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

                      SMALL BUSINESS ACCESS TO HEALTH CARE
    =======================================================================

                                 FIELD HEARING

                                   before the

                          COMMITTEE ON SMALL BUSINESS
                            HOUSE OF REPRESENTATIVES

                          ONE HUNDRED SEVENTH CONGRESS

                                 SECOND SESSION
                                   __________

                          ROCKFORD, IL, APRIL 4, 2002
                                   __________

                               Serial No. 107-51
                                   __________

             Printed for the use of the Committee on Small Business

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    ________________________________________________________________________
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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
    TODD W. 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 April 4, 2002....................................     1

                                   WITNESSES

    Holoka, Mike, Attorney at Law, Rockford, Illinois................     5
    Kobler, Bill, OSF Medical Group, Rockford, Illinois..............     7
    Bartmann, Phillip, Owner & President, Radicom, Inc., McHenry,
      Illinois.......................................................     9
    Brauns, Ryan, Senior V.P. of Consulting, Rockford Consulting and
      Brokerage......................................................    10
    McCarty, Mick, Blue Cross/Blue Shield of Illinois................    13
    Levin, Ryan, V.P. of Product Development & Risk Management,
      Destiny Health Insurance.......................................    25
    Jensen, Amy, Director, Federal Public Policy, National Federation
      of Independent Businesses......................................    28
    Reljic, Boro, Vice President of Government Affairs, Illinois
      Manufacturers' Association.....................................    30
    Woodbury, Vondie, Director, Muskegon Community Health Project....    31
    Lund, Johanna, Chairwoman, Rockford Health Council...............    34

                                    APPENDIX

    Opening statements:
        Manzullo, Hon. Donald........................................    46
    Prepared statements:
        Holoka, Mike.................................................    47
        Kobler, Bill.................................................    48
        Bartmann, Phillip............................................    50
        Brauns, Ryan.................................................    56
        McCarty, Mick................................................    64
        Levin, Ryan..................................................    67
        Jensen, Amy..................................................    78
        Reljic, Boro.................................................    86
        Woodbury, Vondie.............................................    89
        Lund, Johanna................................................    92
    Additional Information:
        Submission by Joesph Hagenbruch, DMD.........................    96

             FIELD HEARING ON SMALL BUSINESS ACCESS TO HEALTH CARE

                                  ----------

                            THURSDAY, APRIL 4, 2002

                              House of Representatives,
                                   Committee on Small Business,
                                                        Washington, DC.
        The committee met, pursuant to call, at 10:00 a.m., at Rock
    Valley College, Technology Center, Room 117, 3301 N. Mulford
    Road, Rockford, Illinois, Donald A. Manzullo, presiding.
        Chairman Manzullo. I am going to call this Small Business
    Committee to order.
        As people find their way into the room here, let me just
    give the order of procedure on it. We do not have the lights
    here, but we would like you to limit your testimony to five
    minutes, and if you see me going like this, you have got about
    30 seconds, and if you go over too much, then you will hear
    that. [Laughter.]
        We are having two panels of witnesses. We have got four
    members of Congress here. I have got to be in Chicago later
    this afternoon. Everybody has to run, including the witnesses.
        We will be joined shortly by Congressman Kirk, who is on
    his way from the Northfield area.
        Exorbitant health care costs are one of the greatest
    expenses small businesses and the self-employed incur as they
    struggle to provide coverage for their employees. As Congress
    continues to examine our nation's health care problems, we need
    to remember that 60 percent of the estimated 43 million
    uninsured are small business owners, their employees and
    families.
        Small business owners are unable to absorb the spiraling
    health care costs and find themselves priced out of the health
    insurance market. Many owners are faced with the choice of
    staying in business or providing their employees with
    insurance.
        I personally know of a small business owner who pays over
    $700 a month for himself and his wife and has a $5,000
    deductible to insure both of them. Both of them are seriously
    considering selling their business, going to work in another
    business just for the opportunity to receive health care
    benefits.
        Our current health care system does not provide equal
    access to affordable, quality health insurance for small
    businesses. One of the reasons small businesses cannot afford
    health coverage for employees is that they are unable to
    achieve the economies of scale and purchasing power of larger
    corporations and unions.
        Small businesses suffer from unequal treatment. What they
    want most is a level playing field when it comes to the
    delivery of health care.
        Large corporations use their purchasing power of thousands
    of employees to offer affordable health insurance to their
    workers. Small business owners, on the other hand, have to find
    their insurance on an individual basis. It makes it extremely
    difficult and expensive to find affordable health coverage.
        I cannot help but wonder why insurance companies cannot
    offer affordable health care to small businesses. Why must
    insurance companies charge the most to those least able to pay
    these inflated prices?
        I am heartened to see President Bush issue a plan for
    helping small businesses prosper in our country. The President
    is aware of the health care access and affordability problems
    facing small businesses, and his plan includes concrete steps
    to increase health security for employees of small businesses.
        His agenda calls for an association of health plans to be
    available for associations that want to provide health coverage
    for their members, similar to what labor unions are doing. It
    calls for a permanent extension of medical savings accounts,
    including a significant reduction of the required deductible
    for these health accounts.
        Congress needs to insure that there are many different
    health insurance options for small business owners to utilize.
    We need to help our businesses attract and keep employees, and
    nothing helps more than the ability to provide health
    insurance.
        I look forward to the testimony of the witnesses here this
    morning, and I want to particularly thank those that have
    traveled long distances to be with us here today.
        I will then yield to Congressman Jerry Weller, who came up
    last night to be with us this morning. Congressman Weller, do
    you have any opening remarks?
        [Mr. Manzullo's statement may be found in appendix.]
        Mr. Weller. Well, thank you, Mr. Chairman. I have just
    brief remarks.
        First, I want to commend you for conducting this hearing on
    an issue of great importance. You know, 99.7 percent of all
    employers are what we classify as small business, and small
    business provides over one half the jobs provided for in
    America.
        So when you look at who has health insurance, who does not
    have health insurance, the vast majority of the 43 million
    Americans today who do not have health insurance are either the
    entrepreneurs themselves or the employees and their families of
    those who are involved or work for small business.
        So clearly health care is a major concern for small
    business. That's why I believe your hearing by your committee
    today is so important. I commend you for your leadership.
        But I also, Mr. Chairman, want to commend Chairman Manzullo
    for your leadership on efforts to expand medical savings
    accounts, efforts to give 100 percent deductibility for the
    self-employed for health insurance cost, to expand the
    opportunities for nursing home or long-term care insurance with
    full 100 percent deductibility for that, and also commend you
    for your leadership on establishing an association of health
    care plans, AHPs, as well as the refundable tax credit proposal
    we're currently debating in the Congress.
        You have been a leader on this effort, and I welcome the
    opportunity to be part of your hearing today.
        Chairman Manzullo. Thank you, Congressman Weller.
        Both Congressmen Weller and Ryan are members of the Ways
    and Means Committee, which is the committee that has
    jurisdiction over about 95 percent of health care issues.
    Members of the Commerce Committee might have said I misquoted
    on that, but the guys that write the checks are the ones that
    write the law. [Laughter.]
        I would now yield to Congressman Ryan from the State of
    Wisconsin.
        Mr. Ryan. Wisconsin.
        Chairman Manzullo. Did I say Mississippi?
        Mr. Ryan. It is a little hilly up there.
        First of all, Chairman Manzullo, I would like to thank you
    for inviting me to come down here. For those of you who do not
    know, my name is Paul Ryan. I represent the First Congressional
    District in Wisconsin, which is everything basically above
    here.
        I have Green County, Rock County, Walworth County, Kenosha
    County and Racine County. That is the area that borders much of
    the Illinois state line, and so this is only about a half hour
    drive from my home town of Janesville. So I really appreciate
    the invitation.
        Like most of us here, I believe that the current employer-
    based health care system has done a relatively good job of
    meeting the needs of workers and businesses alike. However,
    this system and workers' and businesses' budgets have
    experienced increasing strain due to the rising cost of health
    care coverage.
        And I cannot tell you how many times I have traveled
    throughout the First Congressional District in Wisconsin where
    I hear comments from small business owners and local government
    entities who say, ``We wish we could hire more people, but we
    cannot because the cost of health care is just too great.''
        So at a time when we are trying to get people back to work,
    now that we are presumably coming off of a recession, the cost
    of health insurance is becoming an even greater issue in terms
    of the issue of employment.
        In Southeastern Wisconsin, like in Illinois, we have seen
    our manufacturing base erode, leaving behind many unemployed
    workers, and what has been the godsend have been small
    businesses. The engine of economic growth in Wisconsin and, I
    think, much of Illinois and throughout the country has been
    small businesses, and that's why I've watched your work at the
    Small Business Committee.
        I simply want to add my comments to those of Congressman
    Weller in commending you, Chairman Manzullo, for really doing
    the yeoman's work in growing the advocacy of small businesses
    in Congress. You have really been very out front on small
    business issues, such as deductibility for health insurance,
    the 100 percent deductibility.
        You have really done a lot of great work in that area, but
    one thing that I just wanted to bring to your attention is that
    the federal government from my perspective can play two crucial
    roles in encouraging the establishment and growth of small
    businesses and ensuring that business owners are able to offer
    their new employees health care benefits.
        First, the federal government can make it easier for
    entrepreneurs to start new businesses in the first place--and
    that is the work of the Small Business Committee that you have
    championed--by lowering taxes and reducing the cost of
    regulation on businesses so that entrepreneurs have the
    resources and the capital they need to sell their ideas and
    products and build productive businesses.
        But the second way the federal government can actually help
    businesses is to lower the cost of health care so that
    employer-sponsored insurance is affordable and available.
        In the Ways and Means Committee, where Congressman Weller
    and I work, we have heard a lot of testimony, and we have a lot
    of hearings on this issue. One of the recent testimonies we
    have received that I thought was fairly interesting was from
    Dr. Stuart Butler, a Ph.D. economist from the Heritage
    Foundation who recently made some interesting, eye-opening
    observations.
        The first observation he made was about the high rate of
    uninsurance among employees of small businesses. The Kaiser
    Foundation estimates that only 55 percent of firms with ten or
    fewer employees offered health care insurance. This is compared
    to 99 percent of large businesses that offer insurance. He
    cited Congressional Budget Office data that found overhead
    costs of providing health insurance for businesses with fewer
    than ten employees can be over 30 percent of the premium cost,
    as opposed to just 12 percent for companies with more than 500
    employees.
        He also pointed out that while jobs these days seem to be
    transferable, health care is not transferable. This is because
    the tax code helps employers pay for insurance, but does little
    to help individuals who, for one reason or another, are forced
    to purchase their own insurance.
        Basically if you lose your job, you lose your health
    insurance. And that is essentially how it works today. So we
    often hear this in Wisconsin, as I am sure you do here in
    Illinois, and it is no wonder that, according to the National
    Federation of Independent Business, 23 percent of small
    business owners in Wisconsin have experienced a 26 to 50
    percent increase in their health care premiums in 2001 alone,
    26 to 50 percent increase in their health care premiums for
    small businesses in Wisconsin last year alone.
        So this is an issue that is in dire need of reform. I think
    you have identified some great productive ideas, like
    association health plans which help produce buying pools so
    small businesses can team together to get bulk purchasing rates
    through ERISA plans.
        I think we have a range of witnesses who probably have
    different perspectives on this issue, but also the President
    has really taken a leadership role in this. He came to Congress
    and presented a budget with a health care refundable tax credit
    for individuals to buy health insurance, to expand the
    Association Health Plans.
        And so now the time is right for action. Congress is
    engaged; your committee is engaged. And I think we have a
    President who is taking this issue very seriously. So I am very
    interested in hearing the witnesses today, and I appreciate you
    having us down here for this.
        Thank you.
        Chairman Manzullo. I appreciate your opening statement.
        The Small Business Committee is having a hearing in
    Washington next week that deals with the Health Care Finance
    Administration, HCFA. It is Chapter 4 of what we call HCFA
    horror days.
        HCFA is the organization that enters into agreements with
    over 50 medical providers and spends its time torturing medical
    providers, making absolutely incredible mistakes and actually
    driving up the cost of health care. We will be getting into
    that later on.
        I get excited about these issues, especially when we can
    look at a government agency that can streamline and make things
    a lot cheaper.
        Our first witness is Mike Holoka. Mike is an attorney in
    town, and we look forward to your testimony.

              STATEMENT OF MIKE HOLOKA, ESQ., ROCKFORD, IL

        Mr. Holoka. Thank you, Congressman Manzullo, Congressmen.
        My name is Mike Holoka. I am an attorney in Rockford, as
    Congressman Manzullo has already stated. I am married to a
    physician. I have a 12 year old daughter.
        We had a traditional medical plan for many, many years.
        Chairman Manzullo. Hang on just a second.
        Congressman Kirk, why don't you come up here? Did you have
    an opening statement?
        Mr. Kirk. I did not.
        Chairman Manzullo. Okay. Well, then why don't you have a
    seat, and, Mike, continue.
        Mr. Holoka. Sure.
        Chairman Manzullo. We will start the clock all over again.
        Why don't you just introduce yourself?
        Mr. Kirk. It is Mark Kirk from the 10th Congressional
    District of Illinois, representing the suburbs along Lake
    Michigan.
        Chairman Manzullo. Okay. Can you tell us what are your
    committees?
        Mr. Kirk. And we are on the Budget, Armed Services, and
    Transportation Committees.
        Chairman Manzullo. A busy guy. We just introduced our first
    witness, Mike Holoka.
        Mike, start all over again.
        Mr. Holoka. Okay.
        Chairman Manzullo. We know what your name is.
        Mr. Kirk. And I am working on traffic tie-up problems on I-
    90. [Laughter.]
        Chairman Manzullo. He is on the right committee, a
    transportation issue.
        Then what are you doing here, Congressman? [Laughter.]
        Mr. Holoka. That is a problem that will never be solved
    maybe, but good luck.
        I am Mike Holoka. I am an attorney here in Rockford. I am
    married to a physician. I have a 12 year old daughter.
        We had a traditional medical plan for many, many years with
    Guardian Insurance, and we ran the plan through my practice
    because I am a sole practitioner. I have one employee. It was a
    lot more effective to run it through my practice instead of my
    wife's.
        When we first started with the Guardian, we were probably
    at a premium of $4,000 to $5,000 a year. In about 1996, our
    premium had jumped up to somewhere near $8,200, and by the year
    2000, our premium was $21,000 a year for Guardian traditional
    insurance.
        Chairman Manzullo. For how many?
        Mr. Holoka. Just for the family, just for the family. No
    employees. Okay?
        And we had no claims. So there was no reason to see this
    kind of rise.
        Okay. Realizing that we could not afford to continue with
    this kind of a program, we started considering picking up a
    catastrophic insurance policy and self-insuring for like
    $25,000 or $50,000. The premium on that probably would have
    been somewhere in the area of $7,500 a year.
        And we could not understand why the insurance companies
    were continuing to raise premiums at the rate they were because
    I knew physicians were being paid less. So I could not figure
    out what the problem was, why this cost was increasing.
        But to solve our problem, one day my wife received a fax in
    her office, and it said something about an MSA. I had never
    heard of an MSA, medical savings account program. And I read
    over the plan, and I said this is impossible. This is too good
    to be true. They really cannot have this kind of program. It
    makes too much sense.
        And some of the main features of the plan were we could
    pick up a deductible between $3,100 and $4,800 a year, which
    included all of us, not an individual deductible, with the
    opportunity to save up to about 75 percent of our deductible in
    something called the medical savings account. So we were able
    to put that money away which would grow or be invested in
    basically a favored tax status, you know, deferred taxation on
    that account.
        So with the deductible we chose, $3,100, we could put about
    $2,300 a year into this account, and this, of course, could
    always be used for our deductible, pay our deductible or
    however we wanted to use it, or we did not have to use it at
    all. Okay?
        The best part of the plan though was that you did not have
    this large premium, this $21,000 and going up into space. Who
    knows where it was going to end?
        Our premium ended up being about $3,600 a year, and that
    was only because my wife was still on the maternity program. If
    we would not have had maternity, it probably would have gone
    down to almost half of that.
        So it was amazing to me that we heard so little about an
    MSA insurance program like this, particularly in view of this
    insurance crisis and the way it was affecting small business,
    you know, on top of the way it was affecting the country.
        So when I attended a small businessman's breakfast with
    Congressman Manzullo, I had the opportunity to explain how an
    MSA program worked to all of the people at that breakfast
    meeting, and to my amazement, it seemed that nobody had really
    heard about an MSA program, and going around the table, they
    were all like me and said, you know, ``What is this? I don't
    believe this exists. You know, how do we do this? How do we get
    this thing put together?'' And there were probably, I guess, 25
    businesses represented at that breakfast meeting.
        So it is my understanding there are any number of variables
    the way an MSA program works as far as the premium goes. You
    choose your deductible so that you can, in effect, choose how
    much of a premium you are going to pay.
        One quote I received last year was for a $4,500 deductible.
    It was less than the $2,500 premium for my family, and that
    included dental if we wanted it for less than $1,000 a year.
        It is not difficult to see how vital an MSA program is for
    small business when you consider the cost of what a traditional
    plan is.
        Chairman Manzullo. You are at five minutes, Mike.
        Mr. Holoka. Okay. Let me just wrap up real quickly then.
        So we are extremely pleased with this plan. We cannot
    believe all of the benefits we have. We are very happy with it.
    We think it should not only be extended to small business, but
    to everybody in the country.
        And one of the features of an MSA is you can also continue
    it past 65, which means you do not impact Medicare, and if you
    started, say, at age 20 saving a couple thousand dollars a year
    in an MSA account, you could have a couple hundred thousand
    dollars or better by the time you reached age 65, all of which
    would also help the government in terms of managing health care
    as well.
        Thank you.
        [Mr. Holoka's statement may be found in appendix.]
        Chairman Manzullo. Thank you, Mike.
        Mr. Holoka. You are welcome.
        Chairman Manzullo. Our next witness is Dr. Bill Kobler who
    is with the OSF Medical Group in Rockford.
        We look forward to your testimony, Dr. Kobler.

