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



 
                  SMALL BUSINESS ACCESS TO HEALTH CARE

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

                                HEARING

                               before the

                      COMMITTEE ON SMALL BUSINESS
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION

                               __________

                    WASHINGTON, DC, FEBRUARY 6, 2002

                               __________

                           Serial No. 107-41

                               __________

         Printed for the use of the Committee on Small Business





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                      COMMITTEE ON SMALL BUSINESS

                  DONALD MANZULLO, Illinois, Chairman
LARRY COMBEST, Texas                 NYDIA M. VELAZQUEZ, New York
JOEL HEFLEY, Colorado                JUANITA MILLENDER-McDONALD, 
ROSCOE G. BARTLETT, Maryland             California
FRANK A. LoBIONDO, New Jersey        DANNY K. DAVIS, Illinois
SUE W. KELLY, New York               BILL PASCRELL, Jr., New Jersey
STEVE CHABOT, Ohio                   DONNA M. CHRISTENSEN, Virgin 
PATRICK J. TOOMEY, Pennsylvania          Islands
JIM DeMINT, South Carolina           ROBERT A. BRADY, Pennsylvania
JOHN R. THUNE, South Dakota          TOM UDALL, New Mexico
MICHAEL PENCE, Indiana               STEPHANIE TUBBS JONES, Ohio
MIKE FERGUSON, New Jersey            CHARLES A. GONZALEZ, Texas
DARRELL E. ISSA, California          DAVID D. PHELPS, Illinois
SAM GRAVES, Missouri                 GRACE F. NAPOLITANO, California
EDWARD L. SCHROCK, Virginia          BRIAN BAIRD, Washington
FELIX J. GRUCCI, Jr., New York       MARK UDALL, Colorado
W. TODD AKIN, Missouri               JAMES R. LANGEVIN, Rhode Island
SHELLEY MOORE CAPITO, West Virginia  MIKE ROSS, Arkansas
BILL SHUSTER, Pennsylvania           BRAD CARSON, Oklahoma
                                     ANIBAL ACEVEDO-VILA, Puerto Rico
                      Doug Thomas, Staff Director
                  Phil Eskeland, Deputy Staff Director
                  Michael Day, Minority Staff Director


                            C O N T E N T S

                              ----------                                

                                                                   Page
Hearing held on February 6, 2002.................................     1

                               Witnesses

Fletcher, Hon. Ernie, Member, U.S. House of Representatives......     1
Smith, Elaine, President, E. Smith & Associates..................     8
Arth, Raymond, President, Phoenix Products, Inc..................    11
Hughes, Robert, President, National Association for the Self-
  Employed.......................................................    13
Curtis, Rick, President, Institute for Health Policy Solutions...    15
Trautwein, Janet, National Association of Health Underwriters....    16
Lehnhard, Mary Nell, Senior Vice President for Policy, Blue 
  Cross/Blue Shield..............................................    18

                                Appendix

Opening statements:
    Manzullo, Hon. Donald........................................    33
    Velazquez, Hon. Nydia........................................    35
Prepared statements:
    Fletcher, Hon. Ernie.........................................    37
    Smith, Elaine................................................    42
    Arth, Raymond................................................    48
    Hughes, Robert...............................................    59
    Curtis, Rick.................................................    70
    Trautwein, Janet.............................................    75
    Lehnhard, Mary Nell..........................................    83
Additional Information:
    Statement of Associated Builders and Contractors.............   104
    Small Business Committee Press Release dated February 6, 2002   109
    Letter to Chairman Manzullo from Dan Danner, National 
      Federation of Independent Business.........................   110


            HEARING ON SMALL BUSINESS ACCESS TO HEALTH CARE

                              ----------                              


                      WEDNESDAY, FEBRUARY 6, 2002

                  House of Representatives,
                               Committee on Small Business,
                                                    Washington, DC.
    The Committee met, pursuant to call, at 10:05 a.m. in room 
2360, Rayburn House Office Building, Hon. Donald Manzullo, 
(chairman of the committee) presiding.
    Chairman Manzullo. Good morning. We will call our Small 
Business meeting to order. Before any opening statements or 
anything, I want to move immediately to the testimony of Dr. 
Fletcher, who has three other Subcommittee hearings he has to 
attend.
    Congressman Dr. Fletcher, we look forward to your 
testimony. You are up.
    [Chairman Manzullo's statement may be found in the 
appendix.]

