        move toward solutions in the near future, a significant number 
        of small businesses who currently offer health insurance will 
        succumb to economic pressures and will cease to do so.
    HLC believes the following ten principles provide the framework 
necessary to develop a sound set of policies to increase access to 
health coverage for the uninsured:
1. Emphasize Flexible, Targeted, Pluralistic Solutions.
    The nearly 43 million uninsured are not a monolithic population and 
there is no one-size-fits-all solution for the uninsured. Such a 
solution would be both too costly and ineffective given the varied 
nature of the uninsured. Obstacles to coverage vary among disparate 
populations of the uninsured, and solutions must be tailored 
accordingly. For example, an individual who is offered employer 
coverage but declines because he finds the premiums unaffordable merits 
a separate solution from one who is chronically unemployed with no hope 
of an employer subsidized insurance offer. HLC believes in an eclectic 
mix of market-based approaches to address effectively the problem of 
the uninsured including tax credits, insurance market reforms, more 
effective use of existing public program resources, and educational 
efforts about the value and importance of health insurance.
2. Promote Competition, Innovation, and Research.
    Some public policies to cover the uninsured such as a single payer 
health system and government price controls would severely limit the 
incentives for research and development inherent in our current health 
care system. There is a noticeable deficiency in the development of 
cutting edge health care technology in countries with health systems 
not based on free market principles. HLC advocates a health care system 
that supports competition, innovation, and research in the financing 
and delivery of health care services so Americans can continue to have 
access to the best and latest technologies, health care services, and 
products.
3. Respect Consumer Preferences for Employment-Based Coverage Where and 
        When Possible and Help Increase Access to This Preferred 
        Coverage.
    Two recently published surveys strongly indicated that the public 
prefers its health care coverage to be provided through an employer, 
even if those individuals received equal tax treatment. The 
Commonwealth Foundation commissioned a survey of 5,000 people, 49 
percent of whom chose employers as their preferred source of coverage, 
while 23 percent preferred to purchase individually, and only 18 
percent chose the government as their preferred source. Another recent 
survey, commissioned by Harvard University, found similar results: 
three out of four people would rather have their insurance provided 
through their employer over receiving an equivalent amount in wages so 
they could buy it for themselves.
    This consumer preference is not surprising. The employer-based 
coverage system in the U.S. is serving the nation well. Not only are 
employers uniquely effective in pooling varied risks, but they also are 
a driving force in negotiating fair prices and quality improvement 
measures. Individuals negotiating on their own behalf would have far 
less influence in driving these variables.
    Currently, 54 percent of Americans receive health coverage through 
their private employers. We believe this number could be greatly 
increased with the help of targeted tax incentives to small employers 
or to employees who cannot afford to purchase their employer's 
coverage. Our research shows that seven of ten of the uninsured are in 
families with at least one person connected to the workforce, mostly 
through small employers. By leveraging the employer and employee 
contributions with tax credits, small employers can become more 
formidable players in the insurance market, and insurers will begin 
competing for them on the basis of cost, quality, and ease of 
administration.
    The employer-based insurance system is already in place. HLC 
strongly believes that the urgent nature of the growing uninsured 
population precludes the option to build a substantially new and 
different insurance system based on a different purchasing structure, 
as some are suggesting. Political and financial obstacles associated 
with such massive reform would severely delay the resolution of the 
problem of the uninsured.
4. Take Advantage of Experience by Building Upon Successful State and 
        Local Private-Public Partnerships.
    A number of regionally based public-private partnerships have 
succeeded in finding ways to make health coverage more affordable and 
accessible for employers and individuals. Not only are these programs 
filling coverage gaps in small areas around the country, they can also 
serve as excellent laboratories of experimentation that provide crucial 
information on what is necessary to encourage small employers and 
individuals to participate in coverage programs.
    For example, an insurance program developed in Wayne County, 
Michigan, for small businesses found that it was difficult to entice 
these businesses to participate by subsidizing less than one-third of 
the premium. The premium formula that eventually got this program off 
the ground was one-third paid by the employer, one-third paid by the 
employee, and one-third subsidized by the county. HLC believes these 
local successes should be pinpointed and examined for their potential 
application to other areas and populations.
5. Limit the Government's Role to the FINANCING of Insurance Coverage.
    Governments (federal, state, and local) can play a constructive 
role in assisting poor families in gaining access to health care 
services and coverage, but should do so in fiscally responsible ways 
that do not impair, but instead encourage and build upon the effective 
functioning of the private market. State grants for low-income people, 
as well as targeted tax credits, block grants, Medicaid and S-CHIP 
funds, and other public health service programs should be free of 
mandates, regulations, administrative and other requirements that 
impede the provision of high-quality, affordable insurance and 
effective functioning of the private market.
    For example, while Congress and the Clinton Administration allowed 
states more flexibility in designing their S-CHIP programs than their 
Medicaid programs, they nonetheless have made it difficult for States 
to use S-CHIP funds to allow parents of eligible children to purchase 
employer-offered health insurance. Research supported by HLC 
demonstrates that 16 million people are in families where an employer 
insurance product is offered but declined, often for reasons of 
affordability. Allowing more flexibility to use S-CHIP funds to help 
pay employee health insurance premiums could help provide an 
additional, more cost-effective option to those who would otherwise 
remain uninsured.
6. Encourage, Don't Discourage the Maintenance of Private Insurance 
        Programs.
    Occasionally, subsidized health care or health care insurance 
results in employers or other sponsors of health care coverage 
believing they have been ``let off the hook'' for providing what they 
traditionally have. Public health care subsidies and other programs for 
expanding coverage or care should be implemented in such a way that 
current efforts are maintained to the greatest extent possible. Any tax 
or other subsidy for the uninsured must be carefully targeted to ensure 
that it be utilized only by the segment currently declining coverage, 
and not be misdirected toward (or ``crowd out'') those who are already 
insured.