    STATEMENT OF BILL KOBLER, M.D., OSF MEDICAL GROUP, ROCKFORD, IL

        Dr. Kobler. Thank you, Chairman Manzullo and Congressmen.
        I am pleased to be here to be able to present a little bit
    of the medical perspective on the rising cost of health care,
    which is obviously a logical contributor among many other
    factors to the rising cost of health care insurance. I can't
    really talk about what the cost of health care insurance is for
    me, although I do remember when I was last self-employed, and
    that is nine years ago now, I was spending $500 a month for
    family coverage at that time, and I cannot imagine what itwould
    be now under different circumstances.
        The problem is obviously very complex, multi-faceted, but I
    hope I can at least give some insight into the problems we face
    as health care providers and perhaps give you some of the
    reasons why I think that health care costs are going up with
    this insight maybe there are some ideas as to what we can do to
    help control those costs.
        A recent article in the New York Times in January stated
    that the government reports that in 2000, national health
    spending shot up 6.9 percent to $1.3 trillion, the largest one
    year increase since 1993. And they said that hospital and drug
    costs were the main factors in the last increase.
        Growth in health care spending has outpaced the 6.5 percent
    growth of the economy as a whole. Health care accounts now for
    13.2 percent of the nation's total output, up from 13.1 percent
    in 1999 and 12 percent in 1990.
        As a physician, I could argue that that is not a high
    enough percentage, but I think I will leave that alone for the
    time being.
        What are some of the factors leading to these cost
    increases? An old problem that at least we as physicians, in
    deference to my associate sitting next to me, that is again
    rearing its ugly head in professional liability suites In the
    1970s there was a crisis for physicians when all of the major
    professional liability insurers in Illinois pulled out of the
    market. We have now seen that again happen in this state, with
    St. Paul no longer writing coverage, and I am not sure that is
    not even nationally, and CNA has pulled out of that market as
    well.
        Ken O'Bramowitz of the Carlysle Group states the rising
    cost of malpractice coverage is becoming the most important
    factors driving inflation for physician services. Many
    hospitals' insurers are not only increasing premiums, but are
    also reducing amounts of coverage and raising deductibles.
        A Chicago Hospital in 2000 paid the St. Paul Companies $1
    million for $40 million in coverage, with a deductible of $15
    million. In 2001, for that same policy, the premium was raised
    to $1.8 million and cut the coverage to $10 million and doubled
    the deductible. So they are almost paying more than what they
    are getting back.
        Insurers say that the increases are due to large awards by
    juries and large settlements. Some research suggests that the
    average jury award rose to almost $3.5 million in 1999, up from
    just under $2 million in 1993. And according to the Liability
    Monitor in Chicago, professional liability premiums are rising
    at an average annual rate of 30 percent.
        The costs of this are obviously one factor, but there is
    another factor. Because of the increased risk of liability and
    the cost of insurance, physicians are practicing medicine more
    defensively. That means we are doing more tests. We are doing
    more procedures and things that we see would limit our risks.
        Another item is the explosion in the availability of very
    good but very expensive prescription drugs. This is a serious
    problem for all recipients of health care.
        The proposal to provide these drugs under the Medicare
    program is a wonderful concept, but frightening when one pauses
    to consider the source of the funds for this population who
    consume a very large percentage of pharmaceuticals.
        Medicare, managed care and other private insurance plans
    have cut drug benefits in the last few years. They state that
    the average senior spends about $500 annually for medication,
    plus hundreds or even thousands more for private insurance
    policies to cover some of the cost of these prescriptions.
        I saw a patient just the other day who in the year 2000
    paid $7,000 for her medications.
        There are a number of other factors I would like to briefly
    list which also I feel are driving up health care costs. The
    people of this country have an insatiable appetite for health
    care services. They are bombarded with story after story of
    medical miracles, advertising of prescription pharmaceuticals,
    promises of unlimited access to health care made by the managed
    care companies. Yet there's very little incentive for them to
    utilize these services wisely.
        There's an overwhelming burden of government regulation
    which is choking the medical profession in its attempts to
    provide care. Many of you know the alphabet soup as well as I,
    but the provisions of COBRA, CLIA, HEQIA, EMTALA, HCFA, now
    affectionately known as CMS, are burying us in needless paper
    work and documentation.
        We attempt to follow the regulations at the risk of
    prosecution, fines, and imprisonment under a system so complex
    that it is impossible to meet all of its requirements. And now
    we will soon face the absolutely terror provoking HIPAA
    statutes within the next year.
        We are facing a serious shortage of well trained nurses.
    Medical school costs are becoming so large as to discourage our
    best and brightest from applying to medical school, knowing
    that they will face declining incomes and loss of respect for
    the time they spend and dedication they demonstrate in their
    career choice as physicians.
        As a doctor, my job is to investigate problems and try to
    solve them. It would be easy to become discouraged, but
    medicine is still the most rewarding of professions, one worthy
    of fighting for and defending. I am pleased to see this forum
    attempting to understand the problems of medicine and its
    availability to small businesses. After all, physician
    practices have traditionally been counted among the ranks of
    small business over the years.
        If we can work together keeping the patient as the center
    of our focus, I am confident we will find a solution to our
    problems.
        Thank you for listening to my testimony.
        [Mr. Kobler's statement may be found in appendix.]
        Chairman Manzullo. Thank you for your testimony, Dr.
    Kobler.
        Our next witness is Phil Bartmann. Phil is the owner and
    President of Radicom, Incorporated in McHenry, Illinois, coming
    over to see us this morning.
        Mr. Bartmann. Thank you for inviting me.
        Chairman Manzullo. We look forward to your testimony.

       STATEMENT OF PHILLIP BARTMANN, PRESIDENT, RADICOM, INC.,
                              McHENRY, IL

        Mr. Bartmann. Thank you very much for inviting me.
        As the Chairman said, I own Radicom, Incorporated in
    McHenry, Illinois, about 60 miles east of here. We have been in
    business since 1963.
        We presently do employ 28 employees in three locations, two
    in the McHenry area and one in Appleton, Wisconsin. We are in
    the telecommunications business. Our employees range in age
    from 20 to their mid-60s and earn wages from 15,000 to $60,000
    or more. Some of my employees have been with me for over 20
    years.
        We have always provided medical insurance for our
    employees, and the cost has always been covered by the company.
    We have a $250 deductible plan, and the company covers that
    deductible.
        We recently--as a matter of fact, March 1st was the
    anniversary date of our health insurance. Our monthly cost for
    the same number of people went from $8,000 a month to $15,000 a
    month. Our health care for the coming 12 months will be
    $171,000. In 1997, we were paying $36,500.
        The increase has been dramatic. Our per employee cost in
    1997 for an individual was $2,433. This year it will be $6,128.
        We are not contemplating asking our employees to help.
    Right now we charge them a token $10 a week so that those who
    may not need the insurance or are covered by their spouse will
    opt to not because you can see for a few dollars we can save a
    lot of dollars. And we have a few people, mostly spouses who do
    not take our insurance.
        I am the chairman of the board of the McHenry County
    Economic Development Corporation, and we get to share horror
    stories. One that I heard just the other day, one of our very
    active members, she owns a custom woodworking company called
    Phoenix Woodworking, Woodstock. She had nine employees at the
    beginning of the week and now she has ten. She called me
    yesterday.
        She has been getting six month increases. She just started
    providing insurance two years ago. She just received a 24
    percent increase in health costs and six months ago she got a
    19 percent increase.
        It is totally out of control. We are fighting with this.
    This came as such a shock, this dramatic increase. We are
    fighting with ways to try and solve it. It goes right to the
    bottom line. We are a very competitive business. We cannot ask
    our customers to absorb it all, although they are the only ones
    to do it, them or the employees.
        We are fighting very hard to see that we can protect both
    contingencies, that both will not suffer.
        The proposal that Mr. Manzullo's committee has on the table
    to us, not being experts, but it seems like it would be a very
    viable option whereby a number of small businesses or any size
    business could join together and hopefully save money on health
    care costs.
        That is what I have for my testimony. Thank you very much
    for listening.
        [Mr. Bartmann's statement may be found in appendix.]
        Chairman Manzullo. Thank you, Phil. I appreciate it very
    much.
        Our next witness is Ryan Brauns. Ryan is the Senior Vice
    President of Rockford Consulting and Brokerage.
        Ryan, I look forward to your testimony.

    STATEMENT OF RYAN BRAUNS, SENIOR VICE PRESIDENT OF CONSULTING,
                   ROCKFORD CONSULTING AND BROKERAGE

        Mr. Brauns. Thank you.
        Good morning, Chairman Manzullo and Congressman Weller,
    Congressman Kirk, Congressman Ryan.
        Rockford Consulting and Brokerage is a firm specializing in
    employee benefits.
        Chairman Manzullo. Ryan, would you keep your voice up? I do
    not think they are hearing all of it.
        Mr. Brauns. Sure. The firm I represent specializes in
    employee benefits, specifically strategic plan design, fund
    analysis, employee communications, and regulatory compliance.
    Members of the firm have collectively worked with hundreds of
    employer groups ranging in side from two wives to 60,000
    employees, solving many complex cases, and we appreciate the
    opportunity to present our comments this morning regarding the
    health insurance industry, the vital role of the insurance
    broker, and the powerful engine of consumerism.
        To begin, the words of Dickens actually came to mind when I
    was writing this testimony. ``It was the best of times. It was
    the worst of times. It was the Age of Wisdom, and it was the
    Age of Foolishness.''
        Although no one is speaking French today, we are definitely
    fighting a battle. With the finest health care system man has
    yet devised, thousands of people from all over the world
    traveling to our system every year, other countries desperately
    trying to copy what we have, we threaten our own wondrous
    creation.
        So where are we today? There are several possible points of
    insertion into a discussion about the status quo, the state of
    managed care, the outstanding quality of modern medicine, or
    the need for structural change that will yield behavioral
    change. I'd like to take a look today at, frankly, government
    regulation.
        Business is the conduit to health insurance for Americans.
    Depending on whose study you see, the breakdown is usually
    something close to the table we have in the written testimony
    which shows about 64 percent, maybe 70 percent of Americans
    have health insurance through their employer. Yet business has
    been awash in a sea of government regulation.
        One of the other witnesses enumerated a few: COBRA, OBRA,
    ADEA, ADA, ERISA, the Public Health Act, HEFRA, DEFRA, Tax
    Reform Act of 1984, not the least of which is the Internal
    Revenue Code, including Sections 162, 264, 79, 101, 61, 83. I
    could go on, just to identify a few.
        I offer that not to be ridiculous, but to make the point
    that business is not just a wash. We are actually drowning in
    this regulation, and to be sure, much of these rules involve
    needed reforms and have done quite a bit of good. However, many
    have unintended consequences.
        In fact, some foisted some severe unintended consequences
    on the system. One such law mentioned here a moment ago was
    HIPAA, formerly known as Kennedy-Kassebaum or the Health
    Insurance Portability and Accountability Act. It was created
    with the best of spirit in mind, to provide greater access to
    insurance. Yet it really had the opposite overall effect.
        You see, it was not created in a vacuum. The law was
    applied to an already complex and difficult legal structure.
    There was little room for the private sector health care market
    to absorb this new burden. The market becomes more efficient,
    cannot clear, moves farther away from the equilibrium we want.
    In turn, costs are going up and social good is going down.
        HIPAA passed in 1996. It really took effect the next year,
    beginning to propagate throughout the market. I don't think
    it's a coincidence that following the passage of HIPAA we had a
    concomitant rise in premiums, as well as a several million
    person increase into the ranks of the uninsured.
        The guarantee issue portion of the law moves us closer to
    national health care and single payer model, and it actually
    created more uninsured persons. I give you the example of the
    State of Kentucky or Washington and New Jersey, where they
    actually put into effect guarantee issue.
        Once that went into effect in Kentucky, many of the private
    health insurers who were writing individual health policies
    pulled out. Premiums went up by 60 percent, and we had more
    uninsured.
        HIPAA stifles innovation and is foreclosing on solutions.
    Because the law makes bright line delineation between employee
    sponsored plans and individual plans, there is little chance to
    develop hybrid plans involving employer and employee
    contributions, particularly in the mode of defined
    contribution, which we heard so much about.
        The greater the role of government in this market, the
    greater the chance for harmful rent seeking and sub optimal
    behavior as the players devote resources to look for loopholes.
    They stop profit seeking. The market becomes inefficient. It
    leads to more dissatisfaction.
        What HIPAA has shown us, even though it had fine
    intentions, and some of the law is certainly very good, it did
    have unintended consequences, and it gives us a positive
    correlation between regulation and increases in uninsured.
        The insurance market is not easy to shop in for the small
    employer. The cost of information is high, and onerous
    regulations providing friction.
        Chairman Manzullo. Ryan, you are at your five minutes.
    Conclude shortly.
        Mr. Brauns. Excellent. [Laughter.]
        The last thing I would like to tell you about is
    consumerism. Consumerism is a very powerful engine, and I want
    to give you just a few statistics. In 1991, the drug industry
    spent $55 million on direct to consumer advertising. Now they
    are spending over $2 billion on direct to consumer advertising.
    It is a very powerful engine.
        Lastly, I urge you to let Adam Smith's invisible hand guide
    this market. If we reduce the cost of information, eliminate
    the friction cost by onerous regulation, the markets will
    clear. We will have economies of scale. Equilibria will be
    achieved, and satisfaction will be high.
        So when you go back to Washington, when you are in the well
    and you are addressing your fellow members on behalf of the
    nation, I hope your clarion call will be choice. It will be
    competition, and it will be consumerism.
        Thank you very much for the opportunity, and I look forward
    to your questions.
        [Mr. Brauns' statement may be found in appendix.]
        Chairman Manzullo. Thank you, Ryan, for your testimony.
        Our next witness is Mick McCarty, and Mick is with Blue
    Cross/Blue Shield of Illinois.
        I look forward to your testimony.