STATEMENT OF HON. ERNIE FLETCHER, A REPRESENTATIVE IN CONGRESS 
                   FROM THE STATE OF KENTUCKY

    Mr. Fletcher. Thank you very much, Mr. Chairman. I want to 
thank the Chairman and the Ranking Member for providing me this 
opportunity to testify regarding the Small Business Health 
Fairness Act, which I filed back last May.
    Let me note that there are about 12 Members on this 
Committee that are co-sponsors of that bill, including the 
Chairman and the Ranking Member. Also, 18 Committee Members 
voted for the AHP amendment to the Patients' Bill of Rights. As 
you know, this amendment passed the House and is included in 
the final House version. I want to thank you all for your 
support.
    America's growing health care dilemma calls for immediate 
presidential and congressional action. We must address the fact 
that too many Americans lack health insurance. Experts estimate 
that at least 38 million Americans are currently without health 
insurance.
    Additionally, the recession and terrorist acts of September 
11 have increased the ranks of the uninsured by an estimate of 
one million people. The uninsured include some of the most 
vulnerable in our society--12 million children, 17 million low 
income Americans, seven million African-Americans, and 11 
million Hispanics.
    Those without health coverage confront barriers that 
discourage preventive care and delay disease diagnosis. They 
are more likely to be hospitalized for avoidable conditions. In 
fact, last year nearly 40 percent of the uninsured adults 
skipped recommended medical tests and treatments, and 20 
percent did not get needed care for serious problems. 
Consequently, studies reveal that morbidity and mortality rates 
among the uninsured are substantially higher than those among 
individuals with health insurance.
    As double digit health premium increases and a weakened 
economy put more and more small business workers in jeopardy of 
losing their health benefits, we must turn our attention to the 
problem of the uninsured this year. I would like to stress that 
I believe we need to do it early this year.
    In light of the ongoing discussions between the President 
and the Senate regarding the Patients' Bill of Rights, it is 
critical that the final bill take action on comprehensive small 
business health insurance reform. I feel strongly that this 
should include enactment of the Small Business Health Fairness 
Act of 2001, bipartisan legislation approved by the House as an 
amendment to the Patients' Bill of Rights.
    I fear that the number of uninsured Americans will increase 
dramatically over the next few years if we do not act now. The 
Small Business Health Fairness Act would address this problem 
by creating new association health plans or AHPs for workers 
employed in small business, as well as the self-employed. This 
bill will provide working families employed by small 
businesses, which make up 60 percent of the uninsured, with 
more health benefits and more health plan choices.
    Lacking the bargaining power of large corporations, many of 
these businesses are priced out of the health insurance 
marketplace, reluctantly leaving their workers uncovered. AHPs 
address this problem by allowing small businesses to band 
together nationally into associations to provide health 
insurance at lower cost.
    Small businesses and the self-employed do not have the same 
advantages in the marketplace as the corporations and the 
larger union health plans. In fact, small employers now pay 18 
percent more for coverage than large employers. Moreover, 
corporate and union health plans operating under one set of 
rules across state lines are able to take advantage of the 
economies of scale.
    As you may know, the three main arguments against AHP are, 
one, adverse selection or what is called cherry picking; two, 
inadequate solvency standards; and, three, inadequate oversight 
enforcement. Let me address these myths regarding AHPs.
    First, it is illegal for AHPs to deny coverage based on 
health status of any individual employer or employee under 
HIPAA. Cherry picking is possible only when sick or high risk 
people who will generate significant claims can be denied 
coverage. Of course, that does not happen under the way the AHP 
legislation is constructed. It is forbidden.
    Secondly, the bill contains strict requirements under which 
only bona fide professional and trade associations, which exist 
for substantial purposes other than providing health insurance 
must exist for at least three years, can sponsor at AHP. The 
bill strictly prohibits health plans that are set up only to 
offer health insurance or accept only good risks.
    Thirdly, to the extent that low and high risk industries 
can be identified, the bill only allows new self-funded AHPs in 
industries with average or above average risk profiles, thus 
preventing self-funded AHPs from forming in low risk 
industries.
    Fourthly, opponents' allegations about adverse selection 
rest on the mistaken assumption that small businesses will only 
offer bare bones benefit packages through AHPs. However, small 
business owners and workers desire the same benefit packages as 
large business workers, and small businesses must offer 
comparable benefit options to attract and retain employees.
    Fifthly, adverse selection that currently exists in state 
markets will be greatly reduced when younger, healthier workers 
employed in small businesses who are now uninsured are able to 
obtain coverage that is affordable.
    This Act contains tough, new solvency provisions which will 
actually increase consumer protections for many small business 
workers. The DOL's IG has testified before Congress that the 
new enforcement tools for regulators contained in this 
legislation will help reduce health insurance fraud.
    The bill gives federal and state authorities new and better 
enforcement tools to insure that coverage is secure and to 
prevent health insurance fraud. Only longstanding, bona fide 
associations meet the bill's strict eligibility requirements 
and are independent of insurance companies. Tough, new solvency 
standards require claims reserves certified by a qualified 
actuary, minimum surplus reserves, both specific and aggregate 
stop loss insurance and indemnification insurance to insure 
that all claims are paid.
    A.H.P.s must register with the state in which they are 
domiciled. AHPs must abide by strict disclosure and actual 
reporting procedures, and the bill provides new criminal and 
civil penalties. Allegations that health coverage obtained 
through AHPs will be anything less than secure ignore these 
strong protections contained.
    A.H.P.s are fundamentally different, too, from MEWAs. 
Multiple employer welfare plans generally will not qualify as 
AHPs under the new certification process. AHPs will be 
regulated in a manner similar to how single employer and labor 
union pension and health plans are currently regulated. Thus, 
the bill does not require an entire new bureaucracy to insure 
that AHPs are properly regulated.
    The DOL already regulates association sponsored health 
plans for compliance with current federal laws governing group 
health plans. This bill strengthens solvency standards and 
certification rules to plans operated by qualifying bona fide 
trade and professional associations.
    D.O.L. is devoted to identifying, investigating and 
disbanding fraudulent MEWAs. This is the case for many state 
insurance departments as well. Since the bill provides new 
enforcement capabilities that will assist DOL and state 
insurance departments in identifying and shutting down 
fraudulent MEWAs and preventing new ones from getting started, 
resources can be redirected to the regulation of bona fide AHPs 
under new standards in the law. The bill provides that 
associations applying for certification as federally regulated 
AHPs must pay a $5,000 filing fee. This will generate resources 
to enhance enforcement.
    The bill allows the Secretary to consult with the states in 
regulating AHPs and provides that new self-insured AHPs be 
subject to the assessment of state premium taxes and equivalent 
assessments, thus providing resources that can be used for 
regulatory responsibility.
    D.O.L. also has enhanced criminal and civil enforcement 
powers currently not available to stop health insurance fraud 
by terminating bogus small employer and union health plans. 
Illegitimate entities will become criminal enterprises, and DOL 
will have a new cease and desist authority to curtail such 
activities. The DOL IG has stated that these are important and 
necessary in stopping health insurance fraud.
    It is only fair that we should level----
    Chairman Manzullo. Dr. Fletcher, I know your time is 
limited. I have you at eight minutes, but I want to leave some 
time for you and for some Members to ask you some questions.
    Mr. Fletcher. Let me just conclude that I think it is very 
important to level the playing field, and I think it is 
critical that we pass this legislation this year.
    I appreciate the opportunity to testify.
    [Mr. Fletcher's statement may be found in the appendix.]
    Chairman Manzullo. Okay. I appreciate that. I have a couple 
of questions for the doctor. Does anybody else have any 
questions for Dr. Fletcher on his bill?
    Mr. Pascrell. Yes.
    Chairman Manzullo. Mr. Pascrell.
    I am sorry. Ms. Velazquez, did you have any questions you 
wanted to ask of Dr. Fletcher?
    Ms. Velazquez. Sure.
    Chairman Manzullo. Why don't you go ahead?
    Ms. Velazquez. I just would like to know if we could get 
the Speaker to bring this legislation to the Floor?
    Mr. Fletcher. You know, we already have passed the 
legislation, but certainly I will be glad to work with you and 
any other Members to see if we can bring actually the Small 
Business Health Fairness Act to the Floor as an individual 
bill.
    Ms. Velazquez. Thank you.
    Chairman Manzullo. Mr. Pascrell.
    Mr. Pascrell. Thank you. Congressman, what would you say to 
the major criticism, since we seem to be moving towards some 
resolution on this hopefully? What would you say to the major 
criticism from the larger insurance companies? What is their 
major problem, in your eyes, about this?
    Mr. Fletcher. I think first they were considering and many 
were looking at MEWAs and the problems. There was a failed MEWA 
in California and some other association plans there.
    We have strengthened several things that they had concerns 
about. First was if a patient has a problem, who picks up the 
phone when they call and ask? We certainly coordinated with the 
Commissioners of Insurance in the states that they can answer 
the phone. We provided funds to them to enhance enforcement so 
that there are some consumer protections. We also increased the 
requirements and reserves. The actual reporting actually on a 
quarterly basis is required.
    I think the insurance companies had very legitimate 
concerns about making sure that the individuals were protected. 
We also required stop loss insurance, which we did not 
previously, so I think we have answered most of their 
criticisms.
    Mr. Pascrell. Thank you.
    Chairman Manzullo. Mrs. Kelly.
    Mrs. Kelly. Thank you. I want to say that I strongly 
applaud your stand, Dr. Fletcher, on AHPs, and I strongly 
support your bill. I believe I am a co-sponsor of that bill. I 
think it is extremely important that we allow the AHPs to come 
into existence.
    In the past, since my father was a doctor, I have seen what 
has happened over the course of many years through the medical 
system. I have been involved in it myself. I think that we 
must, because I am also a small businesswoman. I think it is 
extremely important that we meet the challenge of insuring 
people and allowing more people to access insurance by doing 
the AHPs.
    I just simply want to make the statement that I applaud you 
for your stand, and I support you.
    Mr. Fletcher. Thank you, Congresswoman Kelly.
    Chairman Manzullo. Congresswoman Tubbs Jones, did you have 
any questions you wanted to ask of our colleague?
    Mrs. Jones. No, I do not. Thank you.
    Chairman Manzullo. Okay. Dr. Fletcher, let me ask a real 
basic question that goes to the real definition of insurance. 
Why is it that large groups of people that want to form 
together, want to band together, in order to buy insurance are 
unable to do so other than the obvious answer of affordability?
    Mr. Fletcher. Well, there are several things. Let me take 
the State of Kentucky as an example where we had a small 
individual market.
    What happened when there were certain regulations is 
without guaranteed issue we had a spiraling increase in cost of 
health care because without being able to bring large groups of 
people together which have different risk, you are not able to 
take advantage of economies of scale, of spreading the risk, 
and that is what insurance is about.
    Additionally, what the good union plans and large 
corporation plans do is that they have one set of 
administration rules across the 50 states, which improves 
efficiency tremendously. What we want to do is allow small 
businesses, so I think it certainly gets right to the heart of 
insurance, especially the protections that we put in, the 
reserves and the stop loss insurance.
    Let me say in response to Congresswoman Kelly's statement 
there that the largest growing segment of small businesses is 
women initiated businesses. This gives them the advantage of 
certainly being able to offer their employees I think a quality 
health insurance product at a cost that is substantially lower 
than what they may be able to get otherwise.
    Chairman Manzullo. You used the term spreading the risk. 
That is the definition of insurance, is it not? You form a 
large pool where you have a lot of healthy people and then some 
sick people, and everybody contributes an equal amount. The 
purpose is to spread the risk so that when there is a need for 
insurance that the money that is pooled will be used for the 
people that obviously have the need.
    Mr. Fletcher. You are right, Mr. Chairman, and the more 
efficiently you can run the insurance product, the lower you 
can keep the premium, and the more attractive it is to healthy 
individuals. The higher the premiums go out, we find the 
healthy individuals drop out because it is a risk/benefit or 
cost/benefit analysis that, you know, each individual goes 
through when they are looking at purchasing insurance.
    Chairman Manzullo. One of the arguments that is used 
against AHPs is the fact that it cherry picks, that you can 
form groups only of healthy people. I mean, how can the 
National Restaurant Association have more healthy people than 
the NFIB or any other trade association? I do not know how we 
come up with that standard.
    But, Dr. Fletcher, is essentially what you are trying to do 
is offer small business people the same type of insurance 
benefits that members of unions have, because unions have been 
out in front of this issue for 50 years by allowing the 
insurance to follow the individual, as opposed to the 
individual having to get his insurance through the employer?
    Mr. Fletcher. Mr. Chairman, absolutely. As a matter of 
fact, some of the union plans are some of the best plans and 
the best coverage across the country, so I laud them for the 
work that they have done. We just want to offer the same 
opportunity for small businesses to provide that sort of plan 
with that sort of efficiency.
    As we look at this, it really is an issue of leveling the 
playing field and making sure that everyone can provide the 
best health care benefits possible.
    Chairman Manzullo. I know years ago when my father, who was 
a union carpenter, transitioned from being a full-time 
carpenter into the full-time restaurant business he struggled 
to make sure he kept his union card and kept his union 
insurance benefits because even years ago it was much cheaper 
and there was much better coverage through his local than there 
would have been if he had been at purchasing insurance 
independently for the small restaurant business that he founded 
years ago.
    Mr. Fletcher. You are absolutely right. The provisions that 
I outline in the bill really prohibit cherry picking. An 
association has to have existed for three years. They have to 
be associated for a purpose other than offering health 
insurance.
    Chairman Manzullo. So you cannot form an organization just 
for the purpose of having an AHP?
    Mr. Fletcher. You are absolutely right. If you form a new 
association even for other purposes and have a below average 
risk--in other words, if you try to form an association that 
would include only healthy people--it is prohibited by the 
bill.
    Chairman Manzullo. So you cannot form an association and as 
a basis of the association you have to pass some kind of a 
medical examination?
    Mr. Fletcher. Absolutely.
    Chairman Manzullo. Okay. I have no further questions. How 
are you doing on time, Dr. Fletcher?
    Mr. Fletcher. I think, you know, I will be glad to take as 
much time as you need.
    Chairman Manzullo. Does anybody else have any questions of 
Dr. Fletcher?
    [No response.]
    Chairman Manzullo. If not, thank you for coming. I 
appreciate it very much.
    Mr. Fletcher. Mr. Chairman, Ranking Member and Members of 
the Committee, thank you for this privilege.
    Chairman Manzullo. Thank you.
    Before we go down the order, Congressman Tubbs Jones, you 
have a constituent you would like to introduce even though it 
may not be that person's time to testify right now.
    Mrs. Jones. Thank you, Mr. Chairman. Thank you, Mr. 
Chairman, and other Members of the Committee. It is my pleasure 
[TECHNICAL DIFFICULTIES]. His name is Mr. Raymond Arth of 
Phoenix Products, Inc. Mr. Arth's company manufactures faucets 
for manufactured housing and RVs. He came here today to discuss 
the health plan he participates in offered by GWI, a wholly 
owned subsidiary of the Growth Association.
    In Cleveland, the Growth Association is our chamber of 
commerce. It is probably one of the largest chambers of 
commerce in the country, and they operate a program. They have 
a small business organization called COSE, Council of Small 
Enterprises, that offers health care insurance to employees of 
that business.
    I thank you, Mr. Arth, for coming to our Committee this 
morning, and I am pleased to introduce you to my colleagues and 
Members of the Committee and people in the audience. Thanks 
very much, sir, for coming.
    Mr. Arth. Thank you very much.
    Chairman Manzullo. Okay. Ms. Velazquez, do you have an 
opening statement?
    Ms. Velazquez. Thank you, Mr. Chairman. I appreciate your 
initiative in calling this hearing on such an important 
subject.
    We have a health care crisis in this country. Today, 40 
million Americans, or one in seven, almost 15 percent, do not 
have health coverage. The number has dropped in the past couple 
of years. It is still unacceptably high, and I fear the slowing 
economy will swell the ranks of the uninsured again.
    The great majority of Americans get health coverage through 
their employer. There is a reason for this. Companies, 
especially large ones, can get the best deal to contain cost. 
It is not surprising then that only 42 percent of companies 
with fewer than 100 employees provide health coverage for their 
workers, while 95 percent of companies with more than 100 
employees provide health coverage.
    In fact, 60 percent of uninsured people, 24 million 
Americans, live in families where the head of the household 
works for a small business. Self-employed people account for 
ten million uninsured Americans, including two million 
children.
    Most small business owners would like to provide health 
coverage for their employees and their families, but they are 
restricted by cost. This is the main reason why health care 
coverage was named as one of the top 11 small business issues 
for this Congress in a report the Democrats released last 
month.
    These companies want to provide health coverage for their 
employees, but cannot. This is not a one size fits all 
proposition. No one solution would cover the entire diversity 
of small businesses. Nonetheless, we have two strong proposals 
that can help these companies help their workers.
    First, we can accelerate the 100 percent deductibility of 
health care premiums. We are now at 70 percent, with the full 
100 percent coming nearly two years later from now. There is no 
reason why we should not make that 100 percent available right 
now. I hope we can work together to put this powerful incentive 
into effect immediately.
    Another proposal is the association health plan which would 
allow small businesses and the self-employed to band together 
in industry specific groups and leverage their collective 
strength to provide better and more affordable health care 
options than they would alone. AHPs could level the playing 
field, putting small business purchasing and bargaining power 
on par with their corporate counterparts. It would be a hedge 
against precipitous price hikes that make it difficult for 
small businesses to continue offering health benefits when they 
have them.
    A.H.P.s and 100 percent deductibility are just two very 
good possibilities. Still, there are other options to learn 
about. That is the purpose of this hearing.
    But I think we should keep one ultimate goal in mind while 
we listen to our witnesses and various new policy proposals. 
Our goal must be to continue expanding the number of American 
working families with health care coverage. It is the right 
thing to do, for our country and our future.
    Thank you very much.
    [Ms. Velazquez's statement may be found in the appendix.]
    Chairman Manzullo. Thank you.
    Let us move on to our first witness, which is Elaine P. 
Smith, president of E. Smith & Associates of Granite City, 
Illinois.
    Where is Granite City?
    Ms. Smith. Southern Illinois.
    Chairman Manzullo. Is that between your district and mine? 
Okay. Well, you are at the bottom of the state, and I am at the 
top of the state, so she has to be in between. Right.
    We look forward to your testimony. We have a five minute 
clock.
    Ms. Smith. Okay.
    Chairman Manzullo. Green is okay. When it gets to yellow, 
that means you have a minute. When it gets to red, then we need 
you to conclude.
    We look forward to your testimony.