    Some community programs HLC has studied that have tried to 
facilitate employer-based coverage in their local areas limit subsidies 
to employers who have not offered coverage within the past year. Still 
other models have prevented crowd-out by targeting subsidies to only 
limited benefit packages that would not be otherwise attractive to the 
employees of employers already offering a standard employer benefit 
package. We believe that funds should be targeted toward lower income 
workers or small businesses with primarily low-income workers.
7. Refrain From Passing Legislation or Implementing Public Policies 
        That Increase the Cost of Health Care.
    Government micro management in the provision of health care, such 
as benefit mandates and liability expansions, increase the cost of 
health care, making it difficult for small employers to afford 
providing insurance for their employees. Federal, state, and local 
governments should resist the passage of laws that will ultimately 
result in more uninsured. It will be counterproductive for Congress to 
use a portion of our nation's budget surplus to make health insurance 
more affordable, yet at the same time pass legislation that makes 
health coverage more expensive. Imposing new mandates on insurers and 
employers, or making employers liable for coverage decisions will 
create additional barriers and decrease the number of people that can 
be covered by new solutions for the uninsured.
8. Include Education to Facilitate Awareness.
    An important part of the solution to health insurance coverage--
often overlooked--is information and education, for both employees and 
employers. It is not uncommon for small employers to be unaware of the 
various options they may have for offering affordable coverage. In 
fact, a recent small business survey by the Employee Benefit Research 
Institute has shown that many small employers are not even aware that 
employee insurance is deductible.
    There is also some misconception regarding the affordability of 
health coverage. In a survey by the California Health Institute, many 
individuals who cited expense as the reason for not purchasing 
insurance actually agreed that it was affordable once they were 
informed of the true cost of various policies. More than likely, there 
are similar misconceptions among individuals and small business owners. 
This may indicate that some amount of uninsurance could be reduced 
through broad efforts to increase awareness of options. Clearly, 
education initiatives could help employees and employers understand the 
critical value of health insurance, as well as ways to keep their 
health insurance premiums down once they do have coverage.
    Educational efforts should be multifaceted--directed toward small 
businesses, employees, and individuals not linked to the workforce. 
Educational efforts must also include efforts to inform those already 
eligible for public insurance programs of how to access those programs. 
The State Children's Health Insurance Program (S-CHIP) is just the most 
recent example of a program in which too few members of the eligible 
population are enrolling for program benefits.
9. Include Solutions for Those Who Are Still Uninsurable.
    While lawmakers focus on access to insurance coverage for the 
majority of the uninsured population, it is also necessary to ensure a 
safety net of non-emergency health care services for those who are, for 
one reason or another, still uninsurable at any given time.
    While reducing the number of uninsured will also reduce the amount 
of uncompensated care, there will still be a need to maintain federal 
and state funding for safety net programs including community health 
centers, rural health clinics, migrant health centers, and health 
services for the homeless. Additionally, it is very important to ensure 
that the nation's hospital system and other providers of charity care 
retain enough strength to be able to offer care to the uninsured. In 
1998, the nation's hospitals alone provided over $18 billion in 
uncompensated care. Continued erosion of Medicare and Medicaid 
disproportionate share payments and other federal payments that have 
helped them to keep their doors open to the uninsured could seriously 
jeopardize safety net services in the near future.
10. Encourage Individual Responsibility.
    Any plan to increase access to health care coverage should 
encourage an appropriate level of personal responsibility in gaining 
access to coverage on the part of individuals, and where children are 
concerned, on the part of parents or guardians. Government approaches 
that discourage self-sufficiency and create incentives for long-term 
dependency on public resources should be avoided.
Conclusion
    The Healthcare Leadership Council (HLC) believes that the benefits 
of the health care system should be available to all Americans by 
promoting bipartisan solutions to close gaps in access to health care 
coverage. We believe that these solutions can and should be consistent 
with HLC's mission: To advance the market-based health care system, 
building on the quality and innovation inherent in the private 
employment-based system, in order to provide all Americans with access 
to affordable coverage and high-quality health care services.

                                


  Statement of Janet Stokes Trautwein National Association of Health 
                   Underwriters, Arlington, Virginia
    The National Association of Health Underwriters is an association 
of insurance professionals involved in the sale and service of health 
insurance, long-term care insurance, and related products, serving the 
insurance needs of over 100 million Americans. We have almost 17,000 
members around the country. We appreciate this opportunity to present 
our comments regarding the rising number of uninsured Americans. NAHU 
has been a proponent of refundable health insurance tax credits to 
address the problem of the uninsured for more than a decade, and is 
pleased to have this opportunity to discuss the practical application 
of a tax credit with the members of this committee. We believe a 
refundable health insurance tax credit will provide a real solution to 
the problem of the uninsured in America by addressing affordability--
the most basic component of access to health care.
    The current estimate on the number of uninsured in this country is 
approximately 43 million people. That number represents an increase 
from a few years ago, despite numerous state and federal efforts to 
improve access. Over half of the 43 million uninsured Americans are the 
working poor or near poor, many of whom already have access to health 
insurance through an employer-sponsored plan.1 Since 
employers already provide access to health plans and pay a significant 
portion of the premiums for many Americans, why do we have so many 
uninsured? The problem isn't access--it's affordability. They just 
can't pay for it.
---------------------------------------------------------------------------
    \1\ U.S. Census Bureau, 2000.