     STATEMENT OF MICK McCARTY, BLUE CROSS/BLUE SHIELD OF ILLINOIS

        Mr. McCarty. Good morning. Thank you, Chairman Manzullo and
    distinguished members of Congress.
        Let me first of all start off by just explaining a little
    bit how Blue Cross/Blue Shield approaches the small group
    market. Today what we do is instead of having each small group
    stand alone, we pool all of these small groups into aggregates
    so that we have hundreds of thousands of employees in a pool,
    and that allows us to spread the risk out among these hundreds
    of thousands, spread the costs out among these hundreds of
    thousands.
        We are able to provide the same level of discounts to a
    group of two that we are able to give to our largest customers.
        We also offer benefit flexibility to the smallest of groups
    so that an employee could choose whether he wants to
    participate in a PPO, whether he wants to participate in an
    HMO, or whether he would like to participate in one of our MSA
    compatible type of programs.
        So that is the approach we are taking now. Now, we have
    actually devised programs specifically for small businesses in
    rural areas. We recently lost another program to offer to
    groups in the 50 employee to 150 employee segments that is
    another small group type of product again.
        So we are very focused on that small group segment, but
    there is only so much we can do in the face of rising costs and
    other factors, and I would like to spend a few minutes talking
    about those.
        We all know that medical costs are going up. Some of it is
    inevitable. It is kind of a fact of life, but there are cost
    pressures that government can access. Congress and the general
    assembly must carefully examine any new mandated balancing the
    benefits of those mandates with the costs that are associated
    with them.
        These costs fall hardest on the small employer groups. Back
    in 1965, there were eight health care mandates that we had to
    follow nationally. Today there's over 1,000, and they all did
    good things for many people, but they carried a cost. Small
    employers bear the burden of that cost significantly.
        Another suggestion that should be considered is the use of
    subsidies to help small employers, whether they come from
    federal or local, statewide combination. These subsidies add
    dollars to the equation, and that is a good thing. But the
    subsidies need to be significant enough to encourage the
    employers to participate. Otherwise we have seen that the
    employers do not necessarily participate without significant
    subsidies.
        I know that there is a lot of talk, and Congress is
    considering association health plans. These merit talk and
    discussion and perusal, but there are some issues that need to
    be discussed and understood about them.
        First of all, the proposed legislation would actually
    undermine many of the state reforms that have already been put
    in place to protect small employer groups. A Congressional
    Budget Office analysis actually came out and said that with the
    implementation of association health plans, we could see prices
    rise, particularly for small employer groups, in four out of
    five cases.
        The GAO also came out with a study that supported that.
        There is a long history of concern about the associations
    that exist today similar to the association of health plans
    called MEWAs, and so there is a concern a little bit about
    making sure that if the association health plans are in the
    offing, that they are done right with the appropriate
    regulation.
        Finally, the CBO would estimate that with the
    implementation of association health plans, you would only
    expect to see about a 1.3 percent increase in coverage. So
    while the thought is good and the appropriate structure might
    be good, we need to make sure that it is going to be successful
    and bring more people into the equation.
        Another concern is the so-called patient rights
    legislation. Again, what that does is add costs, particularly
    the small employer groups. In Springfield, the Illinois State
    Medical Association is pushing legislation that would severely
    limit health plans by Blue Cross and Blue Shield's ability to
    catch and to fix abuse, particularly claims abuse.
        At the same time, this legislation is going to add billions
    to the administrative cost, again, with no benefit to the
    patient. Again, this cost is passed on to employer groups,
    particularly small ones.
        But enough of the negative approach or the things that I
    wanted to talk about there. There are some good things that can
    be done.
        First of all, Governor Ryan and HHS and Secretary Thompson
    have worked together closely on several initiatives. One will
    allow the states to expand Kid Care to the families of eligible
    children. We heartily support this. We think this is extremely
    successful, and the results so far have been very favorable.
        While I mentioned earlier the subsidies can be good, but
    the level of subsidy needs to be significant to really draw
    employers in, I do want to encourage tax credits for small
    employers for their low income workers. I also encourage you to
    press for acceleration of that full tax deductibility for the
    self-employed. I know that it is staggered out a number of
    years, and I know you worked hard and diligently to try to
    accelerate that. I continue to encourage that.
        Expansion of medical savings account. I think it is a
    worthy experiment. Right now it is capped, and it is limited to
    a certain amount of people in the segment in the market, but I
    would certainly suggest expanding that.
        A number of bills in the House, McCain-Schumer and its
    companion in the House, Brown-Emerson. That would have a
    favorable impact on the entry of generic drugs in the
    marketplace.
        One thing that I found extremely interesting is that a
    focus group study found out that small employer groups do not
    understand insurance. They do not know all of the time that it
    is tax deductible and that there are implications to them by
    providing it to their employees.
        I would encourage a broad based approach to informing and
    educating small employers about what their options are in a
    community and what type of tax implications they can enjoy by
    offering their employees employee benefits.
        Chairman Manzullo. Five minutes, Mick.
        Mr. McCarty. I will wrap it up.
        Defined contribution approaches, I think they also merit
    some review. We have not seen a lot of employers pushing
    towards that right now. They still think it is something that
    could bring consumerism back into the equation, and at the
    federal level, Congress is struggling with several key issues
    affecting the small group market
        And all I want to do is encourage whatever legislation and
    mandates are created, that they encourage people to get into
    the pool, encouraging high risk, low risk, everybody into the
    pool, and that will help us stabilize premiums going forward.
        These are difficult times. I commend the committee for your
    effort to focus attention on the impact on health care costs to
    small businesses, and as we have for more than six decades in
    Illinois, Blue Cross and Blue Shield stand ready to help in any
    way.
        Thank you.
        [Mr. McCarty's statement may be found in appendix.]
        Chairman Manzullo. Thank you for your testimony.
        Members of Congress will also be limited to five minutes.
    As the committee chairman, let me exercise my prerogative and
    go first.
        I would ask you, Mr. McCarty, in your opening statement,
    you say essentially that Blue Cross/Blue Shield is already
    community writing for business pools?
        Mr. McCarty. Yes. What we do is we have established these
    pools, and there are a number of factors that go into the
    rating on this particular group, but for the most part, what we
    are trying to do is take the lowest and the highest risks,
    squeeze them down into a narrow focus so that rates are
    somewhat stabilized.
        The problem with doing that, Congressman, is that the
    better risks, as we try to squeeze everything in that community
    to a narrow focus, the better risks will look for rates
    elsewhere, where someone is not necessarily community or pool
    rating like we do.
        Chairman Manzullo. So does that mean that if you insure a
    corporation of 1,000 employees, that will be the same rate as
    insuring Mr. Bartmann's 23 employees?
        Mr. McCarty. Actually, no. The pool is going to generate a
    rate based upon the experience of hundreds of thousands of
    people. And that will set a rate.
        And some of this is already legislated in what we can do by
    the State of Illinois.
        A group of 1,000, their rates are going to be determined
    strictly on their own experience. So it could be higher than
    this other pool with hundreds of thousands of people.
        Chairman Manzullo. Let's face it. Do you know of any large
    corporation that has higher rates than an employer with 23
    employees with the same plan, the same coverage?
        Mr. McCarty. I do not know of any. I am not saying that it
    does not exist. I would have to actually review that.
        Chairman Manzullo. Well, I would submit to you that the
    larger the pool, the bigger the corporation, the cheaper the
    rates are. As a member of Congress, I have Blue Cross/Blue
    Shield, and I think all of us here, you know, we have the same
    plan that Phil does with Blue Cross/Blue Shield.
        But when you say that you are doing these business pools,
    is this lowering the rates of the people in those pools?
        Mr. McCarty. It is keeping the rates lower than if we did
    not create the pools.
        Chairman Manzullo. But when you go to an individual
    employer or--I am sorry--when you go to a corporation, you
    insure that whole group, but you are not asking for any
    increased premiums based upon preexisting illnesses; is that
    correct?
        Mr. McCarty. When we insure a large group.
        Chairman Manzullo. That is correct.
        Mr. McCarty. The risks are evaluated, and preexisting
    conditions are considered in their experience, absolutely.
        Chairman Manzullo. They are considered, but the potential
    insureds are not asked for any previous medical conditions;
    isn't that correct?
        Mr. McCarty. That is correct.
        Chairman Manzullo. But if you went to Phil Bartmann, you
    would have to ask those questions of those 23.
        Mr. McCarty. That is correct.
        Chairman Manzullo. So then it is really not a pool.
        Mr. McCarty. It is a pool in the sense that we are trying
    to drive everybody into a narrower focus. Not everybody is
    going to have the same rate, exactly correct, Congressman.
        Chairman Manzullo. Perhaps I do not understand the narrow
    focus on it, but to me a small business pool would be to take
    every small business person and say we are going to take all of
    their rates and treat you the same as ABC Corporation. We are
    not going to look at any preexisting maladies. We are not going
    to increase your rates based upon the fact that somebody, that
    one employee out of 23 had a heart attack this past year or a
    bout with cancer.
        That would be a true pool.
        Mr. McCarty. That is where our origins actually started,
    Congressman. That is where we began as Blue Cross and Blue
    Shield. As other insurance companies got into the marketplace,
    particularly the for-profits, they began trying to sap out the
    better risks.
        So today where we are at is we are trying to maintain a
    community rating as closely as we can, but what happens is the
    better risks are lured away by other entities, other health
    plans that have a different approach to this marketplace.
        Chairman Manzullo. Such as?
        Mr. McCarty. Other types of insurance companies?
        Chairman Manzullo. Yes.
        Mr. McCarty. I do not want to be indicting here, but any
    type of for-profit company is going to be looking to maximize
    profits as opposed to something else.
        Chairman Manzullo. I understand.
        Phil, did you look at Blue Cross/Blue Shield?
        Mr. Bartmann. They are one of them we looked at last year.
        Chairman Manzullo. What type of rates were you quoted for
    23 employees? Do you remember?
        Mr. Bartmann. I do not remember, but they were not in the
    final three, two or three.
        Chairman Manzullo. Okay.
        Mr. Bartmann. We had United Health Care and Nipon were the
    two finalists, I know, last year, and we ended up with Nipon.
        Chairman Manzullo. Okay. Mike, on the medical savings
    accounts, you went ahead and developed your own form. Is that
    what you did because nobody offered that product?
        Mr. Holoka. Well, the product was actually offered by a
    couple of insurance companies. Fortis is one. Unicare is
    another one, and I cannot tell you all of the carriers who
    would provide it.
        And there is a company that essentially gives us the
    information and the quote rates and everything, and then we go
    through them. They are like a brokerage firm.
        Chairman Manzullo. Okay.
        Mr. Holoka. And that is how we discovered this and were
    quite pleased with it and quite surprised.
        Chairman Manzullo. So a person could just call up one of
    those insurance companies, and they would have a package to set
    up the MSA.
        Mr. Holoka. That should, but you might have to go through a
    broker to get that. You may have to go through an insurance
    broker, you know, who writes the insurance and charges, you
    know, a small premium for that as well.
        Chairman Manzullo. Okay.
        Mr. Holoka. I do not know whether you could write directly
    to the company or not and get that information.
        Chairman Manzullo. But you had to draw up your own plan
    because you were the first, one of the first?
        Mr. Holoka. No, the plan, as I understand it, by statute is
    limited to 750,000 businesses.
        Chairman Manzullo. Right.
        Mr. Holoka. Okay, and I do not know how many had already
    taken advantage of it. Maybe 25,000 or so. There were not a
    great number of companies that had taken advantage of it. And,
    in fact, I had to go through, I think, four or five brokerage
    houses to figure out who actually would set up these MSA
    accounts, and Merrill Lynch in this area turned out to be the
    brokerage firm that was----
        Chairman Manzullo. Financial house.
        Mr. Holoka. Yes, financial house where you could actually
    set up an MSA account. Some of the other brokerage firms like
    A.G. Edwards, for example, they did not have the ability to
    even set up an MSA account. So there was no way you could
    deposit money.
        Chairman Manzullo. Ryan, does your company offer access to
    an MSA account?
        Mr. Brauns. We do. And I would like to echo something Mick
    said, which is that many small employers do not understand the
    options that are available to them. There are things like MSA
    accounts that are out there, either qualified MSAs or even
    nonqualified MSAs, which gets into the consumerism idea.
        What we like to see is people who are very interested in
    accruing personal health accounts, like the President spoke
    about, on a use it or keep it model so that they are
    financially engaged and they take more responsibility when it
    comes to the decision making process.
        But if I could answer a question you asked of Mick, we have
    many clients, all ranges of employee size, numbers of
    employees. We have routinely had 25 and 30 life employer groups
    that have had much lower premiums per single, per family than a
    100 or 200 or 300 life case. Now, by and large you would think
    the larger case is going to be a little bit less expensive, and
    oftentimes it is, but that does not mean that there is not a 25
    life group that may have a $150 single rate and only a $310
    family rate, and you might have a four or 500 life group that
    could be double that.
        So that 25 life group with the good rate is not going to be
    interested in joining a pool. They want to keep their good
    rate.
        That is our concern about pools as I represent clients.
    They are afraid that they are going to get pushed into a pool
    with a lot of risk that is worse than theirs.
        Chairman Manzullo. But you would agree that the larger
    pool, the larger numbers of potentially insured, the lower the
    premiums are going to be.
        Mr. Brauns. Possibly and usually. The question I have
    though is how do you keep the groups, and this is what we are
    waiting to see in the industry; how do you keep those employer
    groups in the plan? What happens when you get the pool going
    and one of these employer groups says, ``You know, we are all
    very healthy. We can get a cheaper rate outside. We want to
    exit``?
        So what is left is by and large a sicker group, and over
    time it could start to spiral. We have had several association
    plans here in Illinois collapse in the last few years. A large
    school association just collapsed this last year, 250 school
    districts, for that very reason. The good risk exits, and the
    bad risk stays.
        Chairman Manzullo. Congressman Weller.
        Mr. Weller. Well, thank you, Mr. Chairman.
        And let me first commend your panel. This has been a very
    informative presentation. I know we have a second panel. So I
    look forward to hearing that as well.
        But let me, since we are limited on time, direct my
    questions. First I want to direct my questions to the two
    business owners on the panel, and the experiment with the
    medical savings accounts, Mr. Holoka, one of the arguments for
    medical savings accounts, and Dr. Kobler brought up this issue,
    is they help control over utilization. People, you know, take
    advantage of health care benefits maybe more than they really
    need to, and of course, that drives up cost.
        And I was wondering from your experiment with medical
    savings accounts how medical savings accounts, the incentives
    involved in medical savings accounts will affect over
    utilization.
        Mr. Holoka. Well, I agree that there is utilization when
    you are not having to pay anything for medical care. When you
    have a deductible, of course, you are paying the first dollars
    out of that deductible. So, for example, we had a $3,100
    deductible for the first year we were in the MSA program. We
    probably spent about $2,800 of that.
        Now, I did not sit there though and calculate whether or
    not we should go to the doctor, you know, or whether or not we
    should have a physical or something of that nature based on how
    much of that deductible was left, nor did I say, ``Let's go
    ahead and spend some more money so we pass the deductible and
    then the insurance company can pick up the rest.''
        So I really think that is more of an individual situation.
    Obviously, I guess you could plan it in such a way that if you
    needed surgery, you could use up the deductible and then go and
    have your surgery that year and make sure the surgery was
    picked up. I guess we can all be calculating or even very good
    stewards of our money in that way.
        But I do not think that is much of a risk. You see, the
    thing about small business people is that they are survivors.
    And really, you know, with all respect to Congress and everyone
    else, if we approach these problems like a business where it