 STATEMENT OF ELAINE P. SMITH, PRESIDENT, E. SMITH & ASSOCIATES

    Ms. Smith. Good morning, Mr. Chairman and Members of the 
Committee. Thank you for inviting me here from Illinois to talk 
about important issues of affordable, accessible health 
insurance, especially for those of us who own or work for small 
businesses. I am pleased to be here on behalf of the National 
Federation of Independent Business representing 600,000 members 
who face a similar challenge.
    My name is Elaine Smith, and I own E. Smith & Associates, 
which is a promotional marketing and fulfillment company based 
in Granite City, Illinois, just across the river, the 
Mississippi River, from downtown St. Louis.
    At E. Smith & Associates, my employees and I work together 
to develop, market and sell point of sale displays, corporate 
merchandise and other related advertising support materials for 
companies such as Anheuser-Busch, Ralston-Purina, Energizer 
Battery, Snapple and Motorola, to name a few. For Ralston-
Purina, my company has fulfilled over four million How to Raise 
a Healthy Puppy and Kitten kits that are marketed to 
veterinarians and veterinary schools.
    E. Smith & Associates was born out of an opportunity to 
become an outside vendor for various Anheuser-Busch projects. 
At the time I was employed by Anheuser-Busch, but in 1986 I 
left the corporate world to work out of my basement with just 
one employee. Since then, E. Smith has grown to 12 full-time 
employees and approximately 80 temporary workers that occupy 
three warehouse facilities and over 100,000 square feet. My 
employees range in skill level from high school graduates to 
college graduates and in age from teens to mid-fifties and earn 
an average salary of $25,000 to $35,000.
    Like many entrepreneurs, I learned early that I could not 
compete with the large corporations in the area of extensive 
benefit packages. Instead, when hiring employees I offered 
perks that big companies could not--flexible and individualized 
schedules, the chance to move up the skill ladder quickly and 
so on.
    For many years I did not offer health insurance as a 
benefit. In fact, having come out of the corporate world, I 
truly had not given much thought to health insurance at all. It 
was a standard in the work arena from which I had come, and I 
had never stopped to think about who was paying for the benefit 
and how much it really cost. However, in recent years two 
experiences forced me to stop and think about health insurance 
and what role an employer should play.
    First, I began to realize that my small business attitude 
and start up perks were not enough to attract and retain 
talented, highly educated workers. At E. Smith, I run a formal 
college internship program providing marketing experience to 
students from Ball State University, Southern Illinois 
University and all the local junior colleges. Ideally, I like 
to hire these interns after they graduate. However, former 
interns began to turn my employment offers down because of the 
lure of benefit packages offered by larger corporations. I 
quickly realized I needed to increase the types of benefits I 
offered, namely health insurance.
    The second experience was more personal than business. A 
good employee who had been with me for quite some time 
experienced a series of common ailments--sinus, sore throats, 
cough, flu. She just could not seem to get well.
    Chairman Manzullo. Elaine, excuse me. If you could get 
right into the meat of the plan that you offer?
    Ms. Smith. Yes.
    Chairman Manzullo. The same with the other witnesses. You 
have a great background, but I do not want you to run out of 
time.
    Ms. Smith. You got it.
    Chairman Manzullo. Okay.
    Ms. Smith. Last year, I decided to provide employer 
sponsored health coverage. I knew I wanted to provide a quality 
plan--medical, dental and vision--with a great network of 
doctors, and I knew I needed to set parameters in order to 
afford it. I set an eligibility requirement of one year and a 
50/50 employer/employee contribution rate.
    In searching for a plan to meet these objectives, I was 
quite surprised to learn how difficult it was to find an 
affordable plan. However, I proceeded and began offering the 
benefit to our employees, to four of them. Eight others were 
covered by spouses or parents. Employees paid $125 a month, 
with employees with dependents covered paying an average of 
$250 a month. My idea was to manage the first year's benefit 
while developing plans to extend the benefit the following year 
so that as the employees' seniority increased so would the 
premium contribution paid by our company.
    Everything seemed to be going smoothly. We budgeted 
accordingly so more employees could be added to our plan at our 
annual renewal. Therefore, I was completely flabbergasted when 
I received my first annual policy renewal statement with a 
whopping 26 percent increase for apparently no particular 
reason. Naturally I contacted my insurance representative to 
inquire about the big jump in cost. I was told quite simply 
that double digit increases were not atypical for small 
business owners and, in his words, were just the nature of the 
health care market.
    My first reaction was to replace the current plan with 
something more affordable. However, after preliminary research 
I realized that in order to keep the quality of my plan my 
choices were very limited. Knowing that providing health 
insurance is necessary for both business and personal reasons 
and knowing that I cannot increase prices to my customers an 
extra 26 percent in order to absorb the cost, I reluctantly 
renewed the policy.
    Ironically, a few months before receiving the health 
insurance premium increase I had taken another big step 
offering long-term and other insurances. All employees signed 
up to participate, and it reaffirmed my belief that insurance 
benefits are important. Therefore, I want to do my best to 
continue offering benefits, but if I face a 26 percent increase 
every year it will become more and more difficult or 
impossible.
    A recent bipartisan poll asked 1,000 Americans what worries 
them most about the economy. The top response overwhelmingly 
was the rising health care cost, with one in three people 
listing it as their top concern.
    Those in the small business community who are insured are 
struggling each year to afford the cost of increasing premiums. 
It is for this reason I support legislation endorsed by the 
NFIB that would create association health plans. AHPs will 
allow small business owners like myself to band together across 
state lines to purchase health insurance as part of a large 
group, thus insuring greater bargaining power, lower 
administrative cost and freedom from costly state insurance 
mandates.
    Chairman Manzullo. I am going to have to put a period right 
there on your testimony.
    Ms. Smith. Okay.
    Chairman Manzullo. Perhaps during the questioning we can 
get out the rest of it.
    [Ms. Smith's statement may be found in the appendix.]
    Chairman Manzullo. Let me just mention to the rest. Please 
try to abide by the clock. Go right to the meat of your 
testimony, the stuff you really want us to hear.
    If there is other stuff that you do not consider to be as 
important, throw that in at the end because we have a lot of 
Members with a lot of questions.
    Elaine, thank you for participating.
    Let me introduce to you Scott Shalek, who is my 
constituent. Scott, do you want to wave back there?
    Scott is from McHenry County. He has been involved in the 
sale of insurance products for years. He was in town for a 
meeting with the trade association. I asked him to stay over so 
that he could listen to the testimony and give me some input 
later on.
    Our next witness is Raymond Arth. Mr. Arth is the president 
of Phoenix Products in Avon Lake, Ohio. Mr. Arth?

  STATEMENT OF RAYMOND ARTH, PRESIDENT, PHOENIX PRODUCTS, INC.