---------------------------------------------------------------------------
    This inability to pay has many causes. As we know, the United 
States government gives a tax break to people covered under their 
employer's health insurance plan. Health insurance premiums paid by an 
employer are not taxable as income to employees, even though many 
people consider employer-paid health insurance to be a part of 
compensation. Although this tax break has provided an excellent 
incentive for many people to become insured, it has also inadvertently 
created another problem--lack of tax equity. When an employer pays $100 
in tax-free health insurance premiums for an employee in a 30% tax 
bracket, it's worth $30 to that employee. To another employee in a 15% 
tax bracket, it would be worth $15, and for the low-income employee 
with no tax liability or the person who is self-employed or otherwise 
has no employer-sponsored plan available, the tax break is worth 
nothing. That's why many low-income employees who must pay part of the 
cost of employer-sponsored health insurance coverage for themselves or 
their family have declined coverage. Most people in employer plans 
benefit from both the dollar amount of the employer contribution and 
the tax exemption on employer-sponsored health insurance premiums. Low-
income individuals only benefit from the employer's contribution if 
they are able to pay their share of the remaining premium, and they 
don't benefit at all from the tax exemption. Increased deductibility of 
health plan premiums for the self-employed has helped and will help 
more as greater deductibility is phased in. Unfortunately, however, 
deductibility does nothing for the bulk of the uninsured--the working 
poor with no or very low tax liability.
    People with no tax liability don't benefit from a deduction for two 
reasons. First, if they owe no taxes, there is nothing from which to 
deduct their premiums, even if the deduction was available without the 
requirement that a person itemize. Second, and probably more important 
for the working poor, a deduction or even a credit that is only 
available at the end of the year is of no value to them because they 
need the funds at the time their health insurance premium is due. They 
can't wait a year to be reimbursed, so they forego insurance entirely. 
That's why they are uninsured now.
    Fortunately, there is a solution for this problem. A refundable, 
advanceable tax credit would allow individuals to receive their tax 
credit dollars monthly, when their premiums are due. This type of 
credit, advanced monthly and administered through the insurance company 
or the employer, provides the following benefits:
           It is simple to understand.
           It is almost impossible to abuse, since the 
        insurance company or employer would certify that coverage was 
        purchased.
           It enhances the effectiveness of COBRA's access 
        mechanism by providing a means to pay COBRA or other health 
        insurance premiums when people change jobs.
           It provides early retirees with needed dollars to 
        help them purchase a health insurance policy.
           Small employers who currently can't afford to 
        provide a health insurance plan would, with the combination of 
        the contribution they could provide and dollars provided to 
        eligible employees through a health insurance tax credit, be 
        more likely to offer a group health plan to 
        workers.2
---------------------------------------------------------------------------
    \2\ See NAHU survey of small employers, March 2001--http://
www.nahu.org.
---------------------------------------------------------------------------
Tax Credits in Employer-Sponsored Plans
    Some health insurance tax credit proposals do not allow a credit to 
be used in an employer-sponsored plan. A better solution is a health 
insurance tax credit designed to be used either to buy coverage in the 
individual health insurance market or to help an employee pay his or 
her share of premiums in an employer-sponsored plan. Most people are 
happy with the employer-based system, according to a 1999 survey by the 
Employee Benefits Research Institute, and many uninsured individuals 
already have high-quality employer-based coverage available to them. A 
recent NAHU survey of small employers shows that many small employers 
pay most or all of an employee's health insurance premium, but little 
or none of the cost of coverage for dependents. Allowing low-income 
employees to supplement their employer's contributions with a 
refundable tax credit would allow families to be insured together, 
which many employees prefer, and would provide the funds necessary to 
allow them to come up with ``their share'' of health insurance 
premiums. It would also address concerns from the business community, 
such as declining take up and shrinking pools, and would empower 
individuals to select their own place of purchase, rather than having 
it imposed on them by the government.
    Another way to help employees pay their share of premiums would be 
to allow (but not require) advanceable Earned Income Tax Credit (EITC) 
dollars to be combined with health insurance tax credit dollars for 
eligible employees. Past concerns about whether or not adequate 
coverage would be purchased with EITC dollars would be addressed 
through the administration mechanisms of the health insurance tax 
credit, which require the purchase of HIPAA-creditable coverage, 
certified by either the employer or the insurance company.
Should a Tax Credit be Flat or a Percentage of Premiums?
    Some people claim that because the cost of individual health 
insurance is different for individuals of different ages and in 
different states, a flat credit is unfair and inflexible. It is true 
that health insurance costs are different for different populations. 
But a credit based on a percentage of premiums is difficult to 
administer because of these very differences. It is very important that 
a health insurance tax credit be advanced monthly, when premiums are 
due. This can be done through insurance carriers for those who purchase 
individual health insurance coverage as well as through the employer 
payroll process for those who purchase coverage in an employer-
sponsored plan. If administration becomes too difficult, it won't be 
cost-effective for employers and insurers to handle this 
administration, and they will elect not to advance tax credits to 
individuals. This will result in the tax credit not being available to 
individuals and families until they file their tax return.
How Much Should the Tax Credit Be?
    Over the years, NAHU has spent a considerable amount of time 
looking at the dollar amount of a health insurance tax credit. In doing 
so, we looked carefully at the amount of coverage that is currently 
financed by employers. Employers pay for much of the coverage that 
insures most people today. It is very important that in our zeal to do 
something about those without health insurance that we don't 
inadvertently discourage employer funding of coverage for those who are 
already insured today. For that reason, it is important that a health 
insurance tax credit be low enough so that it will not provide an 
incentive for employers to discontinue their financial contributions 
towards plans. At the same time, it is important that the credit be 
large enough to provide a meaningful incentive for people without 
access to an employer-sponsored plan to obtain coverage.