    was actually our money on the line, and I thinkCongressman
    Manzullo does that very well; if the entire Congress would do that,
    then I think we would solve these problems, but we do not tend to do
    that.
        We tend to see this unlimited amount of money, this
    unlimited amount of corporations out here that just can afford
    to spend money willy-nilly, and that is why we are driving up
    health care costs.
        I am sure the doctors here would testify that the paper
    work that they have to go through is just unduly burdensome. At
    this point it is almost impossible to keep up with. And on top
    of that, the paper work actually can cause you to become a
    criminal in this country.
        Why if you make a mistake on a HCFA form, why is a doctor
    going to jail and losing his business? Because that has
    happened to a number of doctors in this country.
        Mr. Weller. And I would like to direct a follow-up question
    to Dr. Kobler.
        I would note, based on Mr. Holoka's comments, that the Ways
    and Means Committee, after we return after this break that we
    are currently on, we plan to take up Medicare modernization,
    legislation that Nancy Johns, the Chairman of the Health Care
    Subcommittee of Ways and Means is moving and which she has
    taken the lead on, which is designed hopefully to provide for
    some real regulatory relief, address the reimbursement issues,
    as well as provide prescription drug coverage as a component of
    Medicare.
        That is her goal, and of course, she will be leading that
    charge when we resume later this month.
        Sticking with the subject of MSAs, Doctor, what has been
    your experience with patients who participate who have MSA
    coverage?
        Dr. Kobler. Well, I am not sure that I have had enough
    patients in town that actually are insured by MSA, at least not
    that I am aware of when I look at the route slip as they come
    in. Most of them have the traditional managed care companies
    that we have here locally, as well as the national firms.
        State medical society, the AMA are all on record as saying
    that MSAs are probably a very good thing and probably should be
    expanded.
        We have a physician in Illinois down south who eats,
    drinks, and sleeps MSAs. I get E-mails from him all the time
    about it, and I really think that, you know, the points that
    Mr. Holoka made as well. I think it does make you look a little
    bit more at how you are spending your health care dollars.
        I guess the potential concern that I have as a physician,
    especially in primary care where we practice a lot of
    prevention is to be sure that people are not going to try to
    save that money and not do some of the things that they should
    do preventatively, and we would hope that they would be good
    stewards of those dollars that way as well.
        I think that is one of the potential weaknesses of that,
    but I am not sure. I have not seen the statistics to suggest
    that that is a problem at this point in time.
        Mr. Weller. Okay. I assume I have a little bit of time
    left, Mr. Chairman. Am I about out of time.
        Chairman Manzullo. You are about out of time. Two more
    minutes.
        Mr. Weller. Two more minutes. Okay.
        Let me direct my last question to Mr. Brauns. You are an
    advocate of choice and opportunity and consumerism, I believe,
    from the comments that you made, and you are an advocate of the
    refundable tax credit proposal, which Chairman Bill Thomas has
    been an advocate of in the Ways and Means Committee and others.
        Included in the earlier versions of the Economic Security
    and Stimulus Package that we passed out at the House of
    Representatives, the refundable tax credit that helped laid off
    workers covering up to 60 percent of their premiums as a way to
    help insure they had continued health care coverage while they
    were unemployed until they went back to the work place where
    they had health coverage.
        From your perspective in marketing insurance coverage,
    health care products to your customers, how would your business
    market to this refundable tax credit approach? If I am a worker
    and I have this refundable tax credit, it is a new thing for
    me. I do not really know what to do with it. How would you
    market it and explain it to them and show them how it would
    work?
        Mr. Brauns. I think, number one, it would be very well
    received. I know there is tremendous pressure that is building
    up in this system, and we all know that. A lot of it would
    depend, I think, on what the actual structure of that is.
        Would it be a voucher that they could take? It is going to
    come every month or is it going to be handled through the
    payroll deduction system that goes against their FICA and
    whatnot? Are the employers taking care of that? Are they going
    to get this voucher and then be able to go out to the
    individual health insurance market and then go to that
    insurance company and say, ``I have got this voucher now and I
    can afford to pay these premiums''?
        Some of it depends upon how that is actually going to be
    structured, but we would be very excited to be able to market a
    product like that, and I think it would be very well received.
        You know, by and large, most employers are very
    paternalistic. Most employers want to take care of their
    people, and they are looking for any way they can to increase
    benefit and find ways that they could give more money to
    employees to help them buy more insurance.
        Employers, I do have to tell you though, there is so much
    pressure in the system. They would like to get out of being an
    insurance company. If there was some way that they could do
    that paternalistically, if they knew this product is a defined
    contribution, and it has not taken off yet because defined
    contribution has created this huge individual health insurance
    market, and particularly in the State of Illinois, you cannot
    go to, say, Blue Cross and get a guarantee issue health
    insurance policy for one person.
        If you could, the rates would obviously be expensive, but
    you may have a lot of employers saying, ``Take your voucher and
    go do that.''
        And then the employer would be able to provide 401(k)
    matches, more life insurance, more disability, more vacation
    days, other things that the employer would like to do for the
    employee.
        Chairman Manzullo. Congressman Ryan.
        Mr. Ryan. Thank you, Chairman Manzullo.
        I would like to talk to Mr. McCarty and Mr. Brauns about
    the AHPs and about pooling, and I would like to nail down a
    definition of pools.
        I understand that it is in the best interest or in the
    self-interest of a state Blue Cross/Blue Shield to oppose
    association health plans because those are ERISA plans that
    move beyond state borders. But I'd like to nail down this
    definition of a pool because we are throwing this word around
    so much.
        When you say you are pooling your small business individual
    rates in the State of Illinois in Blue Cross/Blue Shield, you
    are pooling that after you saw the coverage within your own
    insurance structure; is that correct?
        Mr. McCarty. Yes.
        Mr. Ryan. So it is not a pool you are going out into the
    marketplace saying, ``Here, Mr. Bartmann. We have a pool for
    you.'' You are just marketing it as a Blue Cross plan for his
    business, correct?
        Mr. McCarty. When we market to a small group, we are
    marketing individually to him. The rates are set up on his
    demographics. Some risk factors do go into that.
        Mr. Ryan. And you see if there is a heart attack in his
    business or if there are preexisting conditions in his firm,
    something like that, correct?
        Mr. McCarty. Yes.
        Mr. Ryan. Okay. So the pool of the association health plan
    that we are talking about is a little bit different than that
    kind of pool concept. So I just want to make sure that we are
    not saying that these are the same things.
        The association health plan pool is a national pool, an
    ERISA plan which goes through state borders much like any
    Fortune 500 company will have for their employees.
        You know, General Motors, which has a plant up in
    Janesville, has a huge ERISA plan for all of their hundreds of
    thousands of employees, and that crosses state borders. They do
    not have preexisting conditions. They do not have demographic
    questionnaire studies, and they benefit from very good
    insurance packages, very low rates, and rates much, much lower
    than rates for a small business.
        So the goal of pools, as echoed by the President in
    Wisconsin in February and which we talked about in the Ways and
    Means Committee, is to give small businesses access to those
    same kinds of economies of scale, for those same kinds of
    benefits that an ERISA pool provides, just like the Fortune 500
    company gets.
        Would you like to comment on that?
        Mr. McCarty. Just to clarify our position is not to oppose
    association health plans. Our position is that they need to be
    structured appropriately so that, number one, they do not
    undermine existing legislation to existing states. That is
    number one.
        And number two, that they are regulated appropriately
    enough so that the mistakes that have happened with prior
    association type plans do not happen again.
        And, number three, that as we venture into this, it is also
    structured correctly to bring more people into the pool, into--
    --
        Mr. Ryan. Adverse selection.
        Mr. McCarty. Yes, because otherwise you get a modest
    enrollment, it does not catch on, and it winds up having
    selection issues which causes, again, a burden for particularly
    small employers.
        Mr. Ryan. That is a compelling point. I think the adverse
    selection point that, Ryan, you mentioned is a very compelling
    point, but if you compare that to the status quo, we have a 60
    percent uninsured rate for small businesses right now. That is
    not acceptable, and that is under a state-by-state regulated
    environment.
        So the status quo obviously is why we are having this
    hearing, because that is unacceptable.
        Mr. McCarty. Sure.
        Mr. Ryan. But I think if you look at the adverse selection
    studies that when you apply adverse selection studies to ERISA
    pools, you do not have adverse selection nearly to the extent
    that has been suggested with state insurance pools because
    adverse selection goes away with association health plans
    because they are able to evolve with the marketplace. They are
    able to change.
        And so if a businessman like Mr. Bartmann is looking to
    join an AHP or stick with what he has, he will make that
    decision in the beginning. He will make that decision. He will
    adverse select, as you put it, right away.
        If he joins the AHP, he can always get out, but the idea
    that the sick will only be left in the AHPs is an idea that has
    been pretty well defeated intellectually and through many
    studies, including the CBO and CMS that show you risk will be
    well spread. Adverse selection on the national level does not
    really occur because if it would, it would occur with other
    ERISA plans, and that is just simply not the case these days.
        So there is a great story to be told on pooling with ERISA
    plans across the state boundary lines. That shakes up the
    system. That abandons in many cases a state-regulated system,
    but the state regulated system we have today under which Blue
    Cross operates is giving us this huge rate of uninsured and
    these unacceptable rates of increase of health insurance
    premiums for small businesses.
        So I think there is a broader story to be told with respect
    to pooling. I hate to give more of a speech, but----
        Chairman Manzullo. Your five minutes is up. So----
        [Laughter.]
        Mr. Ryan. We deal with this a lot in our committee.
        Chairman Manzullo. Congressman Kirk.
        Mr. Kirk. Thank you, Mr. Chairman.
        We met when you held a hearing on a similar topic in my
    congressional district. We met with Sammy Davis, Jr., the real
    Sammy Davis, Jr., who operates Handyman, Incorporated in
    Mundelein, and Handyman has gone the way that, Phil, you might
    be looking at. Handyman employees are now completely uncovered
    because of the rates and the increases.
        Chairman Manzullo. You said that was going to happen.
        Mr. Kirk. And it has happened, yes. So Handyman, with 13
    employees; is on their own.
        Now, Sammy belongs to a number of associations, and I
    wanted to just ask you. Are you a member of the McHenry Chamber
    of Commerce?
        Mr. Bartmann. I am the Chairman of the McHenry County
    Economic Development Corporation.
        Mr. Kirk. Are there any other associations that you are
    already a member of?
        Mr. Bartmann. NFIB.
        Mr. Kirk. At the NFIB?
        Mr. Bartmann. Almost from the beginning, yes.
        Mr. Kirk. Right. And it would seem to me that NFIB would be
    an ideal place for a national association health plan.
        Mr. Bartmann. That is right.
        Mr. Kirk. Very broad membership, and you do not have that
    option right now?
        Mr. Bartmann. No.
        Mr. Kirk. That is, I think, something that is very
    important for us to have a Medical Savings Accounts for the
    truly small entrepreneur, but to allow you to join through NFIB
    or, I think, ideally the county Chamber of Commerce or even the
    town Chamber of Commerce in the case of my people.
        One of the reasons why costs are going up so much is
    because of enormous jury awards against doctors and hospitals,
    where you get into the unlimited amounts of money that could be
    awarded through ``pain and suffering'' awards.
        I just throw it out to the panel here. What would be the
    impact, in general, of medical malpractice reform?
        Specifically, the House included this as part of the
    Patients' Bill of Rights. It gives us theability to expand
    health care coverage and lower cost.
        Mr. McCarty. I do not have any specific information on the
    impact.
        Mr. Kirk. Well, let me just throw out one number. I just
    talked to some OB-GYNs in my district. The up front cost, the
    first thing they have to pay before they see Patient One was
    $90,000 for medical malpractice coverage, and so that is built
    into their fee schedule right away.
        Mr. McCarty. Right. So, yes, there would be a favorable
    impact on premiums for small employer groups, for large
    employer groups, for everybody, for individuals, if education
    were enacted to protect providers from unusually large or
    outrageously large settlements.
        Mr. Kirk. And it is important that we are not talking about
    limiting someone's economic damage. It is the treble, quadruple
    damages when a jury in a rural county in Illinois says, ``Let's
    give them a $2 billion award.'' That has a ripple effect
    throughout the system.
        Go ahead.
        Mr. Holoka. Yes, in answer to your question, how it impacts
    on a particular doctor's practice and their premium, of course,
    it puts a lot of pressure on the doctor to see enough patients
    to come up with, you know, the premium. But, of course, there
    are a couple of reasons for that.
        One is when you have PPOs, HMOs, and you have the
    government through Medicare and other legislation limiting the
    amount a doctor actually receives, you're really slashing the
    doctor's wrist at the point.
        The second thing is as far as impacting the general cost of
    medical care, health care throughout an entire state, for
    example, we can go back to Indiana in 1980. In 1980, Indiana
    enacted caps on the amount of recovery you could make in a
    medical malpractice, economic or otherwise. So it was enacted,
    and that cap was $100,000 at one level and then $500,000 at the
    next level. Okay? And that was only for catastrophic that you
    could go between the $100,000 and $500,000 recovery.
        Okay. When Indiana first started this, they were 28 in the
    country in health care costs. Okay? In 1990, ten years of
    experience, Indiana was still 28th in the country in health
    care costs. So I really think that medical malpractice per se
    has really no effect or just so small as to be negligible on
    the actual cost of health care.
        Now, how it impacts doctors' offices, I mean, that is
    another thing. If a doctor cannot generate enough income, then,
    of course, they are going to have to close their office, but to
    the malpractice carriers, they have to base this on what their
    experience is.
        The second thing is that there is no such thing as treble
    damages and all of these other things in medical malpractice.
    We have done away with punitive damages in Illinois. We have
    had reform to that degree.
        We have cut attorney's fees in medical malpractice cases.
    There is no other area in Illinois that we have cut attorney's
    fees in, other than through the work comp. statute to attorneys
    that are handling cases on behalf of the injured people.
        Mr. Kirk. And yet in the Congress we hear, especially from
    places that include rural areas like this one, that there are
    whole regions where you cannot get obstetric care.
        Mr. Holoka. Well, I will tell you what. I know of no place
    in this area where you cannot get obstetric care.
        Chairman Manzullo. I mean, you have to understand, too,
    that a lot of things are rural because they saw some cows.
    [Laughter.]
        We are at five minutes.
        Mr. Kirk. Okay. Mr. Chairman, I would just point out that
    our colleagues from other states, Iowa, et cetera, will give
    you a long list of driving distances that you will have to get
    to to find obstetric care, and that is due to the enormous
    malpractice costs that only a suburban/urban area could handle
    the cost structure of that.
        And so we have got real access to care issues erupting in
    the country now because of the enormous liability cost of being
    in this field.
        Mr. Holoka. Can I just make one comment to that? I know a
    general surgeon in town who went out of business, and it was
    not because of her health care premium. I am sorry. It was not
    because of her medical malpractice premium. It was because of
    the way her fees continued to get chopped down to the point
    that she could not stay in business.
        And when you are charging $80 for an office visit, and you
    are getting $8 and $10 and $12, you cannot even cover the cost
    of a nurse, let alone make any kind of profit. You are killing
    yourself in overhead.
        So I think the problem is multi-faceted, and it cannot just
    be directed to medical negligence cases. And again, I would say
    the proof is in the pudding. Medical negligence cases are such
    a small amount of the actual cost of health care as to be
    negligible.
        Chairman Manzullo. Okay. We want to thank the panel for
    coming and testifying. You are welcome to sit through the rest
    of the testimony this afternoon.
        And we are going to take about a ten minute break. During
    that period the second panel can go up there.
        All of the complete written statements will be made a part
    of the record.
        [Recess.]
        Chairman Manzullo. The Committee will come to order.
        Our first witness on the second panel is Ryan Levin. He is
    V.P. of Product Development and Risk Management at the Destiny
    Health Insurance.
        I look forward to your testimony.