    Mr. Arth. Good morning, Mr. Chairman, Members of the 
Committee.
    Chairman Manzullo. If you could put the mike in front of 
you? Thank you.
    Mr. Arth. Yes. Thank you. Good morning, and thank you for 
the opportunity to be here today.
    Adding to the Members' kind introduction, I would like to 
tell you that COSE runs a health plan for small businesses in 
greater Cleveland with 14,000 companies, 87,000 subscribers and 
nearly 200,000 covered lives. We also run chamber programs 
elsewhere in the State of Ohio.
    I am also here today on behalf of National Small Business 
United, the country's oldest small business advocacy 
organization headquartered here in Washington. Health insurance 
has been one of our primary concerns for years.
    After a period of relative stability, we are seeing costs 
escalating again. In our renewal last year, our most popular 
health care plan went up by 24 percent. Most of my employees 
elected to switch to another plan option, but we still were 
facing a 12 percent increase in premiums last year, and we 
expect much higher increases this year.
    We believe there are some fundamental problems that need to 
be addressed, and probably chief among them is the fact that 
our health care delivery system runs on other people's money. 
If you are covered under Medicare or Medicaid, it is taxpayer 
funded. If you have private insurance, it is probably under an 
employer sponsored plan with your employer paying most or all 
of the cost. None of us spend other people's money as prudently 
as we spend our own.
    We have a problem with cost shifting; that Medicare and 
Medicaid do not really pay all the costs for the services that 
are delivered. Those costs do not just disappear. They get 
shifted to the insured segment. Unfortunately, most of the 
burden will fall on small businesses that need to buy private 
insurance. Large self-insured groups do have the clout to avoid 
much of that burden.
    We also have issues with state mandates that affect small 
business in particular. You have heard before about the ERISA 
preemption. We will not bother to revisit that.
    If those are the problems, the question becomes what are 
some of the solutions we can deal with? COSE and NSBU, I 
believe, both were proponents of the MSA program when it was 
first discussed and enacted some years ago. The problem is it 
was not done correctly. We put caps on the number of plans that 
could be sold totally. We capped participation to companies 
fewer than 50 employees. My company with 60 employees is not 
eligible to offer an MSA.
    With those caps, it was not attractive to insurance 
companies or banks to develop the products because there was no 
assurance there would be a big enough market to earn a return. 
The fact that I cannot offer it excludes a number of companies 
and insurers from the program.
    The laws regulating HMOs prohibit the kind of cost shifting 
or cost sharing rather that would be required under an MSA 
program. About 40 percent of the people in this country are 
covered under an HMO program and hence would be ineligible to 
participate in an MSA. That would need attention here.
    The rules are very complex. It is hard to develop and 
manage a plan. I may have to rely on my glasses here. Excuse 
me. There are also issues that the employer and the employee 
cannot make contributions into the savings components. If the 
employer makes a contribution, the employee may not.
    We do have the Section 125 cafeteria plan also as a tool 
with respect to health care, but it is really only available to 
C corporations. If you are an LLC, a partnership, a sole 
proprietor, you cannot contribute to a Section 125 plan.
    The Section 125 plan, with its use it or lose it provision, 
discourages some people from participating in the beginning and 
also encourages a lot of discretionary but perhaps unnecessary 
year-end spending to buy a new pair of glasses or other health 
services that would not otherwise be purchased rather than lose 
the dollar savings. Try to make a doctor's appointment in the 
month of December.
    Another issue we need to address is the whole issue of tort 
reform. The cost of lawsuits is driving up the cost of health 
insurance. There is defensive medicine. There is the basic cost 
of malpractice insurance and so forth. We are very much in 
favor of holding providers responsible for incompetence or 
malpractice. We are very concerned about the provisions in the 
Patients' Bill of Rights especially as it relates to employer 
liability.
    The Patients' Bill of Rights is expected to add 4.2 
percent, which would translate into almost a million additional 
uninsured. If you add liability, quite frankly, I am not going 
to expose myself or my company to yet another range of reasons 
for my employees to sue me, and I would feel no choice but to 
get out of the health insurance business altogether. I would 
urge, in your considerations with respect to the Patients' Bill 
of Rights, that you be very sensitive to that potential 
problem.
    At that point I guess I would be willing to wrap up my 
comments and yield back the balance of my time to keep things 
moving.
    [Mr. Arth's statement may be found in the appendix.]
    Chairman Manzullo. You know the term of art, do you not? 
Yield back the balance of your time. I appreciate that. Thank 
you.
    Our next witness is Robert Hughes. He is the president of 
the National Association for the Self-Employed. I look forward 
to your testimony.

STATEMENT OF ROBERT HUGHES, PRESIDENT, NATIONAL ASSOCIATION FOR 
                       THE SELF-EMPLOYED

    Mr. Hughes. Thank you, Mr. Chairman and Members of the 
Small Business Committee. I would like to thank you for this 
opportunity.
    Chairman Manzullo. Mr. Hughes, could you move the mike a 
little bit closer to your mouth? Thank you.
    Mr. Hughes. I would like to thank you for the opportunity 
to testify before you today to discuss small business health 
care issues. I am Robert Hughes, a self-employed CPA. I am also 
currently president of the National Association for the Self-
Employed, a bipartisan, non-profit small business trade 
association that has over 200,000 members nationwide. Ninety 
percent of our membership consists of small businesses with 
five or fewer employees.
    There are approximately 24 million small businesses in our 
nation. They account for 99 percent of America's employers and 
employ 53 percent of the private work force. Of the 43 million 
uninsured, approximately 24 million have family head that is 
self-employed or working in a firm with fewer than 100 
employees.
    According to the General Accounting Office's October, 2001, 
report on private health insurance, only 36 percent of 
employers with fewer than ten workers offered health coverage 
to their employees. The report cited the primary reason small 
employers gave for not offering coverage was cost.
    These statistics are telling us that Congress and the 
Administration must focus on affordable health care in order to 
effectively reduce the number of uninsured in our nation. We 
strongly believe that association health plans and health care 
tax incentives, including tax deductions and tax credits for 
the self-employed, are necessary to provide affordable health 
coverage.
    There are approximately 135,000 associations in existence 
today within the United States, and nearly every industry, 
profession, cause and interest is represented. Many 
associations also offer tangible value to their members through 
member benefits because of their group purchasing power and 
economies of scale.
    Associations can also tailor benefits specifically to their 
membership's needs. Small businesses with five employees or 
under have very different needs from small businesses with 25, 
100 or 250 employees. The self-employed and small business 
community should be able to pool their purchasing power in the 
acquisition of affordable health coverage, and association 
health plans, we believe, are a mechanism to do that.
    On average, a worker in a firm with less than ten employees 
pays 18 percent more for health care than a worker in a firm 
with 200 or more employees. AHPs, we believe, can reduce health 
care costs by 15 to 30 percent by allowing small businesses to 
join together to obtain the same economies of scale, purchasing 
clout and administrative efficiencies now available to 
employees in large employer and union health plans.
    New coverage options for the self-employed and small 
business workers will promote greater competition and choice in 
health insurance markets. Tough new solvency standards protect 
patients' rights and insure benefits are paid.
    Employee enticement and retention within the small business 
community are also a direct positive effect of association 
health plans. We believe AHPs would enhance the ability of the 
self-employed to obtain affordable health insurance coverage.
    Tax credits and deductions are also a viable solution to 
achieve affordable health insurance. Existing inequities within 
the Internal Revenue Code should be addressed first to create 
parody between employer provided health insurance and health 
insurance for the self-employed with regard to social security 
and Medicare taxes.
    Currently, premiums for employers and employees are not 
subject to FICA withholding tax, which is social security and 
Medicare. Thus, they enjoy health insurance premiums free from 
income tax and FICA tax.
    However, health insurance premiums for the self-employed 
individuals are subject to self-employment tax for themselves 
and their dependents. The result is that the self-employed pay 
a premium on health insurance of up to 15.3 percent of the cost 
of that insurance. Combined with other non-deductible premiums, 
the self-employed pay an additional 25 percent for their health 
insurance.
    By allowing the self-employed to claim their health care 
premiums as a business expense, the net cost of health 
insurance premiums will be reduced by up to 25 percent, which 
is a significant reduction in purchasing health insurance.
    We believe further that a tax incentive, such as a 
refundable tax credit, should be made available for those who 
purchase health insurance coverage for up to $500 for 
individuals and $1,000 for families. A refundable tax credit 
should be made available to those individuals whose employer 
does not sponsor or contribute to an individual or family 
health plan for their employees and the unemployed. Self-
employed individuals would have the opportunity to utilize 
either the self-employed health insurance deduction or the 
refundable tax credit, but not both.
    We talk about numbers and statistics and plans here, but we 
want you to know that all of these items have individuals and 
faces to them throughout the country. We received a call this 
week from one of our members who indicated that his monthly 
premiums are going from $522 a month to $945 a month for his 
coverage. These double digit increases are going to be stifling 
for the self-employed and we believe will hurt the overall 
economy and the self-employed business nationwide.
    Thank you, Mr. Chairman.
    [Mr. Hughes' statement may be found in the appendix.]
    Chairman Manzullo. Thank you, Mr. Hughes.
    Our next witness is Rick Curtis, president of the Institute 
for Health Policy Solutions here in Washington. I look forward 
to your testimony, Mr. Curtis.

   STATEMENT OF RICK CURTIS, PRESIDENT, INSTITUTE FOR HEALTH 
                        POLICY SOLUTIONS

    Mr. Curtis. Thank you, Mr. Chairman. Just by background, we 
are a not-for-profit, independent institute. We largely focus 
on the working uninsured.
    Chairman Manzullo. Would you push that mike a little bit 
closer?
    Mr. Curtis. Okay. I am sorry. We work with private 
businesses. We work with consumer groups. We work with the 
government on approaches to coordinate with private employer 
coverage, and we have also worked on the development of what we 
call consumer choice purchasing groups in the private sector.
    There are several of them that are thriving out there. 
There is one in Connecticut, the Connecticut Business and 
Industry Association. There is one in California under the 
umbrella of the Pacific Business Group on Health. There is one 
in Colorado some of you are aware of. There is a new one in New 
York City.
    The interesting thing to note is that in the face of 
premium increases and the downturn in the economy you are all 
painfully aware of, their enrollment is going up substantially 
right now, which I think points to the obvious advantages of 
worker choice of competing health plans, which these kinds of 
organizations are structured to achieve.
    I would note we do not take positions on things. We are not 
a trade association. I would note that most of these kinds of 
organizations are not a professional or trade association that 
would qualify as a bona fide association under the bill. They 
tend to be under the auspices of business groups on health that 
were formed by big employers to address quality issues and so 
forth, and then they have developed a purchasing pool. For 
small employers, organizations like COSE, of course, and like 
the Connecticut Business and Industry Association would 
qualify.
    What I want to focus on, though, is this issue of the 
uninsured. In good times or bad, as you all know, a very large 
proportion of working uninsured are concentrated in small 
firms. While that is true, it is also important to note that 
there are more workers covered through their small firm than 
there are uninsured, and indeed there are more of them covered 
as a dependent through a spouse's employer than there are 
covered through individual coverage, so it makes sense as 
Congress thinks about the various proposals to extend coverage 
to the uninsured to do things that complements rather than 
replaces coverage through small firms.
    As you all are well aware, surveys show that working 
Americans prefer coverage through their place of employment. 
Nevertheless, there are lots that do not have a stable place of 
employment, who are not full-time, full-year workers, whose 
small firm may not be viable yet. For them, you need other 
approaches.
    The emerging details of the Administration's proposals here 
I think will give latitude for a lot of creative responses in 
both the private sector and the public sector, but our 
impression is there is this iron curtain in these proposals 
between the individual tax credit and the exemptions for 
employer based coverage, and we think that could be very 
unfortunate for an important sector of small employers, and 
those are the small employers who have a majority of low wage 
workers. Some of them do offer coverage, a minority, but 
depending on how you define it, somewhere between 20, 30, 40 
percent.
    For those kinds of employers, I think it is very clear that 
the tax credits are going to be worth a lot more than the 
existing exemptions, so the advantages of employment based 
coverage will be lost. As has been mentioned in previous 
testimony, those advantages include retention of workers, as 
well as the convenience for the workers of payroll deductions 
and so forth.
    While I am not privy to the details as they emerge, it 
looks as if there is this kind if iron curtain as there was in 
previous proposals, and we think there could be a fairly simple 
variation on the theme. There could be a sensible way to better 
reach the uninsured workers and dependents who do have this 
kind of employer who does want to somehow participate.
    That would simply be this. That kind of an employer, and it 
would be defined, you know, fairly simply. The federal 
government through FICA forms and so forth knows the wage 
profile of small employers, and you would simply say those with 
a majority, for example, or two-thirds or 40 percent, whatever 
you wanted, whose workers make less than--pick your number--
$20,000 a year would have an option of having their employees 
benefit from the tax credit instead of existing exemptions.
    If the employer was willing to contribute something, that 
would be exempt from FICA taxation, not individual withholding, 
and then that employer could participate in these various kinds 
of pools that the Administration is proposing be available for 
tax credit recipients, but through the workplace.
    We think that that kind of variation on the theme would be 
constructive for small employers and for the public purpose of 
reaching the working uninsured. You said to keep it brief. I 
will keep it brief.
    [Mr. Curtis' statement may be found in the appendix.]
    Chairman Manzullo. I appreciate that. Thank you for your 
testimony.
    Our next witness is Janet Trautwein, who is with the 
National Association of Health Underwriters. We look forward to 
your testimony.