    A credit in the range of $1,000 for individuals and $2,000-$2,500 
for families is not large enough to cause an employer to stop providing 
coverage for employees, yet still provides a good base to finance 
coverage, even for employees purchasing coverage in the individual 
health insurance market.3 We've attached as exhibits several 
comparisons of the cost of health insurance across the country. The 
first exhibit gives some examples of the types of health insurance 
coverage that are available to a single mother with two children for a 
contribution of about $2,600 per year. This assumes she does not have 
an employer plan available and has a $2,000 tax credit plus $50 per 
month of her own money. We've also illustrated the costs of coverage in 
a second exhibit for a higher level of benefits. A third exhibit gives 
a sampling of group insurance costs for the same person. Keep in mind 
that coverage offered in employer-sponsored plans provides a 
significantly higher level of benefits in many cases that what is 
available in the individual market, in addition to being less 
expensive. The controlled access in employer plans is much more 
effective at keeping a balanced risk pool than the individual health 
insurance market. But a tax credit would bring new people into the 
individual health insurance pool and would over time encourage 
insurance companies to write individual health insurance policies 
geared to the size of the credit, offering more options and making it 
possible for low-income families to obtain coverage without paying much 
more than the credits available.
---------------------------------------------------------------------------
    \3\ The amount of the tax credit would periodically change to 
reflect increases or decreases in the cost of living, as reflected by 
the medical Consumer Price Index (CPI).
---------------------------------------------------------------------------
Is a $1,000 Tax Credit ($2,000 for a Family) Large Enough to Buy 
        Reasonable Coverage?
    Individuals without employer-sponsored health insurance currently 
must purchase coverage in the individual health insurance market 
entirely on their own. This is particularly hard for low--income 
employees who may have to choose between health insurance and 
groceries, and even employees who do have employer-sponsored coverage 
available may not be able to participate because they can't afford 
their share of the premiums. A health tax credit should be considered a 
base from which to build on the financing of health insurance coverage. 
It is not designed to take away the role of the employer in the 
financing of health insurance coverage, or to replace personal 
responsibility.4
---------------------------------------------------------------------------
    \4\ To get an idea what is available in the individual health 
insurance market, see ``Individual Health Insurance Coverage options 
across the United States,'' March 2001, National Association of Health 
Underwriters.
---------------------------------------------------------------------------
What if Someone Doesn't Qualify for Coverage in the Individual Health 
        Insurance Market due to a Health Condition?
    In most states individual health insurance requires that a person 
be in relatively good health. If a person does not qualify for coverage 
based on their medical history, many states have a high-risk pool or 
some other mechanism to ensure that coverage is available. High-risk 
pools provide an affordable alternative for high-risk individuals who 
don't have access to employer--sponsored coverage and must purchase 
individual health insurance coverage. An exhibit illustrating the cost 
of coverage in a sampling of states with high-risk pools is attached. A 
refundable health insurance tax credit could help eligible high-risk 
individuals afford the cost of health insurance coverage in high-risk 
pools in the same way it would be used for others who purchase coverage 
through their employer's plan or through the regular individual health 
insurance market. In addition, states without any safety net for the 
medically uninsurable should be encouraged and provided with incentives 
to develop programs to ensure that coverage is available for these 
individuals.
Administering a Refundable Health Insurance Tax Credit
    The Treasury Department would have primary responsibility for 
administering tax credit payments. The credit, while owned by the 
individual, would not be paid directly to the individual, but would be 
transmitted to an insurance company, employer, high-risk pool, or other 
organization maintaining the individual's insurance account. The credit 
could be used only for the payment of private insurance premiums, and 
could not exceed the total cost of the premiums. Only health plans 
eligible as creditable coverage under the Health Insurance Portability 
and Accountability Act of 1996 (HIPAA) would be eligible for credit 
payment. The credit would be available on a monthly prorated basis, in 
order to ensure the continuing availability of credit funds throughout 
the year, particularly in cases of job change, and to help protect 
against fraud.
    In cases of employer-provided insurance, the monthly tax credit 
allocation can be handled as part of the regular withholding process. 
The credit would be shown as a specific line item on the pay stub. 
Federal income taxes withheld by the employer on behalf of employees 
would be reduced by the amount of the credit before being sent to the 
government.
    For those individuals purchasing coverage in the individual health 
insurance market, the monthly tax credit allocation could be subtracted 
from the regular monthly health insurance premium due, with the 
insurance company using normal billing mechanisms for the balance, if 
any, of the premium. As with employer plans, insurance companies could 
reduce federal taxes owed by the amount of credits they had advanced to 
eligible individuals.
Economic Impact of a Health Insurance Tax Credit
    A refundable health insurance tax credit for low-income individuals 
is an innovative way to achieve affordable health insurance coverage 
through the competitive private sector. A health insurance tax credit 
will help ensure that low-income Americans who have the greatest 
difficulty affording coverage will have a basic level of resources to 
purchase health insurance. The tax credit, by being available only for 
the purchase of private sector insurance, will allow a shift of low-
income individuals from the very costly Medicaid program into private 
insurance plans. A health insurance tax credit would also help to lower 
the per capita cost of insurance, by reducing the amount of 
uncompensated care that is currently offset through cost shifting by 
health care providers to private sector insurance plans, and by 
substantially increasing the insurance base, spreading the cost over a 
wider number of people.
The Children's Health Insurance Program
    A discussion of the uninsured would be incomplete without mention 
of the Children's Health Insurance Program. Many of NAHU's members have 
been invited to serve on state task forces and committees to assist in 
implementation and outreach for CHIP. They have consistently reported 
several shortcomings of the federal CHIP legislation, which they feel 
have impeded their states' ability to reach the largest number of 
uninsured children.