    STATEMENT OF RYAN LEVIN, VICE PRESIDENT OF PRODUCT DEVELOPMENT
                AND RISK MANAGEMENT, DESTINY HEALTH CARE

        Mr. Levin. Thank you.
        Good morning, Mr. Chairman, Congressman Kirk and Ryan.
    Thank you for the opportunity to speak before you this morning.
        I think from our perspective we have a very similar
    perspective to yours: trying to understand the----
        Chairman Manzullo. Ryan, would you keep your voice up? You
    have got a very soft voice.
        Mr. Levin. Our perspective is very similar to that of your
    committee: trying to understand the reasons for high health
    care costs and more specifically, the uninsured and the
    increasing number of uninsured.
        We believe that there are two interrelated reasons for the
    number of employed uninsured. The first is cost, and that is
    one that has been discussed in quite some depth this morning.
    The higher the cost of health insurance, the greater the
    likelihood that someone is going to opt out, some people
    because they cannot afford it, and I think that is plain for
    everyone to see.
        The second reason for employed uninsured, I think, is a
    little less apparent, but interrelated with the first, and that
    is that there are a number of employed uninsured who actually
    can afford health insurance, but choose not to. The reason for
    that is that health insurance provides themwith no value
    because they are healthy, or at least no perceived value.
        Now, the problem with that is that if healthy people choose
    to opt out, the risk pool on average gets sicker and costs
    continue to increase. So in many respects, you get into a
    vicious circle where the higher the health care costs go, the
    fewer people participate and the higher the health care costs
    go.
        So we looked at the situation and said, well, we need to
    understand the underlying reasons for these high health care
    costs, and there have been a lot of reasons spoken about this
    morning. There is one that has not been thought about much and
    has not been discussed much, and that is the role of the
    consumer in health care costs.
        We believe this is actually a very key component to rising
    health care costs, consumer demand, because consumers really
    are driving health care costs in many respects. I will give you
    a couple of examples.
        First, drug costs. We all know that drug costs are a big
    driver of health care costs overall. One of the reasons for
    that is technology. Technological advances have increased drug
    costs and increased the number of prescriptions and probably
    saved other health care costs.
        But there is one more reason, and that is consumer demand
    for drugs. We all watch TV and read magazines, newspapers, see
    the increasing number of direct to consumer drug
    advertisements. Because the drug companies understand that
    advertising directly to the consumer will drive demand for
    their products.
        One study performed by Prevention Magazine found that 87
    percent of people who asked their physician for a particular
    drug are prescribed that drug. Now, the problem is that while
    the providers of these health services understand that
    consumers are driving demand and driving utilization of these
    services, health insurance does not understand that because
    health insurance plans typically dissociate the member or the
    consumer from the cost of the health care that they are
    consuming. They are essentially spending someone else's money
    because all they are paying is a very small portion of the
    total cost of health care.
        Another area where consumers are driving health care costs
    is in their response to managed care. Managed care is a tool, a
    mechanism that has been used by many health insurance carriers
    and specifically HMOs to reduce health care costs. They have
    used things like networks, gatekeeper models where you cannot
    get care other than through a gatekeeper to control health care
    costs.
        Consumers understandably are rebelling against these
    controls because it restricts their freedom of choice. By doing
    that and because the insurers and HMOs have been forced to
    react to that, there has been less ability for them to control
    health care costs, and that, too, is one of the reasons that
    health care costs have been increasing.
        So we believe that health care costs are a big driver of
    the uninsured, and the fact that there is little value for the
    healthy is another big driver of the uninsured. These two are
    interrelated.
        So the solution we feel has two components. First is to
    control the costs of health care by creating the right
    incentives within the health insurance infrastructure, and the
    second is to introduce value for the healthy, to encourage them
    to participate and thus reduce the average cost per participant
    in the health insurance system.
        There are many consumer driven solutions that are being
    touted today, and this is a relatively new movement. The model
    I am going to describe is based on one that is currently being
    successfully used by our sister company, a company called
    Discovery Health. They have over 1.2 million members using this
    model and have demonstrated substantial success in controlling
    health care costs.
        In fact, this model was based on the medical savings
    account concept that we spoke about earlier but is in a
    substantially higher evolved state. The model relies on one
    fundamental principle, and that is that different types of
    health care costs need to be dealt with differently.
        There are those types of health care costs that are
    substantially within the member's control or discretion and
    others that are less within their control. Those within the
    member's control include things like the more routine, day-to-
    day health care costs, doctor office visits, acute prescription
    drugs.
        Those less within the patient's control are hospitalization
    and surgery, those high cost, high severity things that happen
    less frequently.
        Chairman Manzullo. How are you doing on time, Ryan?
        Mr. Levin. I think I have another minute or two.
    [Laughter.]
        Chairman Manzullo. I will give you another minute. Go
    ahead.
        Mr. Levin. What our model does is it uses a personal fund
    that belongs to the member to pay for those more routine costs.
    The key is whatever they do not use they keep, and that
    fundamentally changes the way they behave about health care
    specifically in those areas where they have discretion and
    control.
        And the results of studies performed by our sister company
    show dramatic reductions in spending on those discretionary
    health care costs.
        On the other side, we use insurance, risk pooling, to
    protect people against the high severity and high cost events
    like hospitalization and surgery, where they have very little
    control.
        Wrapped around this are incentives for people to take the
    preventive measures they should be taking, keep healthy, keep
    fit, wellness incentives, and very healthy rewards for using
    those incentives.
        The results of this structure are lower costs because the
    incentives are structured correctly, and very importantly,
    value for the healthy because suddenly and for the first time
    healthy people get value out of their health plan designed in
    this way.
        Chairman Manzullo. Okay. Thank you very much.
        Mr. Levin. And thank you for your time.
        [Mr. Levin's statement may be found in appendix.]
        Chairman Manzullo. The next witness is Amy Jensen. Amy is
    the Director of Federal Public Policy at the National
    Federation of Independent Businesses.
        Amy, we are looking forward to your testimony.
        I am going to excuse myself about two minutes. Mark, would
    you take over as Chairman. I will be right back.
        Mr. Kirk [presiding]. Yes, Mr. Chairman.

       STATEMENT OF AMY JENSEN, DIRECTOR, FEDERAL PUBLIC POLICY,
             NATIONAL FEDERATION OF INDEPENDENT BUSINESSES

        Ms. Jensen. Thank you, Mr. Chairman and members of the
    committee.
        I specifically want to thank Chairman Manzullo for all of
    your hard work to help solve this very important problem for
    small business and also to these strong members who have done
    tremendous things to help small business better afford health
    insurance.
        I am also glad to have this hearing in Rockford since my
    family lives in Wheaton. So I could take the opportunity to be
    back home.
        My name is Amy Jensen, and I am Director of Federal Public
    Policy for the National Federation of Independent Business.
    NFIB is the nation's largest small business advocacy
    organization representing more than 600,000 small business
    owners in all 50 states and also in the District of Columbia.
        Nothing is more important to NFIB than solving the health
    care problems of small business. We firmly believe that
    association health plans in removing the restrictions of
    medical savings accounts are necessary steps to create more
    affordable health care options for small businesses across the
    nation.
        According to the most recent information from the Census
    Bureau, nearly 39 million Americans did not have health care
    coverage in 2000. That is nearly one out of every seven
    Americans.
        Since that time a slow economy, higher unemployment, and
    rising health care costs likely mean that more Americans became
    uninsured, and two million Americans became uninsured due to
    job loss in 2001.
        Over 60 percent of our uninsured population consists of
    small business owners, workers, and their family members. The
    high rate of uninsured in the small business community is
    largely due to the lack of available options for small business
    and also an increasingly shrinking small group insurance
    market.
        We know that the smaller the business, the less likely it
    is to provide health insurance. Sixty percent of businesses
    that have three to nine employees offer health care benefits,
    while most large firms are able to offer coverage.
        Even in the best of times, the small business health care
    plan only covers about 57 percent of the employees, many
    choosing to go without coverage due to the high costs. For the
    smallest of the small offering health coverage is a constant
    battle.
        At NFIB can substantiate that the high cost of health care
    is the number one problem of small business owners today. NFIB
    surveys show that for the past decade small business owners
    have ranked the cost of health insurance as their number one
    problem, higher than taxes, regulations, and every other
    problem.
        Our members also have told us that they believe providing
    health insurance is the right thing to do, right for their
    employees and right for their business. However, the high cost
    of health insurance often prevents them from doing this.
        As you know, Mr. Chairman, NFIB has provided several
    witnesses who testified before your committee, as well as
    Representative Thune's subcommittee, and all of them have
    experienced double digit health care premium increases. Elaine
    Smith from Granite City, Illinois experienced a 26 percent
    increase this year. Ron Hatch of Yankton, South Dakota
    experienced a 50 percent increase. And Phil Bartmann, who
    testified previously and one of the Chairman's constituents,
    experienced nearly a 100 percent increase.
        On average, a worker in a firm with less than ten employees
    pays 17 percent more for health insurance than a worker in a
    firm with 200 or more employees.
        Small businesses need more bargaining power so that they
    can have access to affordable coverage for their employees. In
    today's society when it comes to purchasing health care, the
    rules of the game are stacked against small business. The small
    business with the least income actually pays the most, while
    Fortune 500 companies are able to offer exceptional benefits,
    have more modest annual cost increases, and have more choices
    for their employees.
        These companies have benefited from the economies of scale
    that come from being able to purchase health care in a large
    group across state lines. Unfortunately under today's law, it
    is impossible for small business to purchase health care in the
    same manner as their big business counterparts.
        Association health plan legislation like H.R. 1774, the
    Small Business Health Fairness Act, introduced by Fletcher and
    Dooley, levels the playing field by enabling small businesses
    to purchase their health care like big businesses and union
    plans, through AHPs under what's called ERISA.
        HPs are a private market solution. It builds upon what has
    been proven to work, and if small business could purchase
    health care in the same manner and under the same rules as big
    business, premiums would go down and coverage would increase.
        Allowing small businesses to purchase health care through
    association health plans will allow them to save on
    administrative costs and bring to the market the amount of
    bargaining power in sufficient numbers to absorb risk without
    substantially increasing premiums.
        As you have heard, insurance companies are not fond of
    AHPs. AHPs, it is true, would compete with current insurance
    options, but NFIB believes that that competition is long
    overdue.
        MSAs also offer an alternative solution. Eliminating the
    regulatory burden on MSAs would benefit small business. MSAs
    without the current restrictions would provide positive
    benefits to employees by giving them control over their own
    health care dollars.
        And making MSAs more workable by easing the regulatory
    burden on them would provide yet another affordable health care
    option to small business.
        Tax credits for individuals would also be anther welcome
    option.
        One of the most frequent complaints of small business
    purchasing health insurance today are drastic high rates that
    force them to drop or completely restructure their employer
    sponsored health care coverage. Allowing small business to
    purchase health insurance through AHPs will minimize this
    problem.
        Chairman Manzullo. How are you doing on time, Amy?
        Ms. Jensen. Just wrapping up----
        Chairman Manzullo. All right.
        Ms. Jensen [continuing]. To say we thank you for your
    strong work on AHPs and MSAs, and I look forward to your
    questions.
        [Ms. Jensen's statement may be found in appendix.]
        Chairman Manzullo. Thank you very much.
        I am sorry I had to leave. We have got several members of
    our staff up from Washington taking four different cars in as
    many different directions and trying to coordinate that out
    there.
        Our next witness comes from the Illinois Manufacturers'
    Association. He is Vice President of Government Affairs, Boro
    Reljic.
        Mr. Reljic. Reljic, yes.
        Chairman Manzullo. Boro Reljic, and the reason I asked Boro
    to come here is that there has been a bill that had been passed
    out of the Health Committee of the State House of
    Representatives here in Illinois that would allow employees of
    employers with less than 25 employees to join the State of
    Illinois employees' health risk pool, which I guess would be
    the ultimate associated health plans.
        We found out about it, and Amy has a copy of all of the
    work that has been done on it, and you have come here to
    testify in behalf of that.

    STATEMENT OF BORO RELJIC, VICE PRESIDENT OF GOVERNMENT AFFAIRS,
                  ILLINOIS MANUFACTURERS' ASSOCIATION

        Mr. Reljic. Well, I was trying to figure out. I know that
    that is the scope of what you wanted to talk about, and I could
    just go right through my testimony, but there will be some
    mention of that.
        Chairman Manzullo. That will be fine.
        Mr. Reljic. Thank you.
        Again, my name is Boro Reljic. I am Vice President of
    Government Affairs for the Illinois Manufacturers Association.
    The IMA is the oldest and largest state industrial association
    of its kind in the United States. We formed in 1893 to
    collectively address the problem from the railroads that they
    presented to us. So we have been around a while.
        And health care is really one of the most significant
    problems that are facing our members now. You have heard the
    stores of the significant increases that our companies have
    seen.
        The association itself is not just small employers, but
    large employers as well. We represent companies like
    Caterpillar Tractor and John Deere, as well as companies like
    Zenith Cotter and Rockford Spring Company here in this area. So
    we are a mix of both large and small employers or members of
    the Illinois Manufacturers Association.
        Some of the numbers that have been tossed out particularly
    about health care costs are significant. According to the
    National Association of Manufacturers, health care costs have
    increased by more than 300 percent between 1980 and 1990, or
    $73 billion to $223.6 billion.
        Health care costs in 1999 were 470 percent more expensive
    than 1980, again, $73 billion to $343 billion. And as long as
    we continue to see the cost of health insurance premiums
    increasing in the double digit manner in which it is, we are
    going to continue to find a vicious cycle of more uninsured.
        And we were concerned about that, and so the Illinois
    Manufacturers Association has a couple of viewpoints at least
    on the state level where we work most often to try and address
    some of those problems as we see them.
        One, which was mentioned by the representative from Blue
    Cross and Blue Shield is Illinois' insurance code mandates.
    Collectively the various insurance code mandates account for 20
    percent of premiums right now in Illinois. So you need to keep
    in mind that the various insurance code mandates that are
    placed on group health, which only impacts the small employers
    because larger employers that have the ability to self-insure,
    these mandates do not cover.
        Another reason that we see in the recent increase in health
    care costs is the erosion of managed care. Providers are not
    happy with some of the things that are happening in the
    marketplace, and we need to make sure, you know, the cost
    savings that we saw ten years ago or the controlled cost
    increases that we saw ten years ago as a result of managed
    care, that was not a legislative fiat. It was the ability of
    people to negotiate terms and conditions of payment, and we
    need to make sure that we keep those safeguards in place.
        Another innovative approach and the one that Chairman
    Manzullo is so interested in is the pooling concept, and there
    is a bill in the Illinois House, House Bill 5963, which is
    sponsored by Karen May from Highland Park, which would allow
    employers with 25 or fewer employees to opt to participate in
    the state health insurance pool.
        Illinois has 66,000 state employees that are covered by the
    state health insurance plan, and it is our thought that to give
    those small employers the purchasing power they need, they
    should be able to opt into that program. They should pay the
    premiums. They should pay the increased administrative cost
    that would be associated for running it, but that would allow
    them some of the purchasing power that larger companies enjoy.
        Under the provisions of the bill a company that opted to
    participate would not be able to select only certain employees.
    Every employee of the company would have to participate, and we
    just find that as one of the innovative approaches to try and
    solve this problem.
        We believe in a private sector solution to this issue. We
    do not think that a government mandate is going to answer or
    solve this particular problem, but we need to find ways in
    which we can incent, if you will, employers to go ahead and
    offer health insurance to their employees, which is going to
    benefit all of society.
        [Mr. Reljic's statement may be found in appendix.]
        Chairman Manzullo. You finished early. Great.
        Mr. Reljic. Time is always of the essence.
        Chairman Manzullo. Okay, great. Our next witness is Vondie
    Woodbury, Director of Muskegon, Michigan Community Health
    Project and Vondie came all of the way down here just to be
    with us today.