 STATEMENT OF JANET TRAUTWEIN, NATIONAL ASSOCIATION OF HEALTH 
                          UNDERWRITERS

    Ms. Trautwein. Thank you. As we have heard earlier today, 
the current estimate on the number of uninsured in this country 
is approximately 40 million. Over half of the 40 million 
uninsured Americans are the working poor or near poor, and many 
of these people actually do have access already to health 
insurance through an employer plan. Unfortunately, although 
they have coverage available, many of them just cannot pay 
their share of the cost.
    I know we are focusing today on ways to provide new access 
to small employers, but in doing so we need to keep in mind 
that whether it is from a group health plan, an association 
plan, some type of pooled arrangement, that health insurance 
premium is still calculated based on claims paid out. That is 
where you get a premium.
    Many of the costly services that health insurance premiums 
are based on are not directly impacted by mandates, such as the 
cost of new technology, the cost of prescription drugs. Many of 
those are not affected at all by an exemption on mandates.
    One of the reasons health insurance premiums are so high, 
as we have heard reported today, is that low income employees, 
many of whom are actually in relatively good health, cannot 
afford to participate in the employer's plan. This leaves the 
sicker employees as the ones that are participating and, as we 
discussed earlier, fewer participants over which to spread the 
risk of the entire group.
    If we really want to lower the cost of health insurance, 
which is I think what we are talking about here today, 
regardless of what the insurance vehicle is we have to get 
greater participation in the plans that the employers offer. 
Even with financial contributions from employers, many low 
income people who must pay part of the cost of their plan still 
cannot afford their plan. Many of these employees work for 
small businesses.
    While increased deductibility of health plan premiums for 
the self-employed has helped and will certainly help more as 
deductibility is increased, it does not do anything for the 
bulk of the uninsured who are the working poor with no or very 
low tax liability.
    People with no tax liability do not 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 is available without the requirement that they 
itemize. Second, more important for the working poor, a 
deduction or 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 the premiums are due. They cannot wait a year to be 
reimbursed, so they forego insurance entirely. That is why they 
are uninsured.
    Fortunately, we think there is a solution to this problem 
and that it will address at least the participation problem of 
the uninsured, and that is a refundable, advanceable tax credit 
that would allow individuals to receive their tax credit 
dollars monthly when their premiums are due.
    We also think it would help small employers who currently 
cannot afford to provide a health plan for their employees to 
offer a plan to the workers with the knowledge that employees 
had tax credit dollars to help pay the cost. Now, some tax 
credit proposals do not allow individuals to use a tax credit 
to pay their share of employer premiums. We think a better 
solution is to have a flexible tax credit that can be used 
either to help employees pay their share of their employer's 
plan or to buy coverage in the individual market if their 
employer does not offer a plan.
    I would like to add one point of clarification here. There 
are a number of proposals out there that call for a tax credit 
to go to employers. There is nothing wrong with a tax credit to 
employers. We should do anything we can do incentivize 
employers to offer coverage.
    However, let us keep in mind again today the number of 
employers that do already offer plans. Some of their very 
biggest challenges are in getting their low income employees to 
participate. If we only give the credit to the employers, that 
does not help those employees who are uninsured to pay their 
share of the cost, and overall those health insurance premiums 
rates are not going to go down. We have to look at some sort of 
combination approach to make this work.
    In conclusion, we think a refundable health insurance tax 
credit represents a simple and realistic way to extend private 
health insurance coverage to uninsured individuals and families 
who are most in need of assistance. It is an important 
component of an overall program to increase health care access 
for small business owners, and we think it would provide a real 
solution to the problem of the uninsured by addressing 
affordability, the most basic component of access to health 
care. It is a private sector solution to a difficult public 
problem, and it gives people the tools to make their own 
decisions.
    We believe the most important patient protection is the 
ability to afford health insurance coverage and that real 
access to health care and choice cannot exist without the 
dollars to buy a health plan.
    I appreciate this opportunity, and it looks like I have 
some time left, so thank you.
    [Ms. Trautwein's statement may be found in the appendix.]
    Chairman Manzullo. Thank you for your testimony. All the 
written statements of the witnesses will be made part of the 
record.
    Our next witness is Mary Nell is it Lehnhard?
    Ms. Lehnhard. Lehnhard.
    Chairman Manzullo. Mary Nell Lehnhard, who is with us. She 
is senior vice-president for policy at Blue Cross/Blue Shield, 
and we look forward to your testimony.