    Under the Balanced Budget Act, states have a number of options for 
implementing plans most appropriate to the needs of their uninsured 
children. One of those options is to expand Medicaid. The other 
available options are centered in the private sector. One reason many 
of the people who are already eligible for Medicaid today do not enroll 
is that they do not want the negative stigma associated with public 
assistance. Private sector programs can represent a transition from 
this stigma by allowing and encouraging people to embrace the concept 
of ``self-help'' as opposed to the expectation of government 
entitlement. As you know, this is a concept that has ramifications that 
extend far beyond the health insurance benefits provided by the plan. 
Congress wisely considered these private sector advantages and not only 
authorized states to develop private sector CHIP programs, but also 
allowed for children to be enrolled in the employer-based plans of 
their parents.
    Unfortunately, due to some of the inflexible provisions that were 
also contained in the CHIP provisions of BBA, many states have been 
unable to adequately implement the full range of options allowed by the 
legislation. Even though it appears that states have a range of plan 
benefit options, that reality is virtually eliminated by the cost-
sharing limitations contained in the legislation. Cost sharing is 
prohibited for children in families under 150% of the poverty level, 
and is limited to 5% of family income above that level. Unfortunately, 
cost sharing is defined to extend beyond premium to include co-payments 
and co-insurance.
    A quick calculation of the maximum potential co-insurance liability 
of an ``average'' plan, such as might be offered to state employees, 
one of the plan prototypes allowed under the legislation, for example, 
would make that plan unacceptable. Under CHIP guidelines, the co-
insurance responsibility alone would exceed the 5% maximum for many 
eligible participants. This requirement, along with certain mandated 
benefit requirements that were also included in the legislation, 
virtually forces states to use a benchmark plan based on Medicaid level 
benefits, which, we would point out, are far in excess of what the 
average child who is already insured enjoys today. Those parents who 
have already made the sacrifices necessary to see that their children 
are insured, many of whom are at an income level that would allow CHIP 
participation, are not eligible for CHIP funding because they are 
``already insured.'' In addition, the message they are receiving as a 
result of exercising responsible behavior is that the plans under which 
their children are now insured aren't good enough, because they may not 
meet the standards established under CHIP for uninsured children.
    The other problem associated with the cost-sharing requirements is 
that because each employer plan is different, and the family income of 
each eligible child is different, a separate mathematical calculation 
is required for EACH participant, to be sure the 5% cost-sharing 
limitation is met for that particular plan and participant. Employer-
sponsored coverage is often the easiest and most cost-effective option 
available for children and their families, and will allow families the 
opportunity to be enrolled together on the same employer-sponsored 
plan, but the separate calculation requirement makes plan 
administration unwieldy and expensive. For this reason it is unlikely 
that opportunities for participation in employer-sponsored plans will 
be aggressively pursued. This frustrating provision of the legislation 
is only worsened by a ruling by HCFA that employer plans where 
employers are paying less than 60% of the family premium are not 
eligible for participation in the CHIP program.5 Not only 
does this ruling by HCFA have no legislative basis, but surveys show 
that very few employers pay a significant part of the dependent 
premium, much less 60%.
---------------------------------------------------------------------------
    \5\ Pending HHS Children's Health Insurance Program regulations may 
lessen this requirement slightly. HCFA's 60% employer contribution 
requirement was designed to avoid ``crowd-out'' which theoretically can 
occur when employers or employees drop the coverage they currently pay 
for in order to take advantage of government funding.
---------------------------------------------------------------------------
Summary
    A refundable health insurance tax credit represents a simple and 
realistic way to extend private health insurance coverage to those 
uninsured individuals and families who are most in need of assistance. 
It is fair and is easy to administer. It is a private sector solution 
to a difficult public problem. It gives people the tools to make their 
own decisions.
    In addition to a tax credit, the Children's Health Insurance 
Program could be greatly improved and made available to many more 
eligible uninsured children if changes were made to the cost-sharing 
requirements of the CHIP program to define cost-sharing as premium 
cost-sharing only. It would also appear that HCFA's concerns about 
crowd-out are unwarranted at this time since many states have not been 
able to use their current allotment of CHIP dollars. The best safeguard 
against crowd-out would be to facilitate the use of employer-sponsored 
plans in the CHIP program.
    The most important patient protection is the ability to afford 
health insurance coverage. Real access to health care and choice can't 
exist without the dollars required to buy a health plan.
    Should you have any questions or if we might be of any additional 
assistance, please contact Janet Stokes Trautwein, Director of Federal 
Policy Analysis for NAHU, at (703) 276-3806, or [email protected]
                                 ______
                                 
    In this study, the National Association of Health Underwriters 
(NAHU) compared how much a health insurance policy purchased by a low-
income American family through the individual health insurance market 
in each state would cost, as well as what type of plan benefits would 
be available to the family. The family used in this analysis includes a 
single mother, age 35, who is a non-smoker and is in relatively good 
health, as well as her healthy daughters, ages seven and nine. For each 
state, NAHU sought price and benefit information for a health insurance 
policy with an average annual price of $2600. In some states, coverage 
cannot be obtained for the average price, so information for the least 
expensive available policy is listed. In addition, this analysis lists 
the maximum income level for Medicaid participation by state, as well 
as the maximum family income level for participation in each state's 
Childrens' Health Insurance Program. Both maximum family income levels 
are listed as a percentage of the federal poverty level. Finally, this 
table lists the current state mechanism for providing individual-market 
insurance coverage to medically uninsurable and HIPAA-eligible 
individuals.