      STATEMENT OF VONDIE WOODBURY, DIRECTOR, MUSKEGON COMMUNITY
                             HEALTH PROJECT

         Ms. Woodbury. Yes. Thank you.
        Chairman Manzullo. Thank you very much. I look forward to
    your testimony.
        Ms. Woodbury. And, again, I want to thank you for the
    opportunity to present testimony on the work we have been doing
    in Muskegon County to address health care issues for our small
    business community.
        My name is Vondie Woodbury. I am Director of the Muskegon
    Community Health Project. We are located almost directly across
    the big lake from Milwaukee, Wisconsin. So we are right there
    on the shore.
        I am going to be speaking today about a program that
    community volunteers in our project developed called Access
    Health. Access Health is not an HMO, nor is it an insurance
    product. Access Health is a community owned health coverage
    plan that is sold to eligible small businesses in Muskegon
    County to provide health care coverage to the working uninsured
    and to their dependents. It was intentionally designed to fill
    the gap between public insurance programs, like Medicaid, and
    commercially available products.
        Access Health was developed following extensive
    quantitative and qualitative research within our community.
    Some of the numbers have been touched upon by other speakers. I
    do not think we reflect any differently than other parts of the
    country.
        What we did find is a group that has tended to be very
    small businesses who were insured, less than four employees for
    the most part. They tended to have very low profit margins.
    They were not members of our Chamber of Commerce.
        When we asked them why they did not participate in
    commercial coverage, 69 percent of them told us it was too
    expensive. They had high rates of employee turnover, which for
    us became the carrot because it was very clear to us as we got
    into this market that they needed something to stop the
    hemorrhaging that was going on, the churning in their
    employees.
        As we looked at the market, 95 percent of these employers
    told us they could afford to pay something, but it had to be
    less than $50 per employee per month. The people who worked for
    the business sector, the same type of a profile, but we found
    that the majority of them tended to be women under 40 with
    children. We found a good number of people who had moved
    fromwelfare programs into small business.
        Sixty-four percent indicated that they valued health care.
    They wanted coverage. Most made between $6 and $10 an hour, and
    65 percent of us or 65 percent of them told us again that they
    could afford to pay something, but it had to be less than $50 a
    month.
        It is important to underscore when you look at this part of
    the month that the popular press keeps referring to them as the
    working poor. These are not people that self-identify as
    working poor. They are working. They are helping pay taxes.
    They are helping to support government programs like Medicaid
    and Medicare.
        No one that we went to asked for a handout. They were all
    willing to pay something, and I think that is one of the most
    important things that need to be said about this market.
        To insure that our Access Health Program only served that
    portion of our population who were unable to pay for commercial
    products, we took special steps to limit the type of business
    we serve. Eligible businesses must be located in Muskegon
    County. They cannot have offered commercial insurance for the
    previous 12 months. They must have a median wage of $10 an hour
    or less to participate, and we wanted to make sure that these
    were businesses that were not in the commercial coverage
    market.
        Any business that is found falsifying information and
    dumping existing coverage is dropped from Access Health for
    life. We have targeted 500 businesses, and we hope over time
    that we will grow the pool to 3,000 full or part time
    individuals. At present we have 300 businesses who are
    enrolled, and we have served nearly 1,500 people.
        We work very closely with our Chamber of Commerce who sells
    the Blue Cross/Blue Shield program in Michigan to small
    businesses. We work with local insurance agents. We wanted to
    make sure that our part of the market was exactly that, a
    niche. We weren't going to pull from either.
        So we have actually gotten to a point where Access Health
    is sold by insurance brokers for no commission, and they go
    back after a year and try to trade people up to commercial
    coverage, and so we have worked out a very good relationship
    with our commercial group.
        Access Health is only offered in Muskegon County. Members
    who have medical incidents or seek treatment outside of
    Muskegon must pay the full cost of this out-of-pocket care. By
    limiting our coverage area to our own county, we insure that
    our product does not compete, again, with commercial products.
    It is not intended to do that.
        Within the restrictions, we are able to provide a
    substantial benefit. We enter into contracts with all of the
    providers in our community. When I say ``all,'' it is 97
    percent, both of our hospitals, almost every primary care
    physician.
        We pay them on a fee for service basis. They donate ten
    percent of those fees back to help administer the program. I
    have included a brochure that is on the table that describes
    the medical benefit package. We cover everything that is
    available in Muskegon County, which means if you have cancer,
    you will get care. If you have heart disease, you will get
    care.
        To make it affordable, Access Health funding comes from
    three sources: employer contributions, employee contributions,
    community contributions. This type of structuring is commonly
    referred to as a three share model.
        Three share models are different from traditional
    entitlement programs in which the public assumes the full 100
    percent of the cost. In public policy terms, what it means in
    our program are that taxpayers are liable for 60 percent less
    of the cost than a traditional entitlement program.
        In Muskegon county today an eligible business can buy
    Access Health for an employee for $42 a month. The employee
    will pay $42 a month, and the remaining part of our cost, $55,
    is paid for by our community. The community accesses federal
    dollars that were already in the system called disproportionate
    share hospital dollars.
        A state may redistribute these dollars to states or to
    hospitals who serve a disproportionate share of indigent
    people. We directly draw down those dollars and use it for the
    third share of our program.
        So, again, what we have managed to do is to keep it budget
    neutral. We have not created new funds to finance our program.
        Access Health provides Muskegon County with shared wins for
    all the participants. The community reduces its level of
    uninsured as much as one third by the time we get our program
    up to 3,000 people.
        Those covered get improved health care access, and our
    providers reduce the level of uncompensated care they must
    otherwise cost shift to insure appropriate patients.
        Finally, businesses benefit by reduced employee turnover
    and absenteeism and enhanced competition to provide benefits to
    workers.
        Chairman Manzullo. How are you doing on time, Vondie?
        Ms. Woodbury. I am just about there.
        Chairman Manzullo. Okay.
        Ms. Woodbury. We think our approach is pretty common sense.
    Rockford has been looking at it, and I am delighted to announce
    that Huntington, West Virginia just got legislation through
    their state legislature, and they are about to kick off.
        We have also been to States like Utah, Idaho, Delaware, and
    Beaumont, Texas before the end of this month.
        So with that, sir, I thank you very much.
        [Ms. Woodbury's statement may be found in appendix.]
        Chairman Manzullo. Thank you very much. We appreciate it.
        Our next and last witness is Johanna Lund. She is the
    Chairwoman of the Rockford Health Council, and Johanna's mother
    and my father went to grade school together. So we go back a
    few years, don't we Johanna?