  STATEMENT OF MARY NELL LEHNHARD, SENIOR VICE-PRESIDENT FOR 
                 POLICY, BLUE CROSS/BLUE SHIELD

    Ms. Lehnhard. Thank you, Mr. Chairman, Members of the 
Committee. Blue Cross and Blue Shield plans are committed to 
making small group coverage as stable and an affordable as 
possible. We offer coverage everywhere in the United States. We 
do no red lining. It is available to every small group.
    Blue Cross and Blue Shield plans bring two messages to you 
today. First, we believe the problem of the uninsured should be 
addressed primarily by targeting small employers. The 
statistics speak for themselves. Two-thirds of the workers in 
small firms, groups under ten, are uninsured. We think the best 
way to address this is tax credits for low income workers in 
small firms. Often the employees have access to coverage, but 
they just cannot afford to pay their share of the premium, 
which is typically 50 percent.
    Our second message is that exempting AHPs from state 
regulation will not meet the objectives of the proponents, but 
will result in very serious problems for small employers. 
Proponents argue primarily that AHPs are needed to create very 
large pools of small employees so you can negotiate with 
providers. States figured out that large pools were a good idea 
in the 1990s. Every state enacted a law, a pooling law, that 
said to every insurance company you put all of your small 
groups in one pool.
    For Blue Cross and Blue Shield in a small state, this means 
tens of thousands of employees in one pool. In large states it 
means hundreds of thousands of employees of small employers in 
one pool. This gives us maximum spreading of risk among major 
insurance companies in a state.
    States have also said we have to limit how much we charge a 
sick group compared to a healthy group. The states have said we 
want maximum spreading of risk, and by law we are going to 
limit how much you can vary your premiums based on how sick a 
group is. I emphasize states have maximized the architecture of 
pooling and cross subsidies.
    I would also note that the small employers get the same 
discount from providers that our large employers get. When we 
negotiate with a hospital in town, our small employers get that 
same rate as the largest company in town.
    In fact, what we are concerned about is that AHPs will 
raise the cost for our small employer pools by making it very 
attractive for healthier groups to leave the pools, whether it 
is us or another insurance company, and join an AHP where there 
are no mandated benefits, and they do not need those benefits. 
The people who need the benefits would stay with the state 
insured pools and make the costs go up for those sicker small 
groups.
    Proponents also argue that AHPs will reduce the number of 
uninsured, and I know the number the NFIB has put on is eight 
million. Only two independent studies have been done on this. 
CBO said they would reduce the number of uninsured by only 
about 300,000, but the premiums, because of the phenomena I 
just described, would go up for 80 percent of employers in the 
rest of the market. One reason their numbers are so high is 
because they used, for example, the entire Medicare population 
and made assumptions that they would join AHPs. We urge you to 
look at their assumptions.
    The Urban Institute said there would be no increase in the 
uninsured because of AHPs, and, in fact, the number of 
uninsured would go up by one percent because of again risk 
selection against state insured pools raising the risk for 
sicker groups.
    Not only would exempting AHPs from state regulation and 
oversight not achieve the objective. We think it will mean a 
return to the days of unregulated MEWAs, which were nothing but 
associations of employers exempt from state regulation and 
subject to regulation by the federal government. They were made 
subject to state regulation after very lengthy Senate hearings 
conducted by Senator Nunn citing how employer dollars were 
misused, misspent, sometimes fraudulently, sometimes because 
they did not have the expertise and they did not understand 
they were running an insurance company.
    I would note that insurance regulation of insurance 
companies is intense. They review financial information 
quarterly, daily. If there is a problem, they move in with us. 
They co-sign checks above $500. If there is a problem, they 
review all our benefit structures to protect consumers. They 
review every one of our marketing materials so consumers are 
not misled. You cannot market a policy with ten days of 
coverage as comprehensive coverage.
    They review our rates for small groups. They respond to 
consumer complaints and watch for signals that there might be a 
problem. For example, if providers are not paid the Insurance 
Commissioner gets complaints and knows somebody might be 
running out of money.
    Very importantly, and we can give you stories and evidence 
of this, they act very quickly to seize the assets of a company 
when they see the company going under because they are sitting 
in the company, so those assets cannot either go out of state 
or move offshore, and then there is no money left to pay 
providers, and the employers have to pay their employees' bills 
or the employees have to pay them.
    D.O.L. will not have the authority or the resources to do 
these kinds of things to protect employers. AHPs will simply 
file a certificate certified by an actuary that they hire to 
DOL, and they are in business. They self-report to DOL when 
they run into trouble.
    I would close by saying we have tried AHPs. Their economy 
was an association of employers. They did not work for 
consumers. It was a very public and heartbreaking series of 
hearings that the Senate went through, and we urge Congress not 
to reinvent them.
    [Ms. Lehnhard's statement may be found in the appendix.]
    Chairman Manzullo. Thank you.
    Our last witness is Duane Musser, technical consultant with 
the National Federation of Independent Businesses.
    If you could pass the mike down to Mr. Musser?
    Mr. Musser. Sir, I was not asked to give a statement. I was 
just asked to appear with the NFIB witness with respect to----
    Chairman Manzullo. For any technical questions?
    Mr. Musser. For technical questions. If you would like me 
to say something, I will, but----
    Chairman Manzullo. No. That would be fine. I appreciate 
that. I appreciate that you are here.
    I have a question here that I would like to ask Ms. 
Lehnhard. What is the solution? I had two ladies in the office 
yesterday. They both have Blue Cross/Blue Shield. One had 40 
employees. One had eight employees. Their increase in premiums 
ranged between 35 and 47 percent for one year.
    As they have been checking, they said the small employers 
are saying Blue Cross/Blue Shield is not interested in 
representing small employers. Tough question, but that is what 
they posed to me yesterday. They were from the National 
Association of Women Business Owners.
    Ms. Lehnhard. That is an excellent question. That is the 
heart of our business. We are local. That is our bread and 
butter. We are part of the community. That is our most 
important part of our business.
    The reason health care premiums are going up is because 
hospital costs are going up 16 percent in the last 12 months, 
drug costs are going up 18 percent in the last 12 months, 
Medicare is not paying its fair share, so you put that on top 
of the 16 percent.
    Chairman Manzullo. But how much of an increase do you give 
to the large corporations that have the larger plans with you?
    Ms. Lehnhard. You look at the large employers. They are 
saying the same thing. Hospital costs are going up 16 percent. 
They are having the same experience.
    Chairman Manzullo. No. I am talking about your premiums to 
the large corporations that have the big pools. They are not 
going up anywhere near 35 to 47 percent.
    Ms. Lehnhard. No. They are. I think if you look at the 
data, large employers are experiencing very large increases.
    Chairman Manzullo. But not to that extent. I mean, the data 
shows conclusively that small employers pay 18 percent more in 
premiums than the average, than large employers.
    Ms. Lehnhard. I think if you look at that data, it included 
broker fees for small employers, which run about eight percent. 
It also included royalty paid by small firms to insurance 
companies.
    These are assumptions for how AHPs would function, but they 
are costs that they assume that you have in a small group 
market that we do not have.
    Chairman Manzullo. So you are testifying that Blue Cross/
Blue Shield charges the same premiums to a small employer as it 
does to a large employer?
    Ms. Lehnhard. No. I am saying that we are facing in all 
segments of our market the fact that hospital costs are going 
up 16 percent.
    Chairman Manzullo. I understand that, but are you saying 
that the rate of increase in premiums is the same to the small 
employer as to the large employer?
    Ms. Lehnhard. No. It will not be the same because of 
problems in the turnover in the small group market, which AHPs 
would experience, the fact that individuals in the small group 
market tend to be sicker because often they are----
    Chairman Manzullo. Because their pool is smaller.
    Ms. Lehnhard. No. Our pools for small employers are huge. 
It is all of our small group enrollment is in one pool in every 
state.
    Chairman Manzullo. Yes, but they are not rated according to 
that one pool.
    Ms. Lehnhard. Yes, they are. That pool is used to develop 
their premium. It can be adjusted based on age, sex, and in 
some states they let you adjust for health status, but it has a 
corridor on it like 25 percent or more.
    Chairman Manzullo. Do you mean the amount of increase 
cannot exceed 25 percent?
    Ms. Lehnhard. The amount of difference between your sickest 
and your healthiest group.
    Chairman Manzullo. Does anybody disagree with this? I mean, 
the data I have seen, the people I have talked to, the 
corporations I have talked to, their rate of increase is a lot 
less than the small businesses. I mean, that is why we are 
having the hearing.
    Ms. Lehnhard. I am not saying the rate of increase is the 
same. I am saying that large employees are experiencing double 
digit increases, and they are very alarmed about it.
    Chairman Manzullo. Then if the rate of increase with the 
large employers is not the same as for the small employers, is 
the reason for that that the small employers do not have enough 
people in their pool----
    Ms. Lehnhard. No.
    Chairman Manzullo [continuing]. In order to spread the 
risk?
    Ms. Lehnhard. No. You could not----
    Chairman Manzullo. What is the reason then?
    Ms. Lehnhard. Again, you have the maximum number of people 
in the pools right now because the states have said we have 
seven insurance companies in our state. All right. Blue Cross 
used to have 25 pools. You have one pool now for small groups. 
Aetna, you have to have one pool for small groups. Every 
insurance company can only have one pool, and they have to 
spread the risk across that entire pool.
    Chairman Manzullo. My brother and his wife run a 
restaurant. They pay--just the two of them; their kids are 
grown--$700 a month in premiums with a $5,000 deductible. Are 
they automatically in some kind of a pool in Illinois, two 
people?
    Ms. Lehnhard. They are probably in the Illinois small group 
pool. Now, you can have association health plans that are rated 
separately in some states. I do not know what Illinois law is. 
Rick Curtis follows all of this stuff closely.
    Chairman Manzullo. Please, could you explain that? Thank 
you.
    Mr. Curtis. Well, that may be an overstatement, but there 
are a couple differences here I think worth noting. One is 
different states do have different rating rules. Illinois is 
one that allows very substantial latitude in how a small 
employer is rated. Health status of the employees of a given 
group can have a big effect on rating.
    Chairman Manzullo. So if you have a small group where 
somebody has an illness, then the price goes through the roof 
for those premiums?
    Mr. Curtis. Yes. There are rate of increase limits usually. 
Even in a state like Illinois, they are there even though there 
is latitude.
    Very often the example you gave before of a couple of women 
business owners who had 40 some percent, very often what is 
going on is they have a change in their employee composition. 
They get a new older employee or younger employee.
    Chairman Manzullo. No, they did not. What they did was they 
were told this by their insurance company, and the insurance 
company said well, it is because you have somebody here who is 
at risk. They said who is that risk? You know, what is going on 
here? They said well, we cannot tell you because of privacy 
issues.
    They sat down and had a meeting with the owner of the 
business and the employees and said look, the insurance company 
wants to raise your rates by 45 to 47 percent. That means that 
we may have to cut back on your wages in order to put money 
into it.
    They interviewed each of the people. Come to find out, it 
was one person in the group had a child with AHD. Is that what 
it is? The attention deficient disorder. ADD. Thank you. With 
ADD that saw a doctor once a year.
    Then they turned back to the insurance company and said 
well, we have talked to everybody. The one child sees a doctor 
once a year. The insurance agent said well, yes, that is the 
person that the insurance company says is at risk, and that is 
why your premiums are going up 47 percent.
    Ms. Lehnhard. Mr. Chairman, I would just note as an aside 
that----
    Chairman Manzullo. I am getting a letter from her, and I am 
going to send it to her insurance company. I want in writing 
exactly what happened there.
    Ms. Lehnhard. That may be able to happen, but I would just 
note that will still be able to happen under AHPs. There is 
nothing that says everybody in the AHP pays the same rate.
    Chairman Manzullo. I accept that the rate of increase would 
be less because the pool is bigger.
    Ms. Lehnhard. No. The pool would not necessarily--the 
chamber of commerce in a state would not have maybe a bigger 