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                        Individual Market Health Insurance Options for Subject Family            Maximum Income Level for Medicaid Benefits, 1998     Maximum
                              --------------------------------------------------------------------------------               (Percentage of the FPL)                 Income for
                                                                                                              -----------------------------------------------------    State
                                                                                                                                                                     Children's
                                                                                                                                                                       Health       Medically
            State                                                                                                                                                    Insurance     Uninsurable/
                                   Plan Type      Annual        Annual         Coinsurance       Additional    Pregnant   Kids  Kids   Kids  Medically      SSI       Program    HIPAA Eligibles
                                                  Premium     Deductible           Rate       Policy Benefits   Women/   Under  6-14  14-19    Needy    Recipients   Benefits,
                                                                                                                Infants    6                                            1999
                                                                                                                                                                    (Percentage
                                                                                                                                                                    of the FPL)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Alabama......................  PPO.............     $2316  $1000...........  100% after       All benefits        133     133    100   100        N/A        72.8           200  Risk Pool
                                                                              deductible.      subject to
                                                                                               deductible.
Alaska.......................  Indemnity.......     $2502  $1500...........  80%............  All benefits        133     133    100    90        N/A       100.2           200  Risk Pool
                                                                                               subject to
                                                                                               deductible.
Arizona......................  Indemnity.......     $2647  $750............  90% (60% out of  RX $15 generic/  133/200    133    100    30        N/A        72.8           200  None
                                                                              network).        $35 namebrand
                                                                                               copay.
Arkansas.....................  Non PPO.........     $2541  $500............  80%............  80% preventive      200     200    200   200         16        72.8           200  Risk Pool
                                                                                               care after
                                                                                               deductible.
California...................  PPO.............     $2256  $2000...........  75% after        Maximum out of      133     133    100   100         87        98.4           250  Risk Pool/Open
                                                                              deductible.      pocket is                                                                          Enrollment
                                                                                               $8500.
                                                    $2748  $1000...........  ...............  HealthyCheck
                                                                                               Centers $25 or
                                                                                               $75 copay for
                                                                                               basic
                                                                                               screenings. RX
                                                                                               $10 generic/
                                                                                               $25 namebrand.
Colorado.....................  PPO.............     $2533  $1000...........  80% (60% out of  $25 office          185     133    100    37        N/A        78.1           185  Risk Pool
                                                                              network).        visit copay.
                                                                                               RX $20 maximum
                                                                                               copay.
Connecticut..................  PPO.............     $2536  $750............  70%............  $15 office          185     185    185   185         69      209(b)           300  Risk Pool
                                                                                               visit copay.
                                                                                               Routine care
                                                                                               ltd. to $150
                                                                                               per year. RX
                                                                                               $15 generic/
                                                                                               $25 namebrand
                                                                                               copay.
Delaware.....................  PPO.............     $2618  $1000...........  80%............  RX $15 generic/     185     133    100   100        N/A        72.8           200  Risk Pool
                                                                                               $25 namebrand
                                                                                               copay.
District of Columbia.........  PPO.............     $4488  $750............  80% (60% out of  RX $100             185     133    100    37         55        72.8           200  Open Enrollment
                                                                              network).        deductible
                                                                                               then $10
                                                                                               generic/$20
                                                                                               namebrand
                                                                                               copay to
                                                                                               $1,500 annual
                                                                                               maximum. Other
                                                                                               benefits
                                                                                               subject to
                                                                                               deductible and
                                                                                               coinsurance.
Florida......................  PPO.............     $2395  $750............  50%............  RX $15 generic/     185     133    100   100         26        72.8           200  Risk Pool
                                                                                               $25 namebrand
                                                                                               copay.
                                                                                               Preventive
                                                                                               care ltd. to
                                                                                               $150 per year.
Georgia......................  PPO.............     $2531  $1000...........  80%............  RX $15 generic/     185     133    100   100         30        72.8           235  None
                                                                                               $35 namebrand.
                                                                                               Office visit
                                                                                               $30 copay.
Hawaii.......................                Not available. State-wide employer coverage mandate                  185     133    100   100         53      209(b)           200  Employer
                                                                                                                                                                                  Mandate
Idaho........................  PPO.............     $2484  $2000...........  80%............  $30 copay           160     160    160   160        N/A        79.8           150  Risk Pool
                                                                                               includes
                                                                                               routine not
                                                                                               subject to
                                                                                               deductible, RX
                                                                                               $10 generic/
                                                                                               $25 namebrand
                                                                                               copay.
Illinois.....................  PPO.............     $2628  None............  80%............  $30 copay for       200     133    130   133         41      209(b)           185  Risk Pool
                                                                                               office visits.
                                                                                               RX $10 generic/
                                                                                                $25 namebrand
                                                                                               copay.
Indiana......................  PPO.............     $2532  $750............  50%............  RX $15 generic/     150     133    100   100        N/A      209(b)           200  Risk Pool
                                                                                               $25 namebrand
                                                                                               copay. $15
                                                                                               copay for
                                                                                               office visits
                                                                                               including
                                                                                               preventive
                                                                                               care.
Iowa.........................  PPO.............     $2442  $500............  80%............  $25 office          185     133    100    37         70        72.8           185  Risk Pool/
                                                                                               visit copay.                                                                       Guaranteed
                                                                                               RX $25 generic/                                                                    Issue
                                                                                               $35 namebrand
                                                                                               copay.
Kansas.......................  PPO.............     $2508  $750............  100%...........  $10 office          150     133    100   100         69        72.8           200  Risk Pool
                                                                                               visit copay.
                                                                                               Rx discount
                                                                                               card.
Kentucky.....................  PPO.............     $2865  $2500...........  80%............  Includes RX         185     133    100    46         32        72.8           150  Risk Pool
                                                                                               coverage with
                                                                                               a separate
                                                                                               $100
                                                                                               deductible.