     STATEMENT OF JOHANNA LUND, PH.D., CHAIRWOMAN, ROCKFORD HEALTH
                                COUNCIL

        Dr. Lund. We certainly do, and it is really a privilege to
    be a part of this.
        Thank you, Chairman Manzullo.
        Chairman Manzullo. Thank you, Johanna.
        Dr. Lund. And your entire committee, Congressman Kirk and
    Ryan and Congressman Weller, whom we met earlier in the day.
    Thank you so much for coming to Rockford.
        I am actually here in a dual capacity as Chairperson of the
    Rockford Health Council and a small business owner.
        Rockford, like other parts of the country, is facing a
    crisis in the ability of small business owners to obtain and
    keep affordable health insurance. This fact was documented
    three years ago by a study in 1999, the Rockford Healthy
    Community Study, which identified 16 issues, major health care
    issues, and certainly affordable health insurance care was one
    of the major issues.
        The Rockford Health Council is a community based health
    policy and advocacy group of 54 organizations representing
    health care, business, education, social services, and
    government in Boone, Ogle and Winnebago Counties, our immediate
    area.
        Since the release of the health of community study, we have
    been working collaboratively to address this issue of access to
    medical care. For most of our residents currently, access to
    care is through employer based insurance or Medicare or
    Medicaid.
        But for a sizable number of residents, access to timely and
    appropriate health care is impaired due to lack of insurance.
    We have estimated that as much as 44,200 residents, or 16 and a
    half percent, of our Winnebago County population is uninsured
    and another 11,000 uninsured in neighboring Boone and Ogle
    Counties.
        We estimated that a large portion of the uninsured are
    currently employed in the private sector. Among minority
    populations, the estimates are that 23 percent of African
    Americans and 33.5 percent of Hispanics are currently
    uninsured.
        Our efforts began with at least two premises. One, we want
    to assure access to health care to those who do not currently
    have access, and it is not our intention to compete with the
    commercial insurance market.
        Our desired result is improved health access and outcomes,
    and we also do not want to do it on the backs of doctors and
    hospitals.
        In September of 2000, we sent a team to Muskegon, Michigan,
    to examine their innovative program developed for their small
    business community, and it is one we feel worthy of
    replication, but we do not intend to exclude any other workable
    model.
        We were granted a federal community access program grant
    last September and have been working diligently to develop a
    workable model of coverage for small business owners and their
    employees. We believe that small businesses are having
    difficulty obtaining affordable coverage from the private
    market, in part, due to the high cost of mandated benefits and,
    in part, due to adverse selection based on group size.
        The federal CAP grant has provided funding for a
    concentrated effort to develop new options for our small
    business community. Through a comprehensive study of 4,700
    small business owners with fewer than 25 employees in Winnebago
    County, which was completed in December by Health Systems
    Research, what we found were the following:
        The average small business in Winnebago County employs just
    under nine persons. Forty-seven and a half percent of the
    respondents do not offer health insurance. Even when companies
    offer coverage, only 69.2 percent take the coverage, with 10.7
    percent not eligible at the time of the survey.
        For those individuals who do not take the health insurance
    offered, 59 percent are thought to be using their spouse's
    plan. Twenty, point, four percent say that such employees
    cannot afford their portion of the premium.
        Small employers in Rockford reported rapidly accelerating
    health plan premiums, an average increase of 26 percent last
    year. Ninety percent of the respondents not offering coverage
    cited high cost as the reason.
        We have retained Health Management Associates of Chicago as
    our principal consultant in the development of a plan
    appropriate to our needs and the laws and regulations of
    Illinois. We have met with area legislators, hospital CEOs and
    interest groups to inform them and to seek their support. We
    have engaged the Illinois Department of Insurance in high level
    discussions about how to create a new model of affordable
    coverage for the 4,000 employees we estimate could benefit from
    an initial plan.
        I commend the State Department of Insurance. They are
    working to help us facilitate our plan. Two weeks ago, we had a
    small group, focus group, of nine employers, asking their input
    in helping design a coverage product and further meetings are
    planned.
        We are currently working through the details of a plan that
    would offer basic medical, pharmaceutical and limited hospital
    coverage for working adults employed by businesses of two to 25
    workers with a median wage of $12 per hour who have not offered
    coverage for the past year.
        We hope to develop a model of community coverage like the
    third share arrangement with employers, employees, and the
    community sharing the costs. Our actuary is currently pricing
    this model, which we expect to be able to offer to eligible
    small businesses at no more than $75 per month or less per
    employee share. The $75 was arrived at because that seemed to
    be the participation break point documented in our survey.
        Our goal is to develop a marketable product to bring to
    small business owners before the end of this year. If we are
    successful, this approach could be a model for other Illinois
    communities.
        We appreciate the recognition that this Committee is
    providing for locally developed solutions to the need for
    affordable coverage that have potential applicability on a
    community-by-community basis.
        Again, I thank you and look forward to your comments and
    questions.
        [Dr. Lund's statement may be found in appendix.]
        Chairman Manzullo. Thank you, Johanna.
        Mr. Kirk. Mr. Chairman, I have got to meet with our first
    responders in Riverwoods.
        Chairman Manzullo. Okay.
        Mr. Kirk. So I have got to take off.
        Chairman Manzullo. Well, thank you for coming.
        Mr. Kirk. There is not a day goes by that this subject does
    not come up. So you are right on target.
        Chairman Manzullo. We held a hearing in your district what,
    last year?
        Mr. Kirk. That is right, and I just want to applaud your
    leadership.
        Chairman Manzullo. Thank you.
        Mr. Kirk. Your committee is right on target here.
        Chairman Manzullo. Thank you for coming.
        Mr. Kirk. Thank you.
        Chairman Manzullo. Mr. Ryan, did you want to ask some
    questions?
        Mr. Ryan. Sure. Did you want to go first, Mr. Chairman?
        Chairman Manzullo. No, go ahead.
        Mr. Ryan. Okay. Well, thank you.
        This has been really enlightening. Ryan, I wanted to ask
    you a couple of questions. I notice you have a lot of Ryans in
    Illinois. [Laughter.]
        Mr. Levin. You would think we were in Ireland.
        Mr. Ryan. I am intrigued with your actuarial background
    academically, and your model that you prescribed is one, and
    correct me if I am wrong, that is individual based where you
    make sure that you have informed consumers making decisions.
    And would you agree that in the current system you do not have
    informed consumers and that is a source of the big problem with
    the cost increase that we have?
        It is really not a competitive environment. Would most of
    the panel agree with that?
        Mr. Reljic. Absolutely.
        Mr. Ryan. What do you think, and, Dr. Lund, you said
    something that I thought was very interesting, which is we are
    not trying to preclude other workable models. It seems like
    what youhave heard with these two panels are different ideas on
    how to achieve the goal of getting access to affordable health
    insurance so that there are different workable models.
        What is your, and I would like to ask the panel, all of the
    panel, what is your impression of basically what the President
    outlined on February 11th in Wisconsin when he gave his big
    health care speech? What the President outlined was basically
    this:
        A refundable health insurance tax credit, $1,000 for
    individuals, up to $3,000 for families to purchase health
    insurance, association health plans so that small businesses
    and individuals can get access to pools, and then unlimited
    medical savings accounts, which for those who do not know what
    medical savings accounts are, are like an IRA for health care.
        Right now, as Ms. Jensen said, it is deeply regulated. It
    is capped to the amount of people that can participate in it.
    In the Ways and Means Committee we are advancing legislation to
    unlimit the amount of MSAs that can be used in this country and
    reduce some of the regulatory barriers.
        What do you panelists think of that model, tax credit with
    pooling plans across the country and with unlimited MSAs? Do
    you believe that each of the models that you are calling for,
    that you are developing could thrive in this environment?
        And then at the end of the day, would we or would we not be
    able to have a healthy competition of ideas and models at work
    for the people in this country to try and achieve better health
    care savings?
        And then would that not provide us with not just putting
    our bank on one good idea, but releasing a bunch of good ideas
    to get at the goal of affordable health insurance?
        And I will start with you, Ryan.
        Mr. Levin. I think you are right on in that there is no one
    solution. There are clearly a number of solutions and some are
    more applicable in some circumstances than others. The
    proposals that the President put forward, I think, have a lot
    of merit. Specifically, the tax breaks, that will certainly
    increase affordability.
        Increasing the ability to use medical savings accounts I
    strongly support. My view is that that should not be restricted
    to opening them up to larger employer groups and more
    participants, but should also include moves to increase the
    flexibility of the product designs within that structure.
        Regarding association health plans, I have some strong
    reservations, and in a nutshell, my view is that unless they're
    implemented very, very carefully, they are a recipe for
    disaster because of the selection issue. As soon as you offer
    an opportunity to a number of individual decision makers to
    participate or not to participate, they will make their
    decision as to whether they should participate based on the
    benefit it provides them personally or their organization.
        What that means is that you tend to find those who cannot
    get a better deal elsewhere participating, and you get into
    that risk spiral where the cost for those in the group
    continues to increase because those who can get better deals
    elsewhere go elsewhere.
        Mr. Ryan. Now, that is the topic of adverse selection that
    we debate constantly in our committee, and it is important to
    note that association health plans do not necessarily mean that
    they are going to offer one health insurance package to
    participants in the plan.
        They could function like, I assume, your state health
    insurance plan does, Wisconsin's state health insurance plan or
    the federal employee health benefit plan, which is a laundry
    list of access to different products you can use.
        I chose the Blue Cross PPO, but I think you mentioned you
    are, Don.
        Chairman Manzullo. Most members have because it covers the
    family both in Washington and----
        Mr. Ryan. Yes, and we have many choices. So it seems that,
    if the AHP is structured correctly with the right solvency
    standards and those kinds of things and with the wide variety
    of choices, that the adverse selection can be dealt with.
        But it is an important thing. Does your model that you
    articulate in your testimony with Discovery fit with what we
    just discussed as being the President's plan? Can that be
    furthered?
        Mr. Levin. Absolutely, absolutely, yes.
        Mr. Ryan. Ms. Jensen.
        Ms. Jensen. We were thrilled with the President's package,
    and as you so eloquently put it, I think it is essential to
    have different interchangeable parts that work together.
        The three things that our members tend to look for, and we
    ask our members before we get involved in any issue, is they do
    not like the government telling them what to do. They do not
    like mandates, and they like competition because that is the
    kind of environment that they work in as a small business
    owner.
        So those three components of the President's package are
    essential, and our only concern about tax credits is if you do
    them alone, they are great because they provide you with money
    and resources, but they do not provide the competition that
    brings premiums down.
        So we think it is important that all three work together.
        Mr. Reljic. I would agree. I would also add that the issue
    of this adverse selection is one that is debated not only in
    Congress, but in state legislatures around the country as well.
        But I think we need to take a look at, and I certainly do
    not know the answers to this, but we really need to take a look
    at what is occurring right now because an insurance company
    really has a motivation to find the healthiest people possible,
    and so it becomes an actuarial game that whoever has the best
    actuaries to determine what those losses are going to be is to
    be the most profitable.
        We really should take a look at what is being done to share
    the cost overall as opposed to having a motivation or an
    incentive to find the most healthiest group or the most
    healthiest customer. I think that is where we really--the
    President's package certainly goes a long way at helping get
    more affordable coverage, but I think we also need to take a
    look at that aspect because as you look at it right now, it is
    completely an incentive to have the best.
        The company with the best actuary is the most profitable
    insurance company as opposed to one that is managing the care
    better and sharing those risks.
        Ms. Woodbury. If I look at my community and I think about
    tax credits, I think about the people down the block at the
    Chamber of Commerce because our Blue Cross/Blue Shield product
    has been skyrocketing, and every time it goes up they lose
    members.
        And I think tax credits probably have a bigger impact on
    their part of our local market because it stops businesses then
    from sort of getting themselves out of the market altogether
    and just dumping coverage. I think a tax credit really helps
    businesses that are already there.
        It does not help very much with that part of the market
    that we work with, which is a fairly low income group. If ten
    percent of the businesses that we currently have in our program
    are child care businesses, the average child care worker makes
    $15,000 a year. There is not the expendable income up front to
    wait for a tax credit at the tail end.
        Mr. Ryan. Well, If I could jump in, the President's
    proposal is an advanced refundable tax credit.
        Ms. Woodbury. Okay.
        Mr. Ryan. So you do not wait until the end of the tax year.
    You get it every month when it comes through.
        Ms. Woodbury. Okay. That would be critical because these
    folks just do not have the money.
        Mr. Ryan. No, it is a good observation.
        Ms. Woodbury. I would like to point out though I would like
    to see an insert there in terms of community innovation because
    I think that while we debate these issues and we have debated
    them for a long time now in terms of what we are going to do
    about an insured in the country, that some of the best
    innovations are coming out of communities. It is not just mine,
    but communities across the country have just sat down, like
    Rockford, and said, ``Let's get our own arms around it. This is
    affecting our own hospitals, our own doctors.''
        We have always talked about all politics being local, and
    so is health care. And I think there comes a point where it
    would be good maybe. We have innovation types of programs for
    all sorts of things, certainly in research. Why not some
    innovation money to allow communities to also explore options?
        Because we always tend to think we have invested everything
    that is inventable, and that is not true.
        Mr. Ryan. Well, and that is what the market does.
        Ms. Woodbury. Yes, it does.
        Mr. Ryan. One thing I wanted to add is that there is a big
    debate right now in Washington and Congress about whether or
    not the tax credit goes to people with employer-sponsored
    health care or not. So there is a concern that if you offer
    just the individual market a health care tax credit, you will
    peel away from employer-sponsored health care.
        Some of the proposals have a smaller credit available for
    those enrolled in employer-sponsored plans. So it would cover
    out-of-pocket costs and then a higher credit for those outside
    of it so that you do not carve out or shift away from one of
    the two models and so that you truly do present a level playing
    field so that ideas can compete, the market can work, and that
    incentive structures, as you said, Ryan, can be firmly put into
    place. Then let's see the good ideas flow and see what works
    the best way.
        And that is hopefully what we will end up doing at the end
    of the day.
        Dr. Lund. I certainly cannot add a great deal to what the
    rest of the panel has said. I like the idea of the advanced
    refundable, provided that that is not used for other expenses.
        Mr. Ryan. It would not, no.
        Dr. Lund. It would have to be limited. I understand that is
    where the President wants it to go. I am concerned that as it
    goes through its normal processes, that that might be changed.
    So that would be a concern.
        The other thing is we can be as innovative as we want in
    communities, but if we do not have some sort of equality among
    the states, for instance, we cannot do in Illinois what
    Muskegon has done because of our legislative process, because
    of our legislation currently in place.
        So I would like to see some equity, and then we can change
    and perhaps fund not only innovation, but forms whereby we can
    exchange this information. Right now we pretty much have to
    seek that out for ourselves.
        But I think the President's plan was a very good one. I was
    very happy to see it.
        Mr. Ryan. And I think the concern you mentioned about
    whether the tax credit goes to health care or something else is
    very well founded. One of the ideas that we are kicking around
    to prevent that from happening, prevent it from being spent on
    something else, is to do it through the employer model. Do it
    through withholding so that the HR person at the company, if
    you're at a business that doesn't offer health insurance or
    does offer health insurance, sends it right to the insurance
    company.
        You could do it through other reimbursement ways, through
    the government, through a FICA tax withholding where it goes
    straight to the insurance company without having to have the
    individual deal with it, and then have the chance for fraud
    like we have had in the earned income tax credit and things
    like that.
        So it is just food for thought.
        Dr. Lund. Right.
        Mr. Ryan. I can tell I have gone way over my five minutes.
        Dr. Lund. Just one quick comment. On the MSAs, we are
    taking a look as a possible alternative. I said we are not
    excluding any model. It is something we are calling MSA-lite.
    That would be one opportunity for us to perhaps be able to get
    up and moving more quickly than having to wait for legislation.
        Mr. Ryan. I appreciate that.
        I just want to mention I want to thank the Chairman. I have
    to head back up to Janesville as well.
        Chairman Manzullo. Thanks for coming.
        Mr. Ryan. So thank you very much for this hearing. I
    appreciate it.
        Chairman Manzullo. I appreciate your input.
        Oftentimes I like to find out what associations people
    belong to to see if they could somehow, say, within an
    association health plan--do we have any people from the Farm
    Bureau here?
        What about the Association of Building Contractors? Okay.
        Any other NSIB? All right, okay.
        Any medical professional groups, AMA, ADA?
        So these are aiming my question. I ask that for your
    benefit.
        Who is fighting AHPs and why?
        Ms. Jensen. Well, we have got a variety of opponents,
    largely state regulatory folks, state insurance commissioners,
    and insurance companies. Those tend to be the largest
    opponents, and our bottom line concern, for insurance companies
    we cannot understand why they oppose it because we think that
    largely they would be a partner in an AHP, that they would help
    offer the product.
        So the only reason we can assume they oppose it is a purely
    competitive one, and for State Insurance Commissioners we have
    gone a long way to address any of their concerns about adverse
    selection, cherry picking, as they call it, and we feel that we
    have got a very substantial product that is very safe.
        And, frankly, you know, we have got an uninsured
    population, small business, that is 60 percent. So it is not
    that they are going to be cherry picked out of another health
    plan. They do not have anything right now. So we do not
    understand the opposition, frankly.
        Chairman Manzullo. What I----
        Mr. Levin. Can I?
        Chairman Manzullo. Go ahead, please, Ryan.
        Mr. Levin. Perhaps I can answer that at least my own
    personal perspective. I do not oppose association health plans
    from a business or competitive standpoint. I simply believe
    that they will not work.
        And if as an insurance company I would be forced to
    participate from a risk perspective, then I believe that would
    be loss making to my company, and that clearly would not be in
    our best interest.
        But the existence of association health plans as you
    clearly point out would not harm ourbusiness unless we were
    forced to participate in a way that we believed was not sustainable.
        And, therefore, my personal reservations are based on my
    belief that it is not a sustainable solution to the problems
    that we are facing.
        Chairman Manzullo. But won't you agree that the larger the
    pool of prospective insureds, the greater the sharing of the
    risk, the spreading of the risk, and the lower the premium?
        Mr. Levin. Not exactly, no.
        Chairman Manzullo. Let me ask it another way. If a Ma and
    Pa company with five employees tried to get insurance, isn't
    their insurance a lot more than a company with 1,000 employees
    or 5,000 employees?
        Mr. Levin. The answer to that depends on their health
    status. If that Mom and Pop company of five employees has a
    healthy group of employees, they may well be able to get health
    insurance for less cost than a larger group.
        Chairman Manzullo. So that is called cherry picking; isn't
    that correct?
        Mr. Levin. It's called risk assessment. [Laughter.]
        And appropriate pricing.
        Chairman Manzullo. But in the large corporations you do not
    require a profile as to every employee's medical condition;
    isn't that correct?
        Mr. Levin. And the reason for that is because you have a
    captive participation audience.
        Chairman Manzullo. Right.
        Mr. Levin. I agree with your statement that the larger
    group in general should have lower costs than a smaller group
    because of administrative efficiencies, et cetera.
        From a health risk perspective though, the two do not go
    hand in hand. From a health risk perspective, it depends on the
    choice to participate or not participate in the pool.
        If that choice exists, then you get into the adverse
    selection issues, and if the choice is made by employers----
        Chairman Manzullo. But you have adverse selection now with
    Blue Cross/Blue Shield who will say, ``I want five healthy
    employees.'' But with the 1,000 people over here where they do
    not get the health background, no health check, and give a
    lower premium, there is no cherry picking going on.
        Mr. Levin. Well, with the 1,000 employees, the risk----
        Chairman Manzullo. The universe is complete.
        Mr. Levin. Yes.
        Chairman Manzullo. All right. So if you took these five
    employees for this one company and let them just figuratively
    be part of 1,000 employees, just treat everybody the same as
    they come into this so-called pool, which I still do not
    understand what you are doing that Blue Cross/Blue Shield was
    trying to establish, I mean, then can't you treat those people
    in multiples of fives and say, well, you can treat 1,000
    people?
        Mr. Levin. Here is the issue. If you have a population of
    1,000 people and you have mandated participation of those 1,000
    people in the risk pool, then you have a sustainable solution.
        As soon as you say we have got this population of 1,000
    that are all being treated the same way, each of those people
    can decide to opt in or opt out. Then you have a greater
    likelihood of the unhealthy opting in, and the healthy opting
    out.
        Chairman Manzullo. My brother-in-law is IBEW. He is a
    lineman. You could not pay me enough dollars per hour to do
    what Brad does. His insurance is carried by the union
    regardless of who his employer is. He gets great coverage. He
    has lots of choices, and he is an electrician.
        Mr. Levin. But there you have mandated participation
    because all members of the union are required to participate in
    that.
        Chairman Manzullo. Does anybody want to touch that?
        Dr. Lund. Don, just from a personal experience, Mr.
    Chairman----
        [Laughter.]
        Chairman Manzullo. Yes, Dr. Lund. Does that make it easier
    for us?
        Dr. Lund. When we sold our company, we had 31 employees. So
    that got us just over the 23 employees. Our premium for my
    husband and myself was about $240, $250 a month.
        The day that we changed from that, we were the same two
    people, the same risk factors, the very next day our premium
    went to almost $700 a month because now we were only two.
        Chairman Manzullo. And AHPs would love that, too, be part
    of 2,000 or 20,000.
        Ms. Jensen. Can I make one quick point, Mr. Chairman?
        Chairman Manzullo. Sure.
        Ms. Jensen. All we are asking for is essentially to be
    allowed to participate in what is, as you mentioned, already
    going on with large employers and unions every single day right
    now. I mean, it is working very effectively for those plans.
        If you look at the Caterpillar model or the John Deere
    plan, they provide a high level of health care, and it is much
    cheaper. As far as cherry picking goes, unfortunately our
    members are cherry picked every day. Depending on the laws of
    the state, whether the insurance company chooses to underwrite
    them is a big question.
        So the insurance company essentially has the power to say,
    ``Yes, you will participate,'' or, ``no, you will not,'' and
    under AHPs, the association does not have that ability. They
    say, ``We must offer to every single person who participates in
    an FIB.''
        Chairman Manzullo. Okay. Maybe I am missing something here,
    but I started off with the premise, and I still believe, that
    the larger the group, the more you spread the risk. It brings
    down cost shifting in the end, which makes insurance premiums
    cheaper for people who already have insurance.
        And yet we find this continued opposition from Blue Cross/
    Blue Shield on a flawed CBO report that has been discredited by
    I do not know how many economists and coming from the labor
    unions.
        I mean, AHP's are nothing more than the model for the labor
    unions, they have been out front on this issue for 50 years.
    Because my dad belonged to 792, the local carpenters union, and
    Dad floated from place to place to place before he went into
    the restaurant business. Our family always had insurance
    because the insurance was not employer based. It was based upon
    the pool that existed, and he paid so much into the pool and
    with the labor union dues, et cetera.
        And that has been one of the most seamless plans. You could
    go from an IBEW probably to another craft and transfer your
    insurance. If you decided to go, you know, from electrical work
    to plumbing work, you would probably have a transition period,
    but the family is continuously covered there.
        But I see something so simple as the AHP getting hammered.
    Congresswoman Velazquez, who is the ranking minority member of
    our Small Business Committee, has a lot of labor support, and
    she is a co-sponsor of a bill for AHPs, and members of Congress
    are standing out.
        But if I am wrong, that the larger the pool, the lower the
    insurance rate, then the AHP is for naught. Is that correct?
        Well, let me ask you one last question. The bill to which
    you made reference in the house, doyou know what the status of
    that is?
        Mr. Reljic. It is going to pass today. Who knows? I mean
    the house and senate are in session right now. It passed out of
    the House Health Care Committee with a substantial number of
    votes in a bipartisan manner.
        Chairman Manzullo. So it has bipartisan support?
        Mr. Reljic. Yes. In sessions past it has passed the house
    and stalled in the senate.
        Chairman Manzullo. Who is opposed to the bill? Do you know?
    Any groups?
        Mr. Reljic. Mostly insurance groups and agents as well.
        Chairman Manzullo. Okay.
        Mr. Levin. Can I just make one point?
        Chairman Manzullo. Yes.
        Mr. Levin. That my reservations are with no vested
    interests. It is a professional opinion and a professional
    recommendation I am making that risk pooling only works or
    community rating only works with mandated participation. That
    is why it works for large employer groups and unions.
        As soon as participation is not mandated, the model falls
    over.
        Chairman Manzullo. Do you disagree, Amy?
        Ms. Jensen. I do not believe that union members are
    mandated to participate in the union plan, but we would have to
    discuss that separately.
        Chairman Manzullo. Does anybody know the answer to that
    question? Yes.
        Audience Member. Maybe I am older. Association health plans
    have existed for generations, and what everybody seems to be
    missing is why would they all fall apart. Why don't we have
    them anymore?
        And the reason we do not have them is exactly what Ryan is
    saying, because the choice factor drives the healthy out as
    soon as premiums start going up.
        So what happens is you get the awful spiral where you are
    stuck with the sick and the healthy go elsewhere because they
    can go elsewhere for coverage. And then union model does not
    work because basically when you join the union, that is your
    health plan.
        Now, you can obviously, I suppose--I am not even sure you
    can do this--but I suppose a union member can opt out of the
    union plan if he so chooses to buy individual coverage.
        Chairman Manzullo. But what if his spouse or her spouse is
    covered elsewhere?
        Audience Member. Well, then he would have a choice.
        But the point is though that you are not going to get the
    adverse selection in a union plan. You are not going to get the
    adverse selection in a General Motors plan.
        Chairman Manzullo. Because they are all healthy working
    people.
        Audience Member. No, because it is a preexisting pool that
    is large enough to sustain the illness of the participants.
    Whereas when you are talking about a small business or your
    group, the decision making mechanism is totally different. It
    is driven almost uniquely by cost.
        So as soon as that small employer finds himself in a plan
    that becomes expensive and he can find coverage elsewhere more
    cheaply, he opts out immediately.
        You do not have the same phenomenon. If I end up a General
    Motors employee, that is not the same model. If I am a union
    member, it is not the same model.
        Now, you are absolutely right when you say, you know, the
    larger the numbers, the better the risk and the lower. You are
    absolutely dead right. The problem is that you cannot fit small
    employers into that larger pool unless you mandate it, and that
    is the problem.
        We are not making this up. This is historical.
        Chairman Manzullo. No, I understand. There is another issue
    here. There is a First Amendment issue of right of association.
    I mean, I have a big problem with laws that say small business
    people cannot band together and buy insurance in groups. There
    is a constitutional issue that no one is even talking about.
        You know, I have an appointment at two o'clock. So what I
    am going to have to do is to, Ryan, give you the last word on
    it.
        Mr. Levin. Can I just make the point?
        Chairman Manzullo. Go ahead.
        Mr. Levin. In states like Illinois, there actually are
    rules designed specifically to protect small employers from an
    insurance perspective. Those laws have restrictions on how
    insurance carriers can write a small employer group based on
    their health status.
        In states where these laws are more restrictive, what
    happens is the number of uninsured has increased because the
    model is unsustainable. So the more restrictive these small
    group models become, and what you are talking about with
    association plans where there is community rating within the
    plan is essentially a very restrictive small group law.
        The tighter those laws, the lower participation becomes and
    the higher health care costs become, and that has been proven
    time and again.
        Chairman Manzullo. I want to thank the panel for coming.
        The basic problem is this. Small businesses cannot afford
    20, 25, 27, 30, 35 percent increase in insurance premiums every
    year.
        Mr. Levin. Absolutely.
        Chairman Manzullo. And so we are trying to do something
    innovative. Every time the small business people try to do
    something innovative, somebody comes in and says, ``Your model
    does not work.''
        Well, my comment is the present model is not working. We
    have got small business people that are closing up their doors
    and going to work for larger employers. It is destroying the
    spirit of entrepreneurship.
        And the cost of increase of insurance premiums on a small
    business is much greater than it is on the cost of a bigger
    business. We had a hearing in Washington about three weeks ago.
    I could not get Blue Cross/Blue Shield to admit that.
        If premiums go up, usually premiums for the small business
    person are doubled than they are for the larger corporation.
    But we are at the point now here where the system is broken.
    The system is broken. I mean, no one wants to come in with any
    type of socialistic scheme or anything like that, but we are
    looking for some solutions.
        And the only thing I see out there besides the tax credit
    that goes even to people that do not pay taxes, which is called
    the refundable tax credit, is to somehow allow all of these
    small groups of people out there the ability to form an
    association to be able to come together to try to buy insurance
    for themselves.
        That is an AHP. You know, let's think past and try it. If
    it breaks, it breaks. Because the present system is broken now,
    and at this point we do not have much to lose.
        Well, listen. I want to thank you all for coming. It has
    been tremendous testimony. The purpose of these hearings for
    the person doing the recording is to gather all of this
    information, and I have heard of some innovative plans.
        Ryan, you know, that South African plan, that is a great
    model. And the quality of the different plans, I have never
    heard this type of diversity before in all of my years on
    Capitol Hill when it comes to different approaches to helping
    to insure small business people.
        Somewhere along the line each of the things that you have
    testified to may find its way into some type of legislation.
    The insurance industry has raised, in my opinion, some red
    flags that are cautionary signs that should be used in setting
    up these AHPs, and that has been extremely valuable because
    they have seen not only their experience rating, but worked
    with other AHPs, that there are giant holes in the way these
    things work.
        And I will trust somewhere along the line the insurance
    companies, the labor unions, and the small business people can
    sit down and come up with a workable program that will address
    each of these deficiencies, and that is the reason why we have
    hearings like this.
        This meeting is adjourned.
        [Whereupon, at 12:40 p.m., the Committee was adjourned.]