pool than a Blue Cross and Blue Shield plan. They can still 
vary the rate between groups.
    Chairman Manzullo. Mr. Curtis.
    Mr. Curtis. Yes. I was just going to say the groups I was 
talking about that offer consumers a choice do not allow those 
kinds of variations. They only allow age rating, but they only 
operate in states with pretty tight rating rules because if 
they did that, just as if an AHP did that, in a state that 
allows the sort of thing you are talking about they would be 
creamed to death. In the case of these kinds of groups, they 
would not have any plans to participate. You know, there is a 
reality of what happens in the outside market.
    The other thing is the states that do have loose rating 
rules usually have a 15 percent rate of increase limit on how 
much a given employer's costs can go up in addition to what is 
called trend, and so if the trend is 15 percent and then you 
can add 15 percent on top of that and then you have an old 
worker come in or something, you are pretty soon up to 45 or 50 
percent.
    The state rating rules have a lot to do with what can 
happen to an individual small employer, but I would submit to 
you that an AHP that tries to be nicer than that would end up 
with their low cost members going elsewhere within a state that 
allows loose rating rules.
    We had in Illinois actually a business association that 
tried to put up a consumer choice purchasing group. They 
started in the Chicago area. It was the manufacturers 
association, a very important, very powerful, very large 
membership with a lot of resources group. You know, they tried 
to be better than the market on this very issue. They failed.
    Ms. Lehnhard. I think that is a fundamental point. What our 
CEOs have said is we cannot operate in a market that has two 
sets of rules. A very typical example might be a Blue Cross and 
Blue Shield plan might have a small group market pool, and they 
might be the insurance carrier for the chamber of commerce in 
that state, an insured product.
    If this passes, we would still be the insurance company for 
the chamber, but the chamber group would not have to cover 
substance abuse, ADHD, mental health, any of the state 
mandates. What would start to happen if they did not cover 
those mandates is people would jump back and forth when they 
needed the benefit because the HIPAA law says you can move 
without any waiting period.
    So you stay in the chamber coverage. If you need substance 
abuse or someone in your family does, you are not penalized 
because as soon as you need it you can jump back into the state 
insured pool.
    Our CEO said we cannot keep it affordable for the people 
who for whatever reason cannot get into the association or do 
not want to join the association because they need the mandated 
benefits. We cannot keep it affordable for them if we start 
splintering the pools these ways.
    Chairman Manzullo. I appreciate that. I am way over my 
time.
    Mrs. Velazquez? I am sorry I took too much time, but they 
were great answers.
    Ms. Velazquez. That is okay. Thank you.
    Chairman Manzullo. It is very complicated.
    Ms. Velazquez. Thank you, Mr. Chairman.
    Ms. Lehnhard, you make reference here to the 2000 CBO 
report throughout your testimony. Are you aware that when we 
conducted a hearing last February, February of 2000, 
theyrecognized that the report was fundamentally flawed, and is it not 
true that the CBO report did not specifically evaluate AHPs alone, but 
all types of group purchasing arrangements?
    Ms. Lehnhard. I actually testified at that hearing, and we 
followed up with CBO afterwards. What they said in the hearing 
did not affect their numbers. We have checked with them very 
closely. They are the same numbers.
    Ms. Velazquez. So they came here before our Committee and 
they said that they recognized that it was fundamentally 
flawed, and you say that it does not affect what they stated in 
the report?
    Ms. Lehnhard. It was a very confusing discussion in the 
hearing. I can follow up with you, but they are still saying 
that the numbers from AHPs for increased insurance is only 
about 300,000.
    Ms. Velazquez. Ms. Lehnhard, we have been meeting with a 
lot of doctors who are small businesses because doctors in 
private practice are small businesses. For years they have 
complained that many times their treatment decisions are 
determined by an administrative executive of an insurance 
company not to be medically necessary. As a result, an 
insurance company refuses to provide or pay for such services.
    Do you oppose putting the decision making authority back in 
the hands of doctors?
    Ms. Lehnhard. This is probably the most difficult 
question----
    Ms. Velazquez. I know.
    Ms. Lehnhard [continuing]. In health care. Our concern is I 
will give you an example in Medicare. I worked on the ways and 
means committee for eight years, and we constantly had issues 
like Medicare eligible would want B-12 shots.
    There are millions and millions of people who would like to 
have B-12 shots because they make you feel better. Medicare had 
to say the only time it is medically necessary is if you have 
pernicious anemia. Otherwise Medicare would be paying for all 
these B-12 shots.
    There has to be some tension in the health care system so 
that we do not pay for things that are not tested, are not 
clinically proven or certainly are clinically proven not to be 
necessary or people are not going to be able to afford 
coverage, but it is a very difficult issue.
    Ms. Velazquez. Are you in insurance clinically trained to 
make those determinations?
    Ms. Lehnhard. First of all, only physicians make those 
determinations, and we use guidelines. We work rigorously with 
the different medical specialties. We are very well known in 
our tech program for developing guidelines with medical 
specialty groups on what is now a range of such complicated 
medical procedures that physicians--it is very difficult for 
them to stay up on what the new technology is and whether it is 
effective for what conditions.
    Ms. Velazquez. Let me ask you a question about fairness. 
Doctors can be held liable under state law if the decision 
causes harm to the patient while the insurance company escapes 
liability. Why should doctors be liable for decisions clearly 
made by insurance companies?
    Ms. Lehnhard. You know, you can argue the debates of this 
all day, but I think the fundamental bottom line is our system 
is voluntary in the United States, and we depend on employers 
to offer coverage voluntarily.
    I can envision a board room if liability for employers 
passes, board rooms all over the country saying we cannot 
explain to our stockholders you being in the business of 
exposing the company to hundreds and tens of millions of 
dollars in liability. We are going to cash out employees and 
send them out on their own.
    You know, you can argue the merits, but the problem is we 
are based on employers stepping up to the plate and doing this 
voluntarily, and you just heard that it would be very 
difficult, particularly for small employers, to do this if they 
have the exposure of liability.
    Ms. Velazquez. This is going to be a long debate.
    Ms. Lehnhard. It is a long debate.
    Ms. Velazquez. Ms. Trautwein, in your testimony you say 
that the proposal could be administered through the employer. 
Will this increase additional administrative burdens on small 
business owners?
    Ms. Trautwein. No, I do not think so. There are actually 
two different ways that it could be done, just to give you some 
examples.
    There are some credits that are available already that are 
done in the way I am going to suggest first, and that is the 
employer advances the amount of the credit the employee is 
eligible for on his paycheck, and then when employers do that 
every time they have a payroll they have to make a tax deposit. 
From that tax deposit they simply subtract out the amount of 
any credits that they have advanced to eligible employees. It 
is not reinventing the wheel. They do this already.
    Second, in the economic stimulus bill that passed the House 
there was a provision for transfers and people receiving 
certificates through unemployment offices. That is an idea that 
could be modified so that if there were any sort of a cash flow 
situation what would happen is the employer, when remitting 
their premium, would remit their premium less any tax credit 
amounts and give the names and eligibility numbers directly to 
the insurance company, and the insurance company would be wired 
the money in a few days.
    Ms. Velazquez. Can you explain how affordable the health 
insurance for low income workers would be if the employer does 
not provide and does not make a contribution?
    Ms. Trautwein. Most states in terms of group plans 
require--in order for them to be categorized as group plans 
require some degree of employer contribution, so I think that 
that is dependent on--small business people generally cannot 
afford to make the level of contribution that some of the 
larger employers can.
    I know we are off the discussion of the underwriting pools 
and everything, but that partly has to do with why a group of 
10,000 people made up of small employers is different than a 
group of 10,000 people that work for one.
    I know that is not what you asked me now, but we are 
dependent on employer contributions. We have to have employers 
continue to do that, but it is just not enough for some of 
their low income people. That is why we need some help with 
that.
    Ms. Velazquez. Thank you, Mr. Chairman.
    Chairman Manzullo. Thank you. This is pretty confusing.
    I would like to go to Mr. DeMint, going out of order with 
Mr. Grucci.
    Mr. DeMint. Thank you.
    Chairman Manzullo. Mr. DeMint, please? Then, Mr. Grucci, we 
will come back to you.
    Mr. DeMint. Thank you, Mr. Chairman. You mentioned employer 
contribution, and I would like to follow up on that. I do 
apologize for being late.
    As soon as I ask my question, I am going to have to leave, 
but I would like to throw another idea in the mix because I 
think we will all agree that the more choices we give employers 
and employees to put money into this purchase of health 
insurance and purchase of health care the better off we are. I 
will address my question to is it Ms. Trautwein?
    Ms. Trautwein. Trautwein.
    Mr. DeMint. Ms. Trautwein, in your testimony you recognized 
that there are 40 million Americans that are uninsured. About 
25 million of those work for companies that just do not offer 
insurance.
    I like your idea, and I think others do, too, of the 
refundable tax credit idea to get the employee, the individual 
himself or herself, involved with paying for health care, 
paying for health insurance or even using that credit to offset 
the cost of an employer plan.
    There is another idea in the mix related to an employer 
contribution that I would just like to throw out, get your 
response to, and maybe you can discuss after I am gone, but the 
idea of allowing an employer to put money into a health 
expenditure account or a health 401(k) for the employee to 
purchase health insurance and health care.
    The employee could add to that with the idea of a 
refundable tax credit if they wanted to, but we want to 
encourage these employers that do not offer health insurance 
now to put money with the same tax treatment that they get if 
they did offer a benefit.
    As a small employer myself, I know that dealing with the 
administration of a plan and purchasing small group plans, the 
fact is that in my company of under 20 people the individuals 
could have bought better policies on e-health insurance for 
less money than I was paying for a group policy, and it would 
have been easier for me to give them money and let them own 
their own plan with some changes in the regulations so that 
those plans would not be considered group plans.
    What do you think of the idea of an employer having the 
option of contributing money to an employee's health 
expenditure account? Is that something you have considered?
    Ms. Trautwein. Yes. We have actually thought quite a bit 
about this, in fact.
    So what you are suggesting is they take funds from this 
account and purchase like a policy from an insurance broker or 
on e-health and wherever in the individual market?
    Mr. DeMint. Right. Use some of the money for a base health 
plan. They would have to do that at least in the bill that we 
are talking about. The rest of the money could accumulate, roll 
over, and they could buy their basic health care with it, as 
well as have a backup insurance policy.
    Ms. Trautwein. Okay. Let me characterize this very 
carefully because I do not want it to come across the wrong 
way.
    The individual market is a very important resource for very 
many people. A lot of people can get good coverage there, but 
everyone cannot buy there. The individual market is medically 
underwritten in most states. We have done extensive studies and 
research on this market across the country. Although you can go 
to e-health and pick out a policy, you still have to go through 
medical underwriting in most states. A lot of people do not 
make it through underwriting, and that is the honest truth.
    You do not necessarily have to have cancer to have a 
problem being underwritten on an individual policy. It can be 
as simple as having chronic allergies or controlled asthma, 
controlled high blood pressure, 20 pounds overweight. It does 
not have to be something terrible. That is my concern about 
just all of a sudden just dumping people out and that is the 
only place that they have to go because of that problem.
    So what happens? When they apply for those policies, one of 
three things happens. They either get a very large rate up--it 
can be like 50 percent or more; sometimes it is only 25 percent 
if it is something minor--or they can have a rider, and that is 
very frequent, where a certain condition can be ridered out.
    For example, let me tell you what a rider would be. This is 
important. Let us say that you had had a strained back. A rider 
might be a rider on anything that happens to your back. This is 
fairly common.