Louisiana....................  PPO.............     $2526  $1000...........  80%............  80% office          133     133    100    17         15        72.8           200  Risk Pool
                                                                                               visit copay
                                                                                               and RX
                                                                                               coverage.
Maine........................  PPO.............     $1880  $5000...........  80%............  Includes rider      185     133    125   125         46        74.3           150  Guaranteed
                                                                                               for preventive                                                                     Issue
                                                                                               care and
                                                                                               supplemental
                                                                                               accident
                                                                                               insurance.
Maryland.....................  No PPO..........     $2400  $1000...........  100%...........  RX 100% copay       185     185    185    33         51        72.8           200  Open Enrollment
                                                                                               after
                                                                                               deductible.
Massachusetts................  HMO.............     $4206  none............  100%...........  $15 copay, $25      185     133    133   133         76        91.6           200  Guaranteed
                                                                                               RX copay. Only                                                                     Issue
                                                                                               plan available
                                                                                               in state.
Michigan.....................  No PPO..........     $2594  $1000...........  100%...........  RX 100% copay       185     150    150   150         50        74.9           200  Open Enrollment
                                                                                               after
                                                                                               deductible.
Minnesota....................  HMO.............     $2470  $2000...........  80%............  Preventive care     275     275    275   275         68      209(b)       275-280  Risk Pool
                                                                                               100% coverage.
                                                                                               RX $12 copay.
Mississippi..................  No PPO..........     $2412  $1000...........  100%...........  Office visit        185     133    100    32        N/A        72.8           200  Risk Pool
                                                                                               and RX subject
                                                                                               to deductible.
Missouri.....................  PPO.............     $2706  $500............  80%............  RX $25 generic/     185     133    100   100        N/A      209(b)           300  Risk Pool
                                                                                               $35 namebrand
                                                                                               copay.
Montana......................  Indemnity.......     $3180  $3000...........  50%............  RX discount         133     133    100    48         71        72.8           150  Risk Pool
                                                                                               card and 100%
                                                                                               coverage after
                                                                                               deductible.
                                                                                               Well baby
                                                                                               coverage.
                                                                                               Optional
                                                                                               preventive
                                                                                               care coverage.
                                                                                               Mental health
                                                                                               coverage.
Nebraska.....................  PPO.............     $2406  $500............  90% (60% out of  RX $15 generic/     150     133    100   100         57        72.8           185  Risk Pool
                                                                              network).        $35 namebrand
                                                                                               copay. $20
                                                                                               office visit
                                                                                               copay.
Nevada.......................  Indemnity.......     $3069  $1000...........  80%............  $20 office          133     133    100    31        N/A        78.1           200  None
                                                                                               visit copay.
                                                                                               RX $20 copay
                                                                                               when filled in-
                                                                                               network.
New Hampshire................  Indemnity.......     $3579  $1750...........  80%............  $30 copays. RX      300     185    185   185         74      209(b)           300  Guaranteed
                                                                                               subject to                                                                         Issue
                                                                                               deductible.
New Jersey...................  HMO.............     $5200  None............  100%...........  $30 copays. RX      185     185    133   133         53        77.4       201-350  Guaranteed
                                                                                               50% copay.                                                                         Issue
New Mexico...................  PPO.............     $2580  $750............  100%...........  $10 office          185     185    185   185        N/A        72.8           235  Risk Pool
                                                                                               visit. RX
                                                                                               discount card.
New York.....................  PPO.............     $3820  $250............  100%...........  $20 copay. RX       185     133    100    51         85        85.5           250  Guaranteed
                                                                                               is $50                                                                             Issue
                                                                                               deductible
                                                                                               then $10 copay
                                                                                               for generics.
North Carolina...............  PPO.............     $2652  $2000...........  80%............  $30 office          185     133    100   100         35        72.8           200  Open Enrollment
                                                                                               visit copay.
                                                                                               Preventive
                                                                                               care with $30
                                                                                               copay. Well
                                                                                               baby and child
                                                                                               care with $20
                                                                                               copay. Rx
                                                                                               coverage with
                                                                                               sliding copay.
North Dakota.................  PPO.............     $2051  $1000...........  90% (70% out of  $20 office          133     133    100   100         59      209(b)           140  Risk Pool
                                                                              network).        visit copay.
                                                                                               Rx subject to
                                                                                               deductible.
Ohio.........................  PPO.............     $2254  $500............  80%............  $15 office          150     150    150    30        N/A      209(b)           200  Open Enrollment
                                                                                               visit copay.
                                                                                               RX $15 generic/
                                                                                               $25 namebrand
                                                                                               copay.
Oklahoma.....................  PPO.............     $2617  $1000...........  80% (50% out of  Office visit        185     185    185   185         38      209(b)           185  Risk Pool
                                                                              network).        including
                                                                                               routine care
                                                                                               deducible and
                                                                                               copay
                                                                                               applicable. RX
                                                                                               $15 generic/
                                                                                               $35 namebrand.
Oregon.......................  PPO.............     $2850  $1500...........  20%............  20% copay. RX       133     133    100   100         96        73.1           170  Risk Pool
                                                                                               greater of $20
                                                                                               or 50% copay.
Pennsylvania.................  PPO.............     $2660  $500............  50%............  $15 copay.          185     133    100    37         62        76.8           235  Open Enrollment
                                                                                               Mental health
                                                                                               covered up to
                                                                                               $3000. RX $15
                                                                                               generic/$25
                                                                                               namebrand
                                                                                               copay.
Rhode Island.................  PPO.............     $3888  $5,000..........  100%...........  $10 office          250     250    250   250         81        82.2           250  Open Enrollment
                                                                                               visit copay.
                                                                                               RX discount
                                                                                               card and 100%
                                                                                               coverage after
                                                                                               deductible.