                Opening Statement of Chairman Donald A. Manzullo

        Good Morning. It is my pleasure to welcome everyone to today's
    Small Business Committee field hearing on the crucial issue of small
    business access to health care.
        Exorbitant health care costs are one of the biggest expenses small
    businesses and the self-employed incur as they struggle to provide
    coverage for their employees. As Congress continues to examine our
    nation's health care problems, we need to remember that sixty percent
    of the estimated 43 million uninsured are small businesses owners,
    their employees and families.
        Small business owners are unable to absorb spiraling health care
    costs and find themselves priced out of the health insurance market.
    Many owners are faced with the choice of staying in business or
    providing their employees with insurance.
        I personally know of a small business owner who pays $700 a month
    and has a $5,000 deductible to insure both himself and his wife. He and
    his wife are considering selling their business and taking jobs that
    would pay considerably less in order to receive health care benefits.
        Our current health care system does not provide equal access to
    affordable and quality healthcare for small businesses.
        One of the reasons small businesses cannot afford health coverage
    for their employees is that they are unable to achieve the economies of
    scale and purchasing power of larger corporations and unions. Small
    businesses suffer from unequal treatment--what they want most is a
    level playing field when it comes to health care.
        Large corporations use the purchasing power of thousands of
    employees to offer affordable health insurance to their workers. Small
    business owners, on the other hand, have to find their insurance on an
    individual basis, making it very difficult and expensive to find
    affordable health coverage.
        I can't help but wonder why insurance companies cannot offer
    affordable healthcare to small business? Why must insurance companies
    charge the most to those least able to pay these inflated prices?
        I was very heartened to see President Bush issue his plan for
    helping small businesses prosper in our economy. The President is aware
    of the health care access and affordability problems facing small
    business, and his plan includes concrete steps to increase health
    security for employees of small businesses. His agenda calls for
    Association Health Plans to be available for associations that want to
    provide health coverage for their members, and it calls for a permanent
    extension of Medical Savings Accounts, including a significant
    reduction in the required deductible for these health accounts.
        Congress needs to ensure that there are many different health
    insurance options for small business owners to utilize. We need to help
    our businesses attract and keep employees, and nothing helps more than
    the ability to provide health insurance.
        I look forward to the testimony of all the witnesses here this
    morning and I want to particularly thank those who have traveled a long
    distance to be with us here today.
                                     ______

                      Prepared Statement of Michael Holoka

        My name is Michael Holoka. I am an attorney in Rockford, Illinois.
    I am married to a physician and have a twelve year old daughter. We had
    a traditional medical plan through my practice which covered my family.
    Since I am a sole practitioner with only one employee, this was the
    most economical way for my family to go. We have had our traditional
    insurance plan with Guardian Insurance since 1995 with no additional
    claim experience. I was paying about $5,000.00 per year. By the year
    2000, we were contemplating going without any insurance because of the
    cost of the premiums being $21,000.00 per year for our traditional
    program still with Guardian Insurance. This was based on the fact that
    we had no claim loss, that is we had not made any claim against
    Guardian for medical insurance purposes since 1995.
        Realizing that we could not afford to continue an insurance program
    which was going to continue to rise, at a minimum, twenty percent each
    year. We considered picking up a catastrophic insurance policy and
    basically self-insuring. While health care services had diminished and
    physicians were being paid less for their services, health insurance
    premiums continued to rise. One day my wife received a facsimile
    concerning something called an MSA insurance plan. I was not aware of
    nor had I heard of such a plan. However, the plan turned out to be a
    blessing. In fact, it had sounded too good to be true.
        Some of the main features of the plan were that we could pick our
    own family deductible between $3,100.00 and $4,800.00. We also had the
    opportunity to save up to 75% of the deductible each year, which meant
    we could put into an MSA account an amount just over $2,300,00. If we
    chose not to use those funds for the deductible, they would just
    continue to build in the account which we have with Merrill Lynch. The
    best part of the plan however was the premium. While looking at a
    premium of over $21,000.00 per year with Guardian Insurance for a
    traditional medical plan, the medical plan we chose with Fortis
    Insurance was approximately $3,600.00 per year. This included maternity
    for my wife. If we chose to not include maternity coverage, the premium
    would have been considerably less.
        It was amazing to me that we had heard very little about MSA
    insurance, particularly in view of the insurance crisis. When I
    attended a small business breakfast with Congressman Manzullo, I
    explained how this plan worked. It was amazing to me that none of the
    small business owners in attendance had heard of this plan and there
    had to be over 25 businesses represented at the meeting.
        It is my understanding that there are any number of variables that
    go into the premium. Obviously the higher the deductible you choose,
    the less your premium will be. One quote I received for a $4,500.00
    deductible was less than $2,500.00 per year. If we chose dental, the
    coverage would have added less than $1,000.00 to our plan.
        It is not difficult to see how vital the MSA program is for small
    businesses so that they can provide the proper benefits for themselves
    and their employees for an extremely reasonable cost. There is even a
    term life insurance feature available up to $50,000.00 under certain
    MSA programs.
        The MSA account itself is a tax favored account set up to pay for
    medical care and to allow for a build up of savings to pay for future
    medical expenses. The MSA itself is a high deductible plan with
    extremely low premiums compared to traditional insurance. The premiums
    are of course deductible for the business and the amounts contributed
    to the medical savings account also have special tax treatment. When
    you use the providers participating doctors and hospitals, one hundred
    percent of the eligible charges are picked up after deductible. Plans
    vary as to what percentage is picked up if you use out of network care.
    The bottom line is that the MSA plan certainly will allow small
    businesses to affordably provide medical coverage to the owners as well
    as to their employees.
        We are extremely pleased with this plan. Without it, we would
    probably not have any insurance coverage, would be self-insured for
    health coverage and would probably be maintaining a catastrophic
    insurance policy which, premium wise per year, would probably equal or
    exceed the amount we are paying for the MSA program. It is my hope that
    the MSA program will continue and be of great benefit to small business
    and allow many small businesses to remain soluble in the current
    economic market.
                                     ______

                     Prepared Statement of Dr. Bill Kobler

        I am pleased to be here to present a medical perspective on the
    rising cost of health care, which is a logical contributor, among other
    factors, to the rising cost of health care insurance. This is a very
    complex and multi-faceted problem, and I surely will not be able to
    present a complete picture today, but I hope I can provide some insight
    into the problems we face as health care providers. First, a little
    background.
        An article in the New York Times in January states the government
    reported that in 2000, national health spending shot up 6.9 percent to
    $1.3 trillion in 2000. This was the largest one-year percentage
    increase since 1993. Hospital and drug costs were the main factors in
    the latest increase. (NYT 1/8/02)
        Growth in health spending outpaced the 6.5 percent growth of the
    economy as a whole in 2000. Health care now accounts for 13.2 percent
    of the nation's total output, up from 13.1 percent in 1999 and 12
    percent in 1990. As a physician, I could argue that this is not enough,
    but I'll leave that alone for now!
        What are some of the factors leading to these cost increases? There
    is an old problem which is again rearing its ugly head. In the 1970's,
    there was a crisis for physicians when all the major professional
    liability insurers in Illinois pulled out of the market. St. Paul and
    CNA again stop providing coverage.
        Kenneth S. Abramowitz, of the Carlyl Group states ``The rising cost
    of malpractice coverage is becoming one of the most important factors
    driving inflation for physicians' services.''
        In many hospitals, insurers are not only increasing premiums but
    are also sharply reducing amounts of coverage and raising deductibles.
    A Chicago hospital paid the St. Paul Companies $1 million for $40
    million in coverage in 2000 with a deductible of $15 million. In 2001,
    St. Paul raised the premium for the hospital, to $1.8 million, but cut
    the coverage to $10 million and more than doubled the deductible (NYT,
    9/10/01). Insurers say the increases are due to large awards by juries
    and large settlements.
        Some research suggests that the average jury award rose to $3.49
    million in 1999, up from $1.95 million in 1993. (Jury Verdict Research,
    Horsham, PA)
        According to the Liability Monitor in Chicago, professional
    liability premiums are rising at an annual average of 30%.
        Because of the rising medical malpractice premiums, medical costs
    are rising in another way: Physicians are practicing more defensive
    medicine--ordering extra tests and choosing procedures that limit their
    risks.
        Another item is the explosion in the availability of very good, but
    very expensive prescription drugs. This is a serious problem for all
    recipients of health care. The proposal to provide these drugs under
    the Medicare program is a wonderful concept, but frightening when one
    pauses to consider the source of the funds for this population who
    consume a very large percentage of pharmaceuticals.
        Medicare managed care and other private insurance plans have cut
    drug benefits in the last few years. The average senior spends about
    $500 annually for medications, plus hundreds and even thousands more
    for private insurance policies to cover some of the cost of
    prescriptions. I saw a patient just the other day with a $7,000 tab for
    medication in the year 2000!
        There are a number of other factors I would like to briefly list,
    which also drive up health care costs. The people of this country have
    an insatiable appetite for health care services. They are bombarded
    with story after story of medical miracles, advertising of prescription
    pharmaceuticals, promises of unlimited access to health care made by
    their managed care company. Yet there is very little incentive for them
    to utilize these services wisely.
        There is an overwhelming burden of government regulation, which is
    choking the medical profession in its attempts to provide care. Many of
    you know the alphabet soup as well as I, but the provisions of COBRA,
    CLIA, HCQIA, EMTALA, HCFA, now affectionately known as CMS, are burying
    us in needless paperwork and documentation. We attempt to follow the
    regulations, at the risk of prosecution, fines and imprisonment under a
    system so complex, that it is impossible to meet all of its
    requirements. And now we will soon face the absolutely terror provoking
    HIPAA statutes!
        We are facing a serious shortage in well-trained nurses. Medical
    school costs are becoming so large as to discourage our best and
    brightest from applying to medical school, knowing they will face huge
    debt, declining incomes and loss of respect for the time they spend and
    dedication they demonstrate in their career choice as physicians.
        As a doctor, my job is to investigate problems and solve them. It
    would be easy to become discouraged, but medicine is still the most
    rewarding of professions, one worthy of fighting for and defending. I
    am pleased to see this forum, attempting to understand the problems of
    medicine and its availability to small businesses. After all, physician
    practices have traditionally been counted among the ranks of small
    business. If we work together, keeping the patient as the center of our
    focus, I am confident we will find a solution to our problems.
        Thank you for your time and attention.

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