[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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                      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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