                                                                                               Well baby
                                                                                               coverage.
                                                                                               Mental health
                                                                                               coverage.
                                                                                               Optional
                                                                                               preventive
                                                                                               care coverage.
South Carolina...............  PPO.............     $2487  $2000...........  80%............  RX deductible       185     150    150   150        N/A        72.8           150  Risk Pool
                                                                                               and copay
                                                                                               applicable.
South Dakota.................  PPO.............     $2676  $3000...........  100%...........  RX discount         133     133    100   100        N/A        75.0           140  None
                                                                                               card and 100%
                                                                                               coverage after
                                                                                               deductible
                                                                                               Optional well
                                                                                               baby coverage.
                                                                                               Optional
                                                                                               preventive
                                                                                               care coverage.
                                                                                               Mental health
                                                                                               coverage.
Tennessee....................  PPO.............     $2573  $1000 ($2000 out  80% (50% out of  $30 office          400     400    400   400         25        72.8           100  TENNCare
                                                            of network).      network).        visit copay.
                                                                                               RX coverage
                                                                                               with sliding
                                                                                               copay.
                                                                                               Preventive
                                                                                               coverage.
Texas........................  PPO.............     $2343  $750............  50%............  $15 office          185     133    100    17         15        72.8           200  Risk Pool
                                                                                               visit copay
                                                                                               without
                                                                                               meeting
                                                                                               deductible
                                                                                               including
                                                                                               routine exams
                                                                                               and
                                                                                               immunizations.
                                                                                               Rx $15 generic/
                                                                                               $25 namebrand.
Utah.........................  Indemnity.......     $2340  $1000...........  80%............  All benefits        133     133    100   100         54        72.8           200  Guaranteed
                                                                                               subject to                                                                         Issue
                                                                                               deductible.
Vermont......................  HMO.............     $6191  none............  100%...........  Office visits    200/225    225    225   225         99        80.8           200  Guaranteed
                                                                                               $20 copay. RX                                                                      Issue
                                                                                               not covered
                                                                                               but available
                                                                                               for an
                                                                                               additional
                                                                                               $44.05 per
                                                                                               month.
Virginia.....................  PPO.............     $2592  $1000...........  80%............  $25 office          133     133    100   100         32      209(b)           225  Open Enrollment
                                                                                               visit copay/RX
                                                                                               $25 generic/
                                                                                               $35 namebrand
                                                                                               copay.
Washington...................  Indemnity.......     $2712  $1000...........  20%............  RX subject to       185     200    200   200         77        76.7           300  Risk Pool/
                                                                                               deductible.                                                                        Guaranteed
                                                                                                                                                                                  Issue
West Virginia................  Indemnity.......     $2525  $1000...........  80%............  All benefits        150     133    100   100         29        72.8           185  None
                                                                                               subject to
                                                                                               deductible.
Wisconsin....................  PPO.............     $2567  $500............  80%............  $15 office          185     185    100    45         84        85.0           185  Risk Pool
                                                                                               visit copay.
                                                                                               RX $15 generic/
                                                                                               $25 namebrand
                                                                                               copay.
Wyoming......................  Indemnity.......     $2760  $2500...........  100%...........  RX discount         133     133    100    52        N/A        74.2           133  Risk Pool
                                                                                               card and 100%
                                                                                               coverage after
                                                                                               deductible.
                                                                                               Optional well
                                                                                               baby coverage.
                                                                                               Optional
                                                                                               preventive
                                                                                               care coverage.
                                                                                               Mental health
                                                                                               coverage.
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
PLEASE NOTE: The information presented in this analysis is the exclusive property of the National Association of Health Underwriters (NAHU). It was prepared as an informational resource for
  NAHU members, state and federal policymakers and other interested parties. It is not to be duplicated, copied, or taken out of context. Any omission or the inclusion of incorrect data is
  unintentional. If you have any questions about the information presented in this document, please contact Jessica Fulginiti Waltman, NAHU's Manager of Health Policy, at (703) 276-3817 or
  [email protected]

                                


                                             Washington MSA Project
                                    Issaquah, Washington 98027-8616
                                                     April 15, 2001
    Allison Giles
    Chief of Staff
    Committee on Ways and Means
    U.S. House of Representatives
    1102 Longworth House Office Building
    Washington, DC 20515

    Dear Ms. Giles:
    Please accept this letter as testimony in response to your 
Committee solicitation for written statements bearing upon recent 
hearings on making health care affordable. This statement relates 
directly to Representative Nancy Johnson's Health Subcommittee Hearing 
dated 4 April, 2001.
    The Washington Medical Savings Account Project is a nonprofit 
educational and research organization based in the Seattle area. We 
continue to research the roles and effectiveness of ``Archer MSAs'' 
nationally and in Washington state. We have concluded that federal tax 
favored MSA programs given appropriate latitude, expansion, and scope 
under new legislation will bear constructively upon increasing 
measurably the availability of affordable health insurance.
    Addressing the proposed MSA expansion legislation Representatives 
Thomas and Lipinski introduced this month and which we support, we 
recommend two further vital improvements:
     Eliminate the ceiling for the Archer MSA high deductible 
health insurance but set the upper limit on the allowed total tax 
favored annual contribution to the MSA.
     Allow flexible MSAs linked to either front end deductibles 
or to deductibles for health care services other than routine primary 
and preventive care.
    Both of these modest additions to the Thomas/Lipinski ``Medical 
Savings Account Availability Act'' fit well the intention of 
Congressional action to enhance and improve the affordability of 
healthcare.
    Thank you for an opportunity to provide this testimony;
             Stephen Barchet, MD, FACOG, CPE, FACPE
                                                          Chair/CEO
    Cc: The Honorable Jennifer Dunn