    The third thing is they could be turned down altogether. In 
many states, and fortunately we have 28 states that have high 
risk pools, those people would have somewhere to go at a 
controlled cost, but they may not be able to have exactly the 
same benefits that they would have had if somehow the employer 
would have offered a plan. That is our concern.
    Mr. DeMint. My hope is that ideas like association health 
plans will offer different products that individuals could also 
buy from too, but the thought is that the individual would 
still be better off in the open market than having no insurance 
at all from their employer again as an option.
    I would like to contact you with some of the research that 
you mentioned on the individual plan market.
    Ms. Trautwein. I would love to talk to you about that.
    Mr. DeMint. Thank you, Mr. Chairman.
    Chairman Manzullo. Would you talk about your bill?
    Mr. DeMint. This is a bill designed for employers who do 
not make a contribution to employee benefits--basically to 
allow them to make a contribution that could only be used for 
health insurance and health care. It is really focused on small 
employers, those 25 million individuals who work for companies 
that do not offer insurance, to try to stimulate the individual 
market to a degree, but not to replace group benefit plans 
offered by employers or not to conflict with association health 
plans.
    The thought again is we have a problem with the uninsured. 
If employers are willing to put some money into a plan or that 
the individual can own and accumulate, and it is just like a 
401(k) for health care, then this is just an additional option. 
The thought is we are not going to replace current benefit 
plans, but the fact is with the cost of insurance, the erratic 
changes in the cost of insurance, small employers have a very 
difficult time purchasing small group plans, keeping up with 
the expenses.
    As we look more and more to adding liability to that, they 
are going to dump off in droves. If they are spending $500 a 
month on a health plan for their employees, rather than get out 
of health insurance completely if they decide I would much 
rather see them put the money in a health expenditure account 
and allow them to at least try to buy on the open market, but 
then as we push for things like association health plans or 
other ideas that aggregate risk over a larger number than just 
an individual or an employer, we create another option.
    Mr. Chairman, that is the hope is that we can look at all 
segments of the market and try to encourage employers that do 
not offer a benefit plan to at least put money into an account.
    Chairman Manzullo. What I would like to do is have a lot of 
hearings at the full Committee level on this. What I would 
encourage you to do, Congressman DeMint, is to meet with one or 
more of the people here. There is an obvious desire to insure 
more people.
    Mr. DeMint. Exactly.
    Chairman Manzullo. Ms. Lehnhard, you know, does not like 
AHPs, but that is okay. She has given some very good reasons 
for that.
    Mr. DeMint. Right.
    Chairman Manzullo. She has also stated there is a desire to 
insure more people at rates they cannot afford.
    At the next hearing, I would be interested in knowing what 
Blue Cross/Blue Shield, which is the largest provider in this 
country, what their views would be on what may be an alternate 
plan to AHPs. We are looking for anything that would work here.
    Thank you for your time.
    Mr. Arth. Mr. Chairman, if I may?
    Chairman Manzullo. Sure.
    Mr. Arth. Congressman DeMint, your comments and Ms. 
Trautwein's response really go to the point we were trying to 
make earlier with respect to MSAs. Because MSAs are a group 
product, it addresses some of the access issues that Ms. 
Trautwein mentioned with respect to people who do not have 
perfect health.
    At the same time, it is a high deductible, lower premium 
plan which makes it much more affordable. It is based on the 
premise that the employer and employee, but currently not both, 
could make a tax advantaged contribution into a spending 
account dedicated for health insurance, and it is the reason 
that we really believe that is a solution that is on the table, 
but just has not been properly executed.
    Mr. DeMint. Right. Thank you.
    Chairman Manzullo. Thank you.
    Congressman Davis, my colleague from Illinois?
    Mr. Davis. Thank you very much, Mr. Chairman. Let me 
commend you for holding this very terse, insightful, thought 
provoking hearing.
    As a matter of fact, the more I listen the more convinced I 
am that the only way we are going to really get to the bottom 
of the problem is to ultimately have a national health plan. I 
suspect that there are lots of people who are in disagreement 
with that.
    The question, and anybody can respond, is for those 
individuals who have 20 employees or 25 employees with the 
employees earning $12 an hour or $10 an hour. Is there any way 
that you see either the employer or the employee being able to 
afford a health plan that can be put together that would give 
them adequate protection?
    I understand the complexities of the business. I understand 
the economics. I understand all of it. I still have not seen 
anything yet that provides for that group of individuals that I 
just laid out.
    Mr. Arth. Congressman Davis, my assemblers, which represent 
the majority of the employees in our company, currently I 
believe the ceiling rate is about $9 an hour, give or take a 
little bit. They have access to four different plan choices, 
employer sponsored.
    We pay, depending on the number of dependents, 75 to 95 
percent of the premium. Virtually every employee participates 
with the exception of those who have better coverage available 
through their spouse's employer.
    I think it is getting into the target area you were talking 
about. The participants in the COSE plan are smaller companies. 
The average plan size has 6.2 subscribers, and a lot of those 
companies are not particularly high wage companies. I mean, it 
can be done so I would not throw my hands up and say the only 
choice is to go to a national health plan.
    Mr. Davis. You pay part of the premium?
    Mr. Arth. Yes, sir. We pay the majority of it. Yes, sir.
    Mr. Curtis. Mr. Davis, as you clearly know, most employers 
like you just described cannot afford to pay 90 percent. Many 
of them cannot afford to pay 50 percent of existing rates. 
However, many of them can afford to contribute something. Our 
best guess is they could contribute maybe 25 percent of 
premiums.
    There need to be public subsidies, be it from a state CHIP 
program or from a tax credit that helps the individual out 
substantially. There are some small demos actually within the 
very limited foundation dollars available. There is one in San 
Diego run by the Sharpe Health Plan which is structured like 
that.
    The amount the individual contributes actually slides based 
on family income. There are others that are based on wage like 
one in Wayne County, so there are a couple models out there 
that very generally described fall into that category, and they 
seem to work quite well. They quickly fill up.
    There are several others. There may be one announced today 
announced by a governor in a New England northeastern state, a 
demonstration that would be bigger than the ones I have 
mentioned, but I think that kind of a structure does have 
substantial promise.
    All you have to do is look at the data. Employers under a 
size of ten who have a majority of workers making less than 
$6.50 an hour, which happens to use what a national survey uses 
as a threshold, only about 19 percent in 2000 offered coverage, 
and 81 percent by definition did not.
    That is better than it was a couple years before. Employers 
like you have described typically cannot afford traditional 
contribution requirements.
    Mr. Davis. Thank you.
    Mr. Musser. Congressman, on behalf of NFIB and the 
coalition of small business organizations that support the 
association health plan bill, we would urge you to take another 
look at that in the sense of achieving the goals that you are 
looking at.
    Going back, to give you an example, to the example that 
Chairman Manzullo put forward with a small business getting a 
45 percent increase in their health insurance premium, large 
businesses are not getting those types of increases. It is 
small businesses normally with less then ten or 20 employees 
that are getting hurt.
    What we are looking for is to work on a bipartisan basis to 
give small businesses the same types of tools that large 
companies and labor unions have used for many years. We have 
tried to work with all groups on this over the last few years.
    This has not been tried in the current form that the bill 
has been proposed, so we think it is the most effective way to 
go in the direction that you want to see where we have more 
access to health insurance for small businesses.
    Mr. Davis. Thank you very much.
    Chairman Manzullo. Are you going to be able to come back, 
Congresswoman Tubbs?
    Mrs. Jones. No, I am not. I was hoping I could have a 
chance, at least two or three minutes, from Mr. Grucci.
    Chairman Manzullo. Could you guys work together so we can 
still go down and vote and finish up?
    Mrs. Jones. Yes. We will be short.
    Chairman Manzullo. Go ahead. Both of you ask questions in 
whatever order you want. Felix, you would be next, but you were 
here way at the beginning, so however you want to do it.
    Mr. Grucci. With deference to the senior Member, I will----
    Mrs. Jones. Oh, I love to hear that. It has taken me a long 
time to be more senior than somebody on this Committee.
    Chairman Manzullo. With only a year on the job, you have to 
be more senior now.
    Mrs. Jones. Thanks, Mr. Grucci. I will be brief.
    What I would like to do is give Mr. Arth an opportunity to 
make any other commentary since he came all the way here from 
the City of Cleveland with regard to the COSE proposal.
    Let me ask you, and then you can talk about whatever else 
you would like to. I will restrict comments to three minutes. 
That way it will give you a chance.
    Can you assess your increased costs or your annual 
increased costs for the plan that you provide for your 
employees, sir?
    Mr. Arth. Do you mean for this coming year, ma'am?
    Mrs. Jones. Yes. Generally, what is the average increase?
    Mr. Arth. Well, actually during the 1990s we had a 
relatively stable period. We had a couple years with increases 
as low as two percent or thereabouts. Last year, as I say, we 
ended up settling at 12 percent through plan changes.
    Those options are gone this year, and we are expecting a 
very sizeable increase. I would guess 20 percent or higher. It 
is going to be a real challenge for me in terms of how much of 
that can the company pick up, and we are obviously going to 
have to look at additional cost sharing with our employees on 
that.
    Mrs. Jones. Make a suggestion before a panel of Congress 
with regard to small businesses as to what we could do to help 
you bear that 20 percent increase.
    Mr. Arth. Our group has access to all the data regarding 
utilization. We know where all the dollars are going. If we 
want to get control on health care costs, we have to control 
utilization--hospitals, drugs and so forth.
    As I said earlier, and I will not beat this to death, one 
of the problems is other people's money. That is part of the 
reason we pushed the MSAs because it gets the consumer of 
health care more involved with paying for what they are 
getting. We think there will be better choices. I will not beat 
that further at this point.
    Chairman Manzullo. Mr. Grucci.
    Mr. Grucci. Thank you, Mr. Chairman. I do have an opening 
statement, and I will ask if I could submit it and it be made 
part of the record.
    Chairman Manzullo. It will be made part of the record.
    Mr. Grucci. Ms. Lehnhard, the question that I have I will 
get right to. In New York state we have over three million 
people who are uninsured. We have health care providers that 
are evacuating out of counties because of some of the things 
that you mentioned earlier--reimbursement rates, et cetera. 
Blue Cross was not one of them.
    As a result of the increase in customer base that it got, 
it also raised rates considerably. I was questioning why with 
the increase in new enrollees coming from other health care 
plans would there be a need to raise rates in some instances as 
much as 40 percent?
    If you do not believe that the health care plans and the 
medical savings associations are the right way to go, seeing 
that what we currently have in place is costing itself out of 
the marketplace and out of the reach of small businesses and 
employees, what would your suggestion be to fix the problem?
    Ms. Lehnhard. Let me address the increase in cost first. 
Now, I mentioned this 16 percent increase in hospital costs, 
which is enormous. That is the bulk of our spending. What you 
have to do is not only catch up for those unanticipated 
increases; you have to collect money for the future to build up 
your reserves because your reserves are going down faster.
    Also, in a small group market even though you have a giant 
pool, if you have a big employer he is going to cover 
everybody. When you get to the small group market you are going 
to have employers that do not offer coverage unless their 
employees are really sick. When you get to the individual 
market, you have the worst case that people only buy insurance 
when they really need it.
    As you move down that continuum--large group, small group, 
individual--you have sicker and sicker people, so when health 
care costs go up you multiply the effect because you have more 
people using health care costs in a small group pool as 
compared to the large group pool.
    Chairman Manzullo. We are out of time. I know you did not 
finish your answer. I am very much interested in it. If you 
want to put that in writing and give it to us, we are very much 
interested in it.
    We have to run off to a vote. The Committee hearing is 
adjourned.
    [Whereupon, at 11:40 a.m. the Committee was adjourned.]